Crypto projects play with public funds. The False Claims Act will be a powerful tool to hold them accountable

Last month, the Fairfax County Retirement System said they will be putting $70 million of their $6.8 billion fund into two crypto yield farming funds. In other words, pension funds that allow teachers, firefighters, and police officers to retire are invested in volatile digital tokens known as yield farming projects.

Yield farming projects offer yields significantly higher than those found in bond markets – high risk, high reward, the thinking goes. But there are few investor protections found in traditional finance. The logs and coins earned are subject to extreme volatility and even rug pulls when developers abandon a project and walk away with investors’ funds. There is no Federal Deposit Insurance Corporation protecting these funds.

In October 2021, one of Quebec’s largest pension funds — the Caisse de Depot et Placement du Québec — invested $150 million in crypto lending company called Celsius Network. When Celsius went bankrupt over the summer, the pension fund suffered a precipitous fall in value and had to write off its investment. Interestingly, the fund’s investment manager refused to admit that the investment was a mistake, merely calling it “too early.”

Unfortunately, this probably won’t be the only time a pension fund loses money on a risky crypto bet. But we have tools at our disposal to mitigate damage.

The government can pull certain levers to penalize investments that lure into pension funds with the promise of wild returns just to fill the retirement savings of the people who need them most. Most states have a version of the False Claims Act that mirrors federal law that allows an insider with information about the misuse of public funds to bring that information to the government for a monetary reward. Many of the state versions cover any company lying to get public pension money – in other words, pension stealing is state stealing.

Applying this to the crypto sphere, any crypto company could be held liable for revenue, assets, asset coverage, insurance, the stability of this stablecoin, or any of the many other things that too many crypto companies have been caught lying about , misrepresented under each state’s False Claims Act. For example, if a whistleblower knew that a crypto company’s reported returns were based on nothing more than wishful thinking, that whistleblower could file a complaint on behalf of the state. If found liable, this crypto company would be liable for up to three times the amount in damages (i.e. three times the amount it costs the state) plus penalties.

If a pension fund decides to bet on crypto and that crypto company disappears tomorrow, the fund would go to zero and the fund would have nothing left to pay for that firefighter’s benefits. The funds won’t do that, of course, but even if they invested 10% of their assets in crypto, which then disappeared, that 10% drop would be significant for the people who depend on that money to settle down put.

Some will say that pension funds could lose the “high profit” part of these yield farming operations if they don’t make these risky bets. But I will answer with this: There has yet to be one crypto company that has proven to be a safe investment. Even the so-called “safe” companies in the space — Coinbase, for example, as a public company — have wildly volatile prices and are far riskier investments than what you’d typically see in retirement accounts. The actual crypto companies are even riskier and have outsized losses (and occasional gains). Additionally, the ability for anonymous individuals behind these projects to flee with money — making collection more difficult for the government even if there is a False Claims Act case — should make pension funds think twice before moving into invest in a yield farming project.

Unfortunately, this isn’t the first time pension funds have become overly curious about risky assets. An earlier generation of pension funds chased big risky bets in the home mortgage market. After the mortgage crisis, these big bets led to a series of False Claims Act settlements with the banks, which had lied to the funds about the safety of their investments. Let’s hope this current bout of crypto-curious investment managers doesn’t end with the same devastating loss. However, should that be the case, the False Claims Act will help the government recover those funds.

In Florida, Gov. Ron DeSantis has said he wants to prevent pension funds from carefully examining a company’s environmental, social and governance (ESG) milestones. for example, assessing a company’s efforts to diversify away from fossil fuels or to promote employee equity before investing. But pragmatically, these crypto projects have proven to be far more of a risk to pension funds than a company adopting environmentally or labor-friendly practices. Given the crypto industry’s willingness to admit that it’s all one big Ponzi scheme with no underlying asset, it’s hard to justify a pension fund investing in one.

Learn Crypto Trading, Yield Farms, Income strategies and more at CrytoAnswers
https://nov.link/cryptoanswers