CRYPTO INTELLIGENCE SYSTEMTM
Zone 2
Fraud & Scams
Increase your fraud IQ to sidestep crypto scams and hacks
A guide to understanding and avoiding crypto scams
Cryptocurrency is transforming the financial landscape, offering new opportunities for investment, transactions and financial innovation. However, this burgeoning digital market has also become a prime target for fraud and scams. In this comprehensive guide, we explore various types of crypto scams, how to recognize them, and effective strategies to protect yourself and your investments.
What are crypto scams?
Crypto scams are fraudulent schemes that exploit and deceive investors, steal funds and/or obtain personally identifiable information (PII) and other info. These scams can take many forms, from phishing attacks to Ponzi schemes, pig butchering, impersonation scams and many others. Crypto scams are often rolled out by sophisticated groups and they can evolve rapidly making them difficult to detect and prosecute.
Most scams already existed long before crypto. They’ve simply been adapted to the crypto ecosystem. You can get “pig butchered” with or without crypto, for example. For the most part the same people who were likely to get duped outside of crypto are likely to get duped inside of crypto. There are other pitfalls where everyone needs to stay vigilant at all times.
Common types of crypto scams
Here are some common examples of the variety of crypto scams.
Phishing scams
Phishing scams are a prevalent form of fraud in the crypto world. Scammers send fake emails or messages that appear to be from legitimate crypto exchanges or wallets. These messages often contain links to counterfeit copycat websites where unsuspecting users are prompted to enter their login credentials or private keys, which are then stolen.
Key Takeaway
Urgency is a scammer's favorite tool. They bake urgency into the messaging, includes variations of an urgent upgrade or an app that will be deprecated. Then they double down the urgency by telling users they risk losing their funds (which is rarely the case anyway).
Fake cryptocurrency exchanges and fake wallets
Fake exchanges mimic the appearance of real cryptocurrency trading platforms. They lure victims by offering extremely high returns or juicy sign-up bonuses. The scammers may send unsolicited messages via email or social media or troll Discord channels, for example, pretending to be customer support. Other scams like pig butchering are sometimes used in conjunction with fake exchanges.
MetaMask explains how the scam works, “Like many scams in web3, fake exchanges operate with a model that lures users with the promises of better-than-average (or, often, spectacularly better than average) returns on investments. Other promises could include sign-up bonuses, such as free crypto. Whilst many legitimate CEXs offer rewards for using their platform, it is rarely without conditions: it's more commonly a reward for completing a certain number of transactions, or for just becoming more heavily involved in the platform through deposits or similar. No-strings-attached free money is usually a sign of a scam.”
You can also refer to Datavisor's list of fake crypto exchanges.
The same techniques are also used with fake wallets. The scammer may tell the victim they need to use a certain wallet to interact with a high return opportunity app. Real decentralized finance (DeFi) apps allows users to connect a variety of wallets. Some fake wallets have made it into the Apple app store like the fake Phantom wallet which is a popular wallet for the Solana blockchain.
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How can I spot a fake wallet?
Always review the publisher of the app and look for duplicate branding. The copycat app will steal the icon from the real app. If you see more than one app with the same brand image then one of them is likely a fake. In addition, every wallet offers two setup choices, create a new wallet or restore a wallet. The fake Phantom app didn’t allow users to create a wallet because it wasn’t a real wallet.
Binance reported, “Users have reported that the fake app bears a striking resemblance to the genuine Phantom wallet, making it challenging to differentiate between the two. However, there are significant differences. The fraudulent app only allows users to import an existing wallet, rather than creating a new one, which is a major warning sign.”
Key Takeaway
Most people rely on Apple’s strict due diligence process for getting into the app store so they aren’t expecting to be on the lookout for fake apps. Never let your guard down and always ask yourself if an app or site is the real thing.
Ponzi schemes
Ponzi schemes promise high returns on investment with little to no risk. They use funds from new investors to pay returns to earlier investors, creating a false impression of profitability. Eventually, the scheme collapses when there are not enough new investors to sustain the payouts, and everyone loses. Ponzi schemes existed long before crypto The classic Ponzi offers guaranteed, mouth-watering returns in a short period of time.
