The sad reality of finance is that money, more often than not, comes with scams. Throughout the meteoric rise of cryptocurrency as an industry and blockchain technology, we've seen fraudulent activity hurt the pockets of investors and adopters alike.
While crypto fraud has blighted the industry since its inception, the growth of these thefts endangers the mainstream adoption and acceptance of cryptocurrency.
With this in mind, let's look at how crypto fraud impacts investors and the approaches that can be taken to mitigate the impact of cybercrime involving crypto.
The Types of Cryptocurrency Fraud
Crypto fraud can come in a variety of shapes and sizes and can include criminal behavior such as:
Financial Crime
Because cryptocurrency can be easily distributed digitally, its instant transactions and borderless portability have made crypto a strong tool for tax avoidance, money laundering, and bribery.
Fake ICOs
ICOs (Initial Coin Offerings) shot to prominence towards the end of Bitcoin's second cycle. These ICOs involve the launch of a brand new cryptocurrency and are typically marketed to newcomers into the crypto space looking for a quick profit. Unfortunately, many ICOs are made from thin air, consisting of fake team members and cut-and-paste whitepapers while selling non-existent coins to unsuspecting investors.
Pump and Dumps
Pump and dump schemes became widely used in recent years as coin owners attempted to manipulate markets by claiming that a crypto was set for substantial growth before selling up once a far lower target was hit. These false attempts to generate hype for a coin are not unlike traditional stock market manipulation.
Ponzi Schemes
Not too dissimilar to the pump and dump, Ponzi schemes are also a popular vehicle used in cryptocurrency to bring in wealth for long-time holders of an asset by drawing in new adopters to generate more money.
Theft
Crypto is also rife with more traditional forms of theft, where hackers can enter user crypto wallets and steal their digital currency. To do this, they can create fake cryptocurrency exchanges to trick users into sending over money or use dummy wallets to bill unsuspecting users. There are also several phishing scams that lead to crypto theft.
False Promotion
One of the most popular ways to advertise cryptocurrency scams is to pay celebrities and influencers to market them. Unfortunately, due to the fast pace of the crypto market, many celebrities have agreed to promote cryptocurrency schemes without prior knowledge of the asset itself. As a result, we've seen public figures like Floyd Mayweather, DJ Khaled, and Kim Kardashian charged by the SEC for their involvement in promoting cryptocurrencies on social media.
5 Steps That Will Limit Crypto Fraud
With different forms of cryptocurrency fraud rife within the industry, action needs to be taken by firms to ensure the safety of investors. While decentralization must be maintained, five essential steps can be used to help safeguard crypto from fraudulent activity.
- Prioritize Identity Verification
- Utilize Data Enrichment Tools
- Welcome New Regulation
- Improve User Interfaces
- Education For Crypto Users, New and Old
Let's take a look at these in more detail.
1. Prioritize Identity Verification
While many crypto firms use some form of identity verification through KYC and AML measures, the act of uploading an image of a customer's ID and adding their photo isn't strong enough to single-handedly stop fraud.
It's essential that firms adopt more comprehensive verification methods to confirm identity. One of the most effective ways to achieve this is through blockchain verification.
Blockchain verification can help to bring dynamic identity services, which firms can use to recognize their users in real time. This can incorporate a range of existing data sets such as ID documents and contextual data like phone numbers and IP addresses while cross-referencing it with third-party data like voter registration information.
This form of dynamic cross-checking can help keep users safe from fraudulent activity and cases of duplicated identities.
2. Utilize Data Enrichment Tools
Data enrichment tools can also help firms to better identify their customers based on a series of metrics that their digital footprint leaves behind.
Matters like the use of VPNs, disposable email addresses, false social media network accounts, and other contextual indicators can be utilized to flag any potential fraudulent activity before it has a chance to do harm.
These enrichment tools are already widely available, and cybersecurity firms like SEON are an example of anti-fraud crypto services that can deliver reverse email lookups, reverse social media lookups, device fingerprinting, and a number of other risk identifiers that can help more cryptocurrency firms to avoid heavy losses through criminal activity.
3. Welcome New Regulation
There may be a balance to be struck between tighter regulation and achieving a decentralized crypto landscape, but firms need to work with regulators to build a conducive regulatory framework.
By welcoming more regulatory guardrails to grow alongside the popularity of crypto, exchange usage throughout North America, the United Kingdom, the European Union, Asia, and the rest of the world can benefit from greater security across the board.
For instance, US cryptocurrency exchanges are supposed to be regulated under the BSA, but we're yet to see laws amended to specifically apply to digital asset service providers. It's vital to bridge these gaps to offer a more comprehensive level of protection.
4. Improve User Interfaces
In recent months, we've seen crypto scam websites pretending to be exchanges and NFT marketplaces to trick investors into buying imaginary tokens or paying for cryptocurrencies that don't exist.
This risk is particularly pertinent in the world of NFTs due to the volume of assets that flow through marketplaces like OpenSea, and the ease with which scammers can duplicate non-fungible tokens.
With this in mind, firms need to ensure that their user interfaces are as easy to use and reliable as possible to prevent visitors from getting lost or clicking fraudulent links. In addition, adding web elements that are more difficult for scammers to replicate can also be an advantage in helping to combat fraud.
5. Education For Crypto Users, New and Old
Every crypto-facing firm with ambitions to welcome new investors must utilize a learning portal that supports education about online safety.
Many online exchanges like Coinbase are already building out their learning resources with a particular focus on blockchain mechanics and fraud detection.
As a relatively new industry, many fraudulent actions rely on scamming users who aren't fully acquainted with the industry. Crypto firms must mitigate this as a priority.
Paving the Way for Mainstream Adoption
Perhaps most importantly, taking a proactive approach to limiting fraudulent activity in crypto will form the cornerstone for mainstream adoption. For many prospective investors around the world, cryptocurrencies are strange and mysterious, and perceptions can quickly turn to the landscape's links to the black market and criminal activity.
Through more effective learning resources and regulation, crypto can become a safe environment for all and a place for investors to thrive without the fear of losing their assets.