Cryptocurrencies might be a new form of finance, but the oldest scams in the book work just the same.
Here are some scams fraudsters are using to rob people of their digital money.
First things first: Crypto is no longer a get-rich-overnight scheme
While it was true that the early buyers of cryptocurrencies like Bitcoin are millionaires today, that grace period has long since been over. Still, many are drawn in by the potential, as you can still make some decent money out of it – if you do your homework.
While investors celebrated the massive money-making opportunity that crypto presented in these last few years, cheers could be heard from the seedier side of the financial world too. For every eager, doe-eyed investor were a dozen criminals waiting to con them out of their money. Many succeeded too.
In 2018 alone, cryptocurrencies stolen from exchanges and scammed from investors surged more than 400%, to around $1.7 billion, according to a report from US-based cyber security firm CipherTrace, Reuters reported early this year. Korea and Japan were home to most of the thefts from exchanges, or 58%, throughout 2018.
Some of the scams criminals are using are new – many are old. These include fraudulent initial coin offerings, market manipulation, phony exchange hacks, and age-old Ponzi schemes.
Public enemy number one: ICOsBeing the unregulated currency it is, and also given its very young age and existence solely in the digital world, there is a lot to be concerned with in regards to crypto trading. Unlike shares in a publicly traded company, most cryptocurrencies are not backed by any real-world assets, nor are they controlled by any governing body to put a damper on price fluctuations. Crypto is the Wild West of the financial world, in that you can make a killing (financially, of course!), while also being the victim of someone else’s profit scheme.
All this applies doubly so when you’re dealing with the now-infamous ICOs, or Initial Coin Offerings. Taking its name from the IPO (Initial Public Offering), an ICO allows a company to raise funds by selling coins/tokens to prospective investors in return for cryptocurrency like Bitcoin and Ethereum – sometimes fiat too.
“You create a document essentially detailing exactly how the system would work (usually called a white paper), make a pretty website, and explain why it’s a great idea that could be very useful. Then, you ask for people to send you money (usually Bitcoin or Ether, but you can also take fiat) and in return, you send them back some [of your branded coins – let’s call them XCoin]. They hope that [XCoin] will get used a lot and be in high circulation, which would raise the value of the currency,” Investopedia explains.
Basically, there’s a lot of speculation involved, with many companies’ white papers’ being undercooked. However, that’s not where the real problem lies.
The crux of the problem lies in that ICOs are not mediated by any third party. Transactions are carried out directly between the company and investors, meaning that a company can hoard some funding, then up and disappear overnight without a trace. This happens a lot, and is known as an exit scam.
“Put simply, an exit scam is a fraudulent operation orchestrated by unethical cryptocurrency promoters who disappear with investors’ funds during or in the aftermath of an initial coin offering (ICO). To do so, the scammers typically launch a new cryptocurrency based on a promising concept,” The Next Web explains.
Crypto intelligence firm CipherTrace claims 2019 may be the “Year of the Exit Scam,” with $3.1 billion stolen through exits.
Our advice? Avoid ICOs altogether. According to a study by Satis Group, approximately 78% of ICO’s in 2017 were identified as scams, 4% failed, and only 15% went on to trade on an exchange.
If you do decide to dabble with ICOs, be prepared. Thoroughly inspect a company’s website, staff, white paper and marketing material, and cross-reference with existing, legitimate crypto firms.
“It is your money and your decision, so it is your job to do proper due diligence on the project,” Julian Hawari, CEO of InfakCorp, the first Islamic Fintech Ecosystem, tells AMEinfo. “If it is too good to be true, that is usually the case.”
The safer alternative to ICOs, and one we recommend, is IEOs (Initial Exchange Offering), where a third-party exchange mediates token transactions.
While there are many legitimate exchanges that you should use to buy and sell crypto, like Binance, Huobi and OKEx, there exist even more that are fraudulent.
“There are dozens, if not hundreds, of unregulated online exchanges and brokerage firms offering cryptocurrencies and cryptocurrency trading products,” Commodity.com explains. “Investors should be wary of too-good-to-be-true promotions and promises of quick riches. Once you deposit money, many of these firms will charge you outrageous commissions or make it very difficult to withdraw funds. Some of the worst offenders will simply steal your money.”
Wallet theftWhat comes after a new technology hits the market? Why, malware, of course!
Given the need for a new type of wallet to carry traders’ coins and tokens, a window of opportunity has opened for hackers to try and infiltrate digital wallets. This has brought rise to wallet-targeted malware.
“The piece of malware, named InnfiRAT, a so-called remote access trojan, is able to steal sensitive information stored on a device including bitcoin and cryptocurrency wallet data,” Forbes explains. “The remote access trojan searches for wallet.dat files and if found delivers them to a server controlled by the cyber criminals.”
RATs are usually downloaded through an infected email attachment or app, like any other piece of malware.
Luckily for traders, there exist other forms of wallets, namely paper and hardware wallets that are naturally not connected to any network, so aren’t at risk of an online threat.
A word of advice from an industry expert
AMEinfo spoke with Ahmed Jacob, CTO and Managing Partner at global blockchain Investment management company INVAO, to get some first-hand advice from the executives dealing with these issues on the ground.
“Never invest in anything that you don’t understand,” Jacob said. “Investors need to look at each business case in detail. What is the value proposition of the underlying asset? For example, if a token consists of a real estate portfolio, what assets are included, in which market, and what is the strategy?
He continued: “Also, what rights do I have as an investor? Does the token pay out a dividend, do I have voting rights? If it’s a utility token, what is the business case and what problem does it solve? Essential is also an exit strategy. Where will the token get listed and will it attract liquidity? It also helps to take a look at the team behind the token and their track record. Regulation is an issue as well. I only recommend investing in a token that is being issued in a jurisdiction that has a reliable approach to securities and especially crypto regulations.”