Individuals invest in cryptocurrency for a variety of reasons – a major contributor being the potential for high returns. Because while there are over 4,000 cryptocurrencies that hold little to no value, some like Bitcoin and Ethereum are gaining traction as a means to diversify one’s investments and possibly lead to substantial profits.
Other investors choose cryptocurrency because of the decentralized and borderless nature of the market. Cryptocurrencies operate independently of traditional financial systems and can be bought, sold, and traded on a global scale.
In other cases, investors are drawn to the increased privacy and security that cryptocurrency offers. Transactions are generally anonymous and secure, and many cryptocurrencies use encryption to protect the privacy of users’ transactions and information.
However, as with any investment, there is always the risk of fraud, and the same attributes that make crypto attractive to investors also make it easy for scammers to take advantage of unsuspecting victims.
In fact, the FTC’s data spotlight shows that, since October 2020, nearly 7,000 people reported losses to fake cryptocurrency investments, adding up to more than $80 million. And while the global market cap for all crypto assets reached almost $3 trillion in November 2021, negative events and news articles have since caused the crypto asset market cap to fall to around $1 trillion.
While every investment requires careful consideration, cryptocurrency investments come with increased risk due to:
Cryptocurrencies are decentralized and operate outside of traditional financial systems, meaning there is no central authority or intermediaries involved in managing or controlling the currency. Instead, transactions are recorded on a ledger, known as the blockchain, which is maintained by a network of users. This means they are not subject to the same level of government oversight and regulation as traditional investments.
While some countries have taken a more hands-off approach to cryptocurrency investments, others have attempted to implement regulations but find it hard to actually enforce their rules. This makes it easier for fraudsters to target investors and operate undetected.
Transactions are recorded on a public ledger, but the identities of the users – like their names, addresses, and Social Security numbers – are not revealed. This anonymity makes it difficult for law enforcement to track down the perpetrators of fraud. And while it may be possible for law enforcement or other parties to identify the individuals behind a given transaction, especially if they have access to additional information such as IP addresses or information from exchanges, it does make it easier for fraudsters to carry out their activities without being traced or detected.
The anonymity of crypto also makes it easier for investors to lose access to their own accounts. Cryptocurrency is owned by whoever owns the private key (imagine a super annoyingly difficult password) associated with it. If you lose the private key, you lose the asset. There are plenty of horror stories online of people losing millions of dollars in Bitcoin or Ethereum because they lost their private key.
Additionally, anonymity also makes it difficult for investors to determine if the person or entity they are dealing with is trustworthy. They may not have access to the same level of information or verifications that they would have in a traditional, regulated financial system. As a result, investors may be more likely to trust someone they cannot identify simply because they cannot see the potential risk.
Cryptocurrency can be a complex and confusing concept for many people, particularly for those who are new to investing. This complexity can make it easier for fraudsters to take advantage of inexperienced investors and convince them to invest in scams they might not understand.
Additionally, the technical nature of cryptocurrencies can make it difficult for investors to detect fraud. Some cryptocurrency investments can have complex structures, such as decentralized finance (DeFi) projects or token offerings. This can make it easier for fraudsters to conceal the true nature of their investment or to hide their activities from investors. Finally, in the absence of a central authority or intermediaries, investors may not know where to turn for help if they do fall victim to a scam.
There are several tactics used by fraudsters to attract and scam victims. However, one specific type of crypto-investing scam known as “Pig Butchering” has become one of the fastest emerging scams to plague new crypto investors and is expected to blow up massively this year. This scheme plays out as follows:
The fraudster reaches out to the victim and begins building trust.
A victim will receive an unsolicited text or social media message from the fraudster, enticing the victim to respond even though they do not know who the message is from. These messages seem harmless, but when the victim responds, they fall into the first step of the fraudster’s trap.
The fraudster then carries out normal conversations with the victim, sometimes for months on end, to build rapport and trust. In some cases, the fraudster may even try to form a romantic relationship with the victim through digital communication, causing the victim to lower their guard even further.
The victim is slowly encouraged to invest in cryptocurrency.
Once the fraudster has built a relationship and feels that the victim trusts them, the fraudster will subtly start to mention investing in cryptocurrency.
The fraudster will show the victim fake platforms, websites, or mobile applications showing unrealistic gains that the fraudster has “made” on their investments in crypto assets. He or she is patient when building the relationship to try to get the victim to put their funds into crypto, often offering to educate the victim on crypto best practices. Once a sense of trust is established, the fraudster convinces the victim to invest in a small amount of crypto.
The victim continues to invest more and more.
Over time, the victim continues investing increasingly large amounts of funds into crypto. At this point, the victim may begin obtaining home equity loans or withdrawing funds from their retirement and saving accounts, unknowingly decimating their future financial security.
The fake returns that the fraudster shows the victim seem too good to pass up, and the victim keeps investing more funds. Eventually, the victim will want some of the funds back to see the fruit of their “profits.” However, these profits do not exist. They are part of the fictitious trading platform that is shown by the fraudster.
The fraudster collects more personal information from the victim.
Once the victim tries to withdraw funds from the platform, they are often informed that their account has been frozen, and they are required to put in more personal information as part of a “regulatory” requirement by a foreign government.
The victim provides this information to the fraudster, which often includes sensitive information including social security numbers and bank account information. The fraudster can then use this information to open accounts in the victim’s name or sell the information on the dark market, causing further financial harm to the victim.
After taking more funds, the fraudster disappears.
To make matters worse, the fraudster tells the victim that additional funds must be deposited in order to pay “fees” before the victim will be allowed to take out any of the funds from the platform. The victim will often pay these “fees” but start to become leery at this point. The fraudster will continue to use different tactics to try and obtain more funds, and if they sense that the victim may suspect something is awry, the fraudster will vanish and cease all communication, leaving the victim financially decimated and concerned about what has taken place.
Cash has also always been popular with fraudsters, organized crime, and money laundering because it is easier to hide and difficult to quantify losses in theft, embezzlement and hidden asset cases. Methods such as check payments, credit cards, electronic transfers, and even money orders can still leave a paper trail for investigators to follow.
Now, enter cryptocurrency. There is no “know your customer” with cryptocurrency. Anyone can make transactions with cryptocurrency 24 hours a day, seven days a week, all over the world. And it’s even harder to track than cash.
Consider the following scenarios of cryptocurrency being used for malicious purposes:
And unfortunately, it’s not difficult for fraudsters to turn crypto into cash. A fraudster may use cryptocurrency mixers to try and launder the victim’s funds multiple times before transferring the funds to exchanges. When funds are deposited into a mixer, they are shuffled with the funds of other users and then sent back to different addresses, making it difficult to trace the original source of the funds. After hiding the stolen money, the fraudster can then trade it for fiat currency (like dollars) and use it for themselves.
Cryptocurrency is not inherently bad. With the right research and analysis, investment decisions with cryptocurrency can be beneficial.
There are several steps you can take to detect a fraudulent cryptocurrency scheme:
As the demand for cryptocurrency grows, the need for individuals, financial institutions, and businesses to understand, trace, and determine how and where cryptocurrency was used also increases.
Forensic accountants and fraud examiners can apply their current experience with blockchain and forensic accounting knowledge to find answers. The art of cryptocurrency tracing can help in situations like:
Our blockchain and digital forensic professionals are distinctly positioned to assist in tracing crypto assets, provide clarity for your case, and conduct a thorough investigation on your behalf should you fall victim to a scam.
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