A Ponzi is the extreme end of too good to be true, but there’s a group a people, typically unsophisticated investors, who can’t resist the pitch. The good news is this scheme is the easiest to avoid because you are your own worst enemy. Education and experience are the best remedy to avoid getting sucked in.
The US Dept. of justice charged two men for operating $25M cryptocurrency ponzi scheme, stating, “David Gilbert Saffron, 51, of Australia, and Vincent Anthony Mazzotta Jr., 52, of Los Angeles, allegedly conspired to operate a fraudulent scheme to induce victims to invest in various trading programs that falsely promised to employ an artificial intelligence automated trading bot to trade victims’ investments in cryptocurrency markets and earn high-yield profits. [They]... allegedly misappropriated victims’ funds to pay for personal expenses including private chartered jet flights, luxury hotel accommodations, private mansion rentals, a personal chef, and private security guards.”
Deepfake scam videos and giveaway scams
The primary aim of deepfake crypto scam videos is to steal your money. These scams use the same strategies as phishing attempts, such as offering "too good to be true" deals and creating a sense of urgency.
The FTX exchange declared bankruptcy in November 2022 and CEO Sam Bankman-Fried was subsequently arrested. The deep fake scammers used video footage of Sam to create an AI generated giveaway scam.
“Hello everyone. As you know our FTX exchange is going bankrupt, but I hasten to inform all users that you should not panic. As compensation for the loss we have prepared a giveaway for you in which you can double your cryptocurrency. To do this, just go to the site ftxcompensation.com,” says Sam the deepfake.
The scam site, ftxcompensation.com, stated, “Biggest giveaway crypto of $100,000,000, send the desired number of coins to the special address below. Once we receive your transaction, we will immediately send the requested amount back to you. You can only take part in our giveaway once. Hurry up!”
How do I spot a deepfake crypto scam?
The FTX exchange deepfake scam is combined with a giveaway scam for a double whammy. Prominent CEOs won’t make videos of themselves giving away free money. A bankruptcy trustee controls 100% of FTX assets, therefore a CEO has no authority to “give away” funds. Look closely at the video quality for jittery frames and unnatural facial expressions. Deepfakes are getting better, but look closely at the details.
Giveaway scamsÂ
Not all giveaways are genuine. Crypto giveaway scams typically promise a large prize in exchange for a small “processing fee” or your personal information. Take note of bogus social media profiles or websites trying to appear legitimate. Scammers may directly reach out to you via channels like WhatsApp, Telegram, or Discord.
How do I spot a giveaway scam?
Giveaway scams are ridiculously too good to be true. You’ve heard that theme many times over and the good news is they are incredibly easy to spot. Who in their right mind is going to give you 2 bitcoin if you send them 1 bitcoin? Deepfake video giveaway scams typically display a giant QR code on the video to scan and send funds. None of this makes sense, yet there has been and always will be the gullible group that falls for it every time.
Key Takeaway
Once you become adept at recognizing scams, the method of delivery and type of scam becomes less significant. Viewing examples of deepfake videos, phishing scams and so on will increase your fraud IQ. Crypto education is the key to crypto success.
Pig butchering scams
Pig butchering crypto scams are a form of fraud where scammers build trust with victims over time, often through social media or dating platforms. They lure victims into investing in fake cryptocurrency schemes, gradually increasing the amounts invested. Once the victim's "investment" reaches a substantial level, the scammers vanish, taking all the funds with them.
Named after the practice of fattening a pig before slaughter, these scams exploit the victim's trust and emotional investment to maximize financial gain. Pig butchering can be the most psychological and financially damaging of all scams because victims get both their trust and money stolen at the same time. The psychological damage can be equally expensive.Â
How can I spot a pig butchering scam?
