Cryptocurrency Fraud: Case Studies and Lessons Learned

Cryptocurrencies and digital assets have gained significant popularity over the past decade or so. Many types of criminals, including fraudsters, have taken advantage of the surge in popularity.

Several high-profile examples are useful for identifying trends and patterns in fraud typologies, such as methods of operation, techniques used, and actors involved.

Cryptocurrency Fraud

Cryptocurrency fraud may refer to any fraud involving cryptocurrencies. Although there are many types of crime that may involve cryptocurrencies and digital assets, when accountants refer to fraud, they generally mean illicit activities that involve at least five elements.

1. Misrepresentation of material facts: The perpetrator falsely presenting, concealing, or omitting information that is significant and could impact decision-making.

2. Knowledge of the falsehood: The person who is misrepresenting the facts is aware that they are lying or omitting the truth. If someone unintentionally provides inaccurate information, it may not be considered fraud.

3. Intent to defraud: The person committing the fraud has the intent to deceive others for their personal gain or to cause harm to others. If there is no intent, it may not be classified as fraud.

4. Justifiable reliance on the misrepresented fact: The victim relied on the false information when making a decision. If they did not rely on this information, or if they were aware it was false and still proceeded, it may be hard to establish a case for fraud.

5. Damages or loss suffered as a result: Finally, there was a tangible injury or loss resulting from the reliance on the false information. This could include monetary losses, loss of opportunity, physical harm, etc.

Fraudulent activities can take many forms, including Ponzi schemes, Initial Coin Offering (ICO) frauds, and fake cryptocurrency exchanges. In some instances, the decentralized nature, lack of regulation, and the anonymity provided by cryptocurrencies make them attractive vehicles for fraudulent activities.

Case Study 1: OneCoin

One of the most notorious cryptocurrency scams was OneCoin, promoted as an investment opportunity. Founded by Ruja Ignatova in Bulgaria in 2014, OneCoin was marketed as an investment promising high returns. Victims were told that they could purchase educational packages and tokens that could be used to mine digital assets on a blockchain.

In reality, transactions were not performed on any real blockchain. The scam resulted in claims estimated at $4 billion worldwide. Ignatova was charged with money laundering and securities fraud. She disappeared and is wanted by the FBI. Mysteries around her disappearance include a claim that she was murdered.

Lessons Learned: The OneCoin case underscores the common tactic of exploiting investors’ fear of missing out on opportunities. During a hype cycle, some claimed that OneCoin would replace Bitcoin, and many investors were defrauded.

Case Study 2: BitConnect

BitConnect, a high-yield cryptocurrency investment Ponzi scheme, promised high returns through a lending program. The scheme involved victims sending their Bitcoin in exchange for BitConnect coins, which were used to fund trading bots. The trading bots were claimed to make profits, and investors expected to receive yields from those profits.

The scheme collapsed in 2018 after states issued regulatory warnings, which led to a crash in the value of its coin. Investor losses are estimated at $2.4 billion.

Lessons Learned: The BitConnect case serves as a reminder fraud schemes often use high-yield payouts to induce investors. It’s important to be skeptical of any investment promising consistent high returns with little risk.

Case Study 3: Centra Tech ICO Fraud

Centra Tech managed to raise over $25 million in an ICO by falsely claiming to offer a debit card backed by Visa and Mastercard that would allow users to convert cryptocurrencies into fiat currencies, making them easier to spend. The company sold CTR tokens as a means of fundraising for their company. Promoters of the tokens included Floyd Mayweather and DJ Khaled.

In reality, the company had no relationship with Visa or Mastercard. The founders were arrested in 2018 and charged with securities and wire fraud. One founder was sentenced to eight years in prison. Mayweather and Khaled were charged by the SEC for not disclosing payments they received for their promotional activities.

Lessons Learned: The Centra Tech case highlights the use of celebrities or trusted personalities for promoting scams. It’s important to perform due diligence on investments regardless of the individuals promoting them.

Conclusion

The case studies discussed highlight the need for vigilance and due diligence when dealing with cryptocurrencies and digital assets, as with all investments. As cryptocurrencies go through cycles of popularity and attention, fraudsters are drawn to use them in executing their schemes.

By learning from past cases and applying the lessons learned, individuals and organizations can protect themselves against cryptocurrency fraud.