CRIME AND PUNISHMENT.docx

**CRIME AND PUNISHMENT ** **Theranos and Nikola Scandals:** - Both companies promised revolutionary products (Theranos: blood testing, Nikola: zero-emission trucks) but failed to deliver. - Charismatic leaders, like Elizabeth Holmes and Trevor Milton, played a significant role in persuading investors and the public. - Lack of transparency and accountability led to their downfall. - The cases highlight the dangers of blindly trusting charismatic leaders without proper due diligence. **Cryptocurrency Frauds:** - Cryptocurrencies have enabled new forms of financial crimes like rug pulls, pump and dumps, and Ponzi schemes. - Online platforms and decentralized nature of cryptocurrencies make it challenging for regulators to prosecute such crimes. - Discussion points may include the role of regulatory bodies, jurisdictional issues in prosecuting online crimes, and the need for enhanced cybersecurity measures. **AI-Generated Text:** - Tools like ChatGPT enable easy generation of fake academic papers, essays, and outlines. - Ethical considerations arise regarding the legality and morality of using AI-generated text. - There\'s a need to define clear guidelines and regulations regarding the use of AI-generated content, balancing innovation with ethical concerns. - Concerns about bias in AI detection tools raise questions about fairness and inclusivity in AI-driven processes. **Legalization of Certain Activities:** - Activities like reverse engineering, file sharing, and jailbreaking are often considered illegal but are widespread. - Debate centers around whether these activities should be legalized or regulated instead of being outright banned. - Considerations include balancing intellectual property rights with consumer freedom and innovation. - Discussion could also focus on the impact of digital rights management (DRM) on user freedoms and fair use. **DETAILS AND EXPLANATIONS BELOW 👇** - **Reverse Engineering:** This refers to the process of analyzing a product or system to understand its components, design, and functionality, often with the goal of creating a similar product or improving upon the original. Reverse engineering can be used for various purposes, including understanding how software or hardware works, interoperability between different systems, or identifying vulnerabilities for security testing. - - **File Sharing:** File sharing involves the distribution of digital files, such as documents, music, movies, or software, over a network. This can be done using various methods, including peer-to-peer (P2P) networks, file hosting services, or cloud storage platforms. File sharing has been a subject of legal and ethical debate, as it can involve copyrighted material and issues of intellectual property rights. - **Jailbreaking:** Jailbreaking is the process of removing software restrictions imposed by device manufacturers or operating system vendors, typically on smartphones, tablets, or other mobile devices. By jailbreaking a device, users gain access to features and functionalities that are not officially supported by the manufacturer, such as installing third-party apps, customizing the user interface, or bypassing carrier restrictions. - - **Ad Blocking:** Ad blocking refers to the use of software or browser extensions to prevent advertisements from being displayed on websites or within applications. Ad blockers work by blocking or hiding advertising content, including banners, pop-ups, and video ads, which can improve browsing speed, reduce data usage, and enhance privacy by preventing tracking and profiling by advertisers. - - **Fansubbing:** Fansubbing is the process of creating subtitles for foreign-language media, such as movies, TV shows, or anime, by fans rather than professional translators or studios. Fansubs are often created by volunteer groups of fans who translate and subtitle content into different languages, allowing non-native speakers to enjoy media that may not be officially available in their language. - Aftermarket Ink Cartridges: Aftermarket ink cartridges are third-party replacement cartridges used in printers as an alternative to OEM (original equipment manufacturer) cartridges sold by the printer manufacturer. These cartridges are typically cheaper than OEM cartridges and are available from various third-party manufacturers. However, their quality and compatibility with specific printers can vary, and their use may void printer warranties in some cases. - **DeCSS: DeCSS** is a software tool used to decrypt and circumvent the Content Scramble System (CSS) copy protection used on DVDs. It became infamous in the late 1990s and early 2000s as it allowed users to copy the contents of DVDs to their computers and bypass digital rights management (DRM) restrictions. - - **AACS: AACS** (Advanced Access Content System) is a digital rights management (DRM) and copy protection technology used to protect Blu-ray discs and other forms of digital media from unauthorized copying and distribution. It employs encryption and key management techniques to prevent piracy and unauthorized access to copyrighted content. - - **Hackintosh:** Hackintosh refers to a non-Apple computer that is made to run macOS, Apple\'s operating system. This is achieved through unofficial means, such as modifying PC hardware or using specialized software tools to install macOS on non-Apple hardware. Hackintosh systems allow users to experience macOS on hardware that may be more affordable or customizable than official Apple products. - - **youtube-dl:** youtube-dl is a command-line tool used for downloading videos from YouTube and other video-sharing websites. It allows users to download videos in various formats and qualities for offline viewing or archival purposes. youtube-dl has been popular among users who want to save videos for personal use or backup, but it has also been the subject of controversy due to its potential for copyright infringement. **Elizabeth Holmes has been sentenced to over 11 years in prison** The founder and former CEO of Theranos will be spending time behind bars for defrauding investors. Elizabeth Holmes has been sentenced to 135 months, or just over 11 years, in prison, [according to journalist John Carreyrou](https://twitter.com/JohnCarreyrou/status/1593729016506130432). She will have to report to prison on April 27th, 2023, and will have an additional three years of supervised release once she's out, [according to *[Yahoo Finance]*'s Alexis Keenan](https://twitter.com/alexiskweed/status/1593729301861388288?t=VsscFXsctMunvGl7EZH2JA&s=19). Judge Edward Davila, who has overseen the case, declared that the charges she had been found guilty of made her responsible for defrauding 10 victims out of \$121 million, [according to *[The New York Times]*' Erin Griffith](https://twitter.com/eringriffith/status/1593709536229003264). Davila said that Holmes' refusal to accept responsibility for the fraud counted against her in his sentencing decision, [according to *[The Wall Street Journal]*](https://www.wsj.com/livecoverage/elizabeth-holmes-sentencing-theranos-trial/card/judge-explains-rationale-ahead-of-elizabeth-holmes-s-sentencing-kERLOVhjtY2FbpUACHEH). A jury [found Holmes guilty](https://www.theverge.com/2022/1/3/22865362/theranos-elizabeth-holmes-wire-fraud-verdict-guilty) of three counts of wire fraud and one count of conspiracy to commit wire fraud earlier this year. In the weeks leading up to the former Theranos CEO's sentencing, prosecutors [asked the judge](https://www.theguardian.com/technology/2022/nov/12/elizabeth-holmes-theranos-sentence) to give her 15 years of prison time and to pay victims more than \$800 million. On the day of the trial, the government argued Holmes' actions put patients in harm's way, [according to t*[he WSJ]*](https://www.wsj.com/livecoverage/elizabeth-holmes-sentencing-theranos-trial/card/prosecutors-push-for-harsher-sentence-because-patients-were-at-risk-of-bodily-harm-ez6g2lHhZBe7EEuYUK6T)*.* Meanwhile, Holmes' lawyers filed an 82-page document arguing why [she should get a much lighter punishment](https://www.theverge.com/2022/11/14/23455228/elizabeth-holmes-why-shouldnt-go-prison-theranos-court) --- 18 months of house arrest and community service, at most --- and provided well over 100 letters written in support of the founder. Holmes led a company that promised to revolutionize the medical industry by running over 240 tests on a single drop of blood, where traditional panels required much larger samples. But it turned out that the company's tech didn't work and [gave patients inaccurate results](https://www.theverge.com/2021/9/21/22687026/theranos-patient-bad-test-miscarriage-pregnancy). (Holmes was found not guilty on two counts of defrauding patients and one count of conspiracy to defraud patients.) The trial [mainly hinged](https://www.theverge.com/2021/12/17/22843225/elizabeth-holmes-theranos-trial-jury-deliberations) on whether Holmes knew she was giving out false information. In announcing his decision, Davila cited texts between Holmes and Sunny Balwani, former chief operating officer and president of Theranos, as proof that Holmes conspired to defraud investors, [according to NBC News' Scott Budman](https://twitter.com/scottbudman/status/1593727800719990784?s=20&t=HLHEYgTXDTk3-zA-6Kfaug). Balwani was also [found guilty in a separate trial](https://www.theverge.com/2022/7/7/23198848/sunny-balwani-guilty-theranos-fraud-holmes): 10 counts of wire fraud and two counts of conspiracy to commit wire fraud. Unlike Holmes, Balwani was found to have misled both investors and patients. He is [set to be sentenced](https://apnews.com/article/elizabeth-holmes-business-conspiracy-sentencing-0038d440bed66c42d9bc236c9bbd7801) on December 7th. Nikola admits prototype was rolling downhill in promotional video ================================================================= When Nikola Motor Company founder Trevor Milton unveiled a prototype of the Nikola One truck in December 2016, he [portrayed](https://youtu.be/wLidTCqAAtY?t=1049) it as fully functional. \"We will have a chain on the seats to prevent people from coming in just for the safety. I don\'t want someone to end up doing something and driving this truck off the stage,\" Milton said. \"This thing fully functions and works, which is really incredible.\" In January 2018, Nikola [posted a video](https://www.youtube.com/watch?v=IAToxJ9CGb8) to YouTube and other social channels called \"Nikola One Electric Semi Truck in Motion.\" It showed the Nikola One truck moving rapidly along a two-lane desert highway. But last week, the short-selling investment firm Hindenburg Research published a [bombshell report](https://hindenburgresearch.com/nikola/) claiming that the Nikola One wasn\'t close to being fully functional in December 2016. Indeed, Hindenburg published a 2017 text message exchange in which a Nikola employee stated that the company didn\'t resume work on the truck in the months after the show. Even more incredible, Hindenburg reported that the truck in the \"Nikola One in motion\" video wasn\'t moving under its own power. Rather, Nikola had towed the truck to the top of a shallow hill and let it roll down. The company allegedly tilted the camera to make it look like the truck was traveling under its own power on a level roadway. **Nikola now admits Nikola One didn't work** -------------------------------------------- On Monday morning, Nikola sent out a [lengthy press release](https://www.prnewswire.com/news-releases/nikola-sets-the-record-straight-on-false-and-misleading-short-seller-report-301129952.html#:~:text=The%20report%20from%20Hindenburg%2C%20an,%2Dyear%2C%20groundbreaking%20R%26D%20efforts.) titled \"Nikola Sets the Record Straight on False and Misleading Short Seller Report.\" While the statement nitpicks a number of claims in the Hindenburg report, it tacitly concedes Hindenburg\'s main claim about the Nikola One. Nikola now admits that the Nikola One prototype wasn\'t functional in December 2016 and *still* wasn\'t functional when the company released the \"in motion\" video 13 months later. Nikola claims that the gearbox, batteries, inverters, power steering, and some other components of the truck were functional at the time of the December 2016 show. But Nikola doesn\'t claim that the truck had a working hydrogen fuel cell or motors to drive the wheels---the two key components Hindenburg stated were missing from the truck in December 2016. ***\"Nikola never stated its truck was driving under its own propulsion in the video.