When one of our students told us that he was dropping out of school in August 2021, it wasn’t the first time we’d heard of someone dropping out of college.
What was new, however, was the reason. The student had fallen victim to a cryptocurrency scam and lost all his money – including a bank loan – leaving him not only bankrupt, but also in debt. The experience was financially and psychologically traumatic to say the least.
Unfortunately, this student is not alone. Currently, there are hundreds of millions of cryptocurrency owners, with estimates predicting even faster growth. As the number of people owning cryptocurrencies has increased, so has the number of victims of scams.
We study behavioral economics and psychology – and recently published a book on the growing problem of fraud, scams and financial abuse. There are reasons why cryptocurrency scams are so widespread. And there are steps you can take to reduce your chances of becoming a victim.
Crypto is going off the ground
Scams are not a recent phenomenon, with stories of them going back to biblical times. What has fundamentally changed is the ease with which scammers can reach millions, if not billions, of individuals at the touch of a button. The internet and other technologies have simply changed the rules of the game, with cryptocurrencies embodying the forefront of these new cybercrime opportunities.
Cryptocurrencies – decentralized digital currencies that use cryptography to create anonymous transactions – were originally run by “cypherpunks”, privacy-conscious people. But they have grown to conquer the heads and pockets of commoners and criminals alike, especially during the COVID-19 pandemic when the price of several cryptocurrencies skyrocketed and cryptocurrencies became more common. Scammers have taken advantage of their popularity. The pandemic has also disrupted day-to-day business operations, leading to increased reliance on alternatives such as cryptocurrencies.
A January 2022 report from Chainalysis, a blockchain data platform, suggests that nearly $14 billion was scammed by investors using cryptocurrencies in 2021.
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For example, in 2021, two brothers from South Africa successfully defrauded investors of $3.6 billion on a cryptocurrency investment platform. In February 2022, the FBI announced that they had arrested a couple who had used a fake cryptocurrency platform to defraud investors of another $3.6 billion.
You may be wondering how they did it.
There are two main types of cryptocurrency scams that target different populations.
One targets cryptocurrency investors, who are generally active traders with risky portfolios. They are mostly younger investors, under the age of 35, who have a high income, are well educated and work in technology, finance or IT. In this type of fraud, the scammers create fake coins or fake exchanges.
A recent example is SQUID, a cryptocurrency coin named after the television drama “Squid Game”. After the price of the new coin skyrocketed, the creators simply disappeared with the money.
A variation of this scam involves tricking investors into being among the first to buy a new cryptocurrency — a process called an initial coin offering — with promises of big, fast returns. But unlike the SQUID offering, coins are never issued and potential investors are left empty handed. In fact, many initial coin offerings turn out to be fake, but due to the complex and evolving nature of these new coins and technologies, even experienced and educated investors can be fooled.
As with all high-risk financial ventures, anyone considering buying a cryptocurrency should follow age-old advice to research the offerings thoroughly. Who is behind the offer? What do we know about the company? Is there a white paper, an information document issued by a company that describes the features of its product?
In the SQUID case, a warning sign was that the investors who bought the coins could not sell them. The SQUID website was also full of grammatical errors, which is typical of many scams.
The second basic type of cryptocurrency scam simply uses cryptocurrency as a payment method to transfer money from victims to scammers. All ages and demographics can be targeted. These include ransomware cases, romance scams, computer repair scams, sextortion cases, Ponzi schemes, and more. Scammers are simply taking advantage of the anonymous nature of cryptocurrencies to hide their identities and escape the consequences.
In the recent past, scammers have asked for wire transfers or gift cards to receive money – because they are irreversible, anonymous and untraceable. However, these payment methods require potential victims to leave their homes, where they could encounter a third party who could intervene and possibly arrest them. Crypto, on the other hand, can be bought anywhere and at any time.
Bitcoin has indeed become the most demanded currency in ransomware cases, being demanded almost 98% of the time. According to the UK’s National Cyber Security Center, sextortion scams often ask individuals to pay in Bitcoin and other cryptocurrencies. Romance scams targeting young adults are increasingly using cryptocurrency as part of the scam.
If someone asks you to transfer money to them via cryptocurrency, you should see a giant red flag.
In the area of financial abuse, more effort has been put into studying and educating the defrauded elderly, due to the high degree of vulnerability of this group. Research has identified common features that make a person particularly vulnerable to fraudulent requests. They include differences in cognitive skills, education, risk-taking, and self-control.
Of course, young adults can also be vulnerable and become victims. There is a clear need to extend awareness campaigns to all age groups, including young, educated and affluent investors. We believe that the authorities should step up and use new methods of protection. For example, the regulations that now apply to financial advice and products could be extended to the cryptocurrency environment. Data scientists also need to better track and trace fraudulent activity.
Cryptocurrency scams are particularly painful because the chances of recovering lost money are close to zero. For the time being, cryptocurrencies have no overview. They’re just the Wild West of the financial world.
Yaniv Hanoch, associate professor of risk management, University of Southampton, and Stacey Wood, psychology professor, Scripps College
This article is republished from The Conversation under a Creative Commons license. Read the original article.