The first Fraud Disruption Conference to work on efforts to combat a type of fraud commonly known as “pig butchering” has taken place, with more than 300 federal regulators and law enforcement officials in attendance.

The news comes in an announcement by the Commodity Futures Trading Commission (CFTC) and the Department of Justice’s (DOJ’s) Computer Crime and Intellectual Property Section’s National Cryptocurrency Enforcement Team (NCET). 

Americans are scammed out of billions per year, the CFTC said, making this type of financial fraud a top law enforcement priority.

Fraud disruption

The CFTC added that this would be the first of a series of Fraud Disruption conferences it will host with partner agencies. This will provide the opportunity to discuss various financial frauds and to explore new avenues to combat or disrupt the scams.

The other federal agency participants in this conference were:

• Federal Bureau of Investigations;
• Social Security Administration Office of the Inspector General;
• US Attorney’s Office for the District of Columbia;
• US Attorney’s Office for the District of Massachusetts;
• US Department of the Treasury;
• US Drug Enforcement Administration;
• US Postal Inspection Service;
• US Secret Service;
• US Securities and Exchange Commission.

Pig butchering and cryptocurrency

The term “pig butchering” refers to the metaphorical act of fattening up a victim before slaughter. This type of confidence scam often involves an agent posing as a member of the victim’s community, whether it be religious, social, or ethnic. Another popular variant involves the agent posing as a potential love interest.

Scans are often initiated by an ostensible “wrong number” text. After becoming sufficiently ingratiated, the agent will then spin a sympathetic tale and request a sum of money that the victim is all too happy to part with.

In most cases, pig butcherers request that their victims deposit funds into crypto wallets, often with “stablecoin” tether, which is pegged to the US dollar and accounts for 84% of total pig butchering transactions. Stablecoins are usually preferred by scammers because their price does not fluctuate and can quickly move between accounts without scrutiny.

Some victims have lost their entire life savings, and, in most cases, the funds are completely unrecoverable.

Pig butchers often target socially isolated members of society, so it is no surprise that the scam’s enormity has exploded since the advent of the COVID-19 pandemic. Some victims have lost their entire life savings, and, in most cases, the funds are completely unrecoverable. The CFTC estimates that Americans lost $3.5 billion to pig butchering scams last year.

Aside from their massive financial impact on victims, pig butchering operations are linked with a plethora of human rights violations.

Many scam centers are known to have lured professional fabulists with the same sophisticated techniques they use on other victims, netting citizens of India, China and Uganda with promises of high salaries and false job descriptions. Notorious scam centers situated in civil-war-torn Myanmar have even been accused of profiting from kidnapping and slave labor, where scammers are allegedly prohibited from leaving the premises and subjected to physical and psychological torture.

Pig-butchering scams are deeply implicated in the future of cryptocurrency regulation, a domain over which the CFTC has long sought regulatory jurisdiction. Because crypto transactions are irreversible and difficult to trace, they make an ideal platform for fraud and crime.

Future of stablecoin regulation

How stablecoins like tether should be regulated, and by whom, remains an open and chalenging question.

In May, a bill titled the Financial Innovation and Technology for the 21st Century Act (FIT21) was passed by the US House of Representatives that would grant the CFTC exclusive regulatory power over so-called “decentralized” cryptocurrencies such as bitcoin and ether.

Unlike most cryptocurrencies, these tokens do not have issuers or promoters, and therefore resemble the kinds of commodities the CFTC was created to regulate, such as agricultural options and futures. Reciprocally, this legislation will take the regulation of decentralized cryptocurrencies out of the hands of the SEC, which has been unclear over whether it officially deems them securities. FIT21 notably excludes stablecoins from this binary scheme, leaving its ultimate fate to future legislation.

Tether (USDT) is a non-decentralized cryptocurrency pegged to the US dollar. It is called decentralized because its supply is tightly controlled by its issuer, the eponymous Tether Limited Inc, which mints and destroys its own tokens to keep their value fixed.

As a so-called “stablecoin,” tether’s value is not influenced by promotion because it is pegged to the dollar.

This potentially satisfies one prong of the Supreme Court’s Howey test used to determine if an asset is a security: that value is “derived from the efforts of others.” However, as a so-called “stablecoin,” tether’s value is not influenced by promotion because it is pegged to the dollar, meaning it is not subject to the wild fluctuation that afflicts many other cryptocurrencies.

And because there is no price fluctuation, it is difficult to assert that stablecoins pass another criterion of the Howey test: the expectation of profit. As such, tether occupies a unique regulatory niche, which the CFTC has previously claimed in a 2021 enforcement action against Tether Inc that resulted in it paying $41m in fines for deceptive advertising practices.

Stablecoin regulation now seems like it will fall further into the orbit of the CFTC.

On July 9, the SEC dropped its enforcement action against stablecoin Binance USD (BUSD), potentially signaling a retreat from the position that stablecoins are securities due to their centralized nature. BUSD’s developer Paxos has strenuously denied that it is a security.

Because the CFTC likely anticipates a future in which it will have substantially augmented or complete regulatory power over this type of cryptocurrency, it makes sense that it is co-ordinating its anti-fraud measures against scammers who prefer transacting with them alongside other federal agencies.