New Year, new crypto scams? Watch out for these signs
15:55, 13 January 2022
As we enter a new trading year, one investment industry body is warning investors about cryptocurrency scams and has suggested tips to help identify and avoid them.
Last year crypto-related crime reached record levels with $14bn (£10bn) in digital currencies stolen worldwide in scams, according to blockchain analytics firm Chainalysis.
ChainalysisThe North American Securities Administrators Association (NASAA) - a non-profit association representing securities regulators - sees investments related to cryptocurrencies and digital assets as a "top investor threat" and advises caution for investors seeking opportunities to make money in that space.
Crypto millionaires
"Stories of 'crypto millionaires' attracted some investors to try their hand at investing in cryptocurrencies or crypto-related investments in 2021, and with them, many stories of those who bet big and lost big began appearing, and they will continue to appear in 2022," NASAA Enforcement committee co-chair and Director of the Alabama Securities Commission Joseph P. Borg said.
NASAA offers information for investors to help guard against losing money in crypto scams. The most common crypto-related fraud schemes the NASAA identified were fake digital wallets, “pump-and-dumps” as well as multi-level marketing platforms.
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Fake wallets
Digital wallets are used to store, send and receive cryptocurrencies. Fraudsters often design a fake digital wallet to lure users into disclosing the code that opens the wallet. Once the code is received, the fraudster can steal all the cryptocurrency held in the wallet.
Also seen in conventional securities markets, pump-and-dumps involve the coordinated purchase of a thinly-traded cryptocurrency by groups of individuals who promote that specific cryptocurrency on social media.
This pushes up demand and price, followed by a massive coordinated sale, resulting in a huge price drop. Those unaware of the scheme are left “holding the bag” with a devalued cryptocurrency.
Rug Pull
ChainalysisA newer version of pump and dump is a rug pull, which happens when a developer suddenly abandons a crypto token, typically on the decentralised finance (DeFi) network, and takes all attached funds with them.
Chainalysis estimated that $2.8bn was lost to rug pulls last year, 90% of which was down to the Theodex Exchange rug pull which saw the CEO of a Turkish crypto exchange disappear after a trading halt.
Another 2021 rug pull was the SQUID crypto token - which borrowed its name from the hit Netflix show. Chainalysis estimates SQUID losses at $12m after developers of the crypto token disappeared.
Multi-level marketing
Finally, multi-level marketing platforms lure investors through the promise of high interest with low risk. These investors are then incentivized to recruit more members.
This investment methodology was famously employed by a 20th-century fraudster whose name remains forever attached: the Ponzi scheme.
"Before you jump into the crypto craze, be mindful that cryptocurrencies and related financial products may be nothing more than public facing fronts for Ponzi schemes and other frauds," tNASAA’s Joseph Rotunda said.
"Investments in cryptocurrency trading programs, interests in crypto mining pools, crypto depository accounts and securitized tokens should be seen for what they are: extremely risky speculation with a high risk of loss."
Rotunda serves as the Director of the Enforcement Division at the Texas State Securities Board.
Tips
Advice from NASAA on crypto and other investments is the warning: “if it sounds too good to be true, it probably is.”
The promise of guaranteed returns over very short terms - sometimes hours or days - instead of months or years are often a red flag.
NASAA urged iinvestors to beware of fake client reviews as “anyone can be anyone on the Internet.”
Online accounts
Investors should take steps to identify phony accounts by paying careful attention to domain names, looking closely at content and considering the quality of engagement as scammers often spoof websites and use fake social media accounts to obscure their identities.
“It is important for investors to understand what they are investing in and with whom they are investing,” NASAA President and Maryland Securities Commissioner Melanie Senter Lubin concluded.
“Education and information are an investor’s best defence against investment fraud.”
Read more: Crypto fraudsters took .7bn last year
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