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US State Regulators Ban ‘Ponzi Scheme’ AI Trading DApp YieldTrust

2 mins
Updated by Ryan James
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In Brief

  • Regulators in three U.S. states have banned, an AI-infused smart contract touted to supersede the efforts of human traders.
  • According to the Montana securities regulator, the product did not provide and evidence of trades or profits earned.
  • While the intersection of AI and crypto may at first present regulatory concerns, academics argue that AI produces results that can be interpreted using existing laws.
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Regulators in the US states of Alabama, Montana, and Texas have issued statements banning trading bot and its developer Stefan Ciopraga.

The authorities joined forces to temporarily ban the chatbot on April 4, 2023, calling it a Ponzi scheme and an unregistered securities offering.

US Regulators Claim YieldTrust Did Not Make Adequate Disclosures

The Montana securities regulator alleged that the product offered 2.2% daily staking returns using Artificial Intelligence but offered no proof of trades or profitability.

Investors could deposit funds into the smart contract on the BNB Chain and earn rewards from multiple trading strategies. The built-in artificial intelligence reportedly analyzed markets and created a hybrid trading method with “exhilarating performance.”

The product’s website also claimed could trade 70 times more, as well as generate 25% more profits than a human trader, allowing investors to withdraw profits daily. The Montana filing stated:

“YieldTrust did not provide blockchain data or other information to investors that would permit them to independently verify the cryptocurrency trades represented in the reports or their profitability,”

Statements from the three regulators joined forces to ban Ciopraga and temporarily. The Montana filing has given the respondents 15 days to respond in writing. After that, should the defendants not reply, the order will become permanent.

On March 29, 2023, Tesla CEO Elon Musk and several high-profile tech-industry executives and academics called for a temporary halt to training initiatives for AI more advanced than GPT-4.

The open letter asks developers to cooperate with policymakers to develop sound AI governance. These include oversight of systems with significant computational power. Additionally, the letter, which has collected 9396 signatures, also calls for approaches to distinguish between real and synthetic.

Coinbase CEO Brian Armstrong countered the letter’s premise. He argued that the “experts” that would draft rules for AI did not exist. Neither will bureaucracy solve anything, he argued.

Challenges Regulators Face at the Intersection of AI and Crypto

With respect to regulating AI, an Assistant Professor of Public Health at Texas A&M University said in a recent interview that legally defining AI is the first step in regulation. According to the academic, legal definitions would aid in understanding which elements of AI are subject to laws.

He argued that lawmakers often resort to old laws in the face of rapidly evolving technology. This strategy can hinder societal benefits and create regulatory loopholes.

Add crypto to the mix, and regulators seemingly face a daunting challenge. Montana Commissioner Troy Downing said that scammers are exploiting the hype around AI tools to mislead investors.

But, as electrical engineer John Villasenor points out, any AI algorithm’s result can be tested for legality against existing laws. As with the YieldTrust case, the AI trading mechanics were not the lawsuit’s subject. Rather, the lack of disclosure and a potential unregistered securities offering was questioned.

Upcoming MiCA regulation in Europe addresses disclosure and admission to trading requirements for crypto assets not covered by existing law. Issuing a new crypto or listing it for trading on an exchange will require publishing a whitepaper.

To complement MiCA, the EU is preparing the Artificial Intelligence Act to articulate which AI technologies pose the greatest societal consequences.

For Be[In]Crypto’s latest Bitcoin (BTC) analysis, click here.

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David Thomas
David Thomas graduated from the University of Kwa-Zulu Natal in Durban, South Africa, with an Honors degree in electronic engineering. He worked as an engineer for eight years, developing software for industrial processes at South African automation specialist Autotronix (Pty) Ltd., mining control systems for AngloGold Ashanti, and consumer products at Inhep Digital Security, a domestic security company wholly owned by Swedish conglomerate Assa Abloy. He has experience writing software in C,...