Since the initial appearance of cryptocurrency in the world of finance as a peer to peer decentralised payment system, it was swiftly recognised by wrong doers as an efficient means of defrauding novice investors. The enigmatic "founder" of bitcoin promoted it as a revolutionary mode of investment. As a largely regulation-free and even now, still little understood financial model with the added advantage of anonymity, it remains an excellent vehicle for investment fraud that is still warmly welcomed by fraudsters.
Wrong doers, with their endless ability to innovate new initiatives, adapted tried and tested frauds and applied them to cryptocurrency. Initially there was a hesitant approach to regulating cryptocurrency within the jurisdictions that permit trading in crypto assets. The well-known volatility of crypto assets, to some degree, assists the wrong doers as novice investors accept that they are trading in a high-risk asset and can often be persuaded that their disappearing cryptocurrency was subject to market fluctuation.
Joanna Bailey, a partner, commented "Cryptocurrency still retains its "wild west" status however, the Financial Conduct Authority whilst it does not have direct regulatory oversight of cryptocurrency exchanges the FCA has attempted to limit the frauds by creating a Financial Services Register" Joanna further pointed out "any firm offering crypto products in the United Kingdom must be registered on the Financial Services Register or have express permission to promote such products. There are other rules that registered firms must adhere to such as how their marketing practices are conducted to ensure that consumers are protected. Recent decisions in the High Court of England and Wales may assist victims of fraud in the future."
Below is an illustration of some of the frauds and the variations on old fraudulent themes.
Methods of Fraud
Ponzi schemes - where the scheme is dependent on new investors driven by word-of-mouth recommendations and targets are offered impossibly unrealistic returns on their investments. Old investors are paid out with the cryptocurrency paid in by new investors. Inevitably the schemes are unsustainable and close abruptly with all remaining funds vanishing.
- The characteristics – too good to be true, short term opportunity that the perpetrator will try to rush you into investing.
ICO ("Initial Crypto Offering") Fraud - ICO is similar to IPC ("Initial Public Offering") where investment is sought for new cryptocurrency projects with the promise high returns with little risk. The projects close when the wrongdoers reach a point where the promised returns do not materialise.
- The Characteristics – similar to Ponzi schemes but may have more gravitas due to the similarity to IPOs where there is a genuine opportunity.
Phishing Scams – This is where scammers deceive individuals into believing that they are providing private keys or login credentials to a legitimate source such as a bank or a government agency by means of expertly crafted duplicate websites and emails. Once this vital information has been provided, the wrong doers are able to steal their cryptocurrencies.
- The Characteristics – the victim's belief that they have been contacted by a genuine source and some schemes create the impression that the victims are at risk and they need to act quickly to prevent fraud.
Pump and Dump Schemes: Fraudsters artificially inflate the price of a cryptocurrency by the development of planned misinformation. The wrong doers will often choose a lesser known cryptocurrency and pitch it as the "rising star" and promote across social media platforms with stories of new technological breakthroughs and fake endorsements from acknowledged figures in the field. After which a spate of co-ordinated buying takes place which drives the price up and draws in investors who fear missing out on the opportunity and leads to further price increases. Once the price has risen to what is judged to be its optimum potential, the wrong doers sell their investments leading to a crash, which in turn, causes the victims to start selling, exacerbating the crash.
- The Characteristics – schemes are of short duration and wrong doers create the impression that the opportunity will be missed without speed of action. Less well known cryptocurrencies are selected with a rapid increase in value. Information only found on social media platforms and other forums without any more widespread supporting evidence in legitimate trusted sources.
Exchange Fraud – Wrong doers create fraudulent exchanges which lure investors to deposit funds and then disappear taking the investments with them.
- The Characteristics – the exchanges are often set up in jurisdictions that have no licencing and registration rules. Insufficient information about the business model and the controlling the exchange. Poor security, no two-step verification.
Giambrone and Partners banking and financial fraud litigation lawyers welcome the measures and initiatives that the FCA have put in place to assist with consumer protection and market integrity in the fight against cryptocurrency fraud. Anti-money laundering and counter-terrorist financing rules together with the obligation to conduct customer due diligence monitoring, as well as sandbox testing hub offered by the FCA all play a part in creating a safer environment for cryptocurrency investors.
Combating cryptocurrency fraud requires a comprehensive approach that combines legal, regulatory, technological, and educational strategies. By fostering cooperation between industry stakeholders, regulators, and law enforcement, and by leveraging advanced technologies and global collaboration, the fight against cryptocurrency fraud can be more effective. Continued vigilance, innovation, and adaptation to new threats will be crucial in maintaining the integrity of the cryptocurrency ecosystem.
Joanna Bailey frequently leads the litigation against financial institutions involved in cryptocurrency trading disputes, as well as Forex investment issues and regulatory investigations and has some considerable success in retrieving our clients' funds lost in fraud.
She has developed a range of strategies both to find the assets of the individuals perpetrating the fraudulent schemes and restore the funds to our clients. As well as recognising culpability in the organisations facilitating (but not associated with the fraud), by failing to undertake adequate due diligence.
Joanna led the first case in Europe where proceedings were served on Persons Unknown connected with two digital wallets over the blockchain by non-fungible token or 'NFT' in a cryptocurrency fraud. Following this ground-breaking case Joanna was named as Lawyer of the Week in the Financial Times.
Joanna is highly experienced in high-value out-of-court settlement negotiations and has in-depth knowledge of the Civil Procedure Rules as well as English common law.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.