\"*** And Nikola now admits that it never got the truck to fully function. \"As Nikola pivoted to the next generation of trucks, it ultimately decided not to invest additional resources into completing the process to make the Nikola One drive on its own propulsion,\" Nikola wrote in its Monday statement. Instead, Nikola pivoted to working on its next vehicle, the Nikola Two. So what about that video of the Nikola One driving across the desert? \"Nikola never stated its truck was driving under its own propulsion in the video,\" Nikola wrote. \"Nikola described this third-party video on the Company's social media as \'In Motion.\' It was never described as \'under its own propulsion\' or \'powertrain driven.\' Nikola investors who invested during this period, in which the Company was privately held, knew the technical capability of the Nikola One at the time of their investment.\" **Nikola says it's time to move on** ------------------------------------ Nikola\'s larger point is that the functionality of the Nikola One truck is irrelevant because the company now indisputably has a functional prototype of the truck\'s successor, the Nikola Two. The hype around the Nikola One helped Nikola raise funds that it then used to pay more experienced companies, including Bosch and Iveco, to help it design and build its subsequent vehicles. This strategy culminated with last week\'s [announcement](https://arstechnica.com/cars/2020/09/general-motors-will-engineer-and-build-nikolas-hydrogen-pickup/) that GM will build Nikola\'s Badger pickup truck. Nikola\'s fortunes are now tied to the success of the Nikola Two, Badger, and other products. If those products are successful, it probably won\'t matter that the Nikola One was never drivable. But the fact that Milton lied when he said Nikola\'s first truck \"fully functions and works\" might make investors and customers wonder whether Nikola is exaggerating its current capabilities, too. The structure of Nikola\'s deal with GM puts those issues into stark relief. When GM builds the Badger truck for Nikola, it won\'t use the supposedly groundbreaking battery technology Nikola claims it\'s working on. Rather, the battery-electric version of the Badger will be based on GM\'s Ultium battery platform. Nor will Nikola\'s trucks be using home-grown hydrogen fuel cell technology any time soon. Not only will GM build a hydrogen version of the Badger based on GM\'s Hydrotec fuel cells, but GM will also become Nikola\'s exclusive source of hydrogen fuel cells for Class 7 and 8 semi trucks globally outside of Europe. So what\'s Nikola bringing to the table? One of Nikola\'s key selling points today is that the company has supposedly figured out how to [cut the cost of hydrogen fuel](https://www.youtube.com/watch?v=nbrgQj4xlbk) from today\'s market price of around \$16 per kilogram to below \$4 per kilogram. That would be a big accomplishment if it were true, since it could enable Nikola to build a network of hydrogen filling stations analogous to Tesla\'s SuperCharger network. But Nikola has provided few details about this supposed breakthrough. And Milton\'s history of exaggerating Nikola\'s capabilities is a reason to view them skeptically. Nikola founder Trevor Milton sentenced to four years in prison in EV truck fraud case ===================================================================================== Prosecutors said Milton misled investors by claiming Nikola built its own vehicle from the 'ground up.' Trevor Milton, the founder and former CEO of electric truck company Nikola, was sentenced to four years in prison after [a jury found him guilty](https://www.theverge.com/2022/10/14/23405107/nikola-founder-trevor-milton-guilty-verdict-hydrogen-truck) of misleading investors about the company's technology. Milton was also ordered to pay a \$1 million fine. Federal prosecutor said Milton had lied about Nikola's capabilities, including an assertion that it had built its own electric truck, the Nikola One, from the "ground up." They also [accused him of staging a video](https://www.theverge.com/2021/7/29/22599726/nikola-founder-securities-fraud-charge-milton) that purportedly showed its Nikola One semi driving under its own power when it was actually [rolling down a hill](https://www.theverge.com/2021/7/29/22599726/nikola-founder-securities-fraud-charge-milton). During the sentencing hearing, Milton made several bizarre statements. He claimed that his resignation from Nikola was not a result of the fraud allegations but because his [wife had an illness](https://twitter.com/innercitypress/status/1736807526027735265). He also said he was a [quarter Cherokee](https://twitter.com/innercitypress/status/1736802499292803227) and was emotional recounting "ethnic cleansing" against the tribe. Founded in 2015, Nikola staked out a unique position in the buzzy EV space by claiming it would make zero-emission big rigs using hydrogen fuel cell technology. The company scored a huge win in 2020 when General Motors announced plans to [acquire an 11 percent equity stake](https://www.theverge.com/2020/9/8/21427009/gm-nikola-acquisition-electric-hydrogen-truck). The automaker also said it would help Nikola engineer and manufacture its battery-electric and hydrogen fuel cell vehicles, including [the Badger pickup truck](https://www.theverge.com/2020/2/10/21131754/nikola-badger-hydrogen-electric-pickup-truck-specs-photos-battery-range). But less than a week later, short-selling firm Hindenburg Research [published a bombshell report](https://www.theverge.com/2020/9/14/21436126/nikola-fraud-allegation-hindenburg-short-seller-electric-truck) accusing Nikola of fraud, including the video showing the truck rolling down a hill. The report set off a chain reaction that resulted in Milton's stepping down as board chair and CEO and his eventual arrest. In addition to staging the video, Milton was accused of falsely claiming to produce his own hydrogen fuels at below-market rates and obtaining "billions and billions and billions and billions" of dollars' worth of committed truck orders. Fallout from the report was swift. [GM backed out of the equity deal](https://www.theverge.com/2020/11/30/21726594/gm-nikola-deal-equity-badger-truck-hydrogen). The company has continued operation but scaled down its ambitions significantly. In 2021, Nikola [halted work on its planned electric ATV and motorboat](https://www.theverge.com/2021/2/25/22301823/nikola-powersports-shuttered-nzt-wav), a decision that cost the company \$14 million, according to regulatory filings. The company's stock is now trading for less than \$1 a share. What is Vaporware? ================== A short definition of *Vaporware* --------------------------------- Share on Facebook Vaporware usually refers to computer hardware or software whose manufacture gets announced to the public but is either made available much later or never produced. Note that since the advent of smart vehicles, the term is also used for them. Vaporware products are usually announced during the world's most significant tech events, like CES. Companies that wish to hype their upcoming offerings often talk about them in events that are bound to catch the media's attention, especially in time for Christmas. But due to time or budget constraints, many such wares don't make it to market as promised. Some never do. Contents -------- - [When Was the Term "Vaporware" Coined?](https://www.techslang.com/definition/what-is-vaporware/#When-Was-the-Term-%22Vaporware%22-Coined?) - [How Do Vaporware Come About?](https://www.techslang.com/definition/what-is-vaporware/#How-Do-Vaporware-Come-About?) - [What Are Popular Examples of Vaporware?](https://www.techslang.com/definition/what-is-vaporware/#What-Are-Popular-Examples-of-Vaporware?) - [What Products Were Considered Vaporware but Launched Eventually?](https://www.techslang.com/definition/what-is-vaporware/#What-Products-Were-Considered-Vaporware-but-Launched-Eventually?) - [Key Takeaways](https://www.techslang.com/definition/what-is-vaporware/#Key-Takeaways) Read More about "Vaporware" --------------------------- ### When Was the Term "Vaporware" Coined? A Microsoft engineer is credited for coining the term "vaporware" in 1982, using it on the Xenix operating system (OS), which the company never released. The term first appeared in print in an Esther Dyson newsletter in 1983. Over time, tech writers used vaporware on computing products that took too long to be released. An example would be when InfoWorld editor Stewart Alsop used it to give Bill Gates the Golden Vaporware Award for the much-delayed release of the first version of Windows in 1985. ### How Do Vaporware Come About? In many cases, vaporware come about because their manufacturers don't want to lose out to competitors. Developers thus strive to be the first to introduce products even if they don't exist yet. In some cases, however, the media hype surrounding tech currently in development gives birth to vaporware through miscommunication. The prospect of witnessing the release of the next big thing and scooping competitors can lead to such an incident. ### What Are Popular Examples of Vaporware? Throughout the years, we've seen several vaporware emerge. We named some of the most popular below. #### 1. Ovation Ovation Technologies announced the development of an integrated software package that includes word processing, spreadsheet, database management, and communication capabilities in 1983. Set to compete with WordStar, WordPerfect, Microsoft Word, and Lotus 1-2-3, the suite never came to fruition, and the company filed for bankruptcy in 1984. #### 2. Apple W.A.L.T. and VideoPad In 1991, Apple announced the upcoming launch of its first portable communications device---the Wizzy Active Lifestyle Telephone (W.A.L.T.). It was supposed to be a tablet that doubled as a personal digital assistant (PDA), but it was never released. The company announced the VideoPad during the 1995 MacWorld Expo a few years later. It was a three-in-one portable device---a cell phone, PDA, and videophone combo. It, too, failed the prototype stage and was never released. #### 3. Silicon Film EFS-1 During the Digital Imaging Marketing Association (DIMA) show in February 1998, Imagek announced the EFS-1. It hoped to replace a 35mm film cartridge designed for any camera, enabling photographers to take digital pictures using their existing, non-digital cameras in the next few months. The release didn't push through until after the company changed its name to Silicon Film and announced the EPS10-SF, then ceased to operate. #### 4. Infinium Phantom In a January 2003 press release, Infinium Labs announced the Phantom, designed to "outperform the Xbox, Sony PlayStation 2, and GameCube," with a November launch. True to its name, no such product was released. #### 5. Palm Foleo Palm Computing founder Jeff Hawkins announced the Palm Foleo---a Linux-based subnotebook designed to synchronize with a smartphone so business travelers could work on documents and emails without cramping their thumbs---on 30 May 2007. After only three months, the company pulled the plug on its manufacture. The following timeline shows how the five vaporware cited above never saw the light of day and why, including company bankruptcy, faulty design, engineering challenges, failure to comply with standards, several feature overlaps with existing products, and legal issues. ### What Products Were Considered Vaporware but Launched Eventually? In some cases, products once thought to be vaporware or no-shows actually came to be but years after their promised launch dates. They have since become known as "surfaced vaporware." The following list features a few of them. #### 1. 