The Most Common Crypto Fraud Schemes and How To Deal With Them

• Jeremy Diamond
• Categories: Fraud
• March 12, 2024

Since Bitcoin’s inception in 2009, crypto has seen a steady rise in following. It has expanded from a niche asset class to the mainstream, with multiple global exchanges and DeFi protocols carrying billions within their platforms. This includes holdings within hot wallets or as TVL (Total Value Locked) within DeFi. Moreover, with the successful debut of spot Bitcoin ETFs, billions more have flowed into crypto investment. 

Crypto’s journey, however, has been far from a smooth one. Like any new asset or investment opportunity, it began like the Wild West. Naturally, fraudsters and scammers were quick to take advantage. Fraud, scams, and illegal transactions have frequented the headlines, starting with Mt. Gox, the infamous Bitcoin bankruptcy scandal that cost many of its early investors their coins. 

Dark web marketplaces also contributed to Bitcoin and crypto’s early notoriety. During the 2017 bull run, ICOs dominated the market. Many such ICO projects were outright scams, and many lost their investments in phantom tokens. Recently, scandals like the Terra-Luna collapse and the FTX debacle added devastating losses to the list. 

Canadians lost over $161 million to investment scams in the first six months of 2023, most of which were attributed to cryptocurrency. The figure came from a Canadian Anti-Fraud Centre (CAFC) report. 

Here, we discuss the common types of fraudulent transactions and scams in the crypto world. We will delve into their mechanics and how to avoid them. Equipped with knowledge of fraudulent practices and their real-world examples, you can be more discerning about where you invest your money. 

What are the most common crypto scams?

Remember that the nature of fraud and scams in crypto follows age-old models and patterns. If you understand the history of financial markets, nothing is new under the sun.

Crypto is simply a digital homolog of existing financial concepts. It can be digital money or a tokenized representation of an asset. It can also perform traditional functions of assets or currency, such as being a reliable store of value, an accepted medium of exchange, and a unit of account. Therefore, scams that are possible with government-issued cash or fiat can be translated to the crypto world.

Are all cryptocurrencies and their transactions fraudulent? International data shows it’s far from it and on a downtrend. A recent crypto crime report by Chainalysis noted a significant drop in value received by identified illicit crypto addresses. The number dropped from $39.6 billion in 2022 to $24.2 billion in 2023. 

Aside from the reduction in the absolute value of criminal activity globally, Chainalysis’ estimate for illicit transactions’ share of all crypto transaction volume also dropped. It decreased from 0.42 percent in 2022  to 0.34 percent in 2023.

It is promising to note that the growth of legitimate cryptocurrency usage is far outpacing the growth of criminal usage. Nonetheless, users should be wary of various schemes and tactics to steal money. Here are some of them: 

Crypto Ponzi schemes

The term “Ponzi Scheme” originated from the swindler Charles Ponzi and his activities from 1919 to the 1920s. Ponzi’s infamous scheme involved the United States Postal Service. At the time, the US Postal Service developed international reply coupons that allowed senders to pre-purchase postage, including it in their correspondence. Receivers could take the coupon to their local post office and exchange it for priority airmail postage stamps to send their reply letters. 

Ponzi conducted arbitrage under this type of exchange, which isn’t illegal. However, he took it a step further. Under his company, the Securities Exchange Company, he promised his investors high returns under the postage stamp scheme—50 percent in 45 days or 100 percent in 90 days. 

The offer was too good to be true, but investors latched on to it. Ponzi didn’t reinvest the money. He used the new investments to pay previous investors—essentially redistributing the money and passing it for returns. Ponzi was investigated and subsequently arrested for mail fraud.

In the realm of crypto, this old form of financial fraud has been translated into cryptocurrency token projects or investment schemes promising high returns by using the same tactic: funnelling funds from new investors to pay existing ones. 

Crypto Ponzis masquerades as “high-yield” programs offering unnaturally high ROIs for your fiat money or Bitcoin investment. They present themselves as legitimate opportunities with enthusiastic and well-spoken ambassadors who are ever-present in social media, well-financed campaigns, and investor gatherings. 

Examples of crypto Ponzi include PlusToken and BitConnect. The two were massive global Ponzi operations, luring unsuspecting investors by promising returns unattainable through regular crypto trading and traditional investments. At some point, BitConnect reached a peak market cap of $3.4 billion. Both projects collapsed. BitConnect’s founder was charged with orchestrating a global Ponzi scheme by a federal grand jury in San Diego, US. 

Pump-and-dump schemes or “rug pulls”

In a typical pump-and-dump scheme, also known as a rug pull, frauds spread misleading or false information to trigger a buying frenzy that inflates or “pumps” the value of a coin. Manipulators artificially inflate the price of a chosen cryptocurrency or token and sell their holdings at a profit once the unsuspecting investors buy in. 

