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An influencer group promoted an initiative which appeared altruistic on the surface. Save the Kids was the initiative, a cryptocurrency token that influencers claimed would aid children in dire need and make its investors rich. Several of the influencers were connected to FaZe Clan, a community of esports gamers with millions of followers—many of them teenagers. It made sense to use the huge popularity of the influencers as well as the cryptonomics power to raise funds for those less fortunate.
It didn’t work out that way. The token’s value plummeted within days of launch, with large holders immediately dumping their shares. FaZe Clan supporters that had invested in this project complained. losing their moneyFollow us on Twitter. Save the Kids’ value is almost null as of right now. Save the Kids claimed to have donated over $80,000Binance Charity representative confirmed that they don’t accept altcoin campaign (i.e. New tokens were not accepted by Binance Charity, and the donation did not go to charities. FaZe Clan suspended one of the three coin-related members and removed another member; the group denied that they were acting maliciously.
Save the Kids is one of many examples of crypto projects where influencers used their power over followers to get thousands of dollars only to have the project fail upon its launch. Scammers are using gray areas, the enthusiasm for crypto and lack of regulation to lure gullible supporters into investing. Scammers all over the globe took in a record 14 billion dollars in crypto in 2021. And as the space has evolved, so have scammers’ tactics, in order to stay ahead of an increasingly discerning public.
TIME interviewed Spencer Cornelia and Stephen Findeisen, who are known on YouTube under the name CoffeeZilla, to help chart their history. Mike Winnet was also interviewed. These YouTubers exist somewhere between hard-nosed journalist and pundit: they use tips, inside sources and public records to show how scammers are taking advantage of a “Wild West” in crypto. “It’s like scams on steroids right now,” Findeisen says. “With crypto, it’s easier to just launch essentially your own Ponzi scheme.”
This video shows how the scammers keep tweaking their methods. Cornelia, Findeisen and Winnet walk us through it. Here’s how the influencer scam has evolved in the past five years.
A new type of token was used to deceive the masses in 2016. The website CSGOLotto allowed its users to gamble using “skins,” an in-game currency that could be bought, sold and traded, in a very similar manner to how NFTs are deployed now. That year, the FTC charged two social media influencers, Trevor “TmarTn” Martin and Thomas “Syndicate” Cassell, with deceptively endorsing the service while failing to disclose their stake in the company. The FTC also claimed that they paid gaming influencers for the promotion of the site to their networks.
The complaint, which the FTC characterized as their first ever against individual social media influencers, ended with a settlement but no fine, just a warning, as the FTC said it normally didn’t fine defendants for a first offense. The FTC sent warning letters to 21 social media influencers about future behaviour. “Consumers need to know when social media influencers are being paid or have any other material connection to the brands endorsed in their posts,” Chairman Maureen Ohlhausen said in a statement.
ICOs or Initial Coin Offerings were a major driver of billions in funding for the blockchain industry. ICOs gave new crypto companies the ability to source funding without having to go through the lengthy and highly-regulated process of an IPO. This boom saw the creation of thousands of companies. However, not all these companies offered actual products. The funding also brought more celebrities and influencers into cryptocurrency, as they were paid by houses-of-card firms to help promote the new tokens to their fans.
Centra Tech was one of the bogus projects that relied upon influencers. It promised crypto-financial tools and cutting-edge technology. Instead, U.S. Attorney Ilan Graff alleged that co-founder Sohrab Sharma was responsible for only creating “fake executives, fake business partnerships, and fake licenses that he and his co-conspirators touted to trick victims into handing over tens of millions of dollars.” Meanwhile, two celebrities who had also profited from the scheme were DJ Khaled and Floyd Mayweather, who the SEC found had been paid $50,000 and $100,000 respectively to promote the project, but had failed to disclose their vested interest. Sharma, who pleaded guilty to securities fraud and other charges was sentenced for eight years. Mayweather and Khaled also agreed not to promote securities for the next three years and two years respectively.
These days, one of the most common types of crypto scam is the “pump-and-dump” scheme, which has existed for decades: Jordan Belfort, the “Wolf of Wall Street,” used it to manipulate penny stocks in the ‘90s. They’ve become increasingly prevalent in crypto due to the lack of regulation in the space, and in the ease of creating new crypto tokens and raising money through social media.
In crypto “pump-and-dumps,” influencers buy a new token, also known as an altcoin, on the cheap; sometimes, they’re gifted shares outright by the coin’s creators. The coin’s price rises when influencers promote it on social media. They quickly delete their shares. The panic often causes the price to spiral downward.
“You will see 1,000x or 10,000x price surges,” says Cornelia. “And that allows the developers and creators to sell off their ownership stake to all the people now caught up in the hype, and it allows them to make exorbitant amounts of money in a very short amount of time.”
In the case of Save the Kids, the YouTuber Findeisen followed blockchain records to expose the predatory actions of several key FaZe members, revealing how the project’s underlying code was changed at the last minute to allow large shareholders to sell off their holdings immediately. This scam has not been sued.
Pump-and-dump schemes have been drawing increased scrutiny from regulators, partially because they’re so familiar. Scammers and influential people have turned to NFTs as a safer and more grayer option. You can find a primer about NFTs right here. “NFTs have a more dubious, strange value,” Findeisen says. “So that when inevitably, when your NFT crashes to zero after you’ve dumped it on your fans… you can say “Well, look, you still got a piece of art.”
Winnet says that he’s seen several of the same bad actors in previous schemes happily sell their followers on NFTs. “These are the same people that, a year ago, were telling everybody how you can earn £10,000 a month from your podcast…These are the same people that were doing property events,” he says. “They just move from grift to grift.”
Regulations in the making
Findeisen believes that a change is coming—even though, right now, scams are soaring. According to him, governmental agencies as well as a growing number of YouTubers are starting to notice these scams. They’re also building cases with the help of blockchain-stored information. In February, $3.6 million worth of Bitcoin was seized by the U.S. Department of Justice. Scammers can be caught by anyone, not just from any law enforcement agency.
“In the past, you had to be the FBI… I think a lot of influencers, banks and governments don’t realize how much the blockchain is going to change the way we report things,” Findeisen says. “There’s sort of a crowdsourced intelligence around catching these scams, because now everyone can access all these financial records. This is why I believe that many people will see cases from the past get prosecuted. And I think people are going to become much more scared to scam people with crypto.”
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