Current trends in fraud: Crypto scams

Despite the Covid-19 pandemic, 2020 was an incredible year for crypto assets.  Largely driven by the increased demand from institutional investors, Bitcoin shattered its previous price records. However, its pseudonymous nature and the ease with which it allows users to instantly send funds anywhere in the world makes crypto assets appealing to criminals.

In February the blockchain analysis company Chainalysis released their annual crypto crime report summarising the main trends from 2020.  Surprisingly, despite its increase in popularity, crypto asset related crime fell significantly in 2020 compared to 2019. This fall is likely due in part to the PlusToken scam uncovered in 2019, which took in over $2 billion from millions of victims, making it one of the largest Ponzi schemes in history.

According to Chainalysis, in 2020, just 0.34% of all crypto asset movement related to illicit activity. That might sound low, however it still equates to billions of dollars. Crypto asset investment scams make up the majority of this illicit activity.

Crypto asset fraudsters often have extremely professional looking websites which are sometimes advertised on social media. Victims are then persuaded to make investments with the firm using crypto or fiat currencies through the use of software which is manipulated to show false data surrounding fluctuation of price, profits and investment returns.

Scam firms are known to suddenly close consumers’ online accounts and refuse to transfer the funds to them or ask for more money to cover ‘fees’ or ‘taxes’ before the funds can be transferred.

Ponzi schemes continue to make up a high proportion of crypto asset scams. They are a form of fraud that lures investors and pays profits to earlier investors with funds from more recent investors. There are several markers which can be used to identify a potential Ponzi scheme, including:

• High returns with little or no risk. Every investment carries some degree of risk, and investments yielding higher returns typically involve more risk. Be highly suspicious of any “guaranteed” investment opportunity.
• Overly consistent returns. Investments tend to go up and down over time. Be sceptical about an investment that regularly generates positive returns regardless of overall market conditions.
• Unregistered investments. Ponzi schemes typically involve financial services firms and individuals not authorised by the FCA (or respective regulator in the country in which they are based).
• Secretive, complex strategies. Avoid investments if you don’t understand them or can’t get complete information about them.
• Issues with paperwork. Account statement errors may be a sign that funds are not being invested as promised.
• Difficulty receiving payments.

Another common scam is to present a new crypto asset as an alternative to Bitcoin. The idea is that it’s too late to cash in on Bitcoin and that you need to invest in one of these up-and-coming crypto assets.

It is important to note that certain crypto assets, including the most well-known and widely traded one: Bitcoin, are not regulated in the UK.

From 10 January 2020, the FCA became the anti-money laundering and counter terrorist financing (AML/CTF) supervisor for crypto asset firms, which includes firms that exchange money to and from crypto assets and those that safeguard their customers’ crypto assets. From this date, ‘existing crypto asset businesses’ (i.e. firms operating immediately before 10 January 2020) have had to comply with the Money Laundering Regulations; such firms were required to be registered with the FCA by 10 January 2021.

New businesses (who began operating after 10 January 2020), are required to obtain full registration with the FCA before conducting business. 

Notwithstanding this, it is unlikely that you will have access to The Financial Ombudsman or Financial Services Compensation Scheme, irrespective of whether a firm has temporary or full registration

If you are concerned that you might be a victim to a crypto asset related fraud, you should seek immediate advice. However, it is important to bear in mind that pursuing legal action to recover funds paid into a scam can be expensive, and the blockchain analysis necessary often makes crypto scam particularly complicated.  

Further information

If you would like further information regarding this blog, or if you think you might be a victim of crypto asset fraud,  you can contact our team of specialist crypto asset lawyers. 

Further information regarding our specialist crypto asset legal expertise is available on our webpages.