It’s no secret that cryptocurrencies like Bitcoin, Ethereum, and several others are a highly sought-after commodity in the digital world of online trading. Many smart investors have made massive profits, with many others becoming millionaires overnight.
Unfortunately, there is a dark side to it all that people hardly ever talk about – Crypto fraud.
That’s right. The prospect of overnight riches can make many investors blind to some of the risks that come with online trading, which, in turn, allow fraudsters to lure them into crypto scams. If you’ve fallen victim to crypto fraud, this guide explores some of the steps you can take.
Common Types of Cryptocurrency Scams
According to a 2021 report compiled by the Federal Trade Commission (FTC), more than 7,000 people fall victim to crypto scams every year, reporting losses of more than $80 million cumulatively. Those numbers are projected to rise in the years that follow. To avoid becoming the next victim of a crypto scam, here are some warning signs to keep an eye out for.
1. Establishments That Demand Crypto-Only Payments
If you encounter a seemingly credible establishment or individual claiming that they do not accept any other form of payment other than cryptocurrency such as Bitcoin, that’s a glaring red flag that you’re likely looking at a scam.
It is entirely unlikely that a credible institution would not accept payment in the form of US dollars by normal means via cash, credit or debit cards, checks, or wire transfers but instead insist on crypto payment.
The reality is that any person or institution demanding that you pay them in crypto might have plans to hoard the digital currency to capitalize on its skyrocketing value.
Unfortunately, blockchain does not have the usual know-your-customer (KYC) protocols you would ordinarily find in banks. It means that any person can open a crypto wallet without having to provide a valid form of government-issued ID, Social Security Number, contact details, or address information.
While blockchain is essentially a public ledger that creates permanent and freely-accessible records, individuals can transact on it anonymously, which makes it easy for someone with sinister motives to take your cash and run.
2. Fake or Anonymous Identities
As mentioned before, the glaring absence of KYC protocols leaves behind a major gap despite its widespread use. The fact that cryptocurrency operates on a decentralized platform also means that it lacks safeguards to differentiate the good actors from the bad.
Despite these inefficiencies, blockchain does provide a different form of transparency since the information embedded in it cannot be deleted or modified. Every transaction is logged on the public ledger.
In June 2021, investigators from the US Department of Justice were able to trace the 63.7 Bitcoin that Colonial Pipeline paid in ransom to anonymous hackers. At the time, the cryptocurrency amount was valued at more than $2.2 million.
The transparency built into blockchain alongside the sophisticated tracking tools currently being developed by coders allows law enforcement officers to analyze specific on-chain transactions and track down the culprits.
That said, there’s still a long way to go before these tools become available to municipal-level law enforcement agencies to be able to investigate blockchain scams that occur at a smaller scale and uncover the anonymous identities of bad actors.
3. Digital Games and Collectibles
If the infamous Squid Game crypto scam is anything to go by, one thing is for sure: The next crypto token fraud could be a viral Netflix show away from becoming a reality. Sophisticated cybercriminals have the skills to create new games and fake blockchain worlds fast to cash in on whatever might be trending at the time.
Some of the methods crypto fraudsters are using to scam individuals who are new to the world of blockchain involve getting them to buy a new type of freshly minted token or coin for a game or collectible. If enough excited investors drive up the price through demand and supply, the original token/coin creators (read scammers) can then sell their holdings and vanish in a classic rug-pull move.
Keep in mind that federally-regulated currency has fraud protection and protection from the Federal Deposit Insurance Corporation (FDIC). Unfortunately, these safety nets do not exist on the blockchain. The only way to recover your stolen money would be to get the recipient to refund your cash, which is highly unlikely on a decentralized exchange.
Although you’ll find more robust security measures on mainstream cryptocurrency exchanges, there’s no guarantee that you’ll be able to recoup the funds stolen in a fake blockchain scam. Crypto exchange fraud is more prevalent in smaller, niche platforms.
4. Crypto Investment Schemes
New types of cryptocurrency are constantly being minted. When they hit the blockchain, the process is referred to as an initial coin offering (ICO). While ICOs provide potentially lucrative investment opportunities, they’re also an opportunity for cybercriminals to defraud unsuspecting investors. Here’s how.
An individual or a company may tell you about a new form of cryptocurrency that’s hit the market. They’ll tell you that it represents a once-in-a-lifetime opportunity to invest in it and that you’ll be cashing in on some major returns in the not-so-far future. They may use phrases like 800-1,000% returns. Convinced, you proceed to purchase several new coins and deposit them into a digital wallet.
What you don’t realize is – the wallet in question has been compromised. Alternatively, they may buy up a bunch of coins as demand for the coin increases (driven by new investors like yourself) and promptly sell them when the price goes through the roof in a classic case of “pump and dump.”
5. Romance Scams
According to insight from the 2021 FTC report, the amount of money lost in romance crypto scams accounted for a whopping 20% of the money lost over a six-month period. There’s no shortage of crypto scams in dating apps and usually involve long-distance relationships.