3G The technology was considered vaporware in the early 2000s, but we have all been enjoying its and its descendants (i.e., 4G and 5G) benefits since 2007. #### 2. Bluetooth It took around six years for the technology to gain mainstream adoption since it was announced in 1994. As such, it made Wired's yearly vaporware rankings even in 2000. #### 3. Windows Vista Codenamed "Longhorn," the OS's development began in May 2001 and was delayed several times. It was finally released in 2006 but without many of the features initially promised. #### 4. Mac OS X Introduced as far back as 1984, Mac OS X was finally shipped in 2001, replacing multiple abandoned OS attempts, including Copland and Taligent. It is the predecessor of what we now know as "macOS." #### 5. Lockitron Apigy promised Lockitron---a Bluetooth- and Internet-enabled door lock---as early as March 2013. After raising more than US\$1.5 million worth of pre-orders via crowdfunding, the device continued to be nonexistent until 2016. Thousands of the devices were delivered before the company ceased production. --- While we never see most vaporware come to life, some actually do, just years after they were promised. Key Takeaways ------------- - Vaporware refers to computing hardware or software whose manufacture gets announced to the public but is made available much later or never produced. - Some of the most popular vaporware of all time are W.A.L.T. and VideoPad, EFS-1, Palm Foleo, Phantom, and Ovation's OS. - Some products, such as 3G, Bluetooth, Windows Vista, Mac OS X, and Lockitron, that were once considered no-shows, actually came to life. Crypto rug pulls: What is a rug pull in crypto and 6 ways to spot it ==================================================================== What is a rug pull in cryptocurrency? ------------------------------------- *A rug pull is a type of crypto scam that occurs when a team pumps their project's token before disappearing with the funds, leaving their investors with a valueless asset. * Rug pulls happen when fraudulent developers create a new crypto token, pump up the price and then pull as much value out of them as possible before abandoning them as their price drops to zero. Rug pulls are a [type of exit scam](https://cointelegraph.com/news/crypto-exit-scams-how-to-avoid-falling-victim) and a [decentralized finance](https://cointelegraph.com/defi-101/defi-a-comprehensive-guide-to-decentralized-finance) (DeFi) exploit. Before learning how to spot a rug pull in crypto and why crypto rug pulls happen, it helps to understand the three different types of rug pulls. What are the various types of rug pulls? ---------------------------------------- *There are three main types of rug pulls in crypto: liquidity stealing, limiting sell orders and dumping. * ![Various types of pulls](media/image2.png) Liquidity stealing occurs when token creators withdraw all the coins from the [liquidity pool](https://cointelegraph.com/explained/defi-liquidity-pools-explained). Doing so removes all the value injected into the currency by investors, driving its price down to zero. These "liquidity pulls" usually happen in DeFi environments. A DeFi rug pull is the most common exit scam. [Limiting sell orders](https://cointelegraph.com/trading-for-beginners/crypto-trading-basics-a-beginners-guide-to-cryptocurrency-order-types) is a subtle way for a malicious developer to defraud investors. In this situation, the developer codes the tokens so that they're the only party that is able to sell them. Developers then wait for retail investors to buy into their new crypto using paired currencies. Paired currencies are two currencies that have been paired for trading, with one against the other. Once there is enough positive price action, they dump their positions and leave a worthless token in their wake. The [Squid Token scam](https://cointelegraph.com/news/users-not-able-to-sell-squid-game-token-clocking-45-000-gains) exemplifies rug pulls of this kind. Dumping occurs when developers quickly sell off their own large supply of tokens. Doing so drives down the price of the coin and leaves remaining investors holding worthless tokens. "Dumping" usually occurs after heavy promotion on social media platforms. The resulting spike and sell-off are known as a [Pump-and-Dump Scheme](https://cointelegraph.com/news/pump-and-dump-in-crypto-cases-measures-warnings). Dumping is more of an ethical gray area than other DeFi rug pull scams. In general, it's not unethical for crypto developers to buy and sell their own currency. "Dumping," when it comes to DeFi cryptocurrency rug pulls, is a question of how much and how quickly a coin is sold. Hard pulls vs soft pulls ------------------------ *Rug pulls come in two forms: hard and soft. Malicious code and liquidity stealing are hard pulls, whereas soft pulls refer to dumping an asset. * Rug pulls can be "hard" or "soft." Hard rug pulls occur when project developers code malicious backdoors into their token. Malicious backdoors are hidden exploits that have been coded into the project's smart contract by the developers. The intent to commit fraud is clear from the get-go. Liquidity stealing is also considered a hard pull. Soft rug pulls refer to token developers dumping their crypto assets quickly. Doing so leaves a severely devalued token in the hands of the remaining crypto investors. While dumping is unethical, it may not be a criminal act in the same way that hard pulls are. Are crypto rug pulls illegal? ----------------------------- *Crypto rug pulls are not always illegal, but they are always unethical. * Hard rug pulls are illegal. Soft rug pulls are unethical, but not always illegal. For example, if a crypto project promises to donate funds but chooses to keep the money instead, that's unethical but not illegal. Either way, like most fraudulent activities in the crypto industry, both types can be challenging to track and prosecute. The collapse of the Turkish cryptocurrency exchange Thodex is a prime example of a rug pull in crypto. The \$2 billion dollar theft was one of the biggest crypto rug pulls of 2021. It is also one of the largest [centralized finance](https://cointelegraph.com/defi-101/defi-vs-cefi-comparing-decentralized-to-centralized-finance) (CeFi) exit scams in history. Although [Turkish police detained 62 people](https://cointelegraph.com/news/turkish-police-detain-62-over-alleged-2b-thodex-crypto-exchange-fraud) during its investigation of the major scam, the whereabouts of the alleged perpetrator remains unknown. Other recent examples of protocols that have suffered this type of crypto rug pull include[ Meerkat Finance](https://cointelegraph.com/news/binance-smart-chain-copykat-project-loses-31-million-in-possible-rugpull),[ AnubisDAO](https://cointelegraph.com/news/investors-rug-pulled-after-pouring-57m-into-dog-themed-olympusdao-fork),[ Compounder Finance](https://cointelegraph.com/news/compounding-problems-65m-more-comp-at-risk-as-devs-wait-for-time-locked-bug-fix) and[ Uranium Finance](https://cointelegraph.com/news/50m-reportedly-stolen-from-bsc-based-uranium-finance). How to avoid a rug pull in crypto? ---------------------------------- *There are several clear signs that investors can watch out for to protect themselves from rug pulls such as the liquidity not being locked and no external audit having been conducted. * The following are six signs users should watch out for to protect their assets from crypto rug pulls. ### Unknown or anonymous developers Investors should consider the credibility of the people behind new crypto projects. Are the developers and promoters known in the crypto community? What is their track record? If the development team has been doxxed but isn't well known, do they still appear legitimate and able to deliver on their promises? Investors should be skeptical of new and easily faked social media accounts and profiles. The quality of the project's white paper, website, and other media should offer clues about the project's overall legitimacy. Anonymous project developers could be a red flag. While it's true that the world's original and largest cryptocurrency was developed by Satoshi Nakamoto, who remains anonymous to this day, times are changing. ### No liquidity locked One of the easiest ways to distinguish a scam coin from a legitimate cryptocurrency is to check if the currency is liquidity locked. With no liquidity lock on the token supply in place, nothing stops the project creators from running off with the entirety of the liquidity. Liquidity is secured through time-locked smart contracts, ideally lasting three to five years from the token's initial offering. While developers can custom-script their own time locks, third-party lockers can provide greater peace of mind. Investors should also check the percentage of the liquidity pool that has been locked. A lock is only helpful in proportion to the amount of the liquidity pool it secures. Known as total value locked (TVL), this figure should be between 80% and 100%. ### Limits on sell orders A bad actor can code a token to restrict the selling ability of certain investors and not others. These selling restrictions are hallmark signs of a scam project. Since selling restrictions are buried in code, it can be difficult to identify whether there is fraudulent activity. One of the ways to test this is to purchase a tiny amount of the new coin and then immediately attempt to sell it. If there are problems offloading what was just purchased, the project is likely to be a scam. ### Skyrocketing price movement with limited token holders Sudden massive swings in price for a new coin should be viewed with caution. This unfortunately rings true if the token has no liquidity locked. Substantial price spikes in new DeFi coins are often signs of the "pump" before the "dump." Investors skeptical about a coin's price movement can use a [block explorer](https://cointelegraph.com/news/how-do-you-use-a-block-explorer) to check the number of coin holders. A small number of holders makes the token susceptible to price manipulation. Signs of a small group of token holders could also mean that a few whales can dump their positions and do severe and immediate damage to the coin's value. ### Suspiciously high yields If something sounds too good to be true, it probably is. If the yields for a new coin seem suspiciously high but it doesn't turn out to be a rug pull, it's likely a Ponzi scheme. When tokens offer an annual percentage yield (APY) in the triple digits, although not necessarily indicative of a scam, these high returns usually translate to equally high risk. ### No external audit It is now standard practice for new cryptocurrencies to undergo a formal code audit process conducted by a reputable third party. One notorious example is Tether ([USDT](https://cointelegraph.com/tether-price-index)), a centralized stablecoin whose team had failed to disclose that it held non-fiat-backed assets. An audit is especially applicable for decentralized currencies, where [default auditing for DeFi projects](https://cointelegraph.com/news/default-auditing-for-defi-projects-is-a-must-for-growing-the-industry) is a must. However, potential investors shouldn't simply take a development team's word that an audit has taken place. The audit should be verifiable by a third party and show that nothing malicious was found in the code. ### Spotting a crypto rug pull scam: It takes some digging In 2021, an estimated \$7.7 billion was stolen from investors in rug pull cryptocurrency scams. These investors trusted that they were investing in legitimate projects, only to have the rug pulled from beneath their feet. Before investing, it's worth taking the time to research new cryptos and to do one's due diligence before investing in a new project. Cryptocurrency pump-and-dump schemes: What you should know about these scams ============================================================================ [Bitcoin](https://www.cnet.com/personal-finance/crypto/what-is-bitcoin/), [ether](https://www.cnet.com/personal-finance/crypto/bitcoin-ethereum-or-litecoin-which-cryptocurrency-is-best-for-you/) and [dogecoin](https://www.cnet.com/personal-finance/crypto/dogecoin-the-origin-story-of-the-elon-musk-supported-cryptocurrency/) reached record highs in value this year, [cryptocurrency ](https://www.cnet.com/tags/cryptocurrency/)fans view them as the future of money for the globe. The underlying [blockchain ](https://www.cnet.com/tags/blockchain/)technology allows crypto to work by creating a digital ledger that records transactions, which would seemingly create a safer form of currency. But where there\'s money to be made, scammers aren\'t