By Eva Crouwel, Wesley Gibbs, Willem du Plessis, and Nicole Botha

Crypto Crime

Over the last few years, the adoption of cryptocurrency has been on the rise globally, with specifically high adoption rates within the Asian and African markets. However, with the rise in this adoption a shadow side has emerged; that of financial crimes pertaining to cryptocurrency. Most prevalent amongst these crimes, according to a 2022 report issued by blockchain monitoring provider Chainalysis, were cybersecurity related crimes (such as hacks) and scams. In fact, according to the 2022 Crypto Crime Report compiled by Chainalysis, scams were once again the largest form of crypto-based crime (by transaction volume) with in excess of USD7.7 billion worth of virtual currency misappropriated from victims worldwide.

When looking specifically at increased scams within the Asia region, the struggle is very real indeed. Recent publications, for example by the Malaysian Securities Commission, recorded a total of RM5.2 billion in losses with over 7,200 reported cases to the Malaysian government from the period May 2020 to May 2022. The contrast is stark; where 1,800 cases were reported in 2020, by 2021 this figure had grown to 3,500 reported cases and 2022 looks to be on track for similar numbers.

Recognising the economic opportunities afforded by these advancements to the general public and enabling the rapid expansion and adoption of (different types of) cryptocurrency, whilst also ensuring the safety of consumers within this new market is a nontrivial task.

Investment Scams

Investment scams can be considered the largest bane of all financial scams. Investment scams at their core promise big payouts with minimum risks. Promises of quick money and guaranteed returns make these scams attractive to a wide range of consumers.

The combination of increased interest from consumers with regard to financial planning and investments, the created perception of ‘great wealth’ achieved by early adopter crypto millionaires and the new technology that is brought on by cryptocurrency, creates a perfect storm for exploitation. This perfect storm has recently been further amplified by the effects of the Covid-19 pandemic. The pandemic has played a significant role in the economic downturn for a large portion of consumers, resulting in a need for immediate and significant financial relief.

Investment scams specifically target a victim’s naivety and exploit their search for ‘easy money’ while ending up losing a significant amount of funds. More often than not, victims are coerced into investing in order to gain significant returns in a relatively short period of time. These are known as ‘get rich quick schemes’ and exploit the still prevalent understanding of consumers that cryptocurrency is a means of substantial wealth generation in a limited amount of time. The most common result is that victims are required to pay more and more to a scammer in order to see a return, before they finally realise that they have lost all that they invested.

Investment scams are hard to detect at an early stage and particularly difficult to combat as victims are often convinced that the scammer or their organisation is reputable and reliable and refuse to believe any alternative.

Rug Pulls

With the introduction of cryptocurrency, scams have gained significant sophistication. Scammers no longer solely rely on one specific method to lure their victims, but have found ways to use a combination of techniques in an effort to launder funds or scam investors out of their money, leaving individuals with the ‘rug’ pulled out from under them.

Rug pull scams rely on the information asymmetry between investors and fraudulent blockchain technology developers to defraud investors on development projects. As projects emerging on the decentralised blockchains have become more popular, it has provided fraudsters with the opportunity to capitalise on the lack of understanding of the projects’ underlying source, validity, and trustworthiness of its founders.

The year 2021 saw the most famous example of a rug pull with the SQUID token (inspired by the dystopian Netflix series called Squid Games). The value dropped by 99.9% after the creators made off with an alleged USD3.4 million.

Money Mule Scams

A relatively new phenomenon is the money mule scam. These come in a variety of subsets of scams, but their shared trait is that individuals or ‘mules’ are used to unwittingly aid the laundering of illicit proceeds by further obfuscating the source of funds.

In certain of these scams, individuals are lured into extravagant schemes where the so-called trader or broker (the scammer) supplies liquidity for the individual “to have a kick-start on their investment and make more money than they can imagine” or “to help a friend”. This forms a tempting proposal for the young, the cash-strapped, and the lonely as well as the elderly demographic who are preyed on to make an extra buck or gain a ‘friend’ for the use of their attached crypto wallets and/or bank accounts.

Over the past two years there has been a significant increase in money mule scams, including what is known as a ‘safe account’ scam. This is where the scammer impersonates a bank employee and reaches out to an individual to report that there has been fraud on their account. Unquestionably distressed, the impacted individual easily parts with personal information and identification documentation in order for the scammer to create a so-called ‘safe account’.

The scammer then requests the victim to move their funds to the safe account specified by the scammer. The result is the scammer having access to an account in the victim’s name, opening up the possibilities for fund laundering, as well as access to the victim’s funds.

