Scams are not a recent phenomenon, with stories about them dating back to biblical times. What has fundamentally changed is the ease with which scammers can reach millions, if not billions, of individuals at the push of a button. The Internet and other technologies have simply changed the rules of the game, and cryptocurrencies have come to represent the forefront of these new cybercrime opportunities.
For example, in 2021, two South African brothers managed to defraud investors of $ 3.6 billion from a cryptocurrency investment platform. In February 2022, the FBI announced that it had arrested a couple who were using a counterfeit cryptocurrency platform to defraud investors of another $ 3.6 billion.
You may be wondering how they did it.
There are two main types of cryptocurrency scams that tend to target different populations.
One of them is aimed at investors in cryptocurrencies, who tend to be active traders with risky portfolios. They are mostly younger investors, under the age of 35, who earn high incomes, are well-educated, and work in engineering, finance, or computer science. In this type of fraud, scammers create counterfeit coins or counterfeit exchanges.
A recent example is SQUID, a cryptocurrency named after the television drama Squid game. After the price of the new currency skyrocketed, its creators simply disappeared with the money.
A variation of this scam involves attracting investors to be among the first to buy a new cryptocurrency, a process called initial coin offering, with promises of big, quick returns. But unlike the SQUID offer, coins are never issued and aspiring investors are left empty-handed. In fact, many initial coin offerings turn out to be counterfeit, but due to the complex and evolving nature of these new currencies and technologies, even experienced and educated investors can be deceived.
As with all risky financial ventures, anyone considering buying a cryptocurrency should follow the old advice to thoroughly research the offer. Who is behind the offer? What is known about the company? Is a white paper, an information document issued by a company describing the characteristics of your product, available?
In the SQUID case, a warning sign was that investors who had bought the coins could not sell them. The SQUID website was also riddled with grammatical errors, which is typical of many scams.
Pay for Shakedown
The second basic type of cryptocurrency scam simply uses cryptocurrency as a payment method to transfer funds from victims to scammers. All ages and demographics can be targeted. These include ransomware cases, romance scams, computer repair scams, sextort cases, Ponzi schemes and the like. Scammers are simply taking advantage of the anonymous nature of cryptocurrencies to hide their identities and evade the consequences.
In the recent past, scammers have requested bank transfers or gift cards to receive money, as they are irreversible, anonymous and impossible to track. However, these payment methods require potential victims to leave their homes, where they may encounter a third party who may intervene and possibly detain them. Crypto, on the other hand, can be purchased from anywhere, anytime.
In fact, Bitcoin has become the most common currency requested in ransomware cases, being sued in about 98% of cases. According to the UK’s National Cyber Security Center, extortion scams often require individuals to pay in Bitcoin and other cryptocurrencies. Romantic scams aimed at younger adults are increasingly using cryptocurrency as part of the scam.
If someone asks you to transfer money to them through cryptocurrency, you should see a giant red flag.
The Wild West
In the field of financial exploitation, more work has been done on the study and education of elderly scam victims, due to the high levels of vulnerability of this group. Research has identified common traits that make someone especially vulnerable to scam requests. They include differences in cognitive ability, education, risk-taking, and self-control.
Of course, younger adults can also be vulnerable, and in fact, they are also becoming victims. There is a clear need to expand educational campaigns to include all age groups, including new, educated and affluent investors. We believe that the authorities should intensify and use new methods of protection. For example, the regulations currently in place for advice and financial products could be extended to the cryptocurrency environment. Data scientists also need to better track and track fraudulent activities.
Cryptocurrency scams are especially painful because the probability of recovering lost funds is close to zero. At the moment, cryptocurrencies have no supervision. They are simply the wild west of the financial world.
Yaniv Hanoch is an Associate Professor of Risk Management at the University of Southampton. Stacey Wood is a professor of psychology at Scripps College.