What Is a Cryptocurrency Scam / Examples Of Crypto Scams
This post will focus on cryptocurrency scams, which is a subset of blockchain scams. It is especially relevant considering the most recent scam/rug pull involving Squid Coin. To be completely honest, Squid Coin violated the golden rule of crypto investing, which is common sense. That being said, everyone that lost their money should not be as “out of luck” as they currently are and it is important to note that there are legal avenues evolving for Rug Pull scams. If you were taken advantage of by a crypto scam, call Quattrochi and Torres, PA at 407-452-4918.
Currently crypto is somewhere in between an established alternative to fiat currency and the wild wild west. Those involved with blockchain and crypto at this stage of the evolution will be able to tell, “I walked 15 miles in the snow to get to school” type of stories related to the awkward and unwieldy aspects of blockchain, including crypto scams. As the attention of institutional and retail investors continues to turn towards cryptocurrency, so too does the attention of speculators, fraudsters, scammers and cheats.
According to FTC, from October 2020 through March 31, 2021, reports of crypto-related scams skyrocketed with almost 7,000 people reporting losses and overall losses reaching more than $80 million. These figures reflect a 12x increase in the number of reports year over year and a nearly 1,000% rise in reported losses.
TYPES OF SCAMS:
There are two types of cryptocurrency scams: (1) scams which intend to obtain access to a targets digital wallet or private keys; and(2) scams involving a ruse which results in the target transferring cryptocurrency resulting in a loss. Scams intending to access the target’s wallet typically involve a lack of understanding which results in providing access to their digital wallet, authentication credentials or physical hardware. Scams which result in the target transferring crypto to the scam typically involve malicious means such as impersonation, fraudulent business opportunities or nonexistent emergencies.
Scammers use psychological manipulation and deceit to trick the target into providing vital information which results in access to their digital wallet. The target believes they can trust the scammer often because they believe the scammer is actually a government agency, business, tech support, project member, employer, colleague or friend. There is very little that can be done to rectify this type of scam.
Scammers often peddle some semblance of influence and sometimes try to pose as famous celebrities, businesspeople, or cryptocurrency influencers. Scammers commonly promise to match or multiply the crypto sent to them, which is known as a giveaway scam. Experienced and well-crafted language coupled with what looks to be a valid social media account can create the perfect setting for a scam. Once common sense is eased onto the backburner, this unicorn opportunity can lead to a quick transfer and subsequent loss. Over the past 6 months, there have been multiple scams involving impersonations of Elon Musk and Chamath Paliapatia, two major names in the crypto industry. Unless the perpetrators of the scam are caught by the authorities, there is typically little that can be done to recover the funds. That being said, my firm is always willing to look at the potential negligence of third parties such as wallets, decentralized exchanges and original investors.
Catfish scams are also common, with scammers utilizing dating websites to make unsuspecting targets believe they are in a relationship. Once trust has been earned, conversations often turn to cryptocurrency opportunities and the eventual transfer of either tokens or account authentication credentials. Close to 20% of the money reported lost in romance scams was in cryptocurrency. There is very little to be done to rectify these types of scams, but it is possible that a duty exists among the various dating websites knowingly allowing these scams to take place.
Similar to and sometimes evolving out of Catfish scams are Blackmail scams. In this scam, the target typically receives an email which extorts their vulnerabilities with either actual information or suspected information which the target does not want to be exposed. Blackmail scams commonly have a sexual theme; either actual personal information (IE naked pictures) or adult website history. Unless the target knows the perpetrator there is likely no civil legal recourse. Such scams should be reported to the FBI.
Another type of scam, which we have already lightly discussed and often combines multiple different scams is business opportunity scams. This is another scam that requires a break down in common sense. Criminals offering misleading information through fraudulent websites and business documents offer guaranteed returns to unsuspecting profit seeking speculators. Liquidity is a fickle aspect of blockchain and can be used to create the illusion of funding which elongates the esteem of the bogus guarantee. Things typically go south quickly with the scammers pulling their money and the targets, being unprepared and oblivious, are unable to do the same. These scams are often fact specific, but rest assured, if there is a Defendant to be had, my firm will pursue them vigorously.
Crypto based initial coin offering or nonfungible token project scams. With the rise of new crypto-based investments such as initial coin offerings (ICOs)and non-fungible tokens (NFTs), there are going to be opportunities for scammers to try to exploit the novelty of the concepts. Although crypto-based investments or business opportunities may sound lucrative, every blockchain project is not going to work out. For example, scammers are bold enough to create fake websites and documentation for ICOs and collect user’s deposits into a compromised wallet. In other instances, founders could distribute tokens that are unregulated by U.S. securities laws or falsely advertiser the project to investors. My firm is active in this field and ready and willing to investigate and pursue action against anyone that knew or should have known about the crypto scam.