far behind. Crypto pump-and-dump schemes take advantage of people while making some big money for scammers. They can involve social media influencers who receive financial incentives for telling people to buy a certain digital coin in order to raise its value. Once the value goes up, the scammers and influencers sell their coins and pocket the profits, while everyone else sees their investments lose value. Last month, a group began selling coins based on the hit [Netflix ](https://www.cnet.com/tags/netflix/)show, [Squid Game](https://www.cnet.com/culture/entertainment/netflixs-squid-game-is-its-biggest-show-yet-at-least-according-to-netflix/). The [\$SQUID coin](https://www.cnet.com/culture/squid-game-cryptocurrency-scams-2-million-after-creators-vanish/) had no ties with the show or Netflix but that didn\'t stop many from jumping on the hype train causing the value from one penny to \$2,800 and then free-fall back down to pennies minutes later. This resulted in the scammer making \$2 million while those who purchased the coin lost money. These schemes mark the latest twist in the ever-changing story of cryptocurrencies, which have created some millionaires while bankrupting others through their persistent volatility. With cryptocurrencies becoming easier to develop, scammers are taking advantage of people who have developed FOMO, or \"fear of missing out,\" and are looking to jump on new crypto coins in hopes of getting rich. Here\'s what you need to know about crypto pump-and-dumps. What is a pump-and-dump scam? ----------------------------- A [pump and dump is a securities scam](https://www.sec.gov/rss/your_money/pump_and_dump.htm) usually involving stocks. Scammers create false hype about a stock in order to generate interest. Once investors start buying shares, the price of the stock goes up. When the price reaches a certain point, the scammers behind the fake hype sell all of their shares. This causes the stock price to plummet, which leaves new investors holding the bag. The movie The Wolf of Wall Street portrayed the infamous pump-and-dump scam conducted by [Stratton Oakmont](https://en.wikipedia.org/wiki/Stratton_Oakmont) investment firm in the \'90s. How does this scam work with cryptocurrency? --------------------------------------------- It doesn\'t work much differently than with stocks. A certain crypto asset is pumped up by people in order to make the value increase. \"As the prices rise, the pump creators dump their assets into the FOMO they\'ve generated, resulting in a price crash that leaves the new buyers holding a bag of the assets that now have a lower value than they were purchased at, creating significant and often unrecoverable losses,\" said Douglas Horn, chief architect of Telos Core Developers. What\'s different is what\'s used for the pump-and-dump. [bitcoin](https://www.cnet.com/personal-finance/crypto/the-best-bitcoin-and-crypto-wallets-for-2021/), ether and dogecoin are well-established cryptocurrencies, and it takes someone with the following of Musk to increase or decrease their value. However, since creating a whole blockchain system for a currency takes a lot of time and effort, those knowledgeable about coding can create their own crypto tokens, which are digital assets using an already existing blockchain technology like Bitcoin or Ethereum. These tokens, also referred to as coins, can be created easily like [Shiba Inu](https://coinmarketcap.com/currencies/shiba-inu/), which the developers have referred to as a \"dogecoin killer\" in a tongue-in-cheek manner. Developers can also create billions of these coins, which in turn means they go for fractions of a penny. One Shiba Inu token, for example, costs \$0.000047, so you can buy 20,000 tokens for less than \$1. Since someone can create billions of tokens easily that cost hardly anything, all that\'s needed is to convince enough people to buy these super cheap coins. This can be done through Discord channels, forums or social media, or by getting an influencer to promote the coin in exchange for their own trove of coins. If the scammers have 1 billion tokens worth \$0.000001 then that\'s only worth \$1,000. But if they can increase the value of a token by just one decimal point, their stash of coins is now worth \$10,000. If they dump it quickly, that\'ll cause its value to crash. Another small difference with the crypto pump-and-dump is the term. While it\'s known as a pump-and-dump, in crypto circles the scam is referred to as a \"rug pull,\" as in the rug was pulled right out from under the investors. Part of enticing people to buy these super cheap tokens is to say they\'re \"rug-proof,\" which means there are measures in place to prevent people who have a large number of coins from selling them within a certain time period. What are some examples of cryptocurrency pump-and-dumps? -------------------------------------------------------- In July, [four members of the FaZe Clan participated in a pump-and-dump](https://www.insider.com/faze-clan-save-the-kids-cryptocurrency-scam-controversy-2021-7) for a token called SaveTheChildren. The pro gamers, along with other influencers, pushed the coin to their followers. Once the price increased, they began selling off the tokens they were given to be part of the scam, with some making an estimated \$30,000. Another coin called SafeTrade was sold as \"rug-proof\" earlier this year. Once people started buying, the organizers sold their coins and left everyone else in the dust. A 2020 study from the University of Technology Sydney and the Stockholm School of Economics in Riga found [355 instances of crypto pump-and-dump scams over the course of seven months](https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3670714). The organizers of these scams made millions. Are pump-and-dump scams illegal? --------------------------------- For stocks, yes. For cryptocurrency, no. The Securities and Exchange Commission is the government regulatory agency that investigates securities scams such as insider trading and pump and dumps. It doesn\'t yet have similar rules for cryptocurrency, and [doesn\'t plan on implementing crypto regulations](https://www.thestreet.com/crypto/bitcoin/sec-has-no-plans-to-regulate-bitcoin-or-other-cryptocurrencies-in-2021), at least for 2021. How do you avoid crypto pump-and-dumps? ---------------------------------------- It\'s important to understand if FOMO is contributing to your decision on whether to invest in a cryptocurrency. It may seem like everyone is getting rich off of bitcoin or dogecoin, but that\'s not the case. The next is to do your homework. Crypto coins or tokens can be created fairly easily by people who understand coding. If there\'s a new coin that\'s supposedly going to make you rich, do some web searches to learn more. The initial coin offering, or ICO, will have a [\"white paper\"](https://cointelegraph.com/ico-101/what-is-a-white-paper-and-how-to-write-it) that offers details about the coin, who\'s behind it, what their objective is and so on. Then there\'s a matter of the buzz that\'s being generated. A way scammers get the word out about their coin is going into spaces where people are interested in cryptocurrency, such as Discord channels, social media and forums. If all of a sudden some person starts hyping up a brand new token, there\'s a good chance they\'re pushing a scam. Be wary of any influencer who you may follow who hardly mentions cryptocurrency and randomly begins promoting a token. In the case of the FaZe Clan members, they promoted coins with a social media campaign and gave out thousands of free coins to their followers, which in turn entices other followers to buy coins \-- FOMO strikes again. If you\'re going to take financial advice, get it from a professional and not someone whose claim to fame is being good at a video game. Last, if you\'re still interested in investing, then don\'t invest more than you\'re willing to lose. It\'s possible that with the right timing, an investor could make money off a pump-and-dump, but it\'s better to assume that the money you\'re using to buy tokens will be gone forever. Investors lose millions as crypto schemes operate unchecked in Australia ======================================================================== **Exclusive:** the New Zealand regulator has warned the schemes could be a 'scam' but they have escaped such scrutiny in Australia and thousands have lost money - [[Follow our Australia news live blog for latest updates]](https://www.theguardian.com/australia-news/live/2023/dec/14/australia-news-live-cyclone-jasper-north-queensland-flooding-storm-climate-change-global-warming-fossil-fuels-cop) - Get our [[morning and afternoon news emails]](https://www.theguardian.com/email-newsletters?CMP=cvau_sfl),[[ free app]](https://app.adjust.com/w4u7jx3) or [[daily news podcast]](https://www.theguardian.com/australia-news/series/full-story?CMP=cvau_sfl) - [['They are so convincing': Vera Gazzard lost her life savings to HyperVerse]](https://www.theguardian.com/technology/2023/dec/14/hyperverse-hyper-group-investment-scheme-lost-savings-ntwnfb) Thousands of investors have lost millions of dollars in crypto investment schemes that have escaped regulator warnings in Australia, despite financial authorities overseas warning two of the schemes were a possible "scam" and "suspected pyramid scheme", a Guardian Australia investigation has found. The schemes have operated under various names including HyperFund and [[HyperVerse]](https://www.theguardian.com/technology/hyperverse). They were established by Sam Lee -- once dubbed "the crown prince of bitcoin" in Australia -- and Zijing "Ryan" Xu, who has promoted himself as "one of China's four bitcoin kings". The pair are two of the founders of the collapsed Australian bitcoin company Blockchain Global. Blockchain Global was put into administration in 2021 and owes creditors \$58m. In October the liquidator for Blockchain Global said in a publicly available report that last year he had referred Lee and Xu to the Australian Securities and Investments Commission (Asic) alleging that they "may have contravened" the Corporations Act. The liquidator's report makes a number of allegations about the running of the business by former directors and key personnel and states that he has been unable to progress his own examination of Lee and Xu as they now reside overseas and he "was unable to effect service of the summonses on them". Asic said it does not intend to take any further action at this time. Guardian Australia can reveal that, separately to Blockchain Global, Lee and Xu have promoted a series of crypto investment schemes since 2018, many of which appear to have since failed, leaving investors unable to withdraw funds. The failure of the schemes -- which has led to thousands of people globally losing their deposits -- has raised concern in Australia about the regulator's role in warning investors about high risk, unregulated investment schemes and possible scams. Sam Lee, the founder of the failed Blockchain Global cryptocurrency exchange. The director of RMIT's Blockchain Innovation Hub (unrelated to Lee and Xu's blockchain ventures), Chris Berg, said there had been a proliferation of crypto-based schemes during the pandemic and the regulators often lacked the technical expertise to respond quickly. "There's a pretty substantial skill shortage in crypto knowledge in many of our regulators and that does create problems \[around\]... how to regulate them in due course and also, how can we identify... \[possible\] scams," he told Guardian Australia. "What's needed is not necessarily greater education about crypto, it's greater education about the nature of scams generally and what it would look like if someone was trying to scam you." Lee and Xu did not respond to questions from Guardian Australia but Lee has previously denied the HyperVerse scheme is a scam. **International warnings** -------------------------- The operation of a range of Lee and Xu's investment platforms, mostly under the HyperTech group established in 2020, has prompted consumer warnings from financial watchdogs in the [UK](https://www.fca.org.uk/news/warnings/hyperfund), [New