Cryptocurrency crime is as sinister and disturbing as most financial crimes. The crimes committed range from simple cryptocurrency theft to money laundering and market-to-market fraud. Investors and consumers are susceptible to phishing and scams, where they are asked to send cryptocurrency to a specific location for ransom. Like all financial […]
Cryptocurrency crime is as sinister and disturbing as most financial crimes. The crimes committed range from simple cryptocurrency theft to money laundering and market-to-market fraud. Investors and consumers are susceptible to phishing and scams, where they are asked to send cryptocurrency to a specific location for ransom. As with all financial crimes, buyers should be aware of and educate themselves about potential crimes.
Crimes related to cryptocurrencies are on the rise. During the pandemic, more people were exposed to cryptocurrency trading as lockdowns took place. Thieves use two different tactics to try to steal your cryptocurrency. Either they try to break into your cryptocurrency wallet and steal your cryptocurrency directly, or they try to trick you into sending them your cryptocurrency. According to Chainalysis, cryptocurrency criminals stole a record 3.2 billion cryptocurrencies in 2021. The volume of cryptocurrencies stolen has increased by 500% year over year. Most thefts were committed through scams rather than directly stealing cryptocurrency by breaking into cryptocurrency wallets.
Steal from your wallet
Some cryptocurrency thefts happen when a thief steals directly from your cryptocurrency wallet. A cryptocurrency wallet is a safe place where you store your cryptocurrency, using a numeric address to determine how much cryptocurrency you have in your account. Every cryptocurrency you own has a different address. Most consumers have a custodian wallet in an exchange where they have a private key that controls the cryptocurrency. These custodial wallets differ from bank accounts in that there is no financial claims transaction that guarantees the amount of money in the account. For example, if you have a bank account with an FDIC-insured bank (almost all banks in the United States), your deposits are guaranteed up to a certain dollar amount (usually $250,000). So if you trade crypto using a digital wallet, you will be exposed to these issues.
Unfortunately, there have been issues where some exchanges have been hacked and money stolen from customer accounts. In December 2021, BitMart announced that the company had been hacked and revealed that approximately $150 million had been stolen from cryptocurrency wallets. One strategy that a consumer can use to avoid this scenario is to move their cryptocurrency from a software wallet to a hardware wallet. This device may be disconnected from the Internet.
Theft with scams
Cyber scams are everywhere. One of the most common is email and SMS phishing. These are scams where you receive an email asking you to open an attachment or link. These emails look like real emails from your employer, your bank, or even your friends and family. Many employers will provide training to their employees about cybersecurity scams and how to avoid scams. You can view the email address where the phishing email came from and check if anything is misspelled. If there is a call to action asking you to click a link or open an attachment, think twice before proceeding.
Once you click the link, you may be giving thieves access to your computer. They may be able to track the password you use for your digital wallet and steal your cryptocurrency directly. Alternatively, some scams ask you to send money to avoid a fine. In the United States, there are different types of tax scams, where people are asked to send money directly to avoid a fine. You may even get an email from a relative (a scam) asking you to send money to help them get out of jail. If something goes wrong, stop, think and evaluate your actions before moving on.
Some scams may appear to be legitimate investment opportunities, but they are not, such as fraudulent trading platforms that require you to deposit cryptocurrency. Specific scams are set up to encourage you to open a cryptocurrency account, which can then trick victims into installing hacking software on their hardware, allowing scammers to access a cryptocurrency or bank account.
Money laundering is another crime associated with cryptocurrencies. “Bad actors,” a term used to describe perpetrators of fintech scams, will use cryptocurrency, which is hard to track, to fund illegal businesses. Organizations that sell illegal drugs or firearms require their contacts to purchase these items using cryptocurrency. Money laundering has made it harder for cryptocurrencies to be legit. When retail customers think of a product that could be used for nefarious activities, the comment sours their minds.
Market-to-Market Cryptocurrency Values
As major investment firms increase their exposure to cryptocurrencies, they have added trading desks. Some of the cryptocurrencies bought and sold are for long periods. The value of these cryptocurrencies can vary. Trading desks can use models to create values similar to those used to price Collateralized Loan Obligations (CLOs) before the financial crisis. When it comes to these values, any fraudulent activity can cause problems for the companies that run these trading desks.
The bottom line is that fraud, scams and theft are part of the crypto trading world. Thieves try to access your computer to steal cryptocurrency from your account. Currently, no watchdog offers insurance like the FDIC for funds held in a cryptocurrency account. Hundreds of phishing scams are used to convince you to hand over your cryptocurrency directly to a thief. Cryptocurrencies have been linked to money laundering, where bad actors try to wash off their illegitimate cryptocurrency funds and then use them for legitimate purchases. In summary, as cryptocurrency becomes more mainstream, there will be a need for greater protections for the retail consumer to ensure that they can trust cryptocurrency as a sovereign currency.