You are more likely to spot your friend in a pig butchering scam before they spot it for themselves. Pig butchering scammers will use many techniques, including fake cryptocurrency exchanges and fake wallets. They talk about how much money they’ve made and show screenshots of high returns.Â
The pig butcher grooms the victim into depositing funds, tasting the juicy returns, giving money back to build trust, then doubling and tripling down on the next round of “investments.” The victim takes the bait, sometimes pouring their life savings over a series of deposits and eventually finding out they can’t withdraw funds without depositing more funds. This is how the victim gets fattened for slaughter when the scammer disappears with all the funds.
Rug pulls
Crypto rug pulls are a type of scam that occurs in the cryptocurrency and DeFi space, where developers of a crypto project suddenly withdraw all the funds from a liquidity pool and/or a treasury wallet. Then the token nosedives 95%, for example, leaving investors holding the bag. This happens in DeFi, where anonymity and lack of regulation make it easier for bad actors to pull off the scam.
Rug pulls typically raise funds for a new project launch with the intention of stealing funds from the beginning. The scammers intend to pump the price after the project launches, then they withdraw funds, delete social media accounts and vanish. They hype the project and use any technique to extract as much money as possible from the scam.
How can I spot a rug pull?
Rug pull scammers provide lots of warning signs including anonymous or unverifiable team members, lack of a clear roadmap or whitepaper, promises of high returns, overwhelmingly positive but vague social media presence and overall lots of hype. The devious ones include smart contract code that doesn’t allow investors to sell the token or where the developers don’t relinquish control of the private keys for a liquidity pool. This is a set up so the scammers can take the money and run when the getting is good.
Do some basic sleuthing on social media accounts and look for the age of the account and the number of followers. New accounts and a low number of followers or members could be a flag. Rug pull scammers also turn off replies on social so only they control the narrative. See if the smart contract addresses are published on their website and never send funds to a “send funds to this address” message. You would normally interact with a smart contract using a Web3 wallet like MetaMask and NOT send funds directly to an address.
The AnubisDAO is one of the fastest rug pulls in history where scammers vanished with $60MM in less than 24 hours.
Pump and dump schemes
In these schemes, a group of individuals artificially inflates the price of a cryptocurrency by spreading positive, but false, information. Once the price has risen significantly, they sell off their holdings at a profit, causing the price to plummet and leaving other investors with substantial losses.
Malware and ransomware
Cybercriminals use malware to infect computers and gain access to cryptocurrency wallets. Ransomware attacks, where access to a victim's data is blocked until a ransom is paid in cryptocurrency, are also common.
Social media scams
Scammers use social media platforms to promote fake giveaways or investment opportunities. They often impersonate well-known figures in the cryptocurrency community to gain trust and trick users into sending funds.
Find out more about Top Crypto Fraud Risks and How to Avoid Them.
How to recognize crypto scams
Crypto scams can be quite sophisticated but they’re easy to spot if you know what to look for.
Unrealistic promises
Be wary of any investment opportunity that promises guaranteed high returns with little to no risk. The cryptocurrency market is highly volatile, and no legitimate investment can offer such assurances.
Pressure tactics
Scammers often create a sense of urgency to push potential victims into making hasty decisions. They might claim that an offer is time-sensitive or that there are limited spots available.
Lack of transparency
Legitimate projects provide detailed information about their team, technology, and business model. If you cannot find verifiable information about a project's team members or if the whitepaper is vague and lacks specifics, it could be a scam.
Poorly designed websites or apps
Fake websites and apps may look convincing at first glance but often have noticeable flaws, such as spelling errors, unprofessional design, and broken links. Always double-check the URL and ensure it matches the official website of the cryptocurrency exchange or wallet.
Unsolicited offers
Be cautious of unsolicited emails, messages, or social media posts promoting cryptocurrency investments. Scammers frequently use these methods to reach potential victims.
Protecting yourself from crypto scams
The best way to avoid getting scammed in crypto is to know how to protect yourself and be able to spot scammy techniques. Here are some starting points.
Use reputable exchanges and wallets
Stick to well-known and reputable cryptocurrency exchanges and wallets. Research platforms thoroughly and check for user reviews and security features before committing your funds.