When the manipulators “dump” their coins or tokens, it usually causes a panic as they sell in large volumes. As the panic spreads, the coin or token’s value plunges. The promoters make easy money, and numerous small investors end up “holding the bag,” left with huge losses and no one to sell to. 

These schemes typically happen with the aid of aggressive “shills” or promoters and social media threads. They are executed in crypto exchanges worldwide, usually the less reputable ones. Manipulators use social media communities to spread the word, using platforms like Discord and Telegram to foster enthusiastic discussions. 

The practice also happens in traditional financial markets. Pump-and-dumps have existed on Wall Street since the beginning. A well-known example of this scam in traditional markets is the pump-and-dump on penny stocks by Jordan Belfort and his company in the early 2000s, as popularized in the film The Wolf of Wall Street.

Blackmail and extortion scams

Some scammers will claim to have sensitive or embarrassing personal information like scandalous photos or videos to scare you into paying them, luring you into a trap. Many threaten to release the information publicly but promise to hold off if you give in to their demands. The wording of the demands is similar: the problem will disappear if you transfer crypto to them as soon as possible. 

In some cases, the claims are false; in others, the scammers may have gained access to your personal or business documents. Governments recommend reporting extortion or blackmail scams to the appropriate authorities immediately. In addition, experts advise against sending any money and avoiding communication or negotiation with the thieves.

Phishing and malware attacks

Cybercriminals use malware to gain access to your information or system. Crypto malware is a kind of malware that carries out crypto-jacking attacks. These attacks absorb all the resources from a victim’s computer to mine cryptocurrency. 

You don’t need to own cryptocurrency or have a crypto wallet to be a victim of this scheme. Crypto mining doesn’t usually include stealing funds from a victim’s crypto wallet. The hackers only need your device to mine.

Phishing scams involve fraudsters or hackers pretending to be someone else. They can represent a company, adding credibility to their persona. Their goal is to get you to share private information willingly. 

Crypto phishing scams may ask you to share your private keys—the critical alphanumeric keys needed to access your wallet. They may send an official-looking email with a company’s logo and name, asking you to log in and provide vital information as a way to gain access to your assets or accounts. 

Exit scams and exchange hacks

There are many types of crypto exchanges, and their technology has evolved and improved over the years, especially in security measures. Even with these advancements, however, crypto exchanges remain vulnerable to hacks, just like any exchange holding significant assets. 

Outside parties orchestrate many attacks. However, you don’t need to look too far in other cases. Exchange operators can execute exit scams, leaving with users’ funds in the guise of a security breach or some other emergency incident, like a fake death. 

One of the most notorious alleged exit scams in crypto history was that of Canadian exchange QuadrigaCX, involving its founder Gerald Cotten. News of Cotten’s death alarmed customers with funds held in the exchange. 

The initial disclosure from the exchange in 2019 reported that its founder died of Crohn’s disease complications. The incident cut off access to QuadrigaCX’s cold wallets with $145 million in customer-owned tokens. Exchange withdrawals were subsequently frozen. The firm entered bankruptcy shortly after. 

Further investigation into the incident found that it was both an exit scam and a founder’s death. 

During his time at the company’s helm, Cotten used fake accounts on the exchange to purchase Bitcoin from his customers using fictitious Canadian dollars, according to the auditor Ernst & Young. The stolen Bitcoin was then moved to other exchanges to take risky bets. Moreover, the exchange founder was found to have a track record of theft and deception dating back to his teenage years. 

The Mt. Gox collapse in 2014 marked the earliest crypto exchange disaster in history. It is a stark reminder of the dangers of leaving funds in centralized platforms. 

ICO Scams

ICO stands for Initial Coin Offering. Patterned after IPOs or Initial Public Offerings, ICOs aimed to replicate the stock market dynamics by using coins instead of stocks. ICOs are fundraising methods used by crypto startups.

These startups issue digital tokens, equivalent to a stock, in an unregulated market. The scams usually involve false promises of earnings and ecosystems providing benefits and value like nonexistent products and services. 

Investors expect their tokens to appreciate and thus buy them at an apparent discounted price. “Private sales” claim to offer even more privileges to early investors, as they are deemed more exclusive and precede the actual exchange-based ICO.

The crypto bull run of 2017 coincided with the ICO boom. Thousands of projects flooded the crypto space. Each project had its whitepapers, many of which were plagiarized or filled with unrealistic figures and promises. Since the ICO boom, regulators have caught up. 

Some jurisdictions have labelled company-issued crypto tokens as securities and investigated ICO projects or banned the sale of tokens altogether. Several celebrity ICO endorsers were charged with unlawfully touting coin offerings.

