Cryptocurrency Scams 101: How to Spot Crypto Fraud

A study published in The Wall Street Journal suggests that a new cryptocurrency scam bubbles up every four minutes. Blockchain analytics firm Elliptic reported investors lost over $10 billion due to cryptocurrency fraud and outright theft in 2021, compared to $4 billion in 2019.

Based on the buzz surrounding the as-yet unproven potential of decentralized finance, billions of dollars are pouring into cryptocurrency. Much of that money comes from less experienced investors – an attractive lure for scammers.

Keep reading to learn some hallmarks of a cryptocurrency scam.

Is Cryptocurrency a Scam?

Making an investment in Cryptocurrency is not necessarily a scam. The main problem is that cryptocurrency lacks one unifying framework to regulate it. The lack of oversight in the crypto space makes it ideal for scammers. People curious in crypto should not invest more in cryptocurrency than they can afford to lose.

Types of Cryptocurrency Scams

Today’s cryptocurrency scams are often old scams with a new, cryptocurrency twist.

Romance Cryptocurrency Scams

“Pig butchering” is an increasingly common cryptocurrency romance scam. It begins with friendly text messages from a stranger. Spoiler alert: The texts typically come from a fictitious online persona. Once the scammers gain the mark’s trust, often by indicating a romantic interest, they change the topic to investing in crypto. The scammer encourages the mark to set up a crypto wallet on a fake cryptocurrency platform. 

Eventually, the crypto investments will appear to increase in value, motivating the victim to add more crypto to their account. This is when the pig fattens. The romance angle creates a further incentive. According to The Journal podcast, a scammer might say something like, “Let’s make money on this cryptocurrency exchange, and then we can go travel the world together.” Finally, the scammer “butchers the pig” and steals all the crypto for themselves.

Cryptocurrency Fraud: Initial Coin Offering

Many cryptocurrency scams are simply Ponzi schemes or pump-and-dumps, which use an initial coin offering (ICO) to generate hype – much like an IPO for a regular stock. Groups of scammers generate excitement among ordinary crypto investors, usually with the help of a forum like Telegraph, and then sell all their shares once the price has risen to a sufficient level for the scammers to make a sizable profit.

NFT Cryptocurrency Scams

Non-Fungible Tokens (NFTs) are digital assets that are not replicable. A group of celebrities is facing a class action lawsuit after promoting Bored Ape NFTs. The suit alleges that Yuga Labs, Inc., the blockchain technology company behind Bored Ape NFTs, used covert means of paying celebrities to endorse the NFTs. Allegedly, the celebrities allegedly did not disclose the fact that they were paid promoters, in violation of SEC regulations.

Crypto Scams in the News

Crypto exchange FTX recently made headlines as U.S. prosecutors alleged the exchange had been funneling its investors’ holdings into CEO Sam Bankman-Fried’s cryptocurrency trading firm, Alameda Research. FTX customers never gave permission for their money to be loaned out to Alameda Research. The funds also allegedly went to venture investments and “dark money” political donations. Bankman-Fried has been charged with wire fraud, commodities-fraud conspiracy, and securities-fraud conspiracy. With $10 billion in allegedly stolen customer funds, this may be one of the biggest crypto scams yet.

Following the collapse of FTX, around $477 million was stolen from investors by hackers. Hackers may be converting the crypto into different digital coins and then converting them into bitcoin – a common tactic used by money-laundering crypto hackers.

Crypto Fraud: How to Recover Money?

Once crypto is stolen from a crypto wallet, it is simply gone. There is no insurance to protect cryptocurrency investors from losses, unlike banks deposits, which are protected by the Federal Deposit Insurance Corporation (FDIC). A group of crypto investors recently filed a class action lawsuit against Coinbase, a popular cryptocurrency exchange, alleging that the exchange did not do enough to ensure that user accounts were secure. We have yet to see if Coinbase will be held liable.

How Can If an Investment Opportunity is a Cryptocurrency Scam?

Whether it be a chat room on Discord or the endorsement of their favorite streamer, investors should be very wary of crypto investment opportunities on social media.

In the securities industry, investors can look up a broker or financial adviser on BrokerCheck or Investment Adviser Public Disclosure, yet there is no similar public site for an individual advertising a new cryptocurrency. This is another reason for investors to exercise special caution when investing in cryptocurrencies.

• Avoid phishing tactics. If a stranger reaches out and asks you for the keys or password to your crypto wallet, you should ignore them.
• Legitimate cryptocurrencies have white papers, which explain how the cryptocurrency intends to make money. If there is no white paper or the white paper seems to have generic, boilerplate language, be wary.
• Ignore promises of huge returns. No matter what the investment, promises of huge returns should be a red flag for fraud. 
• Be especially cautious of cryptocurrencies promoted by celebrities or via social media channels.

Do You Need a Securities Lawyer?

A securities lawyer can help you recover money if your FINRA-registered broker or financial adviser recommended a cryptocurrency that turned out to be a scam. Contact Kurta Law if you want a free case evaluation: info@kurtalawfirm.com or (877) 600-0098.