Published on behalf of Criminal Investigator, Andrew Small
Cryptocurrencies are becoming more popular. They can be accessed by anyone and could be considered a potential asset type in both bankruptcy and company cases.
With the innovation of cryptocurrencies, a new ‘Gold Rush’ has been created. A handful will turn out to be the gold the developer and the investor sought, while some are not so genuine or even out-and-out scams.
The American frontier, known as the Wild West, brings visions of expansion into new territory and the associated lawlessness. These periods of history are often characterised by volatility, risk, reward, and loss.
The fast-changing state of the cryptocurrency market and the type of impact it will have on the future of commerce have many similar sentiments. As the attention of retail investors, speculators, and various types of institutional investors continues to turn toward the lucrative cryptocurrency markets, so too does the attention of scammers and cheats.
Given the exponential rise in reported crypto scams, we want to raise awareness of the common types of scams and what kinds of things people and businesses can do to protect themselves.
Types of cryptocurrency scams
Cryptocurrency scams generally fall into two different categories:
- Initiatives aiming to obtain access to a target's digital wallet or authentication credentials. This means scammers try to get information that gives them access to a digital wallet or other types of private information such as security codes.
- Transferring cryptocurrency directly to a scammer due to impersonation, fraudulent investment or business opportunities, or other malicious means.
Investment or business opportunity scams
The adage "if something sounds too good to be true, then it probably is" is one to keep top of your mind for anyone venturing into investing in general, but it is especially true for cryptocurrencies.
Countless profit-seeking speculators turn to misleading websites offering guaranteed returns or other setups for which investors must invest large sums of money for even larger guaranteed returns.
While funds flow freely inward, these bogus guarantees often lead to financial disaster when individuals try to get their money out and find that they can't.
Imposter and giveaway scams
Scammers also try to pose as famous celebrities, businesspeople, or cryptocurrency influencers. To capture the attention of potential targets, many scammers promise to match or multiply the cryptocurrency sent to them in what is known as a giveaway scam.
Well-crafted messaging from what often looks like a valid social media account can often create a sense of validity and spark a sense of urgency. This mythical ‘once-in-a-lifetime’ opportunity can lead people to transfer funds quickly in hopes of an instant return.
For example, Elon Musk became a prominent figure in cryptocurrency during 2020. But in just six months, there had been reports of more than £1.4 million in cryptocurrency transferred to Elon Musk impersonators.
Social engineering scams
For social engineering scams, scammers use psychological manipulation and deceit to gain control of vital information relating to user accounts. These types of scams condition people to think that they are dealing with a trusted entity such as a government agency, well-known business, tech support, community member, work colleague, or friend.
Scammers will often work from any angle or take however much time they need to gain the trust of a potential victim so that they reveal key information or send money to the scammer's digital wallet. When one of these trusted connections demands cryptocurrency for any reason, it can often be a sign of a scam.
Romance scams
Scammers often use dating websites to make unsuspecting targets believe that they are in a real long-term relationship. When trust has been granted, conversations often turn to lucrative cryptocurrency opportunities and the eventual transfer of either coins or account authentication credentials.
Phishing scams
Within the context of the cryptocurrency industry, phishing scams target information relating to online wallets. Specifically, scammers are interested in crypto wallet private keys, which are the keys required to access funds within the wallet.
Their method of working is like that of many standard scams.
They send an email, leading holders to a specially created website that asks them to enter private key information. When the hackers have acquired this information, they can steal the cryptocurrency contained in those wallets.
Blackmail and extortion scams
Another popular social engineering method scammers use is to send blackmail emails.
For such emails, scam artists claim to have a record of adult websites or other illicit web pages visited by the user and threaten to expose them unless they share private keys or send cryptocurrency to the scammer. These types of cases represent a criminal extortion attempt and should be reported to the police.
DeFi ‘rug pulls’
DeFi ‘rug pulls’ are the latest type of scam to hit the cryptocurrency markets.
Decentralised finance, or DeFi, aims to decentralise finance by removing gatekeepers for financial transactions. In recent times, it has become a magnet for innovation in the crypto ecosystem.
DeFi protocols have become popular with crypto investors interested in magnifying returns by hunting down yield-bearing crypto instruments. The practice, known as a ‘rug pull’, means basically once the ‘pot’ of funds has been built by seemingly generating returns for investors, so to encourage them to invest more or encourage others to do so, the scammers walk away with the cash - similar to a Ponzi fraud.
Cloud Mining Scams
Platforms will market to retail buyers and investors to put upfront capital down to secure an ongoing reward. These platforms do not actually own the rate they say they do and will not deliver the rewards following your down payment.
While Cloud Mining is not necessarily a scam, thorough due diligence must be conducted on the platform prior to investment.
Read Action Fraud’s advice about cryptocurrency and online investment scams
The threat of cryptocurrencies to the Insolvency Service
The biggest threat faced by the Insolvency Service with cryptocurrency is the ability it gives an individual to hide assets in bankruptcy or liquidation.
Most crypto transactions, although visible on every blockchain, are anonymous. It’s only when cash is converted to crypto or crypt’ is converted to cash is it likely that this was done via a centralised regulated currency exchange who require the provision of ‘Know Your Customer’ (KYC) information for the transaction.
For a romance scam for example, centralised regulated exchanges should be able to give you details of the victim buying the cryptocurrency and ultimately the offender cashing it out.
What they won’t tell you is all the transactions that happened between those two points. A sophisticated scammer will ensure they move and convert the crypto’ over many different blockchains and transactions to launder their ill-gotten gains.
In theory, this can still be traced using the publicly visible blockchains, although it would require a significant amount of skill and knowledge. There a several cryptocurrency tracing agents that have come into existence who provide services to Government agencies for this very purpose.
The other threat is the draw of the ‘gold rush’. People will be borrowing money to invest for potentially high returns and becoming insolvent because of the currency not performing as they expected.
As the agency tasked with monitoring live businesses, we must also be mindful of the use of Limited Companies to lend an air of legitimacy to crypto scams.
Read more about some of the great work the Insolvency Service has undertaken with crypto linked offences.
So, are cryptocurrency scams on the rise?
Unfortunately, yes, cryptocurrency scams have been growing exponentially in recent years, a by-product of the boom in cryptocurrencies.
What are the warning signs?
We recommend people and companies look for claims like these:
- A guarantee that you'll make money: don't believe such promises as they indicate a scam, even if there's a celebrity endorsement or testimonials, since these can be easily faked.
- Big pay outs with guaranteed returns: ‘guaranteed’ returns are a big red flag.
- Free money: whether in cash or cryptocurrency, free money promises are always fake.
- Big claims without details or explanations: be very sceptical about such claims.
How to protect yourself from a cryptocurrency scam?
- Don't put money in a virtual currency or cryptocurrency if you don't really understand how it works, and don't speculate in cryptocurrencies with money that you can't afford to lose.
- Don't invest in or trade cryptocurrencies based on advice from someone you've only dealt with online.
- Don't believe social media posts promoting cryptocurrency giveaways.
- Don't share your ‘private keys’, which enable you to access your virtual currency, with anyone; keep them in a secure place (preferably offline, where they cannot be hacked).
2 comments
Comment by Guy Bailey posted on
Fascinating and timely piece about a much misunderstood and growing sector for misbehaviour and abuse.
Comment by Steven Fifer posted on
Thank you Guy for the positive comments. I will be sure to pass onto to the author (Steve, Insolvency Service communications team)