The crypto market is one of the booming markets in the world. It has grown rapidly even in the midst of the COVID 19 pandemic. The entire industry now has a market cap of more than $2T according to data by Coinmarketcap.
But this is where the danger lies. A huge market like the crypto market where money abounds is likely to attract bad actors. In the entire history of the crypto industry, billions of dollars were lost due to scams. In a 2019 report published by Investopedia, $9 million is lost every day in crypto scams. In this article, we will revisit these stories in order to warn investors of the schemes that these bad actors have used to prey on their victims.
Types of Crypto Scams
There are different types of crypto scams that bad actors have used so far. What are these? Let’s examine the top schemes used by scammers.
- Fake ICO’s (Initial Coin Offering)
According to Wikipedia, Initial Coin Offering (ICO) is a type of funding that uses cryptocurrencies. A quantity of cryptocurrency is sold to investors in the form of tokens in exchange for legal tenders like BTC (bitcoin) or ETH (Ethereum). The first ICO was held in 2013 by Mastercoin. Ethereum raised 3,700 BTC or $2.3M during its token sale in 2014 in just 12 hours. With ICO, startups were able to raise money directly from the public without intermediaries like venture capitalists, banks, and stock exchanges. But due to a lack of regulations and securities law, ICO was marred with fraud and scams. Scammers used ICO’s to execute the “pump and dump” scheme where they hype the value of a token to gain interest from investors and increase its value and quickly dump it for profit. By 2019, interest in ICO and its revenue tremendously dropped by 97% as compared to its revenue from 2018. Today, ICO was considered a thing of the past and countries worldwide have implemented regulations that eventually contributed to its death.
- Shady Exchanges
Crypto exchanges are platforms that facilitate the trading of cryptocurrencies like BTC (bitcoin), ETH (ethereum), LTC (litecoin), and other digital assets. Some of these exchanges even offer trade services of major fiat currencies like USD (US dollar) and EUR (Euro). Currently, there are 504 active crypto exchanges that operate worldwide. Leading exchanges include Binance, Coinbase, Huobi Global, and Kraken. These exchanges also serve as custodians for their customers which means in some ways they hold control of all the money stored in their users’ digital wallets. Bad actors have exploited the popularity of exchanges resulting in billions of dollars in losses.
- Ponzi Schemes
It is an investment fraud that pays existing investors with money collected from new investors and similar to a pyramid scheme. The only distinction between these two was with the Ponzi scheme, the scammer promises high returns or profit at a later date while with the Pyramid scheme, members are required to recruit other victims into the scam. The Ponzi scheme was named after Charles Ponzi, an Italian swindler and con artist in the U.S. and Canada. According to reports, Ponzi amassed $20 million from his victims. After a century, investors are still being mesmerized by a promise of high returns with no risk and have fallen victim to the Ponzi schemes that abound in the crypto market.
- Theft / Hacking
Despite the advancement of blockchain, the technology that runs the entire crypto market, incidents of theft or hacking continue to grow. Unfortunately, crypto exchanges have become their favorite milking cows.
As the crypto industry advances, bad actors have launched sophisticated attacks that have resulted in massive losses of investors and exchange customers. In some cases, the effect could be so devastating and resulted in shutdowns of crypto businesses worldwide. In a previous article, we have enumerated several techniques that these unscrupulous individuals have used to launch an attack on their victims.
Biggest Crypto Scam Slashers
Now we will start our countdown of the biggest slashers amongst all crypto scams in the entire history of the crypto industry. Let’s begin our countdown in random order with the mother of all crypto scams in the entire history of crypto.
It was founded by “Cryptoqueen” Ruja Ignatova together with Sebastian Greenwood. It was initially promoted as a cryptocurrency based in Bulgaria. According to US prosecutors, the scheme allegedly raked approximately $4B worldwide but in unofficial reports, the figure is more than $19B. In a report by The Times, it was described as “one of biggest scams in history. OneCoin was classified as a Ponzi scheme and was engaged in selling educational materials for trading with prices ranging from 100 euros to 118,000 euros to as high as 225,500 euros. With the purchased package comes tokens that users can use to mine OneCoins. Crypto exchange and mining all rolled into one. On March 1, 2016, it temporarily closed down operations for maintenance without prior notice citing the huge numbers of miners and better integration with the blockchain as reasons. But the promise changes did not happen after it resumed operations after two weeks. In 2017, the exchange again closed down operations without any notice but this time it’s permanent. Ruja Ignatova went missing while Greenwood was arrested in 2018. In 2019, Konstantin Ignatov, the Cryptoqueen’s brother was arrested. He pleaded guilty on charges of money laundering and fraud. He was later sentenced to a maximum sentence of 90 years imprisonment. A huge number of individuals were charged by governments worldwide in relation to the scam. In China alone, 98 people were prosecuted and the Chinese authorities have recovered 1.7 billion yuan (US$267.5 million) during the process. Ignatova remains at large up to these days.
It is an open-source cryptocurrency lending platform founded in 2015 by Satish Kumbhani and Divyesh Darji. It allows users to invest their possession in a non-government-related currency and also offers custodial. With Bitconnect, investors are promised a high yield and classified as another Ponzi scheme. According to the FBI, investors lost between $2.5B to $3.5B when the company shut down its operations and eventually became an exit scam. In 2016, BCC, the native token of the platform experienced a meteoric rise and recorded an all-time high at $463 in 2017. In January 2018, the company halted its operations after regulators from Texas and North Carolina issued a cease and desist order against it. The price of BCC crashed immediately and lost its value by 92% after. All loans offered on the platform were released in BCC instead of being reverted to Bitcoin as originally paid by investors. Sadly, the price of BCC already plummeted to only $0.67 from its price of $363.62 at that time. On August 18, 2018, Darji was arrested in Delhi, India. In June 2019, Kumbhani was arrested by the Surat division of the Criminal Investigation Department (CID) crime. In July of the same year, Dhaval Mavani, Bitconnect’s web developer was apprehended by Indian authorities after being deported from Abu Dhabi.
