Bitcoin: Cryptocurrency investment is a digital wild west of fraud

Cryptocurrency investment has seen a resurgence during the many Covid-19 lockdowns, and with Elon Musk piling into Bitcoin, interest is unlikely to diminish any time soon. But, with the upswing, there has also been a corresponding spike in the volume of cryptocurrency related fraud.

Article published by Julien Artero, Managing Director, Kalita Partners, in CityAM on Thursday 25 February 2021. Article available here

Many of the victims of crypto fraud are savvy investors in the traditional realm of fiat currencies. Investors who would never fall for similar scams in the non-digital world are falling prey, not only to hackers accessing wallets and acquiring passwords, but to outright blockchain fraud.

Cryptocurrency investment is truly the wild west and investors need to mentally adjust to an environment without strict controls and regulations. Fraudsters know that many individual investors do not perform proper due diligence as they would in non-digital assets.

Stuck at home for long periods over the last year due to the pandemic, not only do our behaviours change, but so too can our perception of risk. When investors traverse into the realm of digital assets, with their simple, easy, user friendly platforms, many seem to lose their sixth sense that something may be amiss. 

There is also an easy money, casino mentality with a lot of cryptocurrency investment which means that people are willing to take bigger risks without doing their due diligence first – all of which makes it the perfect environment for fraudsters. 

While certainly not a hard and fast rule, it may be difficult to justify the expense of an investigation to recover those assets for investment losses under USD $5million. 

Fraudsters know this. They focus on smaller transactions and scams varying from Ponzi schemes, unregulated or fake brokers, fraudulent crypto-currency exchange platforms, to hack attacks on legitimate exchanges and crypto wallet providers. According to a report by US-based CipherTrace, last year was overrun by dozens of smaller-scale crypto hacks and scams. 

In typical investigation of cyber-fraud you need to trace the digital record of the transactions to real-world surnames and addresses of individuals; secure, and hold the stolen funds: the cross-border nature of transactions involving multiple jurisdictions may require legal counsel and court actions in different locales; you might need to enlist agencies such as Interpol or Europol. 

The cost in time and money is significant. Even if you are willing or able to commit the time and resources to a complex investigation, the likelihood of recovering your money is much lower than in real world.

Although traditional hacks work in much the same way conceptually, there are significant controls in place supported by a robust regulatory and enforcement infrastructure. Investors can be lulled into false sense of security from their real-world experience of the plethora of fiat currency regulation, controls, and enforcement mechanisms.

The same age-old idiom applies is just as applicable to crypto investing: If it sounds too good to be true, it probably is.

Copyright 2021 - Kalita Partners - published on 25 February 2021 in CityAM.