Zealand](https://www.fma.govt.nz/library/warnings-and-alerts/hyperfund/), [Canada](https://lautorite.qc.ca/en/general-public/media-centre/investor-warnings/investor-warnings-sheet/hypertech-group), [Germany](https://www.bafin.de/SharedDocs/Veroeffentlichungen/DE/Verbrauchermitteilung/unerlaubte/2021/meldung_211019_thehyperfund.html) and[ Hungary](https://www.mnb.hu/sajtoszoba/sajtokozlemenyek/2022-evi-sajtokozlemenyek/piramisjatek-gyanus-mlm-termek-jelent-meg-hyperverse-neven), among others. Prior to HyperTech's establishment, Lee and Xu ran HyperCapital, which was launched in 2018. In August 2022 the Hungarian central bank [released a public statement ](https://www.mnb.hu/sajtoszoba/sajtokozlemenyek/2022-evi-sajtokozlemenyek/piramisjatek-gyanus-mlm-termek-jelent-meg-hyperverse-neven)warning consumers to exercise due diligence before investing in the HyperVerse and (previously) HyperFund schemes, comparing the system underpinning them to a "suspected pyramid scheme", "behind which there is no real economic activity, the only income of the system is the payments of new entrants". It further warned that "there is a significant chance that investors may permanently lose part or all of their invested capital." - [**Sign up for Guardian Australia's free morning and afternoon email newsletters for your daily news roundup**](https://www.theguardian.com/email-newsletters?CMP=copyembed) Asic has so far made no mention of the HyperTech group schemes. In a statement to Guardian Australia, Asic said it discloses "general information on its website regarding the risks of engaging with unlicensed organisations offering unregulated products". "In relation to the issuing of warnings, actions by different regulators in different jurisdictions will depend on the evidence of activities occurring in that jurisdiction and the legislation available." A September 2021 [public warning from New Zealand's Financial Market Authority](https://www.fma.govt.nz/library/warnings-and-alerts/hyperfund/) stated: "The FMA are concerned HyperFund may be operating a scam." "HyperFund operates on a Multi-Level Marketing (MLM) model and claims to offer passive investment opportunities. We have received reports of them recruiting affiliate investors in New Zealand. It is not registered or licensed to provide financial services/products in New Zealand." In addition to the HyperTech schemes, Lee has been involved in the promotion of further apparent investment platforms, including StableDao, VidiLook, VAV, V.E.N.D, and We Are All Satoshi. StableDao and We Are All Satoshi remain active, while as recently as August this year Lee was promoting a relaunch of the Hyper brand through a scheme called Hyper Ascension. It is unknown if Xu is involved in these other investment schemes promoted by Lee. In September, California's Commissioner of Financial Protection and Innovation issued a "[desist and refrain order](https://dfpi.ca.gov/wp-content/uploads/sites/337/2023/09/D-R-We-Are-All-Satoshi.pdf)" to Lee for the operation of the We Are All Satoshi investment platform, alleging it was a "fraudulent pyramid and Ponzi scheme". The commissioner alleged the We Are All Satoshi scheme "does not sell or purport to sell any actual product and has no apparent source of revenue other than funds received from investors". It named Lee as the "founder, CEO and chairman" of We Are All Satoshi and alleged he was targeting investors in the state, breaching multiple provisions of the state's corporations code and ordering him to stop "until the qualification requirements" under California law were met. Xu is not named in the order and there is no suggestion of wrongdoing by him in this regard. Lee relocated to Dubai in 2021. The whereabouts of Xu is unknown. **Give me 2%'** --------------- The model used by We Are All Satoshi appears to be similar to that used by the earlier investment offerings, with subscription packages sold to "members" with the promise of high daily returns. HyperVerse claimed that because it was a membership-based product it did not qualify as an investment product requiring financial regulator oversight. However, this is not the view of the financial authorities where HyperVerse has been most active. Investors in the Hyper group of investment schemes were asked to pay in cryptocurrency for subscription packages, with rewards accumulating in so-called "hyper units" at a daily rate of 0.5%. Similar to traditional pyramid schemes, members were also incentivised to recruit new members. Investors were trained to build their "trees" and build a "community", with people moving up a ranking system based on the number of people they brought into the scheme. While initial investors were able to cash out their hyper units, convert to other cryptocurrencies, or withdraw funds, many later investors say they have lost their money. Those running the schemes have also attempted to "migrate" investors from one platform to another, requiring the injection of further funds into the new platform. This was called "bridging" and was used to reassure investors that they would still be able to access their funds. In a Zoom meeting with Hyper community leaders who had risen up the ranks based on how many people they had recruited, Lee said that at its peak, the "Hyper community" numbered two million members globally. This number cannot be verified. Lee told the August meeting that he wants to grow the next iteration of Hyper to "a billion people in three years". "And if you think, "Well, Sam, you're just doing it for the money' -- yeah I'll do it for the money, just give me 2% of whatever is built; you guys could have the other 98%." "And if you think 2% is too greedy then go find someone else that is less greedy that is ready to help move this community forward." In other Zoom meetings, Lee has blamed the inability to withdraw funds on a "corporate" team, saying he has been left to try to find a solution. He has also said he was responsible for providing the technology to run the schemes, and was involved in the "funds management" side of the business, but not the affiliate marketing side. In a heated question-and-answer forum with community members held in January this year, Lee was asked how things had gone wrong with HyperVerse. There were repeated demands for people to be paid back their lost money. Lee claimed that he had been "caught off guard" by people's inability to withdraw funds, but said he was unable to explain what had happened because he was constrained by a non-disclosure agreement with "corporate". "I thought there was plenty of money to go around but that unfortunately for whatever reason that did not reach membership," Lee said. "I don't understand why membership is not being paid out, you know that's a big question mark for me." When asked why withdrawals had stopped, Lee said he "did not have visibility". "I'm here because something went wrong, and... just saying it's wrong is an understatement, it's gone terribly wrong, but you know I'm here to face the music, I'm here to deal with this." In the meeting, Lee encourages people to "rebuild your tree" in a new scheme, which he suggests he can then promote to other companies. Guardian Australia [has spoken to 10 investors](https://www.theguardian.com/technology/2023/dec/14/hyperverse-hyper-group-investment-scheme-lost-savings-ntwnfb) who say they have lost funds in the various Hyper schemes, including two investors who say they lost more than \$100,000. **Major losses to crypto-based schemes** ---------------------------------------- Data from the ACCC shows that Australian investors have reported losing more than \$350m to crypto-based investment schemes since 2020 across more than 7000 individual reports. The actual amount lost is likely far higher, with ACCC research suggesting just 13% of losses are reported to Scamwatch. Danny De Hek, a New Zealand-based YouTuber who has been labelled the "crypto Ponzi scheme avenger" by the New York Times, has been tracking the investment schemes of Lee and Xu for the past two years. De Hek said he believed that the schemes run by Lee, and other similar schemes, had run largely unchecked by regulators, and more needed to be done to hold them to account. "I feel like I am fighting a losing battle... There needs to be a law change so that we can flag these people, that is what needs to happen." An Asic spokesperson said it had been "very active in warning consumers about the risks associated with crypto assets (as an investment product) and separately, crypto scams", highlighting several media releases and reports. The spokesperson was speaking generally and did not cite examples. If Lee's claim that the community numbered as many as two million people is true, then the schemes' value would amount to at least USD\$450m, based on the minimum investment of USD\$300. However, based on investment numbers boasted by senior leaders of the HyperVerse team, the amount potentially lost could run into the billions. A report from US-based blockchain analysts Chainalysis estimates consumer losses to HyperVerse in 2022 amounted to USD\$1.3bn. Lee has been directly asked if HyperVerse is a scam. "No, because if it was a scam, the website would be offline and I wouldn't be even wasting my time trying to get the information from the community in order to hold corporate accountable," [he said in a February 2023 meeting](https://www.youtube.com/watch?v=2DwZyAUC4FU) with investors. He also tells people they need to be patient if they want to get their money back, and urges them to sign up to a new platform, known as StableDao. According to the internet archive, the HyperVerse website became inactive sometime between April and November this year. Guardian Australia put questions to Lee and Xu prior to publication but did not receive a response. Wire fraud: the most powerful law in crypto right now ===================================================== - My previous article in February 2022 highlighted how DOJ could seek to use the wire fraud statute to prosecute rug pulls (i.e., take the money and run schemes), insider trading, and the market manipulation of digital assets. (See McGinley, \"Expect indictments in the NFT space soon,\" Reuters Legal News (Feb. 4, 2022)). Since then, DOJ has used wire fraud to prosecute the first two rug pulls involving NFTs and to prosecute two digital asset insider trading cases. DOJ has not recently used wire fraud in a large-scale market manipulation case, but it is likely to be a next area of focus, given public reports of market manipulation and spoofing (creating orders with the intent to cancel) by crypto whales, who are individuals or entities that own substantial amounts of a particular cryptocurrency. This article examines DOJ\'s use of the wire fraud statute during the first half of 2022 and what to expect going forward. ### **The wire fraud statute in brief** The wire fraud statute is based on the nearly identical mail fraud statute, which was enacted in 1872 to combat fraud committed through the mail. The wire fraud statute expanded the law beyond the mails to include the telephone, and now all forms of telecommunication including email, text messaging and social media. In general terms, the wire fraud statute prohibits using a wire communication to obtain money or property through a scheme to defraud, which is often accomplished through misrepresentations or false promises. The statute is adaptable; it is not limited by subject matter. Prosecutors have applied it to insider trading schemes, spoofing, and other forms of market manipulation. It is a powerful tool for prosecutors. For this reason, Judge Jed Rakoff famously quipped that to prosecutors the mail and wire fraud statutes are \"our Stradivarius, our Colt 45, our Louisville Slugger, our Cuisinart --- and our true love.