Cryptocurrency Scams

Overview

In recent years, cryptocurrencies have become a worldwide phenomenon, rapidly gaining in popularity and value. Unfortunately, this phenomenon has also caught the attention of fraudsters who are always looking for new opportunities to defraud unsuspecting victims. 

Traditional cyber fraud schemes, where fraudsters use online contraptions to trick their victims in voluntarily transferring their money to third party bank accounts, present inherent risks for fraudsters. Law enforcement agencies and victims can trace, within the banking system and in the real world, where the funds have been electronically or physically and the persons involved can be relatively easily be identified with some efforts and expense. This is because the banking systems in most countries are mature and strongly regulated (especially anti money-laundering provisions).

On the other hand, regulations regarding cryptocurrencies and the platforms / exchanges that host them are completely new and underdeveloped, and law enforcement agencies around the world are unfamiliar with these issues and are slow at adapting to these new technologies.

If any of the scenarios described below sound familiar, it is very likely that you have been a victim of fraud and should take immediate action to avoid incurring additional losses.

What is a Cryptocurrency?

A cryptocurrency (also known as crypto-currency, or crypto) is a digital or virtual currency that is secured by cryptography, and it is designed to work as a medium of exchange.

Most Common Cryptocurrencies

As of this article, the most common cryptocurrencies on the market are Bitcoins (BTC), Ethereum (ETH), Tether (USDT), Binance Coin (BNB), Cardano (ADA), Dogecoin (DOGE), XRP, USD Coin (USDC), Polkadot (DOT), and Uniswap (UNI).

There are a lot of cryptocurrencies out there; many startups are hoping to capitalize on the cryptocurrency craze.

Most Common Cryptocurrency Platforms

We note that the following cryptocurrencies platforms appear to be currently popular and trusted worldwide: Binance, Coinbase, Kraken, Gemini, Crypto.com, Gemini, and Gate.io.

Obviously, the aforementioned list of cryptocurrency platforms is not exhaustive. 

Most Common Types of Digital Wallets for Cryptocurrency

There are essentially two categories of digital wallets for cryptocurrency: hot wallets and cold wallets.

(a) Hot Wallets: Hot wallets are essentially always online connected to the internet (hence the term "hot"). This type includes mobile wallets (mobile phone based application), desktop wallets (computer software based wallet), and web-based applications accessible on most cryptocurrency platforms' website. The fact that hot wallets are constantly connected to the internet means that they are more susceptible of being hacked.

(b) Cold Wallets: Cold wallets are offline ("cold") solutions designed to offer the best security to their users. However, they are inherently less convenient than hot wallets since they require the users to have physical access to the device itself before a transaction can be performed. This type is entirely hardware-based.

Initial Contact: Social Media and Dating Applications

Passive Approach

Fraudsters will often approach their victims through social media (Facebook and Instagram), online messaging platforms (e.g., WhatsApp, Line, WeChat), and dating applications (e.g., Tinder, Skout, Coffee Meets Bagel). The fraudsters usually profile their victim first to assess if the person is a valuable target and then tailor their initial approach accordingly (e.g., romantic, friendship, business opportunities).

In the cases we have seen, the fraudsters would often pose as a young good-looking (often Chinese) man or woman (“Fake Romantic Partner”) who is looking to meet successful like-minded professionals. Invariably, the conversation between the Fake Romantic Partner and his (or her) victim will, at some point, revolve around cryptocurrencies and investment opportunities related to them. He (or she) will often discuss his (or her) own success investing and will introduce the victim to an online cryptocurrencies trading platform completely controlled by the fraudsters.

Active Approach

Grounded in Reality

Fake Employees

This type of scam usually involves communications with some fake employees pretending to be working for the fake brokerage firm. They are often only communicate by email or via instant messaging applications. They are usually the person assisting the victim to be onboard onto the fake platform and will often tell the victim where to which external account the funds should be remitted to. These people are usually the fraudsters themselves. It is done to ensure that the victim feels safe and trusts the fake brokerage firm.

Fake Exchange

Fraudsters often successfully onboard their victims on an elaborate website purporting to be a legitimate cryptocurrency exchange. Victims are often asked to use mobile or web applications entirely controlled by the fraudsters. The fraudsters can then control what the victims are seeing whenever they enquire on the balance of their cryptocurrency accounts. The victims are usually emboldened by the gains they believe they have made on the application, and it prompts them to invest more money or transfer more cryptocurrencies, trying to capitalise on the perceived opportunity.

Method

Fake Exchange or Trading Platform

The fraudsters will invariably induce the victim to transfer his cryptocurrencies into the digital wallet of the fraudsters. Early on, the fraudsters will often request that the victim transfer a small amount of a given cryptocurrency to show how trustworthy their platform is. After great (but fictitious) gains are observed by the victim, the fraudsters will then ask the victim to transfer greater amount of cryptocurrencies to maximise the victim's gains. Thereafter, whenever the victim would request to withdraw a large amount of a given cryptocurrency from his fake account, the fraudsters would invent reasons as to why it is not currently possible and would ask the victim to transfer an additional amount of cryptocurrency to allow them to “unlock” the victim account.

It usually ends with the victim realising that he has been defrauded and the fraudsters stopping all conversations once confronted with the truth.

Fake Initial Coin Offering / ICO Scams

An Initial Coin Offering (“ICO”) is a form of crowdfunding used for financing and launching new cryptocurrencies. It is also a common way for fraudsters to defraud unsuspecting victims. They usually involve the victim transferring large sums of money to the bank account of a third party to take advantage of the deal, or to transfer a great amount of a cryptocurrency under the guise that it will increase significantly in value.

Although not exhaustive, these are the typical red flags to watch out for when trying to ascertain whether the ICO:

  1. No Whitepaper published in respect of the ICO or a very poorly drafted one;
  2. Promises of receiving fixed profit or guaranteed return on investment (ROI);
  3. Websites using stock images for the profile of their team members; and
  4. Limited means of contacting the company doing the ICO.

Challenges

Identifying the Owner of the Digital Wallet used by the Fraudsters

If you are a victim of a cryptocurrency scam, this part is the most difficult and usually requires the victims to spend money hiring a firm specializing in cryptocurrency forensic investigations.

Knowing where to Report the Crime

We come across this issue often. The victim is in Country A, the Fake Exchange states on its website that it is located in Country B, the website itself is hosted in Country C, and the Fake Romantic Partner is communicating with the victim using a telephone number in Country D. 

So where should the victim report the crime?

We usually suggest to victims to first report the crime to their local police force where they are currently residing (ideally to the cyber crime division if there is one) and share with the investigator all information available to the victim at the time. It is useful at that point to engage in a discussion with the investigator assigned to your case and discuss where else should the crime be reported.

In our experience, if the crime is reported in all the countries involved, it is very likely that most (if not all) police forces involved will request that the victims file a report in their home country. 

Important Tips

Keep a Record of Everything

Anything connected to the scam, keep a record of it. The police often relies on the chat records, telephone numbers, the screenshots of the website, and documents sent during the course of the scam to build their case against the fraudsters.

Report to the Police only the Relevant Parts

Very often, we see police reports that have been filed by clients that are incomplete; they focus on all the wrong things that not particularly relevant to your case. We have prepared a guide on how to file an online report with the Hong Kong Police.

Time is of the Essence

It is important not to waste time and make sure that the scam is reported immediately to the relevant authority.

Additional Questions

If you have additional questions which are not addressed here or wish to schedule an appointment to discuss your case, please contact us by telephone on +852 2176 4777 or by email at [email protected].

Victim of a Cryptocurrency Scam?