Fraudulent Transactions in Crypto, Explained

Crypto worth billions upon billions of dollars has been lost to fraud. But what are the most common scams, and can they be stopped?

How can payment fraud be avoided?

Introducing better verification measures can go a long way to protecting consumers.

Amazon and eBay are often held up as good examples of how transactions should be handled in the wider economy. These sites often deliver impartial reviews based on the past activities of buyers and sellers, meaning it is easier for consumers to find someone reputable. Measures are also in place to protect both parties if a transaction doesn’t go to plan.

A multitrader marketplace called Kuverit is aiming to bring this to the crypto and fiat world alike. The company claims it is building the world’s first peer-to-peer platform that is designed to protect consumers from financial loss in fraudulent transactions, meaning they are guaranteed to get their money back. Through its infrastructure, users will be able to check the reputation of the person they are about to deal with, and view a baseline score that is partially calculated as a result of Know Your Customer checks.

Transactions of up to $5,000 in value can be guaranteed through the use of a guarantor, who is paid a fee to ensure that both sides receive their funds. Transactions that are larger than this are protected through so-called “co-op pools” where the risk is spread across multiple guarantors, a feature that is better suited for businesses and those who are making large deals. When something goes wrong, supporting evidence is provided to voters and auditors who look at the case and resolve the dispute. Niche protection pools also offer a financial shield for events that otherwise would have been uninsurable.

With trillions lost to fraud every year, Kuverit says its goal is to reduce customer anxiety, help establish trust within the community, and reduce the stress, uncertainty and apprehension that the crypto industry has been struggling to shake off in its quest for mainstream adoption.

I’m worried — can I track my crypto transactions?

Once a payment is sent, transactions can be tracked and verified through the blockchain.

For example, through a network such as Bitcoin, you can search for a transaction ID to check on the progress of a payment. The details provided include the total amount of fees that are being paid to miners, and how many confirmations the transaction has currently received. In Bitcoin’s case, six confirmations are required before the crypto has safely made its way to its destination.

Many other major cryptocurrencies, such as Ethereum and Litecoin, have their own blockchains where transactions can be verified. Payments involving ERC-20 tokens, a common type of crypto, are also verified through the Ethereum blockchain.

Global governments are also beginning to take an interest in tracking cryptocurrency, too. As Cointelegraph reported back in August, 15 jurisdictions around the world — G-7 countries among them — want to collect and distribute personal data on individuals who complete such transactions. The objective is to stop crypto from being used for illegal activities, namely money laundering and terrorism financing. More detailed measures are expected to be unveiled in 2020.

Tell me more — what are the most common ways to be tricked?

Exchanges, businesses, wallets and people that aren’t what they say they are.

For example, there might be a crypto exchange that looks like it offers fantastic rates and low fees on the trading fees you use the most. But, once you have made a deposit, it could be almost impossible to withdraw your funds. Another risk is entrusting your assets with a platform that has inadequate security measures in place. Just look at Mt. Gox — an astounding 850,000 BTC was lost all the way back in 2014, and those who were left out of pocket are still fighting to be reunited with their funds. Due diligence is essential — and even positive reviews found on crypto forums and social networks should be taken with a grain of salt.

Ponzi schemes are particularly disastrous because the number of victims can grow exponentially. Investors in these scams are normally under pressure to recruit as many others as possible to ensure that their profits rise. Indeed, they may even get a few payments to begin with — meaning those being duped often fully believe that they have stumbled across a real business opportunity. Ponzi schemes usually collapse when the pool of new recruits runs dry.

Phony crypto wallets are another issue. Apps posing as official wallets for NEO, Tether and MetaMask have been uncovered on the Google Play Store before now — and alarmingly, it seems they had hundreds of installs. The apps often requested a user’s private key and wallet password, sensitive personal data that would subsequently be used by cybercriminals to steal even more money. Other malicious pieces of software have piggybacked on reputable crypto wallet brands like Trezor.

Then, there are fake mainstream news articles and “official” social media pages that aim to capture crypto consumers who may have very little experience of the market. We’ve seen fraudulent investment opportunities that have claimed to have the endorsement of A-listers such as Elon Musk, Kate Winslet and Richard Branson — with Dutch billionaire John De Mol going as far to sue Facebook after the public lost an estimated $1.9 million falling for crypto ads that featured his image.

Facebook has even been a target itself, with fake pages on its social networks claiming to be official entities for the upcoming Libra cryptocurrency. They offered the chance for consumers to supposedly buy the stablecoin at heavily discounted prices, even though they hadn’t been launched.

How does payment fraud happen?

Fraudsters are getting increasingly creative — meaning constant vigilance is essential to protect crypto.

Ghost platforms that mimic legitimate exchanges. Fake platforms that invent users in order to make their business seem real. Clones of addresses that at first glance seem identical to the places you usually send funds. Yes, there are lots of great opportunities to be found in the crypto world, but fraud is big business.

Although sham initial coin offerings are not as commonplace as they once were (this fundraising method fell out of fashion a couple of years ago), exit scams remain. Crypto is raised for a business that looks exceedingly promising — complete with boasts of high returns — but then, the company disappears without a trace. In hindsight, the warning signs are there: the white paper was plagiarized, half of the team were not identified, and tough questions from concerned investors went ignored.

Higher levels of scrutiny are necessary because it can be nearly impossible to verify someone’s identity — not to mention their reputation — in the crypto world. All of this is affecting consumer confidence, and the adoption of digital currencies in general. Just look at 2019’s Blockchain Usability Report from the Foundation for Interwallet Operability. It revealed that just 25% of crypto consumers were “very comfortable and confident” that their transactions would be completed as planned. The rest described being very nervous and worried, somewhat stressed, or merely cautiously optimistic about the payment.