Category Archives: James McDonald

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Rogue Crypto Trader Joseph Kim Gets 15 Months Prison, $1.146 Million Restitution Order

Cryptocurrency trader Joseph Kim has been sentenced by the US Department of Justice to 15 months in prison, and the Commodities Futures Trading Commission (CFTC) has ordered Kim to pay USD 1.146 million of restitution after the rogue trader was found to have committed trading-related fraud from September 2017 through March 2018, which resulted in total losses of USD 1.146 million. Further, Kim has been banned from trading for the rest of his life.

In September 2017, Kim was working at a cryptocurrency trading firm based in Chicago and began sending the firm’s Bitcoins and Litecoins to his own wallet. The firm approached Kim and asked him about the missing money, and he asserted that the cryptocurrency exchange was having problems, and Kim had to transfer to other accounts for security purposes. The ruse only held up for two months and Kim was fired in November 2017 after stealing USD 601,000 from the firm.

Kim then solicited funds from clients, without notifying them that he was fired from the firm. Kim made it seem like he was trying to start his own business. Five clients invested USD 545,000, with Kim promising the money would go towards a low-risk arbitrage scheme. However, Kim made high-risk bets on directional cryptocurrency price movements, during a time when the cryptocurrency markets were crashing. Kim ultimately lost all of the money but issued false statements to customers showing profits.

The arrest and prosecution of Kim was a joint effort by the CFTC, Federal Bureau of Investigations (FBI), Department of Justice, and the Securities and Futures Commission of Hong Kong.

The Director of Enforcement at the CFTC, James McDonald, said, “Today’s Order stands as yet another in the string of cases showing the CFTC’s commitment to actively police the virtual currency markets and protect the public interest.  In addition, the criminal indictment and sentence reaffirms the CFTC’s commitment to working in parallel with our partners at the Department of Justice to root out misconduct in these markets. My thanks to US Attorney Lausch and his staff, as well as the Federal Bureau of Investigation, for their assistance in this case.”


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First Bitcoin-Related CFTC Enforcement Action Wins USD 2.5 Million Judgement

On 16 October 2018, a New York Federal Court ordered Gelfman Blueprint Inc., and the CEO Nicholas Gelfman, to pay USD 2.5 million restitution and fines. This is a successful end to the Commodity Future Trading Commission’s (CFTC) first Bitcoin-related anti-fraud enforcement action, an endeavor which began on 21 September 2017.

From 2014 through January 2016 Gelfman Blueprint Inc. solicited USD 600,000 of investments from at least 80 clients. This money supposedly went towards a fund for an in-house high-frequency trading algorithm named Jigsaw, which supposedly made consistent profits. However, the performance reports were fake, and payouts of profits to clients came from new investments from other clients, which makes this a classic Ponzi scheme. The period of 2014 through 2016 coincided with a Bitcoin bear market, and Gelfman Blueprint Inc. was overall unprofitable. The Ponzi scheme collapsed when a fake hack was staged to make it appear like all customer funds were stolen.

The CFTC charged Gelfman Blueprint Inc. and the CEO with fraud, misappropriation of client’s money, and issuing false accounting statements. The final judgement is USD 1.047 million of restitution to clients, and USD 2.031 million of civil monetary penalties. The CFTC warns that Gelfman Blueprint Inc and the CEO might have no money though, and therefore despite the judgement there may be no payout. Further, Gelfman is banned from participating in any future financial activity that falls under CFTC jurisdiction. Notably, there does not appear to be any criminal penalties or prison time for Gelfman, despite effectively stealing USD 600,000.

The CFTC Director of Enforcement, James McDonald, says “This case marks yet another victory for the Commission in the virtual currency enforcement arena. As this string of cases shows, the CFTC is determined to identify bad actors in these virtual currency markets and hold them accountable. I’m grateful to the members of Enforcement’s Virtual Currency Task Force for their tireless work on these matters”.

In the past, the Securities and Exchange Commission (SEC) was the primary enforcer in the crypto markets, but this landmark case shows that the CFTC is ready, willing, and able to perform similar enforcement actions. The CFTC considers Bitcoin and crypto to fall under their jurisdiction as commodities, while the SEC says most cryptos are securities and fall under their jurisdiction. Bitcoin is sufficiently decentralized not to be considered a security itself, but the Bitcoin market still sees regular enforcement action by the SEC since many Bitcoin investment products can be classified as securities.

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US Regulators Support Blockchain Development as Snoop Dog Plays Them Out

As the Coindesk Consensus 2018 in New York drew to a close, it was time for US regulators to have their say, all agreeing that they did not want to interfere unduly with blockchain or the tokens built on the nascent technology, reports Coindesk.

As US regulators continue to look into cryptocurrencies and ICOs, one event at the conference saw three of them on stage together, joined by Kiran Raj, chief strategy officer at crypto exchange Bittrex, and attorney Steve Bunnel as panel moderator. Commodity Futures Trading Commission (CFTC) enforcement director James McDonald, Securities and Exchange Commission (SEC) Enforcement Division Cyber Unit chief Robert Cohen and associate deputy attorney general Sujit Raman answered questions regarding industry regulation.

While the members of the panel made it quite clear they weren’t there to represent their respective agencies, they all agreed that the wanted to see the crypto space unhindered by over-regulation.

They agreed that one of the major concerns continued to be fraud and misuse of the cryptocurrency and blockchain space by criminal activity. Cohen and Mcdonald claimed that their particular agencies had “open-door policies” for ICOs:

“The SEC has been open about meeting with people from the industry, to come in and meet with the staff, to talk about the ideas you have, the new developments, and have a dialogue about the new technology. The commission encourages ways to raise capital, we don’t regulate the technology – we regulate the financial industry and the markets.”
On regulation, McDonald commented:

“Our mission is to foster financially sound markets, and we understand as a regulator that requires a certain amount of [flexibility] in our approach. We’re doing it in a way that doesn’t hinder innovation and doesn’t interfere with other regulatory priorities.”

Associate deputy Attorney General Sujit Raman asserted that Americans need to be protected by the Department of Justice, commenting that ” large sums of money flowing through the market without touching financial institutions… we have to investigate from a national security perspective.”

Asked about his concerns, Bittrex’s Raj suggested that more certainty was needed regarding regulatory processes to combat fraud, agreeing that it was not welcome in the industry, asking, “The problem is how do we take guidance and apply it to what you’re doing when it’s so far away from what the fraud people are doing?”

In contrast to the suited regulators earlier stage performance,  the conference came to a close with an after bash party as promised with a performance by Snoop Dog, who arrived at the half-filled event space in Manhattan’s Meatpacking District, clad in Patagonia fleeces, button-up shirts and Team Ripple tees. He performed to a group of cryptocurrency believers downing champagne and blood orange margaritas.

This wasn’t Snoop dog’s first encounter with cryptocurrency, once tweeting, “My next record is available in Bitcoin n delivered in a drone”.

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