\" (Jed S. Rakoff, \"The Federal Mail Fraud Statute (Part 1),\" 8 Duq. L. Rev. 771, 771 (1980)). DOJ\'s recent cases in the crypto space only prove Judge Rakoff\'s point. ### **Recent cases** ### **1. Rug pull cases** In the first half of 2022, DOJ charged two innovative NFT rug pull cases using the wire fraud statute, both of which are still pending. First, in March 2022, the U.S. Attorney\'s Office for the Southern District of New York (SDNY) in U.S. v. Nguyen charged the first fraud case involving NFTs. SDNY alleged that the creators of the Frosties NFT collection committed a \$1.1 million rug pull by falsely promising purchasers that in addition to cartoon-like images, they would receive perks, such as giveaways and access to a metaverse game. Second, in June 2022, the DOJ Fraud Section in U.S. v. Tuan charged the second NFT rug pull against the creator of the \"Baller Ape\" NFT project, alleging a \$2.6 million rug pull. The allegations in that case are even more egregious: the creators did not provide anything to purchasers, not even images. In neither case did the DOJ allege that the NFTs at issue were securities or commodities, as the classification of NFTs was immaterial to the wire fraud charges. DOJ charged a basic theory of wire fraud --- that purchasers of these NFTs did not receive what they were promised. ### **2. Insider trading cases** DOJ has adopted a similar approach in the insider trading space, charging cases that do not hinge on complexity of the underlying asset. In June 2022, SDNY charged the first ever digital asset insider trading case, against Nathanial Chastain, a former OpenSea employee. The Indictment in U.S. v. Chastain alleges that Chastain had advance knowledge of which NFTs would be featured on OpenSea\'s homepage, which generally leads to an increase in the NFT\'s price. Chastain purchased the NFTs before they were listed and sold them after listing for a profit, reportedly around \$67,000. A month later in U.S. v. Wahi, SDNY charged another digital asset insider trading case --- this time against a former Coinbase employee and two others for engaging in a similar scheme. The allegation is that Ishan Wahi, a Coinbase employee, knew which tokens the exchange would list and tipped this information to his brother and friend, who traded on the information for a \$1.6 million profit. In both cases, DOJ charged wire fraud, not securities fraud, the typical charge in insider trading cases. Although this theory will likely be challenged in court, and the defendants have pleaded not guilty, the use of wire fraud to prosecute insider trading has a long history, dating back to the 1987 Supreme Court case Carpenter v. United States, (484 U.S. 19 (1987). That case involved a Wall Street Journal columnist, who wrote about new stocks in his column. This information was considered confidential business information belonging to the newspaper. The columnist misappropriated this information by giving advance notice of the stocks he would feature to his friends at a brokerage firm, who used the information to trade the stocks. DOJ relied on Carpenter because the misappropriation was strikingly similar to the alleged misappropriation in Chastain and Wahi. Relying on wire fraud provides additional advantages for DOJ. First, DOJ may avoid burdensome and complicated litigation about whether the underlying assets are securities. Second, it allows the DOJ to act unilaterally. In the typical securities fraud case, for example, the DOJ and SEC work in parallel and bring simultaneous cases. While there are benefits to this coordination, it also takes time. When the DOJ solely charges wire fraud, there is less coordination because the SEC cannot charge wire fraud. Rather, the SEC can only bring enforcement actions when the underlying asset is a security. ### **What\'s next** ### **1. Disclosure/misrepresentation cases** In both NFT cases, DOJ focused on representations made to purchasers of the respective NFTs. While these were not large-scale frauds, they underscore DOJ\'s focus on the accuracy of the statements and disclosures defendants made to purchasers in digital assets \-- regardless of the identity of the underlying asset. Going forward, we can expect DOJ to focus on larger disclosure issues, likely at the corporate level. Crypto companies communicate with the public frequently, over various forms of social media. Companies often respond in real time to market events. While communicating quickly and frequently with the public has commercial benefits, it can also lead to inaccuracies. DOJ has already used wire fraud to prosecute alleged misrepresentations made over social media in other contexts (seeU.S. v. Milton, S.D.N.Y. 2021), and it may seek to do so as well in the crypto space. ### **2. Larger insider trading cases** The first digital asset insider trading case charged one defendant for reportedly profiting under \$100,000. The second one, just one month later, charged three defendants for approximately \$1.5 million in profits. This trend in complexity and dollar value will likely increase, especially given reports of larger insider trading problems in this space. (See Foldy and Ostroff, \"Crypto Might Have an Insider Trading Problem,\" Wall Street Journal (May 21, 2022)). Insider cases in a particular industry often start relatively small and involve those closest to the source of information. Over time, they evolve to focus on downstream tippees --- that is, individuals at trading firms a few steps removed from the information, but capable of placing larger trades. I would expect DOJ to focus next on investigating insider trading by large market participants and crypto focused trading firms. ### **3. Market manipulation cases** Finally, we can likely expect the DOJ to use the wire fraud statute to prosecute market manipulation in the digital asset space. The media has long reported on suspected manipulative trading practices in the cryptocurrency markets, including wash trading, and spoofing. (See, e.g., \"In Crypto, Market Manipulation Remains a Problem,\" PYMTS.com (Aug. 1, 2022)). As to spoofing, the practice of crypto whales using buy and sell \"walls\" has attracted attention. These \"walls\" are essentially price points created by placing large volumes of buy or sell orders, with the idea of artificially inflating the price of a token to sell high, or decreasing a token\'s value to create a buying opportunity. In 2018, DOJ apparently investigated price manipulation in the crypto markets. (Robinson and Schoenberg, \"U.S. Launches Criminal Probe into Bitcoin Price Manipulation,\" Bloomberg (May 24, 2018)). Given the rise in prominence of crypto in our economy since 2018, it is only logical that DOJ will tighten its focus on these practices. Although the DOJ\'s results in using wire fraud to prosecute spoofing cases have been mixed (and beyond the scope of this article), the DOJ recently prevailed in a spoofing case involving precious metal futures before the 7th U.S. Circuit Court of Appeals using a wire fraud theory. (See, e.g.,United States v. Chanu, (7th Cir. July 6, 2022)). This success will likely encourage DOJ to apply wire fraud to crypto market manipulation. ### **Conclusion** As crypto becomes mainstream, prosecutors have responded with one of DOJ\'s oldest tools --- wire fraud. In the first half of 2022, DOJ was actively prosecuting cases under the wire fraud statute, and we can expect that trend to continue and expand into other areas of financial fraud traditionally prosecuted by the DOJ, including corporate disclosure and market manipulation cases. Acts and occurrences on board aircraft ====================================== [Criminal](https://www.britannica.com/topic/criminal-procedure) [jurisdiction](https://www.britannica.com/topic/jurisdiction) ----------------------------------------------------------------------------------------------------------------------------- Although some systems of national [law](https://www.britannica.com/topic/law) still adhere to the view that ships and aircraft are part of the territory of the state the nationality of which they possess, this is merely a crude [metaphor](https://www.merriam-webster.com/dictionary/metaphor). In [international law](https://www.britannica.com/topic/international-law), a distinction has to be made between three types of state jurisdiction: territorial jurisdiction over national territory and all persons and things therein; quasi-territorial jurisdiction over national ships and aircraft and all persons and things thereon; and personal jurisdiction over all other nationals and all persons under a state's protection, as well as their property. In case of conflict, territorial jurisdiction overrides quasi-territorial jurisdiction and personal jurisdiction, while quasi-territorial jurisdiction overrides personal jurisdiction. For a long time, the failure of states to extend their criminal laws to their aircraft while they were outside national territory posed a serious problem. As long as an aircraft is flying in the national airspace of some state, the law of that state is applicable. When a crime has been committed during an international flight, however, there may be difficulty in pinpointing when and where it occurred and hence in determining the state the law of which has been violated. Unless the [criminal law](https://www.britannica.com/topic/criminal-law) and [jurisdiction](https://www.britannica.com/dictionary/jurisdiction) of the state of registry have been extended to the aircraft during the period it is outside the state of registry, there may be none applicable; over the [high seas](https://www.britannica.com/topic/high-seas), for example, there would clearly be a gap in the law. This, together with the realization that with the constant increase in air traffic the incidence of offenses on board aircraft was bound to rise, led to the conclusion in 1963 at Tokyo of the [Convention on Offences and Certain Other Acts Committed on Board Aircraft](https://www.britannica.com/topic/Convention-on-Offences-and-Certain-Other-Acts-Committed-on-Board-Aircraft), obliging the contracting states to extend their criminal law and jurisdiction to aircraft of their registry when they are outside national territory. The [convention](https://www.britannica.com/dictionary/convention) furthermore gives the aircraft commander power to ensure law and order on board his aircraft and to disembark any offender in any contracting state in which the aircraft lands. Civil jurisdiction ------------------ In most countries the general [civil law](https://www.britannica.com/topic/civil-law-Romano-Germanic) applies, except as modified. In the interest of avoiding statelessness, most states confer their nationality on those born on aircraft of their registry; but there is in air law no general principle of the law of the flag (i.e., the law of the state of registry) being applicable to every occurrence on board. There are, however, various international agreements that affect the exercise of civil jurisdiction by states. A few may be mentioned. The most important is doubtless Article 28 of the 1929 Warsaw Convention on International Carriage by Air, as subsequently modified by Article 8 of the 1961 Guadalajara Convention and amplified by Article 12 of the 1971 [Guatemala City](https://www.britannica.com/place/Guatemala-City) [Protocol](https://www.merriam-webster.com/dictionary/Protocol). Under Article 28, an action arising from an "international" carriage by air may be brought only before the courts of certain contracting states and no others. The 1933 Rome Convention on Precautionary Arrest of Aircraft, which has not been widely accepted, exempts aircraft actually used on government services or in commercial transport from precautionary attachment. In other cases, the giving of an adequate bond "shall prevent the precautionary attachment or give a right to immediate release." Among [ICAO](https://www.britannica.com/topic/International-Civil-Aviation-Organization) members, Article 27 of the Chicago Convention provides that, subject to certain conditions, aircraft of the contracting states on an international flight are [exempt](https://www.britannica.com/dictionary/exempt) from seizure or detention on patent claims in the territory of other contracting states, without having to deposit a security. Under the 1952 Rome Convention on Surface Damage, in principle, actions may be brought only before the courts of the contracting state in which the damage occurred. Crimes against aircraft ----------------------- [Piracy](https://www.britannica.com/topic/piracy-international-law) ------------------------------------------------------------------- The 1958 Geneva Convention on the High Seas intends to be declaratory of general international law when it defines the offense of piracy principally as *Any illegal acts of violence, detention or any act of depredation, committed for private ends by the crew or the passengers of a private \[i.e., nongovernmental and not noncommercial\] ship or a private aircraft, and directed: (a) on the high seas, against another ship or aircraft, or against persons or property on board such ship or aircraft; (b) against a ship, aircraft, persons or property in a place outside the jurisdiction of any State.