Ask the expert: cryptocurrency scams

Supported By:

Net Patrol International Inc.  Data Investigation and Forensic Services
Bankruptcy and Insolvency Trustees

Cryptocurrency scams are becoming more and more common. Learn how you can protect yourself and your finances.

Cryptocurrency: it’s been endorsed by celebrities, advertised at the Superbowl, and inspired by dog memes. It’s been outlawed in nine countries, uses almost the same amount of energy as the Netherlands or Argentina, and its disruptive impact has been compared to both the invention of Facebook and the discovery of oil in the Middle East.footnote one1

“The hyperbole doesn’t stop there: In 2021, cryptocurrency crime hit an all time high of approximately $14 billion in illicit activities, up from $7.8 billion the previous year,” says Head of Fraud at BMOfootnote two2, Ash Khan.

“Stolen funds and crypto-related scams make up the bulk of that illegal activity. If you’re looking to invest in cryptocurrency, there are several steps you should take to keep your finances safe,” explains Ash.

What is cryptocurrency and blockchain?

“What we think of as regular money, also called fiat currency, is issued and backed by a nation’s government; this includes the US dollar, the Euro, and the Yuan. In contrast, cryptocurrency gets its value from blockchain, does not require an intermediary and is not controlled by a single government. This provides more freedom and inclusivity, as well as creating additional risk. The most common examples of cryptocurrency include Bitcoin, Ethereum, XRP and Tether.”footnote four4

Cryptocurrency is only possible through blockchain technology. As Ash explains, “Blockchain is a distributed and decentralized ledger of data. Transactions are batched into ‘blocks’ and verified through consensus. Each new block is ‘chained’ to previous ones via a unique signature, which is itself secured by cryptography. Cryptocurrency acts as neither a physical nor digital object, but as a record of ownership for an abstract representation of value, maintained on a public ledger. A crypto wallet contains the keys for accessing this ledger, much like a physical wallet contains bank cards for accessing your funds at traditional financial institutions.”

What is cryptocurrency fraud and what are some common scams?

“We see the same types of fraud associated with both crypto and fiat currencies, including identity theft, account takeovers, unauthorized transactions, and the misrepresentation of assets and liabilities.”

Ash adds, “As with regular currency, scammers either deceive you into sharing credentials so they can steal your funds, your personal identity or access your accounts; or they manipulate you into transferring your cryptocurrency directly to them by impersonating someone you trust, posing as an investment service or business opportunity.”

Cryptocurrency’s novelty, decentralization, and lack of oversight may enhance the complexity of fraud and scam scenarios, while reducing the likelihood of victims recovering their funds. He warns, “Cryptocurrency is often little or misunderstood, which may make it easier for criminals to construct and execute their scams and fraud schemes in the first place.”

When cryptocurrency is involved, what do these scams look like?

Many cryptocurrency scams are variations on well-known criminal schemes. Ash provides several examples:

Investment scams: Victims are encouraged to transfer their crypto assets to a fake investment website. Scammers create the illusion of rapid gains, even allowing partial withdrawal of funds to build trust and convince their victims to make additional deposits. Eventually, when victims attempt to withdraw their funds, their requests are rejected or ignored.

Romance scams: Victims are contacted via social media or dating applications, with scammers gaining their trust and offering their cryptocurrency expertise. They are eventually persuaded to transfer personal funds into phony accounts. By the time the victims attempt to withdraw their funds, their new love interest has completely disappeared, along with their money.

Imposter and giveaway scams: Scammers attract victims by pretending to be celebrities, public figures, or influencers and use convincing social platforms to advertise ultra exclusive and limited cryptocurrency schemes. Victims are enticed by exciting celebrity-endorsed opportunities and soon transfer their coin to the imposters.

Phishing scams: It is increasingly challenging to distinguish scam messages from those of legitimate organizations; the appearance, language, and embedded links inphishing emailsand text messages often appear credible. Victims are tricked into downloading malware, sometimes thinking it will facilitate crypto conversion or investment. Victims can also be misdirected to phony websites, where they’re duped into providing their crypto wallet credentials.

What scams are unique to cryptocurrency?