The resulting fallout for the victim establishes significant barriers as well as financial loss.  In addition to losing their funds, victims are often blacklisted by financial institutions and their respective relationships terminated for facilitating the laundering of stolen funds.

Elderly Scams

Over the last years, elderly scams have been on the rise. These scams specifically target senior citizens as they may have access to considerable savings, are often technologically illiterate, may experience age-related ailments and are generally less likely to report incidents over fear of losing their independence or being perceived as inept.

Elderly scams often see victims losing significant amounts of critical funds, such as pension funds or retirement savings, with no way of recouping their losses. The scams are reliant on and target the vulnerabilities attached to elderly individuals in order to extract personal information and/or secure undue financial benefit.

Scammers make use of various platforms and a variety of techniques in attempting to gain the trust of victims. Thereafter, the individual is more susceptible and can easily be coerced into disclosing valuable personal information or accepting assistance (initiating an account takeover). Sadly, scammers often include family members or individuals known to the victim.

Often, the combination of the age of the consumer, their use of cryptocurrency and the volume and value of their transactions can function as a red flag. 

Romance Scams

As more and more people have turned to online dating, apps and social media, scammers have seized the opportunity. These scams, commonly referred to as ‘sweetheart scams’ or ‘catfishing’ occur when a scammer adopts a fake online persona in order to gain a victim’s affection and trust. The scammer deceives the victim, using the illusion of a romantic relationship or close friendship to exploit and/or steal from the individual.

As these scams typically extend over long periods, victims are often fleeced out of large sums of money and end up losing both a significant emotional relationship as well as their funds.

Risk Mitigation

When thinking about risk mitigation pertaining to scams, it is important to consider that scams occur within an ecosystem that consists of consumers and traditional financial institutions as well as cryptocurrency enablers. 

As consumers, when considering any activity within the cryptocurrency ecosystem, it is imperative to be reminded of the adage, “if it’s too good to be true, it probably is”. Cryptocurrency can be used as a means of investing, but large promised returns, especially when structured in an ‘investment plan’ or ‘club’ should be considered a major red flag.

Thorough research is imperative when considering making any financial investments, including cryptocurrency investments. Consumers should not rush investment decisions and often scammers pressure victims into making deposits before they have time to think it through. The use of brokers, account managers, traders, sponsors, agents and other people that offer to trade cryptocurrency on a consumer’s behalf should specifically be avoided.

Consumer education is an essential part of the role cryptocurrency enablers have to play to reduce the asymmetrical information positions that scammers take advantage of. Cryptocurrency providers should put emphasis on educational content when interacting with consumers and invest in making relevant content easily accessible to those interested in their products. In addition, customer segmentation and targeted protection, sometimes by even denying the product to specific consumer segments altogether, is a strong mitigation measure that should be put in place. Having a deep understanding of customers, their interactions with the products and how these behaviours correlate to specific customer vulnerabilities is crucial in preventing scams.

Lastly, defences against scams can be found in the relationship between traditional financial service providers and cryptocurrency enablers. While the cryptocurrency enablers may be providing the end service to the customer, thus facilitating funds being sent to a scammer, the financial service provider, such as the customer’s bank, will have sight and a form of control over transactions going to cryptocurrency enablers. Through regular interactions and collaboration, financial institutions can flag both vulnerable and suspicious customers as well as questionable transactions to the cryptocurrency enabler. In addition, joint transaction prevention lists can be drawn up, specifying the outright denial of transactions that meet certain criteria. This creates a strong advance warning system as well as a control system that serve to protect the shared consumer within the ecosystem.

Cryptocurrency is here to stay but it cannot be denied that financial crimes are detrimental to consumer trust in both cryptocurrency as well as traditional finance. The adoption rate of cryptocurrency over recent years, as well as newly emerging technologies within the virtual/digital asset ecosystem present wonderful opportunities for the future of financial services and at the same time come with threats towards consumers in the use of this technology.

The ecosystem of financial services is one where traditional finance and cryptocurrency can and should co-exist. The curbing of financial crimes within cryptocurrencies should be seen as a shared challenge between consumers, traditional financial service providers, cryptocurrency providers and enablers as well as government agencies (such as regulators and law enforcement). Joining the dots between traditional finance and cryptocurrency enablers will be key to intentional and determined efforts to curb financial crime, increase trust and protect consumers within the financial ecosystem.

Eva Crouwel LLM CAMS is an experienced financial crime professional with over a decade of experience. She currently works as the Global Head of Financial Crime for Luno, a global cryptocurrency platform. 

Wesley Gibbs, Willem du Plessis, and Nicole Botha are Financial Crime Investigators at Luno.