Ambiguous market regulations and anonymity of identity, financial transactions and a rapidly growing cryptocurrency market make it a great place for new and experienced investors to get involved in the market. It’s easy to overlook the fact that there are many scammers and fraudsters operating in this space, seeking to make a profit from novice crypto enthusiasts. Given the novelty of cryptocurrency, which saw bitcoin surge from $8,900 to $64,863 last year, it is no surprise that the scamming business has grown.
The rise of scams
CipherTrace, a global blockchain analytics company, estimates that fraudsters earned $432 million globally between January and April 2018.
FTC (Federal Trade Commission), recently reported that approximately 7,000 Americans lost more than $80 Million on various cryptocurrency scams between March 2021 and October 2020. The average transaction was $1,900.
It’s hard to miss the dramatic, rapid rise in the number and frequency of these transactions. The scam reports have increased by up to 12% compared to the same period last year. The amount lost is now approximately 1,000% higher than last year.
This trend is not limited to the United States. The number of scams related to crypto has been increasing steadily in Australia. The Australian Competition and Consumer Commission’s recent report, Targeting scams: Report of the ACCC on Scam Activity 2020, noted that bitcoin payment frauds were second to bank transfers. Over the past year, investors lost approximately $26.5 million in 1,985 transactions.
It’s fascinating to see all the different ways scammers use to con people. The creativity is truly amazing, from impersonating crypto influencers such as Musk to convincing a new lover to invest in an incredible cryptocurrency opportunity.
Some go one step further and create now-defunct cryptocurrency or an entire exchange. The latest in this line is the now-defunct LUB Token, which was built on Telegram. If you believe the currency’s press releases and website, it offered a 10% daily return.
For those looking for a real shot at proving their fraud, BitKRX, a Korean fraud exchange is a good example. The exchange was not discovered until 2017, when investors attempted to access their funds. It was discovered that 91% of the transaction volume was fake.
Even the most sophisticated investors can fall for these scams, even if they have a good eye and a solid understanding of financial details. Stefan Qin, a former manager of crypto hedge funds, pleaded guilty in February 2021 to defrauding investors through his $90million Virgil Sigma Fund. His profitability record was difficult to resist with nearly 20% monthly returns through arbitrage trading. They do see the absence of audited reports from the firm as a sign that the fund is fraudulent in hindsight.
Defiance against DeFi
Frauds and scams are also on the rise in the relatively new area of DeFi, or Decentralised Financing. DeFi uses blockchain technology to provide financial services such as insurance and lending.
DeFi has a better yield than other traditional methods on crypto-assets. This makes it vulnerable to sudden disappearance and absconding of funds after a project has been funded.
DeFi scammers made $83.4 million between January and April 2021. DeFi hackers accounted for almost 55% in all major cryptocurrency scams. DeFi can be solely credited with $240 million of the $432 million total theft.
Space witnessed a huge outflow of funds with $377 million leaving the market in May 2021.