Six Cryptocurrency Fraud Schemes You Should Know

Bitcoin and cryptocurrency are hot topics in the discourse around today’s investment landscape. It’s common to come across cryptocurrency rags-to-riches stories, but at the same time, bitcoin scams have also hit an all-time high. Fraudsters are also using all kinds of tricks to con unsuspecting buyers and investors. Having supported the Financial Crimes Enforcement Network (FinCEN), Onyx Government Services is no stranger to the various types of financial fraud criminals and terrorists employ—fraud that our analytics helped detect and counter.

Here are six bitcoin fraud cases you should know:

Bitcoin Ponzi Schemes

In 2014 Shavers was arrested for running a bitcoin-related Ponzi scheme and was ordered to pay $40.7 million in fines and sentenced to one and half years in prison.  

Between September 2011 and September 2012, Shavers, through his company Bitcoin Savings & Trust, allegedly raised at least 764,000 Bitcoins, which at the time were worth more than $4.5 million. The money came from clients that trusted him to invest the funds for them.

In 2019 Matthew Goettsche, Silviu Balaci, and Jobadiah Weeks were arrested for operating BitClub Network, a fraudulent scheme that solicited money from investors in exchange for shares of cryptocurrency mining pools.  The scheme ran from April 2014 through December 2019.

Through the scheme, the three men obtained $722 million in stolen Bitcoin from BitClub Network investors. In his testimony, Balaci said he inflated BitClub Network’s website mining activity to fool investors (sheep) into sticking around.

Fake Cryptocurrency Wallets

In 2017 operators of a website called offered new users a chance to create Bitcoin Gold wallets. Users were to submit their private keys or recovery seeds to create the wallets.

However, shortly after they did so, their cryptocurrencies were sent to different addresses. The scammers made away with at least $30,000 in Ethereum, $107,000 in Bitcoin Gold, and more than $3 million in Bitcoin.

On February 24th this year, an app called Trezor went live on the Apple App Store. The app was quietly uploaded to avoid any suspicion. From its name, it appeared to be a hot wallet version of the popular Bitcoin hardware wallet. The app was even linked to the legitimate website and privacy policy.

The app was up for a few days before it was removed from the app store by Apple. Its single goal was to steal from Bitcoin investors who had no idea that Trezor doesn’t have an app.

Fake Cryptocurrency Exchanges

BitKRX was a South Korean cryptocurrency exchange that defrauded investors by pretending to be associated with the Korean Exchange (KRX), a legitimate financial exchange in South Korea.

In case you didn't know, a cryptocurrency exchange is an online platform that allows people to trade cryptocurrencies for other cryptocurrencies or assets.

In 2017 the exchange’s clients began reporting that their money was being stolen through the exchange. The same year the South Korean authorities exposed BitKRX as among the most notorious fake cryptocurrency exchanges in the country at the time.

Komid is another South Korean cryptocurrency exchange that was discovered to be scamming investors from the start. Investigations revealed the exchange faked 5 million transactions to inflate the volume. The move saw them falsely earn $45 million.

In 2019, Komid’s CEO, Choi Soon, received a three-year sentence for faking exchange volumes while another company leader received a two-year sentence for fraud, embezzlement, and misconduct.

Fake Cryptocurrencies

Launched in 2013 by Randall Crater, My Big Coin started as a virtual currency wallet and platform that allowed merchants and consumers to process transactions with their own digital tokens.

In 2018 it was discovered the company had been scamming people out of their hard-earned money. In exchange for their dollars, unlucky customers were getting nothing. A company that purported to be selling legitimate Bitcoin was selling air.

My Big Coin managed to stay in business for a long time without being discovered because of pretending to be a legitimate business. It even claimed to be partnering with MasterCard. Over the cause of its operation, the company lured investors into funding around $6 million.

Mr. Crater was later arrested and charged with fraud and misappropriation. My Big Coin lawsuit became one of the first in American history that revealed a cryptocurrency could be considered a commodity with the jurisdiction held by the U.S. derivatives regulator.

Illegal ICOs

Centra Tech began operations in 2017 as a crypto-financial services company. The company claimed to offer a debit card that converted cryptocurrencies to dollars. During its ICO, they made several false claims, among them an existing partnership with MasterCard Incorporated and Visa Inc for legitimacy.

The company claimed to be working on a debit card that would pioneer the retail use of digital currencies.  So many lies went into enabling the company to raise more than $25 million in its ICO.

To better market themselves, the market sought the services of boxer Floyd Mayweather and music producer DJ Khaled. The two prominent figures helped give the company some credibility.

In 2020 Robert Farkas, one of the co-founders of Centra Tech, was sentenced to a year in prison after he pleaded guilty to securities fraud and wire fraud. Before the reduced sentence, he stood up to ten years in prison. He also had to forfeit $347,062.58 and a Rolex watch he purchased with fraud proceeds.

Twitter Hacks

In July 2020, hackers executed one of the most famous social media scams. The hackers hacked into famous individuals' and companies' accounts and contacted their followers asking for money in Bitcoin. The hackers promised that user funds would be doubled and sent back as a charitable gesture.

According to reports, within minutes of the tweet going live, 320 transactions occurred. Some of the compromised Twitter accounts belonged to Elon Musk, Bill Gates, Warren Buffet, Floyd Mayweather, Apple, and Uber.

Youtube is another social media platform that suffered at the hands of hackers. In July 2020, Steve Wozniak, Apple co-founder, filed a suit against Google after his conversation on Bitcoin was featured in cryptocurrency giveaway scam videos.

Final Word

Ponzi schemes, fake wallets, fake cryptocurrencies, illegal ICOs, and fake cryptocurrency exchanges are only a few of the many scams you should watch out for in the crypto market.

As regulations get into the crypto space, things seem to be getting a little better for investors. However, you still have the responsibility of taking care of yourself and your money. The crypto space is not that safe yet.

Onyx keeps you at the forefront of fraud analytics. Feel free to contact us today.

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