Cryptocurrencies such as Bitcoin, Ether and hundreds more are a hot commodity in online trading, and it’s possible for a smart investor to make a big profit. But the prospect of quick riches can blind some people to the risks and enable crooks to lure them into scams.
What is cryptocurrency? According to the U.S. Commodity Futures Trading Commission (CFTC), it’s a digital representation of value that isn’t backed by any government or central bank. Even so, this virtual money can be used to make purchases, and it can be exchanged for U.S. dollars or other conventional currencies.
But unlike government-backed money, the value of virtual currencies is driven entirely by supply and demand. That can create wild swings that produce big gains for investors, or big losses. And cryptocurrency investments are subject to far less regulatory protection than traditional financial products like stocks, bonds and mutual funds.
For all cryptocurrency’s high-tech gloss, many of the related scams are just newfangled versions of classic frauds. The CFTC has warned about “pump and dump” scammers who use messaging apps and chat rooms to plant rumors that a famous business mogul is pouring millions of dollars into a certain digital currency, or that a major retailer, bank or credit card company is going to partner with it. Once they’ve lured investors to buy and driven up the price, the scammers sell their stake and the currency plummets in value.
Some cryptocurrency crooks run virtual variations on the old Ponzi scheme, peddling nonexistent opportunities to invest in digital currencies and creating the illusion of big returns by paying off old investors with new investors’ money. One such operation, called BitClub Network, raised more than $700 million before its principals were indicted in December 2019, according to federal prosecutors.
Others fraudsters pose as legitimate virtual currency traders or set up phony exchanges to lure people into giving them money. Another con involves fraudulent sales pitches for “IRS approved” individual retirement accounts in cryptocurrencies. There are also straight-up hackers who break into the “digital wallets” where people store their virtual currency.
The North American Securities Administrators Association, a nonprofit that represents securities regulators in the United States, Canada and Mexico, named cryptocurrency fraud as one of the top threats to investors in 2020. If you want to dip into this brave new world of money, take these precautions to avoid being ripped off.
To date there are over 650 investors who have been defrauded and now are victims and the total massive fraud is still being calculated.
Contributed by Andrei Slavenkov - Financial Crime Consultant (Netherlands)
Chronicles of Monte Friesner - Financial Crime Analyst