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NASAA Report Finds Digital Asset Fraud Investigations Up 70%

NASAA's annual enforcement report charted the continued problem of promissory note fraud, and the rise of interest in the metaverse in the securities markets.

The number of state regulators’ investigations into digital assets schemes skyrocketed by 70% between 2020 and 2021, according to the annual enforcement report released by the North American Securities Administrators Association.

The report also showed that promissory note scams continue to be one of the greatest dangers to investors, and that financial services firms are increasingly looking to the metaverse.

The organization of state securities regulators released a report showing state regulators opened 5,337 new investigations last year, and took 1,661 enforcement actions, leading to more than $300 million in restitution. 

Like many regulators, state officials faced challenges during the pandemic that curtailed court proceedings and typical investigative practices, according to Joseph Borg, Alabama’s Securities Commission Director and NASAA’s Enforcement Section Committee Chair.

“Although these limitations resulted in the reporting of lower enforcement numbers in some areas, the data also shows state securities regulators overcame many challenges and continued to protect the public during the pandemic,” Borg said.

NASAA argued state regulators were “the first, and often the last, line of defense” for investors affected by digital asset scams. In 2021, state regulators opened 215 investigations into allegedly fraudulent digital asset offerings, compared to 125 from the prior year. Meanwhile, state regulators opened 89 enforcement actions into digital asset-related misconduct accusations, a 100% jump from two years before.

“Based on inquiries, complaints and investigations from state and territorial securities regulators, digital assets ranked 9th among threats in 2019, 2nd in 2020 and 1st in 2021,” the report read. “State regulators also identified scams tied to cryptocurrencies and digital assets as the top threat to investors in 2022.”

But when it came to enforcement actions, the top issue was promissory notes, “and it was not even close,” according to NASAA. Last year, state securities regulators brought 161 enforcement actions involving promissory note schemes (in second place was internet and social media scams, at 106 total actions). 

State securities regulators had considered promissory note schemes a top threat for investors for the previous three years, and expect it to be the top threat for investors in 2023. NASAA suggested fraudsters are drawn to promissory note scams because the notes are attractive to older investors looking to preserve wealth (they offer fixed returns for a fixed time, regardless of market volatility).

“These elements are as relevant today as they were a generation ago, because in uncertain times, certainty sells,” the report read.

State securities regulators also believe there’s a growing interest in the metaverse among financial services firms. According to NASAA, 2,100 of the 2,391 records filed with the Securities and Exchange Commission mentioning the "metaverse" were filed in 2022 alone. State securities regulators argued financial services firms were following other industries in establishing “virtual storefronts” and creating other products tied to the metaverse.

“These financial service firms have been purchasing plots of virtual land and constructing virtual offices, and they are now promoting services in the metaverse and creating products that afford investors the opportunity to increase financial exposure to the metaverse,” the report read.

In total, state securities regulators referred 291 cases to state and local law enforcement last year, a 43% jump from 2020, while referring 79 cases to federal agencies, a 68% increase from the year before. State regulators fined violators more than $145 million in 2021 (a 313% jump from 2020), seeking $312 million for restitution and about $4 million for “investor education efforts,” which more than doubled the 2020 amount.

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