The Facts
Cryptocurrency trader falls victim to scam
During the 2021-2022 financial year, a cryptocurrency trader had a trading account with a financial company. He used the company’s platform to transfer bitcoin worth the equivalent of A$119,550 to an organisation called Company K.
The investor was under the illusion that he was transferring money to a legitimate organisation. However, this was not the case. The investor was in fact duped by an initial coin offering (ICO) scam that Company K was running.
Funds disappear and scammers stop responding
After the investor had transferred the funds, they became irretrievable and Company K stopped responding to his communications.
The cryptocurrency trader took the view that the financial firm where he held his trading account should have alerted him to the possibility that Company K was fraudulent and should have prevented the transfer of his bitcoin.
Consequently, the investor argued, the financial firm should compensate him for the $119,550 he had lost.
The financial firm disagreed, claiming it provided appropriate security recommendations to its clients.
Expert commentary on the court's decision
Role of the Australian Financial Complaints Authority
This complaint was considered by the Australian Financial Complaints Authority, a dispute resolution scheme which acts as an ombudsman, helping consumers and small businesses reach agreements with financial companies about how to resolve their complaints. The complaints considered cover credit, finance, loans, insurance, banking deposits and payments, investments, financial advice and superannuation.
AFCA decides in favour of financial firm
In this case study published in October 2022 in AFCA’s Annual Review 2021-2022, the ombudsman found in favour of the financial firm, determining that it was not responsible for the cryptocurrency trader’s losses.
AFCA took the view that as the financial firm had told the investor he needed to do his own due diligence because it had no knowledge of Company K, it meant he had been adequately alerted that the investment opportunity did not have the endorsement of his financial firm.
The fact that the investor nevertheless decided to proceed with the bitcoin transfers, despite presumably having some reservations about the legitimacy of Company K, meant that he could not hold his financial firm responsible for his losses.
Responsibility to act with due care and skill
In its findings, AFCA pointed out that the relationship between the cryptocurrency trader and the financial firm was contractual, not fiduciary in nature.
While the financial firm was obliged to act with due care and skill, it was not obliged to conduct investigations into the trading opportunities the investor was considering to establish their legitimacy.
As the ombudsman further pointed out, neither was such an obligation imposed by the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (Cth). The financial firm was not obliged to have data scientists and analysts monitoring transactions and identifying unusual activity.
Growth in cryptocurrency scams in Australia
According to a report released by the ACCC in April 2023, Targeting scams – report of the ACCC on scams activity 2022, during that year 3,910 Australians were scammed using cryptocurrency as the payment method. The total reported lost was $221.3 million, representing an increase of 162 per cent.
Cryptocurrency was the most common payment method in investment scams generally, which resulted in combined losses over $1.5 billion. Given that according to the ACCC’s research, only 13% of scam losses are reported to Scamwatch and over 30% of people do not report scam losses at all, the amount lost by Australians via cryptocurrencies is likely to be higher than this.
That is not to suggest that cryptocurrency is the only way Australians are scammed. The same principles apply to any investment “opportunity”. Do your due diligence, or pay an impartial professional to do it for you.
Even an admirable complaints authority like AFCA may not be able to help you much if you have not done enough to protect your own interests.