Cryptocurrency crime had a record-breaking year in 2021, with a new report finding scammers took $14 billion worth of crypto last year.
That’s nearly twice the $7.8 billion taken by scammers in 2020, according to blockchain data firm Chainalysis’ “2022 Crypto Crime Report,” findings from which were released Thursday, Jan. 6.
With a boom in cryptocurrency interest over the past year, it’s no wonder that “Olympic-level scammers” have taken notice of new opportunities for illicit activity, says William E. Quigley, a prominent investor and co-founder of the WAX blockchain. The high-tech nature of crypto will continue to attract sophisticated scammers, Quigley said during a panel discussion hosted by blockchain firm Light Node Media last month.
Consider a recent “Squid Game” scam in which investors allege a new SQUID cryptocurrency token and related immersive online game were actually just an elaborate scam. Investors claim the developers disappeared after the currency skyrocketed in price and seemingly cashed out with more than $3 million.
BEFORE YOU INVEST IN CRYPTO
Experts say it’s smart to keep your crypto investments under 5% of your overall portfolio. Crypto prices fluctuate wildly by the day, and experts also say you’d be smart not to invest more than you’d be OK losing if the market dropped out altogether. Crypto investments should also never get in the way of other financial priorities like saving for emergencies, paying off high-interest debt, and saving for retirement using more conventional investment strategies.
Like it or not, crypto investors are opening themselves up to this new and evolving risk of fraud and scams. If you’ve incorporated crypto into your investment portfolio or are interested in investing in Bitcoin or Ethereum in the future, here are some common scams and red flags to look out for.
Types of Cryptocurrency Fraud
Cryptocurrency fraud and scams can come in many forms, including:
Financial Crimes
Crypto’s instant transactions, portability, and international reach mean it can be used as a new tool for the furtherance of tax avoidance, money-laundering, and bribery.
Scam Initial Coin Offerings
The first offering of a particular cryptocurrency for sale, called an Initial Coin Offering or ICO, can be a means of preying on the unsophisticated. Many ICOs are completely fabricated, with phony bios of nonexistent team members and technical whitepapers copied from other, legitimate cryptocurrencies.
Pump and Dump Schemes
Crypto can provide a new variation of the classic pump and dump scheme, where owners of a stock try to drive the price up before selling off their holdings at an artificial peak. In the crypto world, this is common at the ICO stage, or even beyond, whenever false claims can hype up demand and permit the originators or dominant holders of the cryptocurrency to earn massive phony profits.
Market Manipulation
Fraudsters can attempt to manipulate the markets where cryptocurrencies or related derivative products are traded. Improper market manipulation may include spoofing, front-running, churning, and other schemes.
Ponzi Schemes
Crypto investments can also be used as the vehicle for a traditional Ponzi scheme, where new adopters are necessary to give artificial returns to the early adopters. Purported investments in emerging crypto markets can also serve as the supposed goal for Ponzi schemes. Given that crypto is widely misunderstood, it can be the perfect cover for a bogus scheme.
Traditional Theft
Crypto also provides criminals new opportunities for theft. They can hack investors’ crypto wallets and steal their currency; they can set up fake wallets to bilk counterparties; and they can set up phony crypto exchanges to steal customers’ money.
Broker/Dealer Fraud
The SEC has examined exchanges and funds investing in cryptocurrencies, which may, depending on the circumstances, need to register as broker-dealers or exchanges.
Unscrupulous Promotors
The SEC famously fined Floyd Mayweather and DJ Khaled for failing to disclose payments they received for promoting investments in Initial Coin Offerings (ICOs).
Blackmail or extortion cryptocurrency scams
One of the oldest scamming approaches in the book, blackmail or extortion is when you receive an email that someone has compromising information about you — be it photos, videos, confidential data, etc. — and they request you pay them money or else they’ll release it.
This becomes a cryptocurrency scam when the scammer requests the payment in cryptocurrency, oftentimes because the transactions cannot be reversed. It’s best to delete these messages and report the sender to authorities.
Social media cryptocurrency scams
Social media cryptocurrency scams are just what they sound like: cryptocurrency scams that occur over social media. Oftentimes this is via a false social media post or advertisement requesting payment in cryptocurrency. You might even see other users responding to the post or leaving reviews. In reality, these could be bots. The post or message might even be from a friend whose account has been hacked.Alternatively, social media influencers might tout a new and potentially fake crypto and encourage users to sign up or send them payments that they might multiply. In some cases, influencers merely pocket the payments. These are considered influencer cryptocurrency scams.
Bottom line: Recognize that cryptocurrency isn’t yet a widely used payment method and any ardent requests to only pay with it are likely a scam.
Giveaway cryptocurrency scams
Somewhat of a cross between impersonation and social media cryptocurrency scams, giveaway scams are when victims are lured to an opportunity to send money to someone promising they’ll multiply the payment.
For example, this could occur from a fake celebrity social media account posting that if followers send them a certain amount of cryptocurrency, they will send back twice the amount. In fact, followers will be sending money directly to scammers, never to see their investment again.
