"I'm much more confident with crypto than with banks or fiat currency because I can actually control it, and the money supply is transparent, stated upfront. It makes online shopping a lot easier and a lot safer." This statement was made by Erik Voorhees, the creator of cryptocurrency exchange ShapeShift.1 While he is correct in that virtual currency does make online shopping a breeze, which of course is great for ecommerce, it is not without its risks. And unfortunately, those risks are unknown to the average shopper or cryptocurrency investor. In today's world of technology, advancement often comes with nefarious individuals who want to take advantage of the unsuspecting shopper or internet user.

Cryptocurrency is often referred to as virtual currency or tokens and was introduced 14 years ago as an alternative to physical currency in the centralized banking system. It is managed on a platform called the blockchain and has an open ledger for recordkeeping, available for all to see. Like it's physical counterpart, cryptocurrency is highly susceptible to fraudsters who will attempt to find vulnerabilities in the system and obtain funds through illegitimate means from victims.

And as cryptocurrency grows in popularity, so does its rate of fraud. According the Web3 Security Report issued by CertiK, a pioneer blockchain security company, and its CEO Ronghui Gu (speaking in regards to fraud), "at $3.7 billion, 2022 is the worst year on record in terms of value lost, far surpassing 2021's $1.3 billion."2 Therefore, we need to take an active role in fraud prevention and providing education to those wanting to invest in cryptocurrency.

TYPES OF CRYPTO SCAMS

ROMANCE SCAMS

Often seen in traditional banking relationships, romance scams have grown exponentially in the crypto world. Scammers will create fake online profiles and regularly include pictures of attractive individuals taken from the internet. They will study public information victims include in their social media and pretend to share common interests and beliefs. Often, scammers reach out to victims on dating apps or via private messaging on social media platforms. Romance scams are what are considered "long" cons. Once the scammer has developed a relationship with the victim, they will turn the conversation to cryptocurrency and attempt to convince them to send money to help the scammer after an "accident" or "family emergency." Sometimes, the scammer will try to sell the victim an investment opportunity. The scammer is banking on the established relationship that the victim will help them because they believe the relationship is real, despite the fact that the scammer and victim have never met in person. The scammer will always make up reasons why their relationship must remain online, such as they work overseas, are in the military, or travel internationally for work (among other excuses). Also, they will always refuse to meet via Zoom or other video conferencing app.

INVESTMENT SCAMS

With the state of today's economy, everyone is looking for a way to make a few extra dollars. Scammers are taking advantage of that desire by offering investment opportunities that have "guaranteed" high returns. As aforementioned, scammers will reach out to the victims via dating apps or social media platforms, sometimes impersonating love interests or investment managers. They will attempt to convince the victim that the investment has little or no risk and will always earn the victim a lot of money. Some of these situations involve "pump and dump" schemes, where the scammer will try to get the victim to purchase the crypto at what they deem a "low price," with promises that the crypto's value is going to increase and produce a massive windfall. To make the asset appear more enticing, they will often "pump" up the value and popularity of it in order to get multiple investments.

Scammers will also create fake exchanges and advertise cryptocurrency at rates below the market value and promise big returns on their investment. All that is required will often be a high introductory fee. And when the victim attempts to exit the profits they believe they have generated, the company has disappeared or is unreachable.3

INITIAL COIN OFFERINGS (ICO)

Scammers often use ICOs as a chance to get money from uneducated investors new to the crypto world. The ICO is fabricated and not include any real information, such as the names of employees or whitepapers published about the coin.

PHISHING SCAMS

Phishing has been a tried-and-true method of fraud that has worked for a long time, in and out of the crypto world. Scammers will attempt to get personal or financial details from the victims through various methods. They often reach out electronically to the victims, sometimes impersonating a legitimate company (ex. Amazon or a financial institution), and entice them to click on a link, webpage, or video. There will either be embedded malware in the links and video or will redirect the victim to a page that is not associated with the legitimate business (but looks so similar to the correct page that the victim does not notice the changes). The malware will steal the victim's private keys for their crypto wallets, their sign-in credentials for exchanges, or other personal information to help the scammer access these platforms. The scammers might also trick the victim into sending money to their wallet, instead of a legitimate one they think they are using.

UPGRADE SCAMS

As technology is always expanding, software is always in the need of the latest patches and updates. This also applies to cryptocurrency exchanges. During these updates, scammers will contact victims and attempt to convince them that they (the scammers acting as the exchange or platform) needs your login credentials or private keys in order to complete the upgrade. Sometimes, these scams align with legitimate mergers which are well-known, so victims are often less to question the contact.

SIM-SWAP SCAMS

This is one of the most recent scams out there today involving cryptocurrency. Scammers reach out to the victim's phone carrier and pretend to be them, requesting that the phone number be transferred to a new phone. They often obtain the necessary personal information to impersonate the victim through a separate hack or method. Once they are able to convince the customer service representatives to transfer the phone number to the new SIM card (controlled by the scammer), they are able to access the phone data, such as log-in credentials and downloaded apps (such as social media and financial). In addition, since they now control the phone number, they are able to get around any two-factor authentication requests. This allows the scammer to access the crypto wallets and other accounts, often resulting the theft of the assets before the victim even knows that any changes have been made to their phone number and accounts.

HOW TO AVOID CRYPTO SCAMS

Always check the sender's email address on any communication.

Check to make sure the websites you visit are legitimate (ex. Gogle.com vs Google.com) or that there are not spelling errors in the web information provided to you (by the scammer).

Use bookmarks to visit your financial websites, especially crypto exchanges; do not click on the links in the emails to get to the webpages.

When working with individuals across social media, be sure to thoroughly review their page. Check for how long the account has been created and if they have a consistent history of posts and activity. Be very wary of brand new accounts, with little or no posts, and few followers that are attempting to sell you crypto products.

Do not believe that any investment has no risks or can generate unreasonable returns/profits.

Be cautious of messages from individuals you do not know or individuals you have been communicating with that refuse to meet or even conduct a video call.

HOW TO REPORT CRYPTO SCAMS

If you or someone you know may be a victim of fraud, you can report these scams to the following:

  • the FTC at 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
  • the Internet Crime Complaint Center (IC3) at ic3.gov/Home/FileComplaint
  • the cryptocurrency exchange company you used to send the money

FINAL COMMENTS

At Ankura, we want to do everything we can to protect consumers. We work with companies in various industries, including cryptocurrency, and have experience in cases involving fraudulent actors. If you find yourself in need of advice, or services to protect your company from the ever-evolving world of fraud and security risks, we are here for you. Do not hesitate to reach out to us.

Footnotes

1. https://blockonomi.com/gleec-coin-exchanges/ 

2. https://www.certik.com/resources/blog/2aHoafYEoeRguK2gE9fD1s-hack3d-the-web3-security-report-2022 

3 https://www.forbes.com/advisor/investing/cryptocurrency/top-crypto-scams/ 

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.