Cryptocurrency Scams

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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.

The cryptocurrency market is changing rapidly and it will have a huge impact on the future of commerce. many businesses have adopted crypto as a payment option, and many other companies have bought crypto as an investment or a hedge.

As the attention of retail investors and institutional investors continues to turn toward the lucrative cryptocurrency markets, so too does the attention of scammers and cheats. One of the most famous scams in recent months has been the crash of the “Stable Coin” TerraUSD, also known as UST, and its sister token Luna, which melted down in spectacular fashion, sending their prices to near zero. few investors saw a problem with this multi-billion dollar coin, and the fall sent a shock wave through the market.

Given the 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.

Cryptocurrency scams generally fall into three different categories:

  1. Initiatives aiming to obtain access to a target’s personal digital wallet. 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. The digital address of your “wallet” is easily known. But the control of the wallet is governed by a series of seed phrases (12 words that must be entered in the correct order). Once a hacker, a rogue employee or a friend knows your seed phrase, the wallet is gone. Wallets can be “hot” or “cold”. A hot wallet is connected to the internet (eg accessed via a browser extension) and could be vulnerable to online attacks, which could lead to stolen funds, but it’s faster and makes it easier to trade or spend crypto. A cold wallet is typically not connected to the internet (eg held on a USB stick) so while it may be more secure, it’s less convenient.
  2. Crypto Exchange problems. Many companies and individuals use crypto exchanges that control their coin portfolios. Examples would include Binance, Coinbase and Several exchanges have been hacked leading to the loss of $$billions in tokens. Several exchanges have ceased trading and gone into bankruptcy.
  3. Transferring cryptocurrency directly to a scammer due to impersonation, fraudulent investment or business opportunities, or other malicious means. Cloned websites and fake social media accounts of major brands and financial institutions can pop up within hours.

Investment or business opportunity scams

Projects that sound too good to be true, are often scams. This is especially true for cryptocurrencies. Scammers use misleading websites offering high guaranteed returns or other setups for which investors must invest large sums of money for even larger guaranteed returns. They generate paper profits while the pyramid builds and funds flow freely inward, but 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.

For example, Elon Musk became a prominent figure in cryptocurrency. But there had been numerous of Elon Musk impersonators and scammers using Elon Musk images and quotes to snare unsuspecting investors. Social media sites are the centre of this activity

Phishing scams

Phishing scams target information relating to online wallets. Specifically, scammers are interested in crypto wallet private keys. They send an email or a DM, 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. A typical example would be a request to change wallets to a more “secure” version.

Blackmail and extortion scams

Another popular method scammers use is to send blackmail emails and messages via social media. 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. Once the coins are transferred, it is difficult to track the wallet path as scammers use laundering and masking techniques to hide the transaction codes.

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 coins are launched, often with famous influencers, and the result is a classic “pump & dump”. 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. The most famous of these scams was the “Squid Game Token” where the price went from $1 to nearly $3000 in the space of a week. The coins liquidity was withdrawn and token sales became impossible.

FOMO (Fear of missing out)

One of the biggest factors in Defi scams has been the psychology behind a person’s fear of missing an opportunity, better known as the “fear of missing out”. Investors are bombarded with messages from influencers who report massive gains. People then FOMO-in, usually at the wrong time, only to see the price pull back or crash completely.

Mining Scams

Bitcoin mining is the most famous mining activity. Several scams have featured people mining coins that subsequently vanish. However, there are dozens of other coins that are digitally “mined” Platforms will market to retail buyers and investors to put upfront capital down to secure an ongoing reward. These platforms often mine junk coins and the rewards are paid in a bogus asset following your down payment.

Cryptocurrencies and company Insolvency

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 (such as Binance) who require the provision of ‘Know Your Customer’ (KYC) information for the transaction. A sophisticated scammer will ensure they move and convert the crypto’ over many different blockchains and transactions to launder their ill-gotten gains.

More and more private individuals and companies have been hiding assets via the transfer of real assets into crypto currencies. In addition to these purchases, many companies now accept crypto as payment for goods and services. Obviously, Directors and individuals have a duty to declare all assets in the event of insolvency.

What are the warning signs of crypto scams?

We recommend people and companies look out for:

  • 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.
  • Incredibly high APR returns for crypto staking
  • Big guaranteed returns.
  • Free coins: whether in cash or cryptocurrency.
  • Big claims without details or explanations.

It’s very difficult to avoid a rug pull or an out-and-out scam, but a period of explosive growth will likely result in a crash. Some crypto exchanges such as Binance, and crypo saving methods such as Revolut allow users to set a “stop order”. Stop orders allow customers to buy or sell when the price reaches a specified value, known as the stop price. This order type helps traders protect profits, limit losses, and initiate new positions. 

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
  • Don’t speculate in cryptocurrencies with money that you can’t afford to lose.
  • Don’t be afraid to take profits.
  • Don’t chase losses. As “buying the dip’ can be problematic.
  • 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 crypto 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). Companies should have a clear protocol that covers who in the organisation has access to the keys.
  • Spread your coin portfolio across multiple exchanges and wallets. Don’t have “all your eggs in one basket”.

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