Rug pull scams accounted for 37% of scam revenue in 2021, up from only 1% the previous year.footnote five5

As Ash explains, “Rug pulls are a variation on the traditional pump-and-dump stock market fraud scheme, with several additional complications. Unlike in the stock market, rug pulls involve the decentralization of transactions, automated market makers, and crowdsourced liquidity based on pairing a new and existing cryptocurrency. The exact definition of a rug pull scam is in flux, with new permutations continuing to emerge.”footnote six6

Ash describes how they tend to follow a schema: “First, developers build out what appears to be a legitimate cryptocurrency project, listing it on a Decentralized Finance (DeFi) platform. These developers hype their new coin on social media, which convinces individuals to contribute to the liquidity pool of an automated market maker, for a proportional share of the trading fees. Next, the founding developers buy some of their own coin to pump up the price; when investors see the buying activity and increasing values, they decide to invest more and add to the liquidity pool. Once the price is high enough, the crypto developers sell all their coin, draining the liquidity pool and leaving the coin’s value near zero. Investors are left with nothing!”

These types of scams are more common in the Decentralized Finance ecosystem, where investors can create tokens for free, completely avoid intermediaries, auditing, or regulatory oversight. Although most rug pulls occur in the DeFI ecosystem, centralized exchanges are also vulnerable, such as with the Thodex rug pull, where users lost over $2.8 billion in crypto assets.footnote seven7footnote 12,12

What steps should people take to keep themselves safe?

There are many things you can do to protect yourself. “We have ten tips that we recommend all individuals consider to protect themselves from fraud, cybercrime and any type of scam—involving both fiat and cryptocurrencies.”

When it comes to cryptocurrency, Ash highlights five common red flags:

  • Too good to be true: If an advertisement contains language guaranteeing high returns on investments or offers free money, it’s likely not legitimate.
  • Online only advice: If you’ve received cryptocurrency advice from someone you’ve never met personally, consider verifying all details with an unbiased third party.
  • Free software: If you’re asked to download free software for crypto conversion or investing, keep in mind that it could be infected with malware or ransomware.
  • Celebrity advice: Fraudsters use messaging platforms and social media apps to advertise phony investment opportunities, by either hacking or imitating known public figures.

Do you have any final words of advice?

If you decide to invest in cryptocurrency, Ash offers these tips:

  • Do your research: Only invest in what you understand. There are many variations in crypto assets, exchanges, and wallet options.
  • Be realistic: Only invest money you can afford to lose. Crypto often fluctuates about 30% per month; if that’s going to keep you up at night, consider less volatile options.
  • Secure your access: Keep your “private key” in a secure place, preferably offline. Don’t forget these top security tips for all types of transactions.

Ash notes that cryptocurrency is one of many potentially profitable investment opportunities; but like most investments, it comes with associated risks. Ash elaborates, “My advice to anyone looking to invest in cryptocurrency is to speak with a trusted BMO investment professional. Although BMO doesn’t currently offer cryptocurrency products, we can help you develop a holistic investment plan that fits your personal goals and your risk appetite.”

Cryptocurrency definitions to know

  • Automated Market Makers are programs that automate the provision of liquidity. They enable automatic, permission-free transactions in decentralized finance by way of “liquidity pools”. Smart contracts, i.e., self-executing computer programs, act as an alternative to individuals or firms.footnote eight8
  • Blockchain is a distributed and decentralized ledger of data. Transactions are batched into ‘blocks’ and verified through consensus. Once a block is filled, it becomes immutable and irreversible, assigned a timestamp, and added to previous blocks. Each new block is ‘chained’ to previous ones via a unique signature, which is itself secured by cryptography.footnote nine9
  • Decentralized Finance (DeFi) is an umbrella term for applications that expands the use of blockchain to more complex peer-to-peer financial services, without overhead costs and intermediaries, but with greater speed, flexibility, and transparency. It’s also unregulated, without code auditing requirements, and generally experiences greater volatility than its centralized counterparts.footnote ten10
  • Liquidity Pools are a collection of cryptocurrency assets locked in a smart contract to provide crowdsourced asset liquidity on decentralized exchanges. The simplest versions involve two paired tokens, with liquidity providers contributing equal amounts of both tokens, eventually earning trading fees or other crypto rewards.

This article was originally sourced by www.bmo.com.