Cryptocurrency Fraud: How Often Does Fraud Occur?
Cryptocurrency crime had a record-breaking year in 2021, with a new report finding scammers took $4 billion worth of crypto last year.
That is nearly twice the $7.8 billion taken by cryptocurrency scammers in 2020. Crypto investors are opening themselves up to the new and evolving risk of fraud and scams.
In the United States, the Federal Trade Commision (FTC) received 6,800 complaints of cryptocurrency investment scams, October 2020 through March 2021. That soared from just 570 in the same period a year ago, and reported losses jumped more than 10-fold to above $80 million.
Cryptocurrency Fraud: What Are Some Common Cryptocurrency Scams?
Many of the related scams are just newfangled versions of classic frauds. For example:
Ponzi Schemes
Some criminals create the illusion of big returns by paying off old investors with new investors’ money. Recently, the DeFi ecosystem has become a massive breeding ground for these types of scams.
Pump-And-Dumps
Using messaging apps or social media, crypto promoters plant rumors that a famous mogul is backing a certain currency. The aim is to lure investors to buy, drive up the price and then sell their stake, causing the currency’s value to plummet.
Romance Scams
Criminals persuade people they met on dating apps or social media to invest or trade in virtual currencies. The FBI’s Internet Crime Complaint Center fielded more than 1,800 reports of crypto-focused romance scams in the first seven months of 2021 with losses topping $133 million.
‘Celebrity’ Endorsements
Con artists pose online as billionaires or other big names promising to multiply your investment in crypto but instead pocket what you send.
Bogus Websites
Phony sites post fake testimonials and crypto jargon promising huge, guaranteed returns on investments.
Cryptocurrency Fraud: How Investors Can Protect Their Crypto
To start, investors must watch out for some common red flags that are similar to classic money wiring scams and credit card fraud:
- A call, text, email or social media message claiming to be from a government agency or other official body seeking a crypto payment to cover a bill, debt or fee
- Pitch claims that the investment involves no risk and guaranteed profits
- 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
- Promises to multiply your money/free money
- Typographical errors and obvious misspellings in emails, on social media posts and during any communication
- Large social media crypto schemes
- Vague details about where your money is going
Secondly, know when to use a cryptocurrency wallet. Just like your physical wallet, you need to protect your digital wallets from hackers.
Experts say small-scale investors with a few hundred dollars worth of crypto are probably safe keeping digital assets on a mainstream exchange like Coinbase. However, if the investor has thousands of dollars worth of crypto, it probably makes sense to incorporate a digital wallet for additional safekeeping.
There are two types of crypto wallets: hot and cold wallets.
- Hot wallets are stored online and are secure but are more susceptible to hacking than cold storage.
- Cold wallets are stored offline in a USB-drive format. It is more secure but if the investor forgets the password or loses the device, access to the money could be lost forever.
Crypto held in hot wallets are not FDIC-insured like cash in a bank. Therefore, you’ll want to make sure that whatever platform or wallet you store your crypto in has robust security measures. A few examples of these include two-factor authentication, storing a portion of holdings in its own cold storage, and incorporating private insurance policies in case of theft or hacking.
Cryptocurrency Fraud: Do’s and Don’ts To Prevent Fraud
Do’s
- Resist pressure to buy right now. Scammers often try to create a false sense of urgency around a supposedly red hot cryptocurrency. This technique is consistent with a pump-and-dump scam.
- Check out any dealer in virtual currency options or futures contracts before you buy. The U.S. Commodity Futures Trading Commission (CFTC) has a tool for running an online background check.
- Thoroughly research any virtual currency platform or digital wallet provider before providing any credit card information, wiring money or disclosing sensitive information.
- Carefully read any agreement with a digital wallet provider. Unlike banks and credit card companies, they might not accept the responsibility for replacing your money if it is stolen.
Don’ts
- Don’t invest in or trade virtual currencies on the advice of someone you’ve only dealt with online, whether it be an anonymous tipster on social media or a supposed romantic partner.
- Don’t put money into an individual retirement account advertised as “IRS approved” or “IRA approved.” Some self-directed IRAs do allow investment in virtual currencies, but the Internal Revenue Service does not approve or review IRA investments.
- Don’t make cryptocurrency payments in response to threats over bills or promises of a prize/reward. Government agencies and legitimate businesses do not demand payment in cryptocurrency.
- Don’t share your “private keys.” The codes that enable you to access your virtual currency are only secure if it is kept in a safe place. If the security of these codes is compromised, the investment is at extreme risk.
Cryptocurrency Fraud: Where Can You Report Fraud?
Investors should always report fraud and other suspicious activity involving cryptocurrency. Investors can report the fraud to the FTC, the Commodity Futures Trading Commission (CFTC) and the U.S. Securities and Exchange Commission (SEC).
If the fraud involves extortion or blackmail, the FBI can be contacted. Lastly, report the fraud to the crypto exchange used to complete the crypto transaction whenever there is suspicion or evidence of fraud.
Adam Johnson is an editorial intern who writes for www.stockinvestor.com.