Fake apps
As a digital payment method, different cryptocurrencies also have different apps, and cybercriminals can be skilled at replicating them. In 2021, there were over 300,000 downloads of a fake app that stole banking credentials from victims. Once users download these fake apps, they might begin sending payments directly to the crypto scammer.
Fortunately, there are some red flags you can watch for before downloading cryptocurrency apps to ensure they — and your investments — are legit.
Regulation of Cryptocurrency
The SEC, CFTC, and IRS all assert regulatory control over cryptocurrency under certain circumstances. For the SEC, a given cryptocurrency must qualify as a security, or the “investment of money in a common enterprise with a reasonable expectation of profits to be derived from the entrepreneurial or managerial efforts of others.” The SEC developed its application of this test to cryptocurrency in its now-famous report on The DAO, a German crypto ecosystem.
The CFTC also has authority to regulate crypto as a commodity in accordance with the Commodity Exchange Act. The CFTC has recently stated that crypto enforcement is a top priority because of its high risks for investor fraud.
The IRS has also taken the position that cryptocurrency investments are assets that should be treated like any other for tax purposes, permitting it to tax returns on crypto investments. And through its Criminal Investigations Division, the IRS can pursue money-laundering crimes committed with cryptocurrency. Enforcement efforts by the SEC, CFTC, and IRS can also extend internationally to schemes that have violated U.S. laws.
As cryptocurrencies continue to grow in market cap and influence, whistleblowers will be essential in helping the government catch wrongdoers and prevent fraud. Whistleblowers can also take advantage of the various whistleblower reward programs offered by the SEC, CFTC, and IRS and potentially share in any government recovery.
How Investors Can Protect Their Crypto
Even the most advanced and enthusiastic cryptocurrency experts understand there are many new and evolving risks in the world of crypto right now. Some have weathered scams themselves, such as the blockchain investor and entrepreneur Ian Balina, who said he lost $2.5 million after his private wallet key information was compromised by someone hacking into his Evernote account.
Balina’s story highlights the possibility of loss and fraud when dealing with such a new, volatile asset class, even for successful investors.
Financial experts advise most passive investors to keep crypto holdings to under 5% of their portfolios, and never to invest in crypto at the expense of saving for emergencies or paying off high-interest debt. If you feel ready to start investing in crypto, here are some best practices to protect your money:
Cryptocurrency Red Flags
For starters, watch out for some common red flags that are similar to classic money wiring scams and credit card fraud:
- Typographical errors and obvious misspellings in emails, on social media posts, and during any communication
- Promises to multiply your money
- Contractual obligations that lock you into holding crypto without being able to sell
- Fake influencers or claims to be a celebrity
- Psychological manipulation like blackmail or extortion
- Large social media crypto schemes
- Promises of free money
- Vague details about where your money is going
Know When to Use a Crypto Wallet
Just like your physical wallet, you need to protect your digital wallets from hackers. Practice good digital security habits akin to how you’d handle large sums of physical cash by putting them in a safe or FDIC-insured savings account.
Experts say small-scale investors with a few hundred dollars worth of crypto are probably OK keeping it on a mainstream exchange like Coinbase. However, if you amass thousands of dollars worth of crypto, it probably makes more sense to incorporate a wallet for additional safekeeping.
There are two types of crypto wallets, typically described as “hot wallets” and “cold wallets.”
Hot wallets are hosted, or stored online. They are secure, but more susceptible to hacking than cold storage, which is when you store crypto offline on a piece of hardware. Think of cold storage as kind of like a safe in USB-drive format. It’s more secure, but if you forget your password or lose the device, you could lose access to your money forever.
Crypto held in hot wallets is not FDIC-insured like cash in the bank. You’ll therefore want to make sure that whatever platform or wallet you store your crypto in has robust security measures, including:
- Two-factor authentication
- Storing a portion of holdings in its own cold storage
- Private insurance policies in case of theft or hacking (separate from FDIC insurance)
Keep Track of Your Wallet Keys
You only get one unique key to access your wallet, says Mac Gardner, a Florida-based certified financial planner and founder of FinLit Tech. Losing your key or having it stolen could mean losing the crypto altogether.
“You need to have a lot of control around getting access to [your wallet key.] It’s not a thing where you can forget your username and password if you don’t write it down,” Gardner says. “Each code has a process and a certain number of characters. It’s extremely personalized because of this virtual space. If it wasn’t, anybody could go in there and then grab your stuff, right?”
Report Fraud
You should report fraud and other suspicious activity involving cryptocurrency to the following bureaus using these links:
- The FTC: ReportFraud.ftc.gov
- The Commodity Futures Trading Commission (CFTC) at CFTC.gov/complaint
- The U.S. Securities and Exchange Commission (SEC) at sec.gov/tcr
- If the fraud involves extortion or blackmail, you can also go to the FBI.
Also don’t forget to report the fraud to whatever crypto exchange you used to complete the crypto transaction whenever you suspect or have evidence that bad actors are at play.
