When bitcoin was first introduced to mainstream society, many hailed this revolutionary new cryptocurrency as a mechanism to replace fiat currency with a bulletproof global financial system. After all, it was created from the ground up with privacy and security intrinsically built into its architecture, appeared to be positioned to yield high rewards and make financial transactions anywhere in the world faster and more accessible than ever before.
However, as this emerging technology becomes more prevalent, a whole new genre of frauds, scams and organized crime is emerging on its heels. From all cryptocurrency-involved regions there are reports of manipulation of cryptocurrency prices, traders committing fraud, exchanges stealing money, criminals hacking credit card payment systems and organized crime groups using cryptocurrency to cover their tracks as they undertake increasingly complex transactions using the dark web and cryptocurrency as a means of obfuscating their identities and methodologies.
Because, while digital currencies are revolutionizing the entire investment, transaction, contract and technology industry, blockchain and cryptocurrency technology is still in its infancy, which means new threats are continually emerging and the criminal use of this technology, both financially and from a data protection viewpoint, is significant, through the use of hacking, deception and impersonation.
The Rise of Cryptocurrency Scams
From fabricating fake Initial Coin Offerings (ICO) to pump-and-dump scams and pyramid schemes, the evolution of fraud in the world of digital currency is rapid and constantly shifting. The problem has become so pervasive that the U.S. President has signed an executive order on market integrity and consumer fraud with emphasis on cyber-fraud and digital currency fraud. While this genre of fraud is new and rapidly growing both in scale and complexity, there are some well-established “basic” frauds that have proven effective and can be detected and prevented fairly easily with some awareness and research:
1. Fake Coin Scam
The fake coin scam is simple but a classic. Unwitting investors unknowingly invest in or purchase a fake cryptocurrency (an altcoin) because it claims to have reputable backers or partners. And while they are led to believe their investment is growing and they will
soon enjoy a substantial ROI, the scammers are already spending their funds.
2. ICO (Initial Coin Offering) Scam
This type of scam usually begins by creating a great deal of hype and persuading people to buy into a vision or technology that claims to solve a particular problem, with coins being offered in exchange for a cash investment in the company or technology. This scam feeds on greed and the ignorance of inexperienced investors who fall for the allure of significant gains without doing their homework, resulting in investment in a fake ICO.
3. Pump and Dump Scam
In this market manipulation scheme, promoters “pump” a certain bitcoin to rapidly increase its value and gain the attention of investors. Believing the hype, investors buy in only to be stuck with their “investment” once the scammers have cashed out and “dumped” their stock.
4. Pyramid or Ponzi Scheme
Cryptocurrency pyramid schemes operate in the same way as in any other industry. Investors are encouraged to recruit new investors into a new coin or ICO on the promise of daily returns on investment and a commission. These schemes often implode or are shut down unexpectedly, causing anyone not at the top of the “pyramid” to lose their entire investment.
5. Fake Wallets
Cryptocurrency is typically kept in a wallet, which can either be a hardware, software or paper wallet. Each type of currency has its own wallet and these wallets can be stored online or offline depending on the level of security and accessible required by the user. Just as there are fake coins and companies, there are counterfeit wallets. These wallets promising you complete control and security of your funds, only to take your private (encrypted) key along with all of your money using a clone of your wallet.
Conducting Cryptocurrency Fraud Investigations
Cryptocurrency scams pose new challenges for investigators; however, the key isn’t to attempt to fight the crime with the same technology used to create the scam. Behind most of these scams are impersonators or hackers using phishing attacks, stolen credit cards or social engineering techniques. Because cryptocurrency fraud typically involves impersonation, stolen identities, and fake personas, the investigation starts by determining the real characters and real locations of the fraudsters.
To conduct cryptocurrency fraud investigations and expose financial cyber-crimes, investigators need to combine traditional investigative techniques with advanced online investigation and often, digital forensics. It may include employing impersonation using encrypted communications, accessing online platforms where ICOs may be offered, and finding data buried in the deep or dark web, originating anywhere in the world. And of course, underpinning any investigation, regardless of its technicality nature, is the use of creative problem-solving and analytics, as well as a solid understanding of human tendencies, motivations and vulnerabilities.
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