DeFi rug pulls are the most recent type of scam to hit blockchain markets. Decentralized finance aims to decentralize finance by removing gatekeepers and eliminating the need for established financial institutions. DeFi may have more legs than cryptocurrency itself, but it has its own problems. With novelty and evolution their will always be bad actors. When it comes to the DeFi market, rug pull scams are responsible for $113 million in losses as of July 2021. The most common type is a liquidity scam involves listing an alt-coin on a decentralized exchange (DEX) and pairing it with a cryptocurrency(such as Ethereum (ETH)). The misconstrued clout that comes with being on the ethereum blockchain allows the scammers to pump life into their project and attract targets looking for first-mover profits. Once the scammers sufficiently hype the project, they add liquidity controlled by a smart contract to a DEX such as Uniswap, Pancackeswap or Sushiswap. As targets interact with the project it creates a semblance of normalcy, which eventually leads to complacency. Then, suddenly atthe peak of the token’s newfound popularity, the project owners dump their stake at once, taking a massive profit. In some cases there are nefarious aspects to the smart contract which prevent the holders from selling, but typically everything happens so quickly it wouldn’t have mattered anyways. If you have been a victim of a rugpull scam you may have legal recourse against the scammers and the DEX.
Another type of rug pull involves technical manipulation. Scammers exploit the “approve” function of ERC20 tokens which can create a situation where the holders cannot sell the tokens they purchased. The targets find out as the rug pull occurs that, through manipulation of the smart contract, the option to sell is only available to the scammers, or developers. When a user swaps their token on a DEX, they’re allowing (approving) the smart contract to spend the token. A malicious developer may modify this “approve” function so that users can only buy a token, but not spend it in anyway. The unsuspecting users think they can sell, convert, or spend in another way – like other cryptocurrency tokens – but find out later that, through manipulation of the smart contract algorithm, these options are only available to the project developers, or whoever/whatever the contract specifies.
Lets not forget about cloud mining scams. Platforms create a token project which requires mining, which they market to retail buyers and investors. Mining requires the targets to put down upfront capital to secure an ongoing stream of reward. After the scam is exposed it becomes abundantly clear that these platforms do not actually own the hash rate they say they do, and will not deliver the rewards following the upfront capital. While Cloud Mining in itself is not always a scam, investors should proceed with caution and due diligence. Depending on the circumstances and the locations of the platform, project and mining, my firm diligently pursues these matters and is willing to recover both fiat and crypto damages.
EXAMPLES OF SCAMS:
Amplyfi.money: The scammers stole $2,500 ETH from investors. According to the project creators a single developer scammed everyone by exploiting a backdoor in the holding wallet, stealing close to $10,000,000.00.
Unicat: The scammers used a nefariously coded smart contract to steal $200,000 in crypto. Victims were made to believe that the smart contract would protect their funds only to find out the code allowed the scammers to swipe the money and run.
Thodex: The CEO of this scam disappeared with $2bn in crypto. Thodex was both successful and popular at the time of the scam, which affected 30,000 of 300,000 holders.
Meerkat Finance: This is a developing rug pull, but apparently$31,000,000 disappeared from the project. According to Meerkat this scam was not a scam and was somewhere between a test and a social experiment. It’s unclear whether the victims have been made whole or injuries remain.
Squid Coin: Squid, which came about follow the Netflix thriller Squid Games, purported to let buyers partake in online versions of the games depicted in the South Korean monocratic thriller. Between Oct. 1 to Oct. 26, the value of a Squid coin rose by more than 23million percent, from a little more than a mere cent to $2,861.80. It then plummeted, the Squid Telegram page went dark and the whitepaper has been taken offline.
If you’re interested in a token project, you should do your own research and cover your own ass because, regardless of the semblance of maturity, the world of blockchain and crypto is novel. Everything from the development team to the technical aspects should be examined to avoid exploitation.
Read the fine print
One of the warning signs for a scam is vague documentation or an overly ambitious whitepaper. For example, Squid’s whitepaper states: “Your experience will only reflect on the joy of winning rewards and sorrow of losing money when the game failed.” This is overbroad, absurd and completely avoids the monetary risk associated with the investment.
Check the developer’s holdings
Check what percentage of the token supply is in the control of the developers. The larger the percentage of holdings by the developers, the more control they have over the market. The more control the greater the temptation to manipulate or rug pull. On the other hand, developers having very little skin in the game is a red flag as well. Goldilocks theory should be examined and applied.
Examine the code:
For most projects, the source code is available for viewing without having to jump through hurdles. The harder it is to seethe code, the more likely there is something to hide.
Blockchain, crypto, defi and tokenomics will provide revolutionary products but like all movements, the first steps are flimsy and overwrought with bad actors who create projects to defraud investors; intentionally or through negligence. If your organization is looking to engage in blockchain for financial transactions, it’s worthwhile to do a complete security audit of the project first. If you, or someone you know is a victim of a crypto scam call my office to discuss your legal rights. At Quattrochi and Torres, Justice is our Priority.