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Cryptocurrency fraud: Five key questions answered

Tony Lewis
17/06/2021

Locations

United Kingdom

As reports of fraudsters tricking novice investors into cryptocurrency scams become more common, Fieldfisher fraud and financial crime specialist Tony Lewis offers a perspective on the problem.
 
1. Why has cryptocurrency fraud become such a problem?
 
Since their 'invention', the value of cryptocurrencies have proved to be extremely volatile, meaning investors can either win big or lose big.
 
Like any relatively new asset class with the potential for very high returns, there is always a risk fraudsters will try to take advantage of it.
 
When returns on savings in normal bank accounts are poor, depositors will look for other places to invest their funds. Cryptocurrency has regularly been in the news as offering huge returns, and companies offering cryptocurrency services are well advertised.
 
This attracts lots of novice investors, who tend to be more susceptible to fraud than professional investors.
 
At the same time, cryptocurrency is unregulated so it is easier for fraudsters to exploit than traditional, regulated bank accounts and other authorised investment schemes.
 
These factors have combined to increase the number of frauds involving crypto-assets.
 
 
2. Who typically falls victim to these scams?
 
Companies do not tend to get scammed, as fraudsters usually go after individuals.
 
Individuals have generally either been profiled and targeted specifically by fraudsters, or are chosen at random. They are typically encouraged to make investments in what purport to be lucrative cryptocurrency schemes, usually via an exchange.
 
Quite often, the people responsible for setting up the exchange will just take the money as soon as it is transferred to them and disappear.
 
In other cases, individuals hand over the money for a crypto-asset and either lose control of it, or never had control in the first place.
 
The owner of a crypto-asset is the person who has the key, and not necessarily the person who put the money in to buy it.
 
Even if the person who buys the asset does have the key, there is a risk of losing it or having the information that gives them access stolen.
 
A common trick is for fraudsters to set up a crypto exchange and tell the people they sell the crypto assets to that they have a holding of a certain amount of crypto-assets, and that the value of that holding is going up.
 
But then when the holder tries to withdraw money from the exchange, they find they cannot access the funds.
 
The key lesson from this type of fraud is that anyone thinking of investing in cryptocurrency should only use recognised exchanges, which they can verify by doing some simple internet research.
 
 
3. What are the most common types of cryptocurrency fraud to watch out for and how do they work?
 
Crypto schemes that target novice investors should be treated with caution, as these tend to be the type of exchanges set up purely to perpetrate fraud.
 
This is not always the case, of course, and many legitimate operators set up to provide useful and perfectly legal crypto services to consumers.
 
The old adage that if something looks too good to be true, then it probably is, is very applicable to cryptocurrency schemes, however.
 
There are also more traditional push payment frauds, where fraudsters use social engineering to get people to transfer money, and then the fraudsters hide this money as cryptocurrency, because crypto-assets are more difficult to trace than physical assets like cash, real estate, art and cultural artefacts etc.
 
 
4. What role should authorities and regulators play in addressing the issue?
 
It is tempting to call for stronger regulation and urge the Financial Conduct Authority (FCA) to do more to control crypto, but the reality is that there are always going to be unregulated asset classes that people are attracted to because they purport to offer higher returns.
 
Regulation would help with crypto fraud, but it will also push fraudsters onto other asset classes in the unregulated margins of the financial sector.
 
Another problem is that people do not always bother to check with the regulator and set up exchanges that are not under regulatory supervision, and it takes a while for the FCA to catch up with them.
 
The good guys are already doing the right thing, but the bad guys will just continue to mislead customers.
 
Also, there is nothing to stop a fraudster putting a footnote on their website saying "Authorised and regulated by the FCA", even if it this is not true.
 
 
5. How can companies and investors mitigate against the risk of cryptocurrency fraud?
 
Anyone thinking of buying into these sorts of assets should make sure they do so through one of the major, recognised exchanges.
 
However, arguably the real risk with cryptocurrency is not fraud, but that cryptocurrency is a fundamentally risky asset class.
 
When you invest in crypto-assets, due to their instability and tendency to react very quickly to all kinds of events, there is a big risk of losing money even if you make a genuine investment.
 
Tony Lewis is a partner in the dispute resolution team at Fieldfisher, specialising in fraud and financial crime.
 

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