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Crypto Fraud: What do you need to know, and how can we help?

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The accelerating popularity of cryptocurrency has been fuelled by the global disruption of the COVID-19 pandemic. The ease of accessing the market, together with investors’ desire ...

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Date: 24/06/2022

Authors:

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Nadia Osborne

Senior Associate

The accelerating popularity of cryptocurrency has been fuelled by the global disruption of the COVID-19 pandemic. The ease of accessing the market, together with investors’ desire to make a hefty profit from a small sum has caused interest in digital assets to soar. As its popularity has soared, crypto has become a hotbed for fraudsters looking to take advantage of inexperienced investors. Here, we take a look at what types of fraud are becoming prevalent in the crypto sphere, what you should watch out for, and what legal tools we have in our arsenal to combat it.

Cryptocurrency Fraud

Decentralised digital money designed to be traded over the internet and lying outside the control of the government and authorities: it should perhaps come as no surprise that the market of cryptocurrency is growing and that cryptocurrency-based crime is at an all-time high:

  • 2.3 million in adults in the UK held cryptoassets in 2021;
  • Worldwide, the total transaction volume of cryptocurrencies rose by 567% in 2021, totalling $15.8 trillion;
  • One of the largest sources of revenue from “crypto crime” is fraud, revenue from which totalled $7.8 billion last year.

The FCA has even gone so far as to say that investors in cryptocurrency “should be prepared to lose all their money”.

Why are fraudsters targeting cryptocurrency?

Fraudsters follow money and opportunities – and the crypto market provides both. Firstly, the money: crypto is a vast and growing market, with trillions invested into it annually. Secondly, the opportunities: these are many. Crypto has a perceived legitimacy with new investors. It is also, in some cases, capable of providing significant returns for minimal investment – an attractive marketing tool. It is often fast-moving, so investors will fear missing out on a deal. What’s more, unlike bank transfers or typical investments, crypto transactions are not vetted by an entity who could intervene in a suspected fraud. Fraudsters are exploiting these trends and feelings to their advantage.

As the profile of the crypto fraudster has changed, so too has the profile of their victim. These are not elderly, vulnerable investors, whose grasp of technology is being preyed upon. Instead (and more worryingly), the victim profile is much wider, and includes the younger, tech-savvy, and digitally adept consumer, who is being lured into scams of increasing sophistication.

What does crypto fraud look like?

Cryptoasset criminals and fraudsters have recycled and adapted techniques from conventional fraud (in cash or bank transfers) to suit their more modern needs. The fraudsters’ approach is not new. At the end of the day, their aim is to separate investors from their money. This can be achieved by tried and tested methods like:

  • Impersonating third parties to obtain confidential information and/or prompting victims to send them money;
  • Making too-good-to-be-true business proposals, and pressurising the victim into investing; and/or
  • Exploiting weaknesses in a victim’s cybersecurity infrastructure.

Fraudsters are increasingly using social media to promote sham apps; using photographs of and posing as celebrities to bait the more impressionable investor. “Romance fraud” is also running rife as scam-artists trick their unsuspecting love interests into investing. When we strip away the technological terms and acronyms, crypto fraud is a fraud like any other: you just need to know how to spot it.

What to watch out for

Demands for crypto-only payments:

    Though gaining in popularity, crypto is not likely to replace traditional payment methods any time soon. Credible institutions are unlikely only to accept cryptocurrency – even high street retailer Lush, who has accepted cryptocurrency as a method of payment since 2017, continues to take payments in fiat currency.

    Phishing:

      The sending of emails intended to bait recipients into clicking on links and parting with personal details. Unlike traditional phishing attacks, crypto-phishing will also encourage victims to enter their crypto wallet information.

      Money laundering:

        Criminals use illegally obtained funds to buy a digital asset, thereby washing the money into a digital product, such as an NFT, potentially implicating the seller. This is an area of growing concern amongst regulators.

        Cryptocurrency investment schemes:

          Scam artists target companies and individuals with a supposed once-in-a-lifetime opportunity to invest in new forms of crypto. Victims can be pressurised into depositing new coins into a digital wallet that has been somehow compromised. In other cases, scam artists prey on youthful investors, using the ease of creating and listing a novel coin, before “pulling the rug”, and making off with investors’ money. We discuss this scheme in further detail below.

          Crypto investment scheme scams are (unfortunately) very common for a number of reasons. Crypto has it all: the ease of creating coins and listing them on exchanges, the possible exposure and publicity (which fuels investment), the reputation for high returns, and the successful meme-inspired tokens like Shiba Inu Coin, which have harnessed the cultural zeitgeist and excited a new and willing type of investor: the blockchain newbie.

          Rug Pulls, SQUID Coin and the “Blockchain Newbie”

          The extent of fraudulent activity in the crypto sphere has grown and become more elaborate, a key development being the creation of digital tokens.

          The SQUID Coin scam saw fraudsters capitalise on the huge popularity of Hwang Dong- hyuk’s South Korean survival drama series, Squid Game. Fraudsters baited new investors by claiming to have created a new SQUID coin, and a related online game. The game lured unwitting victims in to buy tokens, promising a way to earn more as they played. As the value of cryptocurrency is determined solely by the demand of the market, the SQUID coin’s value skyrocketed from 1 cent to nearly $3,000 in one week, before crashing by 99.99%, which resulted in the developers making off with approximately £2.4million of investors’ funds.

          How can Fladgate help?

          If you have been a victim of crypto fraud, act as soon as possible.

          Fladgate can take steps to enable you to pursue recovery of your assets. This may involve:

          • Starting investigations to trace your assets.
          • Applying to court for a proprietary injunction and/or a freezing injunction to prevent the defendant or fraudster from accessing or transferring your assets. If the fraudster has not yet been identified, we can also assist with seeking a worldwide freezing order against “persons unknown”, which can help to protect your assets and/or your ability to enforce a judgment down the line.
          • Seeking Court orders to obtain information from third parties who are ‘caught up’ in the wrongdoing, helping you to track the perpetrator.
          • Seeking Court orders to acquire confidential documents from a bank or cryptocurrency exchange.

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