Ambiguous market regulations, the anonymity of identities, financial transactions, and a rallying, rapidly expanding cryptocurrency market- all of it makes for a heady concoction for both new and experienced investors alike to participate in the cryptocurrency market. But what's hard to miss is that this space is teeming with fraudsters and scamsters as well, looking to profit off the unaware, inexperienced crypto enthusiasts. And given the wild west of cryptocurrency and its novelty, with bitcoin swinging extraordinarily between $8,900 to touching a high of $64,863 this year, the rise of the scamming industry here is not surprising.
Scams on the rise
A global blockchain analytics firm, CipherTrace, estimated that the fraudsters have globally earned somewhere around $432 million between January- April this year.
A recent report by FTC (Federal Trade Commission) stated that around 7,000 U.S. consumers reported losing more than $80 million on various cryptocurrency scams between October 2020 and March 2021, with an average of $1,900 per transaction.
It is hard to miss the sharp, steep rise in both the volume and frequency of such transactions. Comparing this time period with the same last year, the scam reports have risen by as much as 12%. This takes the amount lost to around 1,000% more, as compared to last year.
And it's not just the United States that has seen this trend. Australia has also seen a steady spiral in the number of crypto-related scams. A recent report by the Australian Competition and Consumer Commission, titled Targeting scams: report of the ACCC on scam activity 2020, also pointed out that bitcoin payment frauds ranked second only to the age-old technique of bank transfers. Investors lost around $26.5 million in 1,985 transactions over the last year.
It is interesting to see the myriad ways scamsters are employing to dupe people. From impersonating cryptocurrency influencers like Musk to luring a new love into investing in an amazing crypto opportunity, the creativity is indeed fascinating.
Some of them take it a step further by creating now-defunct cryptocurrencies, or in some cases, an entire exchange. The most recent in the line is the now-defunct “LUB Token”, which was based on Telegram. The currency offered a daily return of 10% if its press releases and now-gone website is to be believed.
And for those who want a genuine shot at the legitimacy of their fraud, the Korean fraud exchange, BitKRX is a handy case study. Uncovered in 2017, the exchange vanished when investors tried to access their funds. It was found that 99% of its transaction volume was fabricated.Even sophisticated investors, with a keen eye and understanding of financial details, can fall prey to such scams. In February 2021, former crypto hedge fund manager Stefan Qin pleaded guilty to defrauding his investors through his $90 million Virgil Sigma Fund. His profitability record was hard to resist, with almost 20% monthly returns by means of arbitrage trading. In hindsight, they do point to the lack of audited reports by the firm as a red sign that the fund is fraud.
Another area where frauds and scams are burgeoning is the upcoming, relatively nascent area of DeFi or Decentralised Finance. DeFi takes blockchain technology and utilizes its applications in various financial services like insurance, lending, and more.
DeFi is known to offer a higher yield on crypto-assets as compared to other conventional means. But, this also makes it extremely vulnerable to sudden vanishing and absconding post-raising funds for a project.
Between January-April 2021, DeFi scamsters raked in almost $83.4 million. Looking at the broader picture, almost 55% of all major cryptocurrency scams were DeFi hacks. That means out of a total theft amount of $432 million, $240 million can solely be attributed to DeFi.Space saw a massive outflow of funds, with as much as $377 million flowing out of the market in May 2021.