October 12, 2021

Outsmarting Smart Criminals: 5 Tips for Avoiding Crypto Scams

By Robert Ellenhorn, Payment Risk Specialist



Everyone is talking about crypto.

With Bitcoin in the news daily, excitement around cryptocurrencies is at an all-time high. The total value of all digital currencies in August of 2021, was more than $1.9 trillion, according to CoinMarketCap. And with all that money floating in the digital ether, it’s not surprising that fraudsters are crashing the party.

Crypto investment scams are proliferating across the web, with hacksters making extravagant promises to lure unsuspecting victims into their take-the-money-and-run schemes. According to the FTC, since October 2020, reports of crypto scams have skyrocketed, with nearly 7,000 people reporting losses of more than $80 million to fraud. U.S. law enforcement are striking back, with officials able to recover $2.3 million paid in Bitcoin a month after a criminal cybergroup known as DarkSide hit Colonial Pipeline with a crippling ransomware attack.

In fact, cryptocurrency became the most common payment method used in investment scams and fraud in 2020. Previously, wire transfer was the most frequently used method of payment. But the ease of moving money with cryptocurrency and the increasing popularity of crypto as an investment tool have made it a prime target for scams. A quick look at the basics of crypto demonstrates why the currencies lend themselves so easily to fraud.

Understanding Crypto

Cryptocurrencies are digital tokens that can be sent electronically from one user to another anywhere in the world. Unlike traditional payment networks like Visa or American Express, no single company or person controls any crypto network. Instead, decentralized networks of computers around the world keep track of all cryptocurrency transactions, similar to the decentralized network of servers that makes the internet work.

With no central entity running any currency, no one has the authority to force new users to reveal their identities — in fact, the networks are intended to create financial networks outside the control of any government, entity or enterprise. For criminals, this makes crypto much more attractive than other payment systems, which generally require customers to provide identification before opening an account and receiving transferred money.

Crypto’s foundational anonymity, however, is under scrutiny, with government regulation on the horizon. In August, the Senate’s $1 trillion infrastructure bill included a rule that requires “brokers” of transactions in digital assets — i.e., cryptocurrencies — to report their customers to the Internal Revenue Service so they can be taxed. However, crypto advocates and entrepreneurs say the bill’s definition of “broker” was so broad it would potentially encompass miners, validators, and developers of decentralized applications, all of whom have no way of identifying their anonymous users. The question remains how the crypto industry — which Wired magazine describes as “a crypto-anarchist, anti-bank, borderline anti-government manifesto disguised as code” — will respond to calls for increased monitoring.

Payment Organizations Are Held Responsible for Crypto Scams, So Know the Signs

As the fight over regulation continues in Washington, cryptocurrency scams remain as dirty a business as any other criminal activity. Cybercrooks use complex, deceptively convincing techniques to steal funds from investors and then move them across payment organizations.

Payment organizations are held liable for any crypto scams that are laundered or transacted through their services. It is therefore critical that they partner with regulated crypto brokers. This means that due diligence must verify that any crypto companies seeking access to payment services are operating with licenses. Even simple steps like confirming the crypto company has verifiable contact information can help payment organizations weed out the criminals.

Payment organizations should also recognize the tactics used by crypto crooks to swindle investors. With fake exchanges, for example, fraudsters lure victims with coupons promising bitcoin payouts in exchange for modest verification payments, usually of no more than 0.005 bitcoin (about $200). That $200 investment, of course, nets nothing in return. The ongoing global chip shortage has triggered another scam, in which cybercriminals send out messages advertising fake crypto mining equipment sales of items like video cards. An advance payment is required, at which point the criminals vanish with the funds.

Recent scams also target people who lost their jobs due to COVID-19. Scammers will lure these victims to make large upfront deposits in order to buy into fake investments. They will then be convinced to pay ridiculously high commissions, taxes and fees. The promise of huge profits is dangled in front of the investors to make the fees and taxes look like a small percentage of what they’ll earn. But inevitably, victims end by losing their deposits and the money they’ve spent chasing their phony earnings.

Other scams operate under the guise of bitcoin mining. In these cases, massive profits will be offered if one invests in a mining operation, with “guaranteed returns” offered along the lines of “Invest $100, earn $1000.” Adding another layer of fraud, crypto scam operators may also open front merchant accounts to collect funds from their victims by credit card. Scammers may process credit card transactions through dummy stores, which purport to sell clothing or other innocuous items, enabling transaction laundering.

Stay Aware: 5 Tips for Avoiding Crypto Scams

When looking at the legitimacy of any crypto broker or website, it is essential to keep a few things in mind.

  1. Pay attention to the payment environment. Be extra careful with merchants that push customers to make payments or transfer money by wire, bitcoin or any other method that does not offer consumer recourse — they may be fronting a criminal enterprise.

  2. Double check URLs. Fraudsters will imitate popular cryptocurrency websites or apps by, for example, switching letters to numbers       — using an "l" for a "1" or an "O" for a "0.” Investors then get tricked into transferring coins or cash to a fake site.

  3. Research is essential. Conduct extensive research into the website, company or name that is allegedly behind any crypto brokerage. Look for signs that it is illegitimate, including bad reviews and any mentions on websites such as ScamAdviser.

  4. Is it registered? Check to see if the website or brokerage has a license with a relevant regulatory body. For example, see the British Financial Conduct Authority’s newly released list of “Registered Cryptoasset Firms.

  5. The best criminal tip-off is the most tried and true. If the broker makes promises that sound too good to be true, they almost certainly are!

EverC’s MerchantView has the ability to detect sites which offer services related to crypto or sell crypto. This technology can also determine if a website is offering crypto as a payment method, which is a risk indicator. MerchantView focuses on the end points — seeing where the problem starts and tracing it back — rather than the actual channel, making it adaptable to many potential forms of transactional laundering.

Find out how MerchantView can detect risks and protect payment organizations from crypto scams here.