Enable two-factor authentication (2FA)
Two-factor authentication adds an extra layer of security to your accounts. Even if scammers obtain your password, they will still need access to your second authentication method, such as a mobile device, to log in.
Be cautious with your private keys
Never share your private keys with anyone. Your private keys are the gateway to your cryptocurrency holdings and sharing them can result in loss of funds.
Verify the source
Always verify the authenticity of emails, messages, and websites before entering your personal information or making transactions. Look for official contact information and cross-check it with trusted sources.
Stay informed
Keep up to date with the latest news and trends in the cryptocurrency market. Awareness of new scam tactics and security measures can help you stay one step ahead of scammers.
Educate yourself and others
Education is a powerful tool in combating crypto scams. Learn about common scams and share this knowledge with friends, family, and colleagues to help protect the broader community.
Reporting crypto scams
Part of being a contributing member of the crypto community is holding people (and platforms) accountable and looking out for the greater good of all. Be sure to report crypto scams when you see them.
Contact the exchange or wallet provider
If you suspect that you have been targeted by a crypto scam, contact the customer support team of the exchange or wallet provider immediately. They may be able to freeze your account or assist in recovering your funds.
Report to regulatory authorities
Report the scam to regulatory authorities, such as the Financial Conduct Authority (FCA) in the UK or the Securities and Exchange Commission (SEC) in the US. They can investigate and take action against fraudulent activities.
File a complaint with consumer protection agencies
Agencies like the Better Business Bureau (BBB) and the Federal Trade Commission (FTC) in the US accept complaints about fraudulent businesses and scams. Filing a complaint can help these agencies track and address widespread scams.
Utilize online platforms
There are various online platforms and forums where you can report crypto scams and warn others. Websites like Scamwatch and Reddit have dedicated sections for discussing and reporting cryptocurrency fraud.
Legal implications of crypto scams
It’s not easy to recoup lost or stolen crypto but it might be worth legal action and effort in some cases.
Legal recourse for victims
Victims of crypto scams may have legal recourse depending on the jurisdiction and specific circumstances of the fraud. Consulting with a legal professional specializing in cryptocurrency and financial fraud can provide guidance on potential actions, such as pursuing civil litigation or seeking restitution.
Regulatory measures
Governments and regulatory bodies worldwide are increasingly focusing on the cryptocurrency market to curb fraud and protect investors. New regulations and enforcement actions aim to hold scammers accountable and create a safer environment for cryptocurrency trading and investment.
International cooperation
Given the global nature of cryptocurrencies, international cooperation among law enforcement agencies is crucial in tackling crypto scams. Collaborative efforts can lead to more effective investigations and the recovery of stolen funds across borders.
The future of crypto security
Technology is constantly changing as are the devious tactics of crypto scammers. Here’s a glimpse of what to expect in the coming years.
Advances in technology
As the cryptocurrency market continues to evolve, so too will security technologies. Innovations such as blockchain analytics, artificial intelligence, and enhanced encryption methods promise to improve the detection and prevention of fraud.
Regulatory developments
Ongoing regulatory developments will play a significant role in shaping the future of crypto security. Clear and consistent regulations can help establish industry standards and protect investors from fraudulent activities.
Community-driven initiatives
The cryptocurrency community is proactive in developing solutions to combat scams. Community-driven initiatives, such as decentralized autonomous organizations (DAOs) focused on security, can provide collective oversight and rapid response to emerging threats.
Staying vigilant about crypto fraud and scams
Crypto scams pose a significant threat to both individual investors and the broader cryptocurrency market. By understanding the various types of scams, recognizing warning signs, and implementing robust security practices, you can protect yourself from falling victim to fraud. Stay informed, be vigilant, and contribute to a safer crypto community by sharing knowledge and reporting suspicious activities. The dynamic and innovative world of cryptocurrency offers immense potential, but it requires a concerted effort to navigate safely and securely.
Keep in mind that scammers use a combination of techniques designed to fool investors.
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