As cryptocurrencies have become increasingly popular with legitimate users so too has their abuse by financially-motivated criminals. Crypto-frauds include cryptocurrency thefts, romance scams, and investment frauds. Investment fraudsters understand the appeal of huge returns from cryptocurrency speculation and authorities have warned that this kind of scam is on the rise. Our research shows the broad use of credible-looking online adverts and websites, alongside traditional pressure tactics to coerce victims into making transfers.
With resources stretched to investigate crimes including the use of cryptocurrency, techniques to trace, investigate and make recoveries are now available to law firms and investigators.
Cryptocurrencies now becoming mainstream
As cryptocurrencies have become increasingly popular with legitimate users, so too has their abuse by fraudsters, extortionists, and cybercriminals. In 2021 a report showed that worldwide cryptocurrency adoption had jumped over 880% in one year. Use of cryptocurrency by individuals and institutional investors has likely fueled this growth.
Cryptocurrency frauds on the rise
Corresponding with this massive uptake, illicit transactions were also estimated at a record $14.3 billion in 2021. One silver lining was that while this showed an all-time high in absolute terms, it was only 79% higher than the previous year, indicating that legitimate use of cryptocurrency was outstripping criminal abuse.
Regardless, in the UK, the Financial Conduct Authority (FCA) and the police body responsible for fraud reporting, Action Fraud have both warned of the prevalence of cryptocurrency-related scams. Fraud reports showed that at the end of 2021, £146 million had been lost to these scams, representing more than a 30% increase on the year before.
The many faces of cryptocurrency frauds
Cryptocurrency frauds can come in many guises. Cryptocurrency thefts as a result of cyber incidents or hacking have peppered the news with huge losses reported by some exchanges. “Initial Coin Offering” (ICO) frauds are where fake launches of new cryptocurrencies are used as a lure to extract money from investors, or legitimate coin launches are impersonated. Romance scams, where victims are lured into paying in cryptocurrency, are also on the rise.
One of the more prevalent techniques is the fake cryptocurrency investment scheme. In these scams, fraudsters will create credible-looking online adverts, send emails and create websites to advertise fake high-yield investment opportunities.
In some cases, these scams use the endorsement of celebrities or influencers to lure victims into the scam. These scams have evolved from so-called “boiler room” frauds where bogus stockbrokers would cold call investors to pressure them into buying worthless shares. Instead of shares, modern-day cryptocurrency scams use similar pressure tactics to coerce victims into worthless cryptocurrency investments.
Professional-looking and polished scams
Our team has reviewed the UK financial regulator’s warnings issued about unregulated firms to identify the current “state of the art” scams. We discovered realistic and convincing-looking websites, with login pages, ticker-tape graphics to show the exchange rates of various cryptocurrencies and dynamic graphics to show latest investors and transactions.
In one case, we found a scheme presented a screenshot of its UK Companies House filings on the site in an apparent bid to convince users of credibility, despite the fact that registering a company in the UK is no real indication of this.
MDR Cyber has also helped investigate similar suspected frauds which claim to offer high returns on investments but failed to deliver on their promises. The schemes have also relied on platforms which show users have made significant gains, but when they wish to cash out, the fraudsters are quick to deny this option.
Typical schemes have involved the use of professional-looking website “platforms” and the use of pressure tactics by operators to convince victims to make transfers.
Research Observations
Fraudsters are agile and quick to diversify into new schemes which generate returns. Cryptocurrency investment frauds are a new version of an old crime. Unfortunately, many of these criminal enterprises are able to commit their frauds by hiding behind the relative anonymity that the internet and cryptocurrencies can provide.
Many of the tools and techniques used by law enforcement for tracing stolen cryptocurrency are also available to private investigators and law firms operating in the civil and criminal arenas. Alongside cryptocurrency tracing methods, more traditional methods of investigation against the wrongdoers can be pursued including the use of legal orders to compel disclosure of information from domain registrars, email and web-hosting providers and third-party cryptocurrency exchangers. Private prosecutions in England and Wales can also be launched in some circumstances.
Recovering funds
Our legal teams use a wide range of orders to identify accounts owners and to freeze funds, preventing them being moved or spent. If cryptocurrency is traced into a customer account held at a third-party cryptocurrency exchange or service, it may be possible to obtain court-ordered disclosure from the third party which reveals the identity of the customer who received the funds, and thereby helps to expose the perpetrators of fraud or other malfeasance. It may also be possible to obtain an order freezing the account in question or the funds therein, pending recovery action. For more information contact mdrcyber@mishcon.com.