In the scam, one party convinces the other to give them money to purchase a promising new cryptocurrency. The unsuspecting party, who would at this point be love-struck, would then send money to the scammer to purchase the crypto assets. The fraudster would then disappear and cut off all communication with the victim.
6. Phishing Scams
The internet is rife with phishing scams. Unfortunately, crypto adds new and potentially harmful repercussions to conventional attacks.
In your run-off-the-mill phishing scam, a bad actor would send an email in an attempt to bait the recipient into clicking the link. The link would then direct the victim to a fake website, created as an identical replica of the original one. They would then enter their login credentials to the site.
The problem with crypto phishing is that the victim would be directed to a fake site, which they believe hosts their crypto wallet, and proceed to enter their private key information. Once the fraudster has this information, they can then use it to access your wallet and deplete all the NFTs, tokens, coins, and every other crypto asset stored in it.
Unfortunately, blockchain wallets only provide one key to the user. Although the decentralized design of the blockchain ensures that no single entity can control your information, you can see how this would be a problem if you ever needed to change your key.
7. Counterfeit NFTs
NFT is short for Non-Fungible Token. It is a unit of blockchain data that can be traded and sold and is usually associated with digital files, including audio, video, pictures, art, etc. Counterfeit NFT scams involve a scammer stealing an artist’s work and then opening a fake one on an NFT marketplace. They then put the counterfeit art up for auction for unsuspecting buyers to bid on the work. The highest bidder then purchases an NFT that is essentially worthless.
Biggest Crypto Scams
Below is a compilation of some of the biggest crypto scams in the recent past based on the amount of money that victims were collectively defrauded of.
Squid Game Crypto Scam
Squid Game was no doubt the most streamed Netflix show of 2021. While riding on the show’s success, the fraudsters launched the Squid Game Token, a crypto asset that went from being worth a few bucks to a whopping $3,000 in a matter of weeks.
The token was so popular that it was widely covered by major media outlets, including Business Insider, Forbes, and CNBC, despite the fact that the creators of the new token used the name “Squid Game” without authorization from the show’s creators.
Individuals who purchased the tokens quickly realized that they were unable to sell them off when the price soared. This, of course, was intentional since the creators of the tokens secretly embedded an anti-sell mechanism right into the crypto.
Some people were allowed to sell, though. The token’s creators had a huge payday in their “pump and dump” scheme. Retail investors were left reeling from their losses.
FaZe Clan Crypto Scam
In June 2021, FaZe Clan members, a group of well-known social media influencers, began promoting a cryptocurrency dubbed SaveTheKids, which was widely touted to be charity-based. These influencers devoted time to shooting promotional videos to push the token and even lent their photos to the charity’s website.
The idea behind it was to get individuals to invest in it because of its affiliation to one of the largest global Esports brands, and proceeds from the project would go towards raising money for the children’s charities.
Shortly after the crypto token was launched, the initial investors sold off their tokens, taking off with unsuspecting victims’ funds. The token was rendered completely worthless thereafter.
Bitconnect Scam
At its ICO, Bitconnect was touted as an open-source cryptocurrency that guaranteed investors up to 40% returns. Unfortunately, the whole thing turned out to be a well-orchestrated Ponzi scheme that scammed investors out of a cumulative $3.45 billion.
Pincoin Scam
Pincoin was a Vietnamese cryptocurrency that attracted a cumulative investment of $870 million from 32,000 people. When investors attempted to sell their investment and redeem their profits, they were instead rewarded with a different token known as iFan. The creators of Pincoin disappeared with investor funds shortly after.
ACChain Exit Scam
When ACChain was first launched in Shenzhen, China, the cryptocurrency token appeared to be a highly lucrative venture. Thousands of investors got themselves a piece of this lucrative pie, raising a total of $80 million at the ICO. Shortly after, it became apparent that things weren’t as they seemed.
A photo of what was supposed to be the ACChain headquarters was leaked online and went viral in a matter of days. The photo showed nothing more than an empty room, and the company disappeared shortly after with investor funds.
Where to Report Crypto Scams
If you or someone you know has fallen victim to a crypto scam, you first need to report that and any other suspicious or fraudulent activity to the crypto exchange you used to carry out the transaction in question. Once you do, you need to make reports to the following government agencies:
- The Commodity Futures Trading Commission (CFTC)
- The Federal Trade Commission (FTC)
- The US Securities and Exchange Commission (SEC)
If you were defrauded using blackmail or extortion, you also need to file a report with the FBI.
Once you’ve reported the scam to the relevant authorities, you’re now probably trying to figure out how to find out who scammed you so that you can recover your stolen crypto. It’s important to mention at this point that there are several recovery scams on the internet. Ensure you don’t fall for them only to end up losing more money than you already have.
That said, the chances of finding out who scammed you and subsequently recovering your stolen funds are slim. The only real possibility of this happening is if you work with law enforcement agencies to help track and seize your money.
These agencies employ sophisticated blockchain analysis tools to “follow the money” and find out exactly where your coins, tokens, NFTs, and other crypto-assets went. You may be able to recover your funds even if the perpetrator is in an entirely different cryptocurrency jurisdiction outside the United States.
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