Home > News > Regulation > CFTC Charges South African Firm and CEO With $1.7 Billion Bitcoin Fraud

RegulationJuly 12, 2022

CFTC Charges South African Firm and CEO With $1.7 Billion Bitcoin Fraud

Regulator says it is the largest fraudulent scheme involving the cryptocurrency in any CFTC case.

The Commodity Futures Trading Commission has charged a South African commodity pool operator and its CEO with allegedly running a fraudulent multilevel marketing scheme that took in over $1.7 billion worth of bitcoin from at least 23,000 investors. It is the largest fraudulent scheme involving bitcoin charged in any CFTC case, according to the derivatives markets regulator.

The CFTC charged Cornelius Johannes Steynberg of South Africa and the company he ran, Mirror Trading International Proprietary Limited, with fraud and registration violations. The charges allege Steynberg created and operated a global foreign currency commodity pool through Mirror Trading International that only accepted bitcoin, and that he and the company misappropriated the more than 29,000 bitcoin they accepted from pool participants.

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According to the CFTC’s complaint, the commodity pool, which was controlled by the company and Steynberg, purportedly traded off-exchange, retail foreign currency on a leveraged, margined and/or financed basis. This was conducted with participants who were not eligible contract participants through what Steynberg claimed was a proprietary software program, or bot.

The complaint alleges Steynberg made fraudulent omissions of material facts in solicitations to actual and prospective pool participants. These omissions allegedly include failing to disclose that he and his company misappropriated pool funds; that there was no trading “bot” trading on behalf of participants; that no profitable trading took place on behalf of participants; that the account statements provided to participants were actually simulated trades from “demo” accounts; that purported “returns” paid to some participants were in fact principal deposits from other participants; and that online broker Trade300, where Steynberg purportedly traded the participants’ bitcoin, was a fake entity he created.

The complaint says that of the more than 29,000 bitcoin Steynberg and his company accepted from participants, they only deposited fewer than 1,900 bitcoin and lost 566.6 bitcoin trading unprofitably.

“Defendants never traded profitably, never earned any profits trading, and misappropriated essentially all of the at least 29,421 Bitcoin they accepted from participants,” the complaint states.

The CFTC is seeking full restitution to defrauded investors, disgorgement of ill-gotten gains, civil monetary penalties, permanent registration and trading bans and a permanent injunction against future violations of the Commodity Exchange Act and CFTC Regulations. Sternberg, who was a fugitive from South African law enforcement, was recently detained in Brazil on an Interpol arrest warrant.

Another Headache for Crypto: Blockchain Is Vulnerable, Study Says

The digital ledger, touted as safe from tampering, isn’t really that secure, per DARPA.

By Larry Light

Now, in cryptocurrency’s summer of discontent, comes a study that says the underlying technology for digital money is vulnerable to tampering.

Blockchain, the public ledgers used on computers worldwide to keep track of bitcoin and its ilk, is often hailed as a great way to ensure transactions are private. The point is to keep control of digital denominations out of the hands of government or other central authorities, such as banks.

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But blockchain is subject to other forms of centralization, according to the study for the Defense Advanced Research Projects Agency, done by a research firm called Trail of Bits. The report finds “unintended centralities” in these purportedly decentralized systems that could let in outside hackers or other tampering.

Three internet service providers handle 60% of all bitcoin traffic, the report declares. It warns that bitcoin “traffic is unencrypted—any third party on the network route between nodes (e.g., ISPs, Wi-Fi access point operators, or governments) can observe and choose to drop any messages they wish.” In other words, these folks can commandeer crypto exchanges and assume control of the digital assets.

Of course, blockchain users need to trust the handful of entities that oversee the system, but DARPA throws doubt on its ability to deliver. One might argue that this situation is a lot like the one that oversees the traditional monetary structure.

Joshua Baron, the DARPA program manager in charge of the study, said in a statement: “We should not take any promise of security on face value and anyone using blockchains for matters of high importance must think through the associated vulnerabilities.”

Since peaking late last year, bitcoin has lost two-thirds of its value, with other cryptos also dropping enormous amounts. That has encouraged crypto critics, who argue that the digital assets are worthless and bound to fail.

The DARPA study’s conclusion is getting notice because the agency has a storied reputation. It is best known as the government office that funded the creation of the internet. The agency delves into science and technology that ranges from computer security to new weaponry.

Nonetheless, crypto fans aren’t impressed by its blockchain verdict. Take Ric Edelman, founder of an advisory firm now known as Edelman Financial Engines, and a staunch crypto advocate. He points out in an interview that crypto and blockchain are still in their infancy, with major bugs yet to be worked out.

The automobile has been around since the 1930s, and it took until the 1960s to add safety features such as seatbelts, he argues. “Blockchain technology is only 13 years old,” he adds.