* The convention defines the effect of piracy under international law as follows: *On the high seas, or in any other place outside the jurisdiction of any State, every State may seize a pirate ship or aircraft, or a ship taken by piracy and under the control of pirates, and arrest the persons and seize the property on board.* A state, having done so, may decide upon the penalties to be imposed and the fate of the ship, the aircraft, or the property. This definition of piracy deliberately excludes acts committed for political motives, as well as acts [confined](https://www.britannica.com/dictionary/confined) within a ship or aircraft, such as [mutiny](https://www.britannica.com/topic/mutiny) or the hijacking of an aircraft by its passengers or crew. Although some states, for example, the [United States](https://www.britannica.com/place/United-States), have in their own laws categorized hijacking as aircraft piracy, this in itself is unable to bring about the consequences of piracy under international law. Hijacking ========= Unlawful seizure is the legal name that states at the international level have given to aircraft hijacking. Thus, the 1963 Tokyo Convention obliges contracting states to take all appropriate measures to restore control of an aircraft hijacked in flight to its lawful commander, and obliges the state in which the aircraft lands to allow the passengers and crew to continue their journey, and to return the aircraft and its [cargo](https://www.britannica.com/dictionary/cargo) to those lawfully entitled to possession. In response to a wave of hijackings that began in 1968, the 1970 [Hague Convention for the Suppression of Unlawful Seizure of Aircraft](https://www.britannica.com/topic/Convention-for-the-Suppression-of-Unlawful-Seizure-of-Aircraft) was concluded in an effort to prevent hijackers from finding immunity in any of the contracting states. Far more grievous than hijackings as regards the number of persons injured or killed and of aircraft damaged or destroyed have been the many acts of sabotage or violence committed against aircraft and [civil aviation](https://www.britannica.com/technology/aviation) installations. This led to the conclusion at Montreal in 1971 of the Convention for the Suppression of Unlawful Acts Against the Safety of Civil Aviation, on roughly the same lines as the 1970 Hague convention dealing with the problem of unlawful seizure. Goods, passengers, shippers, and other parties ---------------------------------------------- Problems of [liability](https://www.britannica.com/topic/liability-law) arising from the international [carriage of](https://www.britannica.com/topic/carriage-of-goods) passengers, baggage, and cargo by aircraft are dealt with by the widely accepted Warsaw Convention on International Carriage by Air, which was concluded in 1929, [amended](https://www.merriam-webster.com/dictionary/amended) in 1955 by the Hague [Protocol](https://www.merriam-webster.com/dictionary/Protocol), supplemented in 1961 by the Guadalajara Convention, and further amended in 1971 by the [Guatemala City](https://www.britannica.com/place/Guatemala-City) Protocol. The 1971 protocol was much influenced by the so-called Montreal agreement of 1966, which was an agreement among airlines accepting the terms of the [United States](https://www.britannica.com/place/United-States) government for withdrawing its denunciation of the Warsaw Convention. Not every party of the Warsaw Convention has accepted the 1955 or the 1971 [amendment](https://www.merriam-webster.com/dictionary/amendment) protocol; nor is a party that accepts either protocol required to denounce the [treaty](https://www.britannica.com/topic/treaty) which the protocol [amends](https://www.merriam-webster.com/dictionary/amends). The result is that there are in fact three separate treaties (Warsaw, Warsaw--Hague, and Warsaw--Hague--Guatemala City) with a number of states being parties to more than one. The contracting states to the Warsaw convention seek to reduce and eliminate problems of [conflict of laws](https://www.britannica.com/topic/conflict-of-laws) by agreeing to adopt uniform rules in their internal laws governing the international carriage of persons, baggage, or cargo by aircraft. The qualification "international" has the special meaning attributed to it by the convention and, in order to avoid [ambiguity](https://www.merriam-webster.com/dictionary/ambiguity), carriage governed by the Warsaw Convention is often referred to as Warsaw carriage. Some states have extended the rules of the convention to carriage not governed by the convention. The rules established by the convention are mandatory in the sense that the parties to the [contract](https://www.britannica.com/money/contract-law) of carriage cannot vary them, especially not to the detriment of the consumer. They are also [exclusive](https://www.merriam-webster.com/dictionary/exclusive) in the sense that no additional claims can be brought against the carrier outside the terms of the convention. In the event a passenger is injured or dies, or baggage or cargo is damaged or lost during "international" carriage, the convention makes the carrier prima facie liable. In order to avoid liability, the carrier has to prove that he and his servants and agents have not been at fault. His liability may also be excluded in whole or in part if the injured person is wholly or partly to blame for the damage. In return for the [presumption](https://www.britannica.com/dictionary/presumption) of his liability, the carrier is given the benefit of [limited liability](https://www.britannica.com/money/limited-liability), a benefit that he forfeits if it is proved that the damage resulted from his willful misconduct or that of his servants and agents. The convention lays down detailed rules on the issuance and contents of the appropriate documents of carriage (passenger ticket, baggage check, and air waybill) and enforces them with the penalty of absolute and unlimited liability. For the carriage of passengers, the Guatemala City Protocol further lays down rules on possible supplementary compensation schemes and periodic increases of the liability limit. The rules concerning documents of carriage, which can have important effects on the carrier's liability, were substantially modified at The Hague and again at Guatemala City. While aircraft may fly over private lands in normal flight, most national laws protect the landowner against excessively low flights and other undue interference with his possession and use of land, such as the performance of aerobatics and buzzing. In addition, normally, every system of national [law](https://www.britannica.com/topic/law) allows third parties on the surface (of the Earth) to recover for damage [done](https://www.britannica.com/dictionary/done) by an aircraft in flight, or by persons and things in or falling from it, though in some countries there are limits to the amount recoverable. Some national laws base liability on fault. The majority, however, hold the owner or the operator of the aircraft absolutely liable for any damage caused. Insurance against third-party liability is compulsory in many states. In 1933 a convention was concluded in Rome on surface damage caused by foreign aircraft. This was supplemented by the 1938 Brussels Insurance Protocol. Both have since been superseded by the 1952 Rome Convention on the same subject. The convention applies only to surface damage caused in a contracting state by aircraft registered in another contracting state. It accepts the principle of absolute [liability](https://www.britannica.com/dictionary/liability), subject to the exception of [contributory negligence](https://www.britannica.com/topic/contributory-negligence), providing however that *There shall be no right to compensation... if the damage results from the mere fact of passage of the aircraft through the airspace in conformity with existing air traffic regulations.* The convention makes the operator of the aircraft liable. The main raison d'être of the convention is said to be its scheme of compulsory insurance; in return, the liability of the operator is limited according to the weight of the aircraft, unless the damage is caused by a deliberate act of the operator, his servants, or agents, done with intent to cause damage. An unauthorized user of the aircraft also [incurs](https://www.britannica.com/dictionary/incurs) unlimited liability. Actions to recover compensation may be brought only in the state in which the damage occurred. An important element in the convention is the provision that judgments rendered under it are enforceable in all other contracting states. The convention came into force in 1958, but the number of states that have accepted it is not very high. The wording of Article 1(1) of the convention quoted above gives rise to doubt whether damage resulting from sonic booms is covered. In view of the treatment accorded to passengers by the Guatemala City Protocol, a revised convention establishing absolute, unlimited, and adequately secured liability for all damage caused by aircraft to third parties on the surface would seem indicated. International regulation ======================== Under the 1919 Paris Convention, an International Commission for Aerial Navigation (ICAN, or CINA) was created with headquarters in Paris. In 1937 an Inter-American Technical Aviation Conference decided on the creation of a Permanent American Aeronautical Commission (CAPA). Both were superseded by the establishment in 1947 of the [International Civil Aviation Organization](https://www.britannica.com/topic/International-Civil-Aviation-Organization) (ICAO) under the 1944 Chicago Convention. The [Soviet Union](https://www.britannica.com/place/Soviet-Union) joined in 1970, making ICAO membership almost universal. ICAO is a specialized agency [affiliated](https://www.merriam-webster.com/dictionary/affiliated) to the [United Nations](https://www.britannica.com/topic/United-Nations), with headquarters in Montreal. It has a [plenary](https://www.merriam-webster.com/dictionary/plenary) Assembly, which holds the budgetary power; a permanent Council elected triennially, which, among other things, adopts the Annexes to the Convention; an Air Navigation Commission; an Air Transport Committee; and a plenary Legal Committee, which discusses matters of air [law](https://www.britannica.com/topic/law) of common interest to members and prepares draft conventions for their consideration and acceptance. One of the most important functions of ICAO is the preparation and periodical revision of international standards and recommended practices relating to [civil aviation](https://www.britannica.com/technology/aviation). It has [done](https://www.britannica.com/dictionary/done) much to standardize aeronautical regulations throughout the world. Among other functions of ICAO may be mentioned those in connection with joint support programs among members for financing air navigation facilities and its [technical assistance](https://www.britannica.com/money/technical-assistance) program. The ICAO Council, under the [Chicago Convention](https://www.britannica.com/topic/Chicago-Convention-on-International-Civil-Aviation), may also function as either a conciliation body or a judicial organ in disputes between members. **Space law**, the body of regulations in [international law](https://www.britannica.com/topic/international-law) that governs conduct in and related to areas of space above [Earth's](https://www.britannica.com/place/Earth) lower atmosphere. The evolution of space [law](https://www.britannica.com/topic/law) began with U.S. President [Dwight D. Eisenhower's](https://www.britannica.com/biography/Dwight-D-Eisenhower) introduction of the [concept](https://www.britannica.com/dictionary/concept) into the [United Nations](https://www.britannica.com/topic/United-Nations) in 1957, in connection with