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Following the rise of Bitcoin in 2017, the popularity of cryptocurrencies has been on the increase. This is when Bitcoin reached $20,000 – an annual gain of over 2000% at the time. Despite the ‘Great Crypto Crash’ in 2018, cryptocurrency remains extremely popular. Bitcoin is now accompanied by other significant cryptocurrencies such as Etherium, Ripple’s XRP, Binance, Tether, and countless others. As a result, cryptocurrency fraud is on the increase. In January 2021, the UK Financial Conduct Authority warned investors against lending or investments in cryptoassets, that they should be prepared “to lose all their money.”

Fraud has been around for centuries. We have previously featured the Top 10 Greatest Frauds in World History. Frauds have become more complex over time. Here we look at cryptocurrency fraud and what you can do to protect yourselves from the more complex frauds and scams.

What is Cryptocurrency Fraud?

Cryptocurrency scams or cryptocurrency fraud comes in many guises. These include: –

  • Ponzi Schemes – This is where new adopters are used to provide artificial returns to the early adopters in the scheme. They provide high financial returns that aren’t usually available via traditional investments. The fraud lures investors and pays the first investors with funds generated from the most recent investors. It forms the illusion of a sustainable business just so long as new investors continue to contribute additional funds. Furthermore, it requires that most investors don’t request full repayment and still believe the non-existent assets they purport to own, actually exist. Cryptos could yet be the perfect cover for a ponzi scheme.
  • Scam Initial Coin Offerings (ICOs) – This is the first offering of a cryptocurrency for sale. A number of ICOs are phony with the sole intention of scamming potential investors into a completely fabricated cryptocurrency.
  • Market Manipulation – This can include front-running, churning, spoofing to name but a few. It includes activities fraudsters can use to manipulate the markets, artificially inflating or deflating the price of cryptocurrencies or derivative products.
  • Pump & Dump Schemes – This occurs when owners of a stock attempt to rocket the price of an entity before trading their holdings at a fake peak. This is common in the cryptocurrency market, most commonly at the Initial Coin Offer. This is where entrepreneurs launch a new cryptocurrency, often with no government regulation.
  • Traditional Theft – Criminals can hack investors’ crypto wallets to steal their currency. They have also been known to set up fake wallets to bill counterparties and establish phoney crypto exchanges to steal people’s money.
  • Broker / Dealer Fraud – This includes professional traders investing in cryptos, not registering as brokers or dealers, or exchangers.
  • Unscrupulous Promoters – This is where world-renowned celebrities will receive payments for promoting investments in ICO’s to inflate the prices. Examples of celebrities who have done this and have been fined include Floyd Mayweather.
  • Financial Crimes – The international reach, speed and ease of initiating a crypto transaction means it is an attractive tool for money-laundering, crime and other unscrupulous criminal behaviour.

5 Examples of a Cryptocurrency Fraud

  1. OneCoin – This is a real-life example of a Ponzi scheme. OneCoin was a crypto promoted by a Bulgarian based company founded by Ruja Ignatova. It has been described by The Times as one of the biggest scams in history. It is reported to have brought in approximately $4 billion, despite media outlets describing it as a ‘get-rich-quick scheme scam and cult’ that was ‘virtually worthless’. Other outlets called it a ‘high-risk pyramid scheme’. Despite this the fraud rumbled for a number of years until 2018 when the OneCoin office was raided by Bulgarian police. This has been brought to life in the film Fake, starring Kate Winslet.
  2. Bitcoin Gold – This was one of the countless crypto assets that get created every day. The fraudsters behind the scheme created a professional website (mybtgwallet.co), offering people the chance to create Bitcoin gold wallets. The scam involved users submitting private wallet keys to protect their cryptocurrency wallets to do so.  This allowed the fraudsters to steal $3 million in Bitcoin.
  3. Bitcoin Savings & Trust – The BS&T scheme was initially a Ponzi scheme to attract early investors and ultimately developed into a fake ICO. This was a classic case of a fake company claiming to be legitimate to take investors’ money. It is is claimed 265,000 bitcoins were stolen. Trendon Shavers, the ‘brains’ behind the scam, had 7% of the Bitcoin in circulation at the time. He was sentenced to a mere 18 months in prison and was forced to pay $40 million in fines.
  4. My Big Coin – This fraud was an example of a cryptoasset being a complete fake. The fake coin lured investors into investing over $6 million into the fake currency. The scam was accused of “misappropriating over $6 million from customers by transferring customer funds into personal bank accounts, and using those funds for personal expenses and the purchase of luxury goods.”
  5. Cryptocurrency Clipboard Hijackers – Many online scams are driven by malware. Malware is complex lines of code that is a huge threat for people who invest in cryptocurrency. One example of crypto malware is Cryptocurrency Clipboard Hijackers. This is the code that Windows clipboard monitors cryptocurrency addresses. Hijackers will swap the intended address of a a crypto transaction to send that money elsewhere. There are a number of versions of this virus, with some being able to monitor a staggering 2.4 million cryptoasset addresses.

How To Protect Yourself From Cryptocurrency Fraud

The National Fraud & Cyber Crime Reporting Centre provide the following guidelines to protect yourself.

  • Stay in Control – Ignore uninvited cold calls, especially investment offers. If you are contemplating investing your money, seek independent advice and research thoroughly.
  • Don’t Assume It’s Real – Always be wary and don’t assume websites, adverts or social media posts are genuine or real investment opportunities. Criminals regular use common brands or well-known people to make their frauds appear to be legitimate.
  • Never feel pressurised to make a decision – Always be on the guard if you are being pressurised to invest quickly or make a decision on guaranteed returns, that sound too good to be true.

Action Fraud works closely with the Financial Conduct Authority (FCA). They highlight how £27 million has been lost to crypto investment scams in 2018/2019. If you would like advice on your tax affairs please contact us. Call us on 0800 471 4546 or you can contact us here

 

Nigel Carr

Nigel Carr

Nigel is a freelance financial writer and Author at Kinsella Tax. A business graduate he writes on financial matters as well as music for a number of high quality websites.