Fraud, hacks and scams: the growing pains of a new asset class

Cryptocurrencies have attracted their fair share of scammers and  fraudsters and, given that one of the primary roles of financial services regulators is to  ‘maintain confidence in the financial markets’, it is easy to understand why regulators have  been cautions about cryptocurrencies. However, what is encouraging is that overall  (according to research carried out by Chainanalysis), the level of crypto-illicit activity is  falling: “In 2019, illicit activity represented 2.1% of all cryptocurrency transaction volume or  roughly $21.4 billion worth of transfers. In 2020, the illicit share of all cryptocurrency activity  fell to just 0.34%, or $10.0 billion in transaction volume” For a copy of Chainanalysis’s 2021  report, click here. 

Cryptocurrency frauds dip as DeFi Hacks continue to grow 


Furthermore, research carried out by Ciphertrace (recently acquired by Mastercard)  showed: “By July 2021, DeFi-related hacks totalled $361 million, already making up three quarters of the total hack volume this year… DeFi-related fraud accounted for 54% of major  crypto fraud volume, whereas last year DeFi-related fraud only made up 3% of the year’s  total.” Could this rise in the amount of DeFi-related fraud be due to the fact that there has  been a surge in interest in DeFi? After all, the number of people who have opened DeFi  accounts has soared…

How DeFi users have increased globally 

Source: Consensys 

The rise of ransomware attacks, including the one on the Colonial Pipeline which shut down  one of key pipelines supplying petrol and aviation fuel to the eastern seaboard in the US, has led to the Department of Justice creating the Ransomware and Digital Extortion Task  Force. This task force has successfully managed to retrieve most of the ransom paid due to  one of the key advantages of Blockchain technology. In the event of ransom demands  stipulating payment using a public blockchain, such as Bitcoin, all transactions can be  viewed on the chain whereby enabling any persons to track and trace the funds. In addition,  it is possible to identify which digital exchange has been used and so help tie Bitcoin  addresses to real people and locations across the globe. This is a far cry from the traditional  ransoms which were demanded in cash, gold or diamonds – all of which are almost  impossible to trace since a suitcase of such a ransom leaves no digital footprint for  investigators to follow. 

Given the rising profile and adoption in terms of the use of Digital Assets, a number of  organisations are now offering Anti Money Laundering (AML) services to help identify the  source of Digital Assets and, in some cases, help identity fraudulent activity or even track  and trace funds in the event of a scam or fraud. Such organisations include: • Alaco anayltics 

• Chainanlysis 

• Confirm 

• Merckle 

• Kroll 

A key factor for different jurisdictions trying to crack down on the potential for fraud in the  Digital Assets sector is to introduce more regulation. In the UK, firms can only deal in  cryptocurrencies if they have temporary registration or have been accepted onto the FCA  Crypto register. In South Korea, which a couple of years ago was one of the most active  nations in terms of turnover and trading of cryptos, the Korea Internet and Security Agency  (KISA) has specified that operating Digital Asset exchanges are required to have a license by 28th September 2021. This is likely to result in a number of exchanges having to close as only  28 exchanges (out of the 63) operating in the country had received the necessary licenses.  In the US, Securities and Exchange Commission (SEC) Chairman, Gary Gensler, believes  crypto trading platforms must register with the SEC and is therefore urging regulations to be  changed. Meanwhile, the Russian cyber security business, Kaspersky (set up in 1997), has  identified four common scams and has advice for people so as to help them not become the  victims of fraud and scams: 

“do not follow dubious links from letters, messages in messenger apps and social networks • be critical of extremely generous online offers 

• download applications from official stores only 

• use a security solution that protects against phishing, scams, and prevents the installation  of malicious applications 

• take extra precautions before purchasing a product in an online store if the company is  unknown. It is better to study on special WHOIS-sites information first about how long the  domain has existed and who its owner is: if it is completely fresh and registered to a private  person, you should not purchase from them.” 

Where money exists, it will always incur scams and frauds. The world of Digital Assets is no  different and it could be argued that the current nefarious activities are simply the growing  pains of an asset class which is undoubtedly gaining more exposure and adoption in today’s  world.