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Scams and cryptocurrency can go hand in hand – here’s how they work and what to watch out for

When one of our students told us that he was going to drop out of school in August 2021, it was not the first time we heard of someone ending his studies prematurely.

What was new, however, was the reason. The student had been the victim of a cryptocurrency scam and lost all of 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 currently hundreds of millions of cryptocurrency owners, with estimates predicting even faster growth. As the number of people owning cryptocurrencies 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

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, with cryptocurrencies coming to embody the vanguard of these new opportunities for cybercrime.

Cryptocurrencies – which are 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 cryptocurrencies became more common. Scammers have capitalized on their popularity. The pandemic has also disrupted day-to-day business activities, leading to greater reliance on alternatives such as cryptocurrencies.

A January 2022 report from Chainanalysis, a blockchain data platform, suggests that in 2021 nearly US$14 billion was scammed by investors using cryptocurrencies.

For example, in 2021, two brothers from South Africa successfully defrauded investors of $3.6 billion on a cryptocurrency investment platform. In February 2022, the FBI announced that they had arrested a couple who used a fake cryptocurrency platform to defraud investors of an additional $3.6 billion.

You might wonder how they did it.

False investments

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

One targets cryptocurrency investors, who tend to be active traders with risky portfolios. They are mostly younger investors, under 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, fast returns. But unlike the SQUID offering, no coins are ever issued and potential investors end up empty-handed. In fact, 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 age-old advice to thoroughly research the offer. Who is behind the offer? What do we know about the company? Is there a white paper, an information document issued by a company describing the characteristics of its product?

In the SQUID case, a warning sign was that the investors who bought the coins were unable to sell them. The SQUID website was also riddled with grammatical errors, which is typical of many scams.

Demand Payments

The second basic type of cryptocurrency scam simply uses cryptocurrency as a payment method to transfer funds from victims to scammers. All ages and demographic groups can be targeted. These include ransomware cases, romance scams, computer repair scams, sextortion cases, Ponzi schemes, and more. Scammers simply take advantage of the anonymous nature of cryptocurrencies to hide their identity and escape consequences.

Close-up of man's fingers typing text message
Romance frauds often result in requests for cryptocurrency.
Tero Vesalainen/iStock via Getty Images

In the recent past, scammers would ask for wire transfers or gift cards to receive money – because they are irreversible, anonymous and untraceable. However, 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, being demanded in nearly 98% of cases. According to the UK’s National Cyber ​​Security Center, sextortion scams often ask individuals to pay in Bitcoin and other cryptocurrencies. Romance scams targeting young adults are increasingly using cryptocurrency as part of the scam.

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

wild west

In the area of ​​financial abuse, more work has been done to study and educate older people who have been defrauded, due to the high levels of vulnerability of this group. Research has identified common traits that make a person particularly vulnerable to fraudulent solicitations. They include differences in cognitive abilities, education, risk taking and self-control.

Of course, young adults can also be vulnerable and become victims too. There is a clear need to broaden education campaigns to include all age groups, including young, educated and affluent investors. 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.

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