Analysis of the SEC’s Warning Advising Against Cryptocurrency IRAs

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Single glass jar with chalk labels used for saving US dollar bills.
The Securities and Exchange Commission has issued a warning to advise investors against using cryptocurrency IRAs.

The old adage “make hay while the sun shines” may be cliché, but it bears a lot of truth and meaning that traverses the deep semantics of wise thought.

The widespread existence of anxious would-be retirees has become a routine because, well, everyone wants a hassle-free retirement.

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Quite unfortunately, some workers fail to accomplish their economic goals on time, and this reality has exposed them to ravenous fraudsters.

Henceforth, a majority of these persons end up shifting their goal posts towards investing in self-directed Individual Retirement Accounts (IRAs), which have been found to be heavily flawed.

Investor Alert

The Securities and Exchange Commission (SEC), through an Investor Alert earlier this month, noted the increased popularity in crypto-supported IRAs and issued a warning to would-be investors.

In a statement, the SEC acknowledged the advancing appearance of virtual monies in the retirement accounts scene, which has joined the league of investment options that are disposed to retired professionals.

Certainly, it is important to realize that the Investor Alert was not the product of a case study, but a prediction of dark economic days to come.

Lori Schock, a key figure in SEC affairs, noted that the association of IRAs with digital assets provides the economic imperative to warn investors of the potential risks of fraud.

The wide range of cryptocurrencies provided by Initial Coin Offerings (ICOs) present a plethora of financial hazards, which have been witnessed before.

Expectedly, the latest Investor Alert by the SEC is an addition to the existing warnings that have been issued by key financial institutions.

The Association of International Certified Professional Accountants (AICPA) also recently warned about the risk of fraud associated with self-directed IRAs.

A Case of Vulnerability; Self-Directed IRAs

You Might Be Wondering, What Is the Intersection Between Digital Assets and Self-Directed IRAs?

Well, here’s how.

Generally, IRAs are meant to offer investors an opportunity for effective retirement saving. IRA finances are usually managed by custodians like banks and trust organizations.

Additionally, other companies may be tasked with this purpose, but only through approval by the Internal Revenue Service (IRS).

Hand putting Coins in glass jar.
Generally, IRAs are meant to offer investors an opportunity for effective retirement saving. IRA finances are usually managed by custodians like banks and trust organizations.

IRA custodians are highly vetted bodies to ensure fraud-proof systems, which work within the best interests of investors and stakeholders involved in the entire value chain.

Quite obviously, these custodians are expected to regulate IRA accounts and restrict their holdings to mainstream and easy-to-monitor stocks and bonds.

In the case of self-directed IRAs, the rules demarcating bona fide investable assets become flexible to a rather limitless degree.

In this case, a custodian becomes spoilt for choice and typically allows an investor to direct retirement funds in holding alternative assets.

Investments in alternative assets have been known to expose investors to a variety of financial risks that extend right from a lack of disclosure to a predisposition to fraud.

Digital Assets; An Imminent Risk of Fraud

The SEC has expressed concern over some self-directed IRAs that permit investors to invest in digital assets that include cryptocurrencies and tokens—offered in ICOs.

Indeed, this possibility has metamorphosed into a “fraudster magnet” due to the loopholes associated with this kind of retirement saving.

Indeed, owing to the aforementioned human weakness of circumstance, and the offerings of self-directed IRAs, criminals may have a field day in enticing would-be retirees to invest in digital assets that offer high returns.

Nevertheless, it is noteworthy to realize that not all forms of digital investment is fodder for fraudulent business.

Digital assets may be traded lawfully without any cases of foul play and the occurrence of financial casualties.

However, most cryptocurrency offerings may happen outside the boundaries of financial safety and regulations.

This becomes a reality whenever investors lack the access to critical information about the trading of digital assets, thus making unwise decisions.

Additionally, the SEC concedes that a majority of digital trading platforms have succeeded in tricking investors into thinking that they operate within SEC regulations.

This detail was explained by Bart Chilton, a former commissioner for the Commodity Futures Trading Commission, who dubbed the crypto space as “a haven for bad actors.”

The truth is that various investors are largely green about the crypto space and may not distinguish between legitimate and fraudulent crypto deals.

Case Example: Ponzi Scheme

Cryptocurrency coins - Litecoin, Bitcoin, Ethereum.
The SEC has expressed concern over some self-directed IRAs that permit investors to invest in digital assets that include cryptocurrencies and tokens—offered in ICOs.

The inception of cryptocurrencies came with unprecedented uncertainties in the global financial industry.

There has been concern over the application of virtual monies in financial fraud rackets, which lure investors into Ponzi schemes.

The application of cryptocurrencies in Ponzi schemes may present itself in the event where investors fabricate fictitious financial prospects in an effort to pull funds from unsuspecting people.

The growing internet phenomenon has proved to be a key platform for the creation and proliferation of fraudulent schemes associated with the cryptocurrency model.

This aspect is well illustrated by a 2013 case of SEC v. Shavers in which an American was charged with running a Bitcoin-supported Ponzi scheme meant for defrauding investors.

In the case, investors were lured with the promise of 7 percent interest earnings every week.

It was also alleged that the invested finances would be used in Bitcoin arbitrage ventures to produce returns to the benefit of all investors.

Well, instead, a large portion of the invested coins ended up being cashed into U.S. dollars to be spent on the organizer’s personal needs.

Opinion: Is Bitcoin a Ponzi Scheme by Itself?

Bitcoin, as well as other cryptocurrencies, have proved to be favorite fodder for fraudsters across the economic divide.

In the context of this article, one would wonder whether Bitcoin, as an example, is a Ponzi scheme by itself.

Well, what about the fact that initial Bitcoin investors made monumental profits?

A close look at past financial scandals, like the historic Bernie Madoff scam, exposes one reality—the first responders to any bubble are usually the greatest beneficiaries to a scheme.

It is very realistic to declare that persons who bought Bitcoin early, at its inception, made lots of money.

As much as we may choose to protect Bitcoin and its other crypto counterparts, this virtual coin has presented all the characteristics of an asset bubble.

As Robert Schiller, a world-renowned financial bubble expert, puts it, any form of asset bubble can be likened to a spontaneous Ponzi scheme.

Cryptocurrency coins - Litecoin, Bitcoin, Ethereum.
Bitcoin, as well as other cryptocurrencies, have proved to be favorite fodder for fraudsters across the economic divide.

The first responders to a scheme usually benefit the most, and their success stories are used as effective baits to pull in more gullible investors.

This process can progress for years on end before a reality check kicks in—when the party ends in a bloodbath.

It is also interesting to realize that most Bitcoin adopters favor the crypto coin with the passion of cult members.

Bitcoin “initiates” tend to harbor protective thoughts about conspiracy theories and the belief that everyone is out to “hurt their good Bitcoin.”

So, yes, Bitcoin might be the personification of a typical Ponzi scheme—time will tell.

Cherry Pepper

Research is my comfort zone. I constantly hunger for knowledge, and believe that I bear the calling to communicate the products of my thought processes to individuals like myself. While many people believe in the adage "knowledge is power", I assert that enlightenment means life.
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