By: Jeremy Montoya
Cryptocurrency Risks
In the wake of the sentencing of Sam Bankman-Fried, ex-CEO of the crypto-exchange FTX, the financial community across the globe is reminded again of the reality of the risks associated with cryptocurrency. The crypto craze is back and is gearing up to be stronger than it was over two years ago, before its crash in 2022, with popular cryptocurrencies like Bitcoin and Ethereum reaching for new all-time highs. However, along with the crypto craze comes the threat of scams and fraud.
Common Crypto Scams and Their Impact
Financial analyst Casey Murphy, identified one of the common threads amongst crypto scams, stating that “Crypto scams often aim to gain private information, such as security codes, or to trick a person into sending cryptocurrency to a digital wallet that may be compromised.” Casey goes on to identify a list of common schemes used by crypto cyber criminals, including: Social Engineering Fraud, Frauds Promising Romance, Imposter and Giveaway Scams, Phishing, Blackmail and Extortion Schemes, Fraud Involving Investment or Business Opportunities, New Crypto-Based Opportunities, ICOs (Initial Coin Offerings) and NFTs (Non-Fungible Tokens), Rug Pulls, and Cloud Mining. These scams along with fraudulent crypto exchanges like FTX, BlockFi, Voyager Digital, and other cryptocurrency platforms, have led to multi-billion dollar losses for commercial and private investors.
Global Financial Losses
Cryptocurrency analyst Shaurya Malwa reported that crypto users lost over $2Billion to hacks, scams and exploits in 2023 and that access control exploits flash-loan attacks and exit scams accounted for the majority of the losses. The issue of crypto scams has increased to such heights that business and finance journalist Khristopher J. Brooks noted that “Cryptocurrency and other investment scams are now the riskiest type of cons in the U.S., with crypto fraudsters frequently cheating their victims out of thousands of dollars.” Brooks points out that in a report created by the Better Business Bureau, that states that “[a]bout 80% of Americans targeted in crypto and investment scams last year lost money.” One such story of a victim who lost over $700,000 was reported by Kristine Lazar who recounted how a “local senior lost her life savings… after clearing out her retirement and savings accounts for what she thought was a legitimate crypto investment.” These stories of devastating financial loss are becoming ever more common, and these losses have led world leaders to recognize the need for a response to safeguard their citizens against the impending threat that crypto scams entail.
Legislative Responses in the European Union
The European Union Agency for Law Enforcement Cooperation recognized that “that tackling the criminal use of cryptocurrencies is a race against time,” and that “countries that do not take the risks seriously are in danger of becoming a haven for crypto-enabled scams, money laundering and terrorist financing.” Legislators in the European Union have passed the “The Markets in Crypto Assets regulation” which will require “Crypto companies… to register with a financial regulator in at least one EU member state. This would put them under the supervision of two of Europe’s top financial watchdogs, the European Banking Authority and the European Securities and Markets Authority.” These regulations are set to take effect between July 2024, and January 2025.
United Kingdom’s Regulatory Measures
In the United Kingdom (UK), Journalist Ryan Browne, reported action being taken by the Financial Conduct Authority (FCA), stating that “The FCA has become especially aggressive on crypto advertising. In October 2023, the FCA started to require that firms wishing to promote consumer crypto investing in the U.K. be authorized or registered with the regulator, or have their marketing approved by an authorized firm.” The Treasury Committee for Parliament in the UK has also concluded that “cryptocurrencies pose significant risks to consumers, given their price volatility and the risk of losses. Given retail trading in unbacked crypto more closely resembles gambling than a financial service, the MPs call on the Government to regulate it as such.” Such regulations could help curtail the way crypto scammers attempt to deceive their targets, and would provide extra security around the use of crypto currencies, and would help provide disclaimers regarding the dangers related to crypto assets.
Challenges and Regulatory Approaches in the Developing World
The developing world has also been affected by the increased popularity of crypto, and they are no less vulnerable to the threats that come along with it. In 2022 The UN trade and development body, UNCTAD “called for action to curb cryptocurrencies in developing nations” they suggested that three policy changes that need to take place to ensure the stability specifically in developing countries, including: “ensuring financial regulation; restricting advertisements related to cryptocurrencies; and providing a safe, reliable and affordable public payment system adapted to the digital era, such as a central bank digital currency or fast retail payment system.” These changes will ensure that crypto currencies are introduced into the developing world in a safe, and secure manner.
United States’ Strategy on Cryptocurrency Regulation
The United States has been working on ways to become appropriately involved in regulating the use of cryptocurrencies. Economist Adam Hayes points out that the SEC has taken up the mantle as one of the governmental agency best positioned to provide regulations in the crypto market. He states that “SEC Chair Gary Gensler has defended the regulator’s actions, saying in 2022 that the top five crypto exchanges ‘likely are trading securities’ and thus need to register with the SEC.” Hayes notes that “Cryptocurrency markets… have been associated with many frauds and scams, [and] SEC enforcement could deter fraudulent activities… by applying securities laws, the SEC ensures crypto enterprises provide more accurate and thorough information to investors.” One of the problems that is Hayes points out as being prevalent in the crypto world is that “[t]he anonymity… in cryptocurrency markets make them susceptible to manipulative practices, [which] SEC oversight could help curb… [by] [m]onitoring the crypto markets… [which] could help maintain market integrity and investor trust.”
End of crypto scams in sight?
Although the SEC has not yet taken control of the crypto market within the United States, it has “accelerated its push to subject these markets to the full spectrum of its financial regulations,” which could mean that more robust regulations are on the horizon for crypto investors. With the SEC, UN, UK, and EU and other countries all pushing for more regulation in the crypto realm, the days of crypto scams and frauds could be nearing its end.