disarmament negotiations. Following the successful launchings of the Soviet satellite [Sputnik](https://www.britannica.com/technology/Sputnik) 1 in 1957 and the U.S. satellite [Explorer](https://www.britannica.com/technology/Explorer-satellites) 1 in 1958, both the [United States](https://www.britannica.com/place/United-States) and the [U.S.S.R.](https://www.britannica.com/place/Soviet-Union) took an active interest in the development of international space policy. It was established that traditional laws of [sovereignty](https://www.britannica.com/topic/sovereignty) that allow any nation to claim for itself uninhabited and uncivilized lands are not viable in space territories and that countries cannot extend the boundaries of their dominion indefinitely into the space regions above them. In 1959 a permanent [Outer Space Committee](https://www.britannica.com/topic/Outer-Space-Committee) was formed for the purpose of maintaining the United Nations Charter and other international law in space, which opened the way for peaceful exploration. In 1963 the [Nuclear Test Ban Treaty](https://www.britannica.com/event/Nuclear-Test-Ban-Treaty) was signed, followed by an Outer Space Committee resolution to prohibit nuclear weapons testing in space. Later that same year a UN General Assembly declaration acknowledged a free international interest in space development and outlined rules assigning each nation individual responsibility for dealing with transgressions of international law and for any resulting destruction. International cooperation was recommended for the [safeguarding](https://www.britannica.com/dictionary/safeguarding) of all astronauts in crisis situations. In 1967 an [Outer Space Treaty](https://www.britannica.com/event/Outer-Space-Treaty) was ratified by 63 participants in the United Nations. This agreement reasserted all earlier guidelines for international space conduct. In addition, it banned certain military activities, such as the deployment of weapons of mass destruction in space and on celestial bodies; established each state's ownership of and responsibility for its space projectiles and components; urged common participation in the protection of space and terrestrial environments; and provided for the open observation and inspection of each state's activities and installations by others. This document has been noted as a landmark in the development of international space law; like most [subsequent](https://www.britannica.com/dictionary/subsequent) space-law agreements generated by the United Nations, it remains in effect today among participating countries. This [treaty](https://www.britannica.com/topic/treaty) was followed in 1968 by an Agreement on the Rescue and Return of Astronauts and the Return of Objects Launched into Space, which reinforced international commitment to the safety of humans in space, assigned economic responsibility to each country for the recovery of its equipment, and confirmed the control of each space power over the vehicles that it launches. Another important treaty, the 1972 Convention on International Liability for Damage Caused by Space Objects, set out detailed rules regarding the recovery of damages for losses caused by space objects. Although international diplomacy continues to play an active role in the codification of acceptable space conduct, several issues remain the subjects of debate. Because nations are prohibited from laying claim to space territories, for instance, there is a need to establish regulations governing the apportionment of usable resources that space may eventually provide. A method for determining the extent of each country's control over the air above remains to be agreed upon. The development of space for a growing array of government and private activities also poses significant challenges for space law. The agreements on which space law is based were formulated at a time when governments dominated space activities and commercial space ventures were just beginning. Whether these agreements remain adequate and appropriate for the 21st century requires review. Various provisions of current space law limit military activities in space, but there is still no overall framework regulating the military uses of space. The wisdom of developing space weapons or, alternatively, of keeping space a weapons-free [environment](https://www.merriam-webster.com/dictionary/environment) [constitutes](https://www.merriam-webster.com/dictionary/constitutes) yet another issue for discussion. AI-Detectors Biased Against Non-Native English Writers ====================================================== In the wake of the high-profile launch of ChatGPT, no fewer than seven developers or companies have countered with AI detectors. That is, AI they say is able to tell when content was written by another AI. These new algorithms are pitched to educators, journalists, and others as tools to flag cheating, plagiarism, and mis- or disinformation. It's all very meta, but according to [**a new paper**](https://arxiv.org/abs/2304.02819) from Stanford scholars, there's just one (very big) problem: The detectors are not particularly reliable. Worse yet, they are especially unreliable when the real author (a human) is not a native English speaker. The numbers are grim. While the detectors were "near-perfect" in evaluating essays written by U.S.-born eighth-graders, they classified more than half of TOEFL essays (61.22%) written by non-native English students as AI-generated (TOEFL is an acronym for the Test of English as a Foreign Language). It gets worse. According to the study, all seven AI detectors *unanimously* identified 18 of the 91 TOEFL student essays (19%) as AI-generated and a remarkable 89 of the 91 TOEFL essays (97%) were flagged by at least one of the detectors. "It comes down to how detectors detect AI," says [**James Zou**](https://profiles.stanford.edu/james-zou), a professor of biomedical data science at Stanford University, a Stanford Institute for Human-Centered AI affiliate, and the senior author of the study. "They typically score based on a metric known as 'perplexity,' which correlates with the sophistication of the writing --- something in which non-native speakers are naturally going to trail their U.S.-born counterparts." Zou and co-authors point out that non-native speakers typically score lower on common perplexity measures such as lexical richness, lexical diversity, syntactic complexity, and grammatical complexity. "These numbers pose serious questions about the objectivity of AI detectors and raise the potential that foreign-born students and workers might be unfairly accused of or, worse, penalized for cheating," Zou says, highlighting the team's ethical concerns. Zou also notes that such detectors are easily subverted by what is known as "prompt engineering." That term of art in the AI field simply means asking generative AI to "rewrite" essays, for example, to include more sophisticated language, Zou says. He provides an example of just how easy bypassing the detectors is. A student wishing to use ChatGPT to cheat might simply plug in the AI-generated text with the prompt: "Elevate the provided text by employing literary language." "Current detectors are clearly unreliable and easily gamed, which means we should be very cautious about using them as a solution to the AI cheating problem," Zou says. The question then turns to what to do about it. Zou offers a few suggestions. In the immediate future, he says we need to avoid relying on detectors in educational settings, especially where there are high numbers of non-native English speakers. Second, developers must move past using perplexity as their main metric to find more sophisticated techniques or, perhaps, applying watermarks in which the generative AI embeds subtle clues about its identity into the content it creates. Finally, they need to make their models less vulnerable to circumvention. "The detectors are just too unreliable at this time, and the stakes are too high for the students, to put our faith in these technologies without rigorous evaluation and significant refinements," Zou says. Quibi: What is it, why did it fail and what comes next? ======================================================= Quibi is a mobile-first streaming service for short-form video packed with stars. It failed. What was it and what went wrong? [Quibi](http://quibi.com/#link=%7B%22role%22:%22standard%22,%22href%22:%22http://quibi.com%22,%22target%22:%22%22,%22absolute%22:%22%22,%22linkText%22:%22%3Cem%3EQuibi%3C/em%3E%22%7D), a mobile-first subscription video service in the US and Canada, launched in April after months of hype. It was yet another new streaming service vying for your money, but Quibi was a little different than the rest: Quibi staked \$1.75 billion on ultraexpensive, star-studded shows \-- all of which came in episodic nuggets shorter than 10 minutes and were designed to be watched on your phone. In less than seven months, it failed. Wednesday, Quibi confirmed it is [shutting down](https://www.cnet.com/tech/mobile/quibi-is-shutting-down-meg-whitman-jeffrey-katzenberg-shows/). The service itself will [go dark on or around Dec. 1](https://help.quibi.com/hc/en-us/articles/360051442231-Quibi-End-of-Service-Announcement), Quibi said Thursday on its [customer support page](https://help.quibi.com/hc/en-us/articles/360051442231-Quibi-End-of-Service-Announcement). [Quibi](https://www.cnet.com/tech/mobile/quibi-bet-1-75-billion-youd-stream-on-the-go-then-the-pandemic-hit/) would be a risky bet even in normal times. But Quibi, which launched April 6, rolled out a mobile-only concept just a couple weeks after the pandemic locked down large swaths of North America, trapping people in their homes. People can watch Quibi at home on their phones, of course, but Quibi\'s bet on exclusively mobile, short-form video was premised on people gobbling up these \"quick bite\" episodes while out and about. After it launched without any support to watch Quibi\'s programming on televisions, the company scrambled as users complained about not being able to watch its shows on the biggest screen in the house. It also launched without simple, easy ways to share or meme its shows on social media, stunting virality and word of mouth ([Golden Arm](https://twitter.com/zachraffio/status/1250273191810875392) excluded.) Quibi also ramped up in the middle of a wave of new streaming services, as tech and media giants all rush to shape the future of video. That means Quibi was competing for your subscription dollars against heavy-duty upstarts like [Disney Plus](https://www.cnet.com/tech/services-and-software/disney-plus-streaming-service-everything-to-know-mandalorian-baby-yoda/), [Apple TV Plus](https://www.cnet.com/tech/services-and-software/apple-tv-plus-how-to-sign-up-cost-price-shows-movies-films-reviews-how-to-watch/), [Peacock](https://www.cnet.com/news/nbc-peacock-streaming-service-prices-launch-dates-shows-movies-to-expect/) and [HBO Max](https://www.cnet.com/news/hbo-max-launch-dates-prices-shows-movies-to-expect/), as well as established players like [Netflix](https://www.cnet.com/tags/netflix/). This intensifying competition coincided with record unemployment, forcing families everywhere to re-evaluate how many services they pay for \-- and which ones to leave out. And of course, \$5-a-month Quibi faced a Goliath in [YouTube](https://www.cnet.com/tags/youtube/), the pioneer of free, short-form video that draws in more than 2 billion viewers every month. Still, Quibi believed its unconventional strategy \-- very expensive, star-packed programming released in 10-minute-or-less episodes that you can watch only on mobile devices like your phone \-- would hit a sweet spot. It had the backing of all the major Hollywood studios and a seemingly endless litany of film, TV, music and sports stars making shows. It\'s also brought [T-Mobile](https://www.t-mobile.com/) on board to offer [free subscriptions](https://www.cnet.com/tech/mobile/t-mobile-adds-quibi-as-latest-perk-for-some-wireless-customers/) to some wireless customers. Quibi has recruited a who\'s who of stars to work on its programming, including [Chrissy Teigen](https://www.instagram.com/chrissyteigen/?hl=en), [Lebron James](http

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