How To Avoid a Crypto Scam

Crypto scams operate on age-old deception tactics packaged in a new technology wrapper. The following are ways to catch on quickly to a crypto fraud scheme and thus avoid it:

Don’t fall for promises of guaranteed returns

Crypto markets are incredibly volatile, making it impossible to guarantee a specified rate of return. Projects that are ultra-confident about their fixed returns should immediately be held suspect. 

If it’s too good to be true, it is

New, untested crypto projects tend to promise the moon. The most enduring crypto projects involve considerable time, effort, and investment and always come with a warning. A little research about a project’s reputation, team or founders, traction, and output protects your investment. Be cautious of big claims that are unbacked by data.

Be wary of invasive or unexpected communications

Ignore unexpected or unknown emails, phone calls, or texts from people urging you to log into an account, access a business opportunity, join a group, or send crypto to resolve an issue. 

Resist pay-to-play opportunities

Crypto is full of pay-to-play offers asking you for a fee to generate publicity, win awards, get a job, or secure a position in the industry. No one competent enough should have to pay for a place in the industry. If you encounter these types of schemes, run. 

Learn To Spot Red Flags Early

In crypto, there’s a common expression called DYOR—an acronym for “do your own research.” Even if crypto is full of retail investors and decentralized projects, traders and investors should be highly cautious of fraudulent transactions and get-rich-quick schemes. 

Due diligence is paramount. Remember that many crypto scams are simply mirrors of old psychological tricks and financial deceptions. With time, you can develop the skills to catch these typical red flags early.

When deciding whether to invest in a coin or project, read the whitepaper, use educational resources, stay abreast of news, check the project’s reputation and history, review the currency or token’s performance, and ask or consult experienced investors. Professional investors will likely provide invaluable advice and insight on navigating the volatile crypto markets. 

Once lost, it could be tough to get your money back. Nonetheless, cryptocurrency is not a black hole, and regulators have developed ways to trace illegal transactions on the blockchain. There may still be a way to recover your funds. You could join a class-action lawsuit. Nevertheless, you must inform the government about unscrupulous practices to prevent them from happening again. 

Seek Legal Help From Diamond and Diamond Lawyers

Crypto scams make up over half of financial fraud incidents in Canada. The legal landscape around crypto is still evolving; however, greater certainty has been emerging in recent years. While retrieving your funds can be challenging, it is not impossible. Government agencies have gained expertise in tracing blockchain transactions and penalizing financial fraud.

It is important to document your experience for future reference. Thus, you need to ensure proper reporting with the police, financial institutions, and credit agencies, with a law firm to guide you along the way. 

It is also crucial to obtain proper legal guidance from a reliable law firm when engaging in crypto-related investments. It’s equally important when dealing with potential fraud. A lawyer with experience in handling financial fraud can help you evaluate financial contracts and pursue legal action against scammers. Contact us today for further assistance with your financial matters. 

Secure your financial future and peace of mind. Navigate potential crypto scams with Diamond and Diamond Law. 

FAQs on Cryptocurrency Fraud

What signs of financial or crypto fraud should I watch for online?

Crypto fraudsters use the internet and social media to proliferate their scams. They typically use the following tactics to convince you to part with your money online: 

• High-pressure sales tactics: they act pushy, forcing you to act ASAP or miss out on the opportunity.
• Asking you to download a Trojan horse: one of the requirements to invest is to download an app that gives access to your computer. 
• Deceptive good looks: many crypto promoters could be professionals, celebrities or paid “shills.” Look beyond a website’s slick design and claims of celebrity endorsement.  
• No trading experience needed: many claim you don’t need specialized knowledge or trading experience to be successful in crypto investing. They might tell you everything’s automated, so you don’t need to do anything but watch your investment grow.
• Pay more to get less: some scams ask you to deposit more money to withdraw from your account. 
• Unreachable for inquiries: the fraudsters become unavailable once you make a withdrawal request or have further questions.

How do you know a crypto platform is legit in Canada?

There are ways to check whether a company engaging in crypto assets trading or advice in Canada is legit:

• Check whether the individual, company, or entity is registered with their respective territorial or regional securities regulatory authority.
• Find out if the company has a history of crypto litigation or has faced disciplinary action.
• Verify the company through the National Registration Search tool.
• Check investor alerts from the Canadian Securities Administrators site.
• Check authorized crypto asset trading platforms on the Canadian Securities Administrators’ list. 

Why hire a lawyer to advise you on crypto fraud? 

The majority of fraudulent deals and transactions in Canada are now perpetuated in the world of crypto. Many who fall prey to such scams are typically less informed about crypto as a digital asset and technology and are unaware of the laws governing it. 

Nonetheless, investing in crypto can present a growth opportunity if you screen and choose your investments properly. Checking with a lawyer can help you detect scams early. Lawyers can also advise you on matters of registration, reporting, and taxation on your investments.