Understanding Crypto Scams and How to Outsmart Them


After two months, Tho Vu fell in love. The 33-year-old customer service agent, living in Maryland, had met “Ze Zhao” through a dating app, and says she soon started 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. In October 2021, although they had never met in person, they were talking about where to buy a house, how many children to have, and even how he hoped she would give birth at home . “I want to take you with me when I do anything,” he said in posts seen by TIME. “You are so important [to me] like my mother.

To fund their life together, Zhao pushed Vu to invest in Bitcoin. Vu was impressed with the cryptocurrency’s massive price gains. She was also reassured by Zhao’s suggestion to buy her Bitcoin through Coinbase, an established US cryptocurrency exchange, before transferring it to Zhao’s preferred site. “Every time we did the trades, he would repeat why we were doing it,” Vu says now. “It was always, ‘baby, we’re doing this for our future’.”

It wasn’t until Vu tried to withdraw her winnings that she realized that Zhao was a fiction, just like this shopping site. She was sending these tokens directly to a team of professional scammers. It was a so-called pig-butchering scam – also known as a crypto-romance – in which criminals spend weeks or months gaining the trust of victims. Vu says she lost around $306,000 including her investment and the additional payments she was told as fees and taxes by the bogus exchange. “It was one of the most traumatic events of my life,” says Vu. “Not only had I lost all my savings, but this future that I thought was a new adventure, it was a lie.”

Crypto tracking

Cryptocurrency scams, like the one Vu fell in love with, are currently driving an online crime boom. 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 victim of cybercrime, there is chances are crypto is involved.

According to a report by research firm Chainalysis, which tracks the movement of cryptocurrency across the internet, $14 billion worth of cryptocurrency was sent to “rogue” wallet addresses last year, triple the 2017 amount. These digital wallets may have been used for fraud, terrorism or payments for child pornography. There are so many victims of crypto-romance that they have formed an advocacy group, the Global Anti-Scam Organization (GASO), which counts Vu among its members. Last year alone, GASO fraud reports totaled $73 million in losses.

And when it comes to things like ransomware attacks, the damage adds up fast. In February, Chicago-based financial firm Jump Trading sunk $320 million to bail out its Wormhole crypto platform after a massive hack. Meanwhile, the daily investor rush into crypto has created a slew of new targets.

The challenges of recovering money from crypto scams

Many people assume that cryptocurrency is so popular with criminals because the tokens move around anonymously. In practice, major digital currencies such as Bitcoin and Ether are actually very traceable. Every transaction is permanently recorded on a public blockchain, essentially a decentralized database. Although real names are not attached, criminals become vulnerable when trying to cash out their crypto in dollars, euros, or other traditional fiat currency.

This is because exchanging crypto for fiat requires an exchange such as Coinbase or Binance. These exchanges are regulated in many countries, including the United States, and are required to collect information about their users. A warrant or court order could compel these exchanges to reveal the owners of these wallets.

“I think there’s a false sense of security among crypto criminals about how difficult it is to be tracked down,” says Ben Hamilton, a forensic investigator who hunts down financial scammers for risk management firm Kroll. .

Indeed, the US Department of Justice recently charged two people with laundering $4.5 billion worth of Bitcoin from a Bitfinex hack in 2016, after tracing the coins through a complex web of crypto records. transactions. Investigators such as Chainalysis monitor wallet addresses containing funds stolen from the Wormhole hack, which means culprits may find it difficult to cash out.

Read more: Inside the Chess Match That Led Feds to $3.6 Billion in Stolen Bitcoin

The biggest problem is actually getting the money back. With fiat currency, international transfers often move no funds. Banks can simply adjust their records of who owns what, so transactions can be blocked or reversed.

Blockchain transfers, on the other hand, are automated and nearly impossible to tamper with. Tokens can be transferred across borders without any outside permission, and all transfers are completely irrevocable: if a scammer tricks a victim into sending them crypto, or takes over someone’s wallet and sends their money elsewhere , there is no central institution to cancel the transfer. . “My scammer kept pushing me to buy Bitcoin,” Vu explains. “With cryptocurrency, he could be anywhere in the world and still get money. With the bank, he has an institution, he has a location.

Authorities, usually constrained by regional and national borders, are struggling to keep up. Jan Santiago, Deputy Director of GASO, says police forces often refuse to track crimes outside of their geographic area, and many barely understand what cryptocurrency is. “You have to go to the FBI level, but everybody goes to the FBI, and the FBI is overwhelmed,” he says. (An FBI spokesperson declined to comment.)

Data from Chainalysis suggests that crypto money laundering is highly centralized in a few poorly regulated countries, particularly Russia, or in exchanges that mask their location.

This points to a need for international cooperation, says Mark Turner, managing director of Kroll’s financial regulatory unit. Turner argues that nations need to agree on international standards to manage the flow of illicit crypto. Governments could regulate crypto wallets like they do bank accounts, allowing exchanges to blacklist specific wallets based on their compliance status, while banks could block transfers to and from dubious exchanges.

Avoid Crypto Scams

In the meantime, crypto users will need to protect themselves and educate themselves. “The naivety and ignorance of many people diving headfirst into the world of crypto is the biggest attraction for these scammers,” says a moderator of Reddit’s CryptoScams message board, which has seen an “exponential” increase in traffic. over the past year. Scammers exploit the lack of collateral in the cryptographic infrastructure, often walking victims through the process of distributing so-called seed phrases that unlock their wallets. Many popular wallet services and crypto art markets also do not offer multi-factor authentication, a common way to secure digital accounts.

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

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

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