Understanding Crypto Scams and How to Outsmart Them

Tho Vu fell in love with her after two months. The 33-year-old customer service agent, living in Maryland, had met “Ze Zhao” through a dating app, and says she quickly began exchanging messages with him all day on WhatsApp. He seemed like someone she could rely on—he called her “little princess” and sent her reminders to drink enough water. By October 2021, despite never having met in person, they were talking about where to buy a house, how many kids to have, even how he hoped she’d do a home birth. “I want to take you with me when I do anything,” he said, in messages seen by TIME. “You are as important [to me] as my mother.”

Zhao encouraged Vu to buy Bitcoin in order to fund their lives together. Vu was impressed by the cryptocurrency’s massive price gains. She was also reassured by Zhao’s suggestion that she buy her Bitcoin through Coinbase, an established U.S. cryptocurrency exchange, before transferring it to Zhao’s favored site. “Every time we did the trades he would repeat why we were doing it,” says Vu now. “It was always, ‘babe, we’re doing this for our future’.”

Only when Vu tried to withdraw her gains did she realise that Zhao was a fiction—and so was that trading site. She’d been sending those tokens straight to a team of professional crooks. It was a so-called pig-butchering scam—also known as a crypto-romance—in which criminals spend weeks or months gaining victims’ trust. Vu estimates that she lost approximately $306,000. This includes her investment, and any additional payments she was told by the fake exchange were fees or taxes. “That was one of the most traumatic events in my life,” says Vu. “Not only had I lost all my savings, but this future that I thought would be a new adventure—it was all a lie.”

Monitoring crypto

The rise of cryptocurrency frauds such as the one Vu fell for is driving an increase in online criminal activity. Romance scams, investment scams, digital wallet hacks, pyramid schemes, ransomware attacks, and even digital art thefts—the methods may be different, but wherever you find a cybercrime victim, odds are good that crypto was involved.

According to a report from the research firm Chainalysis, which tracks the movement of cryptocurrency across the internet, $14 billion worth of cryptocurrencies was sent to “illicit” wallet addresses last year, triple the amount for 2017. These digital wallets could have been used to commit fraud or terrorist acts, as well as for payments related to child abuse materials. Many victims of crypto-romance have created an advocacy organization, Global Anti-Scam Organization. Vu is a member. Last year alone, GASO’s fraud reports added up to $73 million in losses.

When it comes to ransomware attacks and other malware, damages can quickly add up. Jump Trading, a Chicago-based financial institution invested $320 million to bail out Wormhole’s crypto platform following a major hack. The crypto-craze has brought new investors to the table.

Recovering money from crypto-scams is difficult

People often assume cryptocurrency is popular because it allows anonymous transactions. It is possible to track major digital currencies, such as Bitcoin or Ether. Every transaction is permanently recorded on a public blockchain—essentially a decentralized database. Although real names aren’t attached, criminals become vulnerable when they try to cash out their crypto into dollars, euros, or another traditional fiat currency.

That’s because swapping crypto for fiat money requires an exchange such as Coinbase or Binance. The exchanges, which are licensed in several countries (including the U.S.), are required to gather information on their users. A warrant or court order could compel those exchanges to reveal those wallets’ owners.

“I think there is a false sense of security among crypto-criminals about the difficulty of being traced,” says Ben Hamilton, a forensic investigator who tracks down financial crooks for the risk management firm Kroll.

Two people were recently accused by the U.S. Department of Justice of laundering Bitcoins worth $4.5 Billion from Bitfinex’s 2016 hack. They had traced these coins via a complex network of transaction records. Chainalysis, an investigator group, is monitoring wallet addresses that hold stolen funds in the Wormhole hack. This could mean the suspects might not be able to cash out.

Continue reading: In the Chess Match That Led The Feds To $3.6 Billion in Stolen Bitcoin

Recovering the money is the bigger issue. With fiat currency, international transfers often don’t actually move any funds—banks can simply adjust their records of who owns what, so transactions can be blocked or reversed.

The blockchain transfers are, however, automated, and nearly impossible to alter. Tokens can be transferred across borders without any outside permission, and all transfers are totally irrevocable: if a scammer tricks a victim into sending them crypto, or gains control of someone’s wallet and sends their money elsewhere, there is no central institution to reverse the transfer. “My scammer just kept pushing me to buy Bitcoin,” says Vu. “With cryptocurrency he could be anywhere in the world and still get the money. With banking, it has an institution, it has a location.”

Authorities—generally restricted by regional and national borders—struggle to keep up. Jan Santiago, the deputy director at GASO says that police officers will sometimes refuse to investigate crimes beyond their area. Many people don’t even know what cryptocurrency is. “You have to go to the FBI level, but everyone’s going to the FBI, and the FBI is overwhelmed,” he says. (A spokesperson for the FBI declined to comment.

Chainalysis’ data suggests that crypto money laundering is highly centralized in a few lightly regulated countries, especially Russia, or in exchanges that obscure their location.

That points to a need for international cooperation, says Mark Turner, a managing director in Kroll’s financial regulation unit. Turner believes that countries must come up with international standards to manage illicit cryptocurrency flows. Crypto wallets can be regulated by governments in the same way as bank accounts. Exchanges may blacklist certain wallets depending on compliance, and banks might block transactions to or from suspicious exchanges.

Crypto scams should be avoided

In the meantime, crypto users will have to protect—and educate—themselves. “The naivety and ignorance of many people diving head-first in the crypto world is the biggest attraction to these scammers,” says one moderator of Reddit’s CryptoScams message board, which has seen an “exponential” rise in traffic over the past year. The lack of security in crypto infrastructure is often exploited by con artists who coach their victims on how to unlock their wallets using the “seed phrases”. Multi-factor authentication is a popular way to make digital accounts safer.

Another CryptoScams moderator, Luis Garcia, says a “culture of instant gratification” and feverish hype around new crypto projects leads to “irrational decisions.” He advises crypto users to never give out their seed phrases to anyone, and to never Google search the name of a legitimate service instead of typing in its URL directly (scammers sometimes buy ads at the top of search results for popular crypto sites in order to to lure you onto a dangerous fake site).

Be careful who you trust, says Garcia, whether buying a wallet or using an exchange—and never let anyone else manage your money, especially if you met the way Vu met her scammer. “Beware of direct messages [DMs],” he says. “Being tricked in DM can cost you everything you own.”

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