It is a cryptocurrency wallet that offers quick and guaranteed returns to its investors. It was founded in 2018 by Chen Bo with main investors from China and South Korea but its operation expanded to other Southeast Asian countries like Cambodia, Malaysia, Vanuatu, and Vietnam. In November 2020, Chinese authorities confiscated $4.2B worth of digital assets after a launched crackdown against the PlusToken Ponzi scheme. But according to reports, the scammers defrauded their victims a total of $5.7B worth of cryptocurrencies. Bo and 14 of his co-conspirators were convicted in connection with the case and received a sentence of two to eleven years in jail and were also fined from $100,000 to $1 million.
- Bitcoin Savings & Trust (BST)
It was launched in November 2011 as First Pirate Savings & Trust by Trendon Shaver a.k.a Pirate. He claimed to have been selling BTC (bitcoin) to local buyers but to expand his market and cater to the volume of its buyers, he founded BST. The Ponzi scheme operates by selling invested bitcoins at a high rate then buy back at a market price to gain a high yield weekly interest of 7%. A huge number of investors have fallen victim to this scheme as according to a claim by Pirate, over 500,000 bitcoins had been deposited. With more deposits coming in, transactions became expensive and difficult hence Pirate reduced the interest initially offered to its investors. This resulted in mass withdrawals and unrest amongst its investors. Pirate closed BST after entering an agreement with his clients to refund all their BTC (bitcoin) investments. In August 2012, BST announced a default and was later revealed that Pirate used the money for personal gain by supporting his lavish life. The misappropriated amount of $147,000 was spent on rent, car-related expenses, utilities, retail purchases, casinos, and meals while $434,000 was invested to now-defunct crypto exchange Mt. Gox. In November 2014, he was arrested and charged with one count of securities fraud and one count of wire fraud. Two months later, he was ordered to pay $40.7 million in a related U.S. Securities and Exchange Commission civil lawsuit federal judge in Texas. According to prosecutors, he defrauded 764,000 bitcoins from his victims or $4.5 million with BTC (bitcoin) worth at that time. Out of the 100 investors of BST, 48 suffered losses.
- Pincoin and iFan
These were two ICOs’ backed by Modern Tech, a Vietnam company based out in Ho Chi Minh City. It is now believed to be the biggest ICO scam in crypto history with 32,000 people and amassed over $660 million dollars. The scammers lured their unwitting victims by conducting events and conferences to convince them of the viability of the projects. Just like a fox in sheep’s clothing, the project turned into an exit scam when its leaders ran off with their investors’ money. The leaders who pulled off the scheme were Vu Huu Loi,Ho Xuan Van, Ho Phu Ty, Luu Trong Tuan, Luong Huynh Quoc Huy, Nguyen Trung Hieu, Nguyen Duc Trong, and Bui Thi Ngoc My. In April 2018, due to alleged fraud, protesters flooded the headquarters of Modern Tech Co., Ltd. According to reports, Vietnam Prime Minister Nguyen Xuan Phuc signed a directive for a new regulation strengthening the management of activities related to cryptocurrencies. The regulation states that the State Bank of Vietnam will direct all banks and credit organizations not to conduct any cryptocurrency-related transactions. In line with this, the Ministry of Justice was also directed to formulate a legal framework for the management and handling of cryptocurrencies.
- Mirror Trading International (MTI)
A South African company trading that offers automated trading services or bot using BTC (bitcoin) as its base currency. It was founded by Johann Steynburg in April 2019. The trading was so popular with over 160,000 active members. The company claimed that the bot was powered by AI members who need not be knowledgeable in trading and has promised lavish returns to investors. By using the platform members bitcoins can yield 0.5% to 1.5% per day. In September 2020, MyBroadband reported on a group calling itself Anonymous ZA leaked an anonymized copy of MTI’s entire database which includes sensitive information like account names, e-mail addresses, and bitcoin balances. According to the leaked data, MIT received a total of 22,984 bitcoin in deposits as of September 14, 2020. What’s more surprising, it was also revealed that Clynton Marks was the mastermind and not Steynberg. MTI is now dubbed as the “biggest crypto scam in 2020”. According to Chainalysis, MTI defrauded its victims with a total of $589 million worth of cryptocurrencies. Steynburg went missing in mid of December 2020 and his whereabouts are still unknown. Husband and wife Clyton and Cheri Marks both denied the allegations of their involvement in the said scam including the kidnapping of Steynburg. Advocate Vaughn Victor stated that the total number of victims ranges from 48,000 and 60,000.
As we examine these scams, the majority of which are “Ponzi schemes”. But why people are lured with this type of scheme? High yield and fast returns could be two of the possible reasons why investors are enticed to risk their hard-earned money. But is it even worth it? We all know the answer but sometimes we tend to turn a blind eye to the screaming truth and reality of investing. A famous line goes “If it’s too good to be true, it must be a scam” and this is particularly true when it comes to investments. Crypto scams have largely contributed to market crash which decreases the trust and confidence of investors in the industry. Time and again, governments have warned investors to be wary of these types of investments. Hence, the implementation of regulations but unfortunately the growth of the crypto market has been stagnated due to stringent crypto regulation laws.