Cryptocurrency needs stricter regulation - Wakeupandsmelltheblog Cryptocurrency needs stricter regulation - Wakeupandsmelltheblog

Cryptocurrencies

Cryptocurrency needs stricter regulation

When one of our students told us they were going to drop out in August 2021, it wasn’t the first time we heard of someone ending their studies prematurely.

What was new, however, was the reason. The student had been the victim of a cryptocurrency scam and had lost all his money – including a bank loan – leaving him not only broke, but in debt. The experience was financially and psychologically traumatic, to say the least.

This student, unfortunately, is not alone. There are hundreds of millions of cryptocurrency owners, with estimates predicting even faster growth. As the number of owners has increased, so has the number of victims of scams.

We study behavioral economics and psychology, and recently published a book on the growing problem of fraud, scams and financial abuse. There are reasons why cryptocurrency scams are so prevalent. And there are steps you can take to reduce your chances of becoming a victim.

Crypto takes off – and so do scams

Cryptocurrencies — decentralized digital currencies that use cryptography to create anonymous transactions — were originally run by “cypherpunks,” privacy-minded people. But they have grown to capture the minds and pockets of ordinary people and criminals alike, especially during the COVID-19 pandemic when the price of various cryptocurrencies skyrocketed and they became more commonplace. Scammers have capitalized on their popularity.

A January 2022 report from Chainanalysis, a blockchain data platform, suggests that in 2021 nearly $14 billion was defrauded by investors using cryptocurrencies. Then, in February 2022, the FBI announced that it had arrested a couple who were using a fake cryptocurrency platform to defraud investors of an additional $3.6 billion.

There are two main types of cryptocurrency scams that tend to target different populations.

One targets investors, who tend to be active traders holding 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 IT. In these types of frauds, the scammers create fake coins or fake exchanges.

A recent example is SQUID, a cryptocurrency coin named after the television drama “Squid Game”. After the price of the new coin skyrocketed, its creators simply disappeared with the money.

A variation of this scam involves tricking investors into being among the first to buy a new cryptocurrency – a process called an initial coin offering – with promises of big and fast returns. But unlike the SQUID offering, no coins are ever issued and potential investors end up empty-handed. Many initial coin offerings turn out to be fake, but due to the complex and evolving nature of these new coins and technologies, even experienced and educated investors can be fooled.

As with all risky financial ventures, anyone considering buying a cryptocurrency should follow the age-old advice on researching thoroughly: who is behind the offer? What do we know about the company? Is a white paper, an information document from a company describing the characteristics of its product, available?

With SQUID, a warning sign was that investors who bought the coins could not sell them. The SQUID website was riddled with grammatical errors typical of many scams.

Demand Payments

The second basic type of scam simply uses cryptocurrency as a payment method to transfer funds from victims to scammers. These include ransomware cases, romance scams, computer repair scams, Ponzi schemes, and more.

In the recent past, scammers requested wire transfers or gift cards – irreversible, anonymous and untraceable – to receive money. But these payment methods require potential victims to leave their homes, where they might encounter a third party who can intervene and possibly arrest them. Crypto, on the other hand, can be purchased from anywhere and at any time.

Indeed, Bitcoin has become the most commonly demanded currency in ransomware cases, demanded in nearly 98% of cases. According to the UK’s National Cyber ​​Security Center, sextortion scams often demand payment in Bitcoin and other cryptocurrencies. Romance scams targeting young adults are increasingly using cryptocurrency.

If someone asks you to transfer money to them via cryptocurrency, you should see a giant red flag.

wild west

Research has identified common traits that make a person particularly vulnerable to fraudulent solicitations, including differences in cognitive abilities, education, risk taking and self-control.

We believe that the authorities must step up and use new methods of protection. For example, the regulations that currently apply to financial advice and products could be extended to the cryptocurrency environment. Data scientists also need to better track and trace fraudulent activity.

Cryptocurrency scams are particularly painful because the probability of recovering lost funds is close to zero. For now, cryptocurrencies have no oversight. They are simply the Wild West of the financial world.

Yaniv Hanoch is Associate Professor of Risk Management, University of Southampton. Stacey Wood is a professor of psychology at Scripps College.

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