Pervasive and creative fraud is a regular feature of DeFi | Womble Bond Dickinson
Much of crypto fraud is a classic old-fashioned scam based on investors’ “fear of missing out.” Like the Ormeus Coin company whose sibling leaders have just been slapped with criminal and civil charges by the Department of Justice. The SEC says Ormeus Coin executives raised $124 million from more than 20,000 investors, lying about the source of Ormeus Coin’s value and spending the money on travel, real estate and personal expenses . The company’s CEO has been arrested and faces 65 years in prison. Like Stephan Curry, you don’t have to be an expert to invest. But it might help to avoid being scammed.
And some of these scams are creative. For example, a DeFi cryptocurrency project called Beanstalk held hundreds of millions of dollars worth of stablecoins that were advertised as being worth $1 each. They are worth nothing now. Who would have expected a disastrous investment from a company whose business model is described in the press as an “honest Ponzi”, which relies on the promise of future investments to ensure the coins’ claimed value? ‘today ? The disaster may have been foreseeable, but not the entirely legal scam that resulted in the losses.
DeFi and crypto enable a financial tool called flash loans, borrowing large sums to make a purchase, then reselling at a profit and repaying the loan very quickly. Flash loans can provide immediate access to large sums to take advantage of a short-term investment opportunity. In this case, the loan was used to buy out at least a supermajority of voting rights in the “decentralized autonomous organization” that controls Beanstalk. Once in control, the new Beanstalk Controller submitted a proposal for a vote, voted the controlling actions in favor of the proposal, and then when the work of the proposal was quickly completed, according to the Guardian “he sold the rights, repaid the loan and began the process of laundering the proceeds.” And what did the newly voted proposal do? At first glance, it looked like the proposed program would simply give $250,000 to Ukrainian aid, but once passed, the program quickly transferred almost all of Beanstalk’s investor funds, $180 million, to the personal account of the person who just bought the shares.
The shareholder took control of the company for a while, successfully proposed and adopted a stock to pay himself all the money held to repay the crypto investors, then sold the shares and repaid the borrowed money to buy control of the business. Nice trick. It’s basically the same as buying out a community for $5 million, withdrawing $30 million in account holder deposits to pay you, then selling your shares in the bank once all of its accounts have been reduced to zero by you. This would go against banking rules as banks are highly regulated. But crypto isn’t, so maybe running this scam here won’t break any laws. That doesn’t make it OK.
Games without rules can work for you or against you.