Cryptocurrency and fraud - October 09, 2021

Cryptocurrency and fraud
Cryptocurrencies are notorious for their use in illegal transactions. A month ago, the SEC issued an investor alert, noting that fraudsters continue to exploit the rising popularity of digital assets to lure retail investors into scams, often leading to devastating losses.

According to the Chainanalysis’ 2021 Crypto Crime Report, in 2019, illegal activities represented 2.1% of the total volume of cryptocurrency transactions, or about $21.4 billion in transfers. In 2020, the illicit share of all cryptocurrency-related activities dropped to just 0.34%, or $10.0 billion in transactions. However, we should expect an increase in the numbers related to 2020’s reported illicit activities, as some of the illegal activities have not yet been identified as such. Chart 1 shows the total cryptocurrency value received by illicit entities in 2017-2020.

According to the report, scams constituted the majority of all cryptocurrency-related crimes, accounting for 54% of illegal activities, or about $2.6 billion in cryptocurrency received in 2020.

As we can see, scam revenue decreased significantly in 2020 compared to 2019. However, as pointed out by Chainanalysis, the number of individual payments to scam addresses rose from just over 5 million to 7.3 million, which means that the number of individual scam victims rose by more than 48%. The drop in revenue from scams in 2020 compared to 2019 can be explained by the fact that there were no large-scale Ponzi schemes in 2020 like the ones observed in 2019. Most of the revenue from scams in 2020 went to investment scams (see Chart 2).

It’s interesting to note that, according to another Chainanalysis’ report, Eastern Europe sent by far the most web traffic to scam websites between June 2020 and July 2021. We would like to mention two of the notable scams that caused serious losses in Eastern Europe.

Finiko. According to Chainanalysis, more than half of the value sent to scam addresses from Eastern Europe between June 2020 and July 2021 went to Finiko, a Russia-based Ponzi scheme that collapsed in July 2021. According to the report, Finiko received over $1.5 billion in bitcoin between December 2019 and August 2021. 

Onecoin. Onecoin was promoted as a cryptocurrency. In fact, it was a Bulgaria-based Ponzi scheme founded by the self-proclaimed "CryptoQueen" Ruja Ignatova. Investors have lost $4 billion. 

Crypto investors  should also keep in mind the possibility of funds theft. Chainanalysis estimates that more than $520 million in cryptocurrency was stolen from services and individuals through hacking and non-technical attacks in 2020. This is 52% above the 2019 level, but still 57% below the volume stolen in 2018. But the number of attacks is on the rise in 2019 and 2020.

Chainanalysis emphasizes that cryptocurrency-related crime is rather small when compared to the amount of illicit funds involved in traditional finance. However, as SEC pointed out in the aforementioned alert, investors may be less skeptical of investment opportunities that involve something new or “cutting-edge,” or may get caught up in the fear of missing out. The SEC recommends to be cautious if you spot any of these red flags of fraud:

  • Promises of high investment returns with little or no risk
  • Unlicensed/unregistered sellers
  • Depictions of investment accounts rapidly increasing in value and providing large returns
  • “Opportunity” that sounds too good to be true
  • Fake testimonials

The bottom line

We have repeatedly mentioned that investing in cryptocurrencies is a very adventurous journey, even if scams or theft are not taken into account. Those who can’t help but start this journey should also take into account the risks of illicit activities. We have also often emphasized that a well diversified and a professionally managed portfolio of stocks is the best choice for an investor. 

Disclaimer: This analysis is for general information and is not a recommendation to sell or buy any instrument. Since every investment holds some risk, our main business policy is based on diversification to minimize threats and maximize profits. Innovative Securities’ Profit Max has a diversified portfolio, which contains liquid instruments. This way, our clients can maintain liquidity, while achieving their personal investment goals on the long term.