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Crypto anxiety: Should you worry about crypto crime?

Fri, 20 May 2022 20:10:29 GMT

Last week’s crypto crash – with more than $300 billion wiped out – heightens public wariness of digital currencies. It’s a wariness that’s justified, but it goes beyond whether or not Bitcoin holds its value. We live in a moment of peak hype around the need for crypto bravery and protections.

“ Make $$$ working from home ” scams have evolved. Crypto-innovators advertise historic opportunities on prime-time television — allowing clever criminals seeking new ways to lure unsuspecting people (or those willing to look the other way) to clean cash with crypto.

“Bitcoin ATMs” that convert cash into cryptocurrency now exist practically everywhere. In late 2021 there were more than 26,000 across the U.S., from Walmarts to financial districts. In the new scams, cash-intensive businesses bypass cash deposit limits by hiring individuals to deposit cash in cryptocurrency ATMs: Mules take $9,000 cash, deposit $7,000 and keep $2,000 for the trouble. Do this weekly and clear $100,000 in a year. Too good to be true? Probably. Prosecutions are still rare , and most ATM operators implement money laundering countermeasures. But do stories like these attract us? Absolutely.

Like big wave surfing videos that deliver an adrenaline rush without the risks of getting crushed, crypto crime stories are hard to turn away from. Last year, crypto exchange Africryptco-founders disappeared with about $3.6 billion in customers’ money. Headlines read like spoofs, but aren’t: “PancakeBunny suffers $45M attack”; “BurgerSwap loses $7.2 Million”; “ Furucombo suffers $14 million ‘evil contract’ hack”; “WhaleFarm Rugpulls with $2.3M.”

To address thieves and anarchists, and to create more efficiency and fairness, some in government argue for regulatory revolution. White House expert Carole House led the drafting of a recent executive order calling for expanding protection s to crypto assets. Treasury Secretary Janet Yellen followed in April, calling for “foundational” policy work. New regulations, like storm clouds, gather on the horizon.

As an economist tracking financial crimes innovations, I have followed blockchains for years. I have created RegTech companies, and I have enforced regulations as a government official. And yet, like most people , I am @cryptohesitant. We fear missing out on the next Google or Amazon yet doubt that zealous friends and influencers actually understand the words they say. As Matthew McConaughey’s character says in “The Wolf of Wall Street ,” “…Nobody – and I don’t care if you’re Warren Buffet or Jimmy Buffet – nobody knows if a stock’s going up, down or f-ing sideways. …But we have to pretend we know.”

This much I know. Cryptography enabled crypto assets by apparently solving the “ double-spending ” problem. If I spend a dollar bill at one store, I can’t also spend it at another. Economists say that a dollar bill is “rival” and “scarce”; it can’t be held by multiple people simultaneously (“rival”), and it can’t be easily created (“scarce”). With easy copy-paste computer functions, a virtual currency couldn’t exist. Once online “stuff” becomes rival and scarce, it becomes as-if physical. Like explorers discovering new places, cryptography has enabled real possibilities and risks.

Matt Damon’s “ fortune favors the brave ” captures the moment perfectly. As skyrocketing Bitcoin created stories of new riches, entrepreneurs exploded the variety of crypto assets, crypto markets and paths to wealth, both legitimate and exploitative. But the basics remain the key to choosing a path.

Rolling waves of new crypto assets perform only one of two functions, neither of them new: 1) payment or 2) investment. If the asset price remains stable, called a “stablecoin” such as a currency tied to the U.S. dollar (Tether, CBDC, etc.), then the coin is merely a substitute for the dollar. Do with it as you would your bank account. If the price of the asset moves with volatility like stocks and bonds or artworks subject to market pressures and animal spirits , like “Bitcoin” and NFTs such as CryptoPunk , then treat the asset as an investment.

Cryptography enabled a new form of identity: pseudo-anonymity, and this is where risk arises. All assets lie on a spectrum from anonymous – a $5 bill on the sidewalk has no obvious owner – to a fully diligenced named bank account. In a pseudonymous exchange, mathematical processes replace the need to know another’s physical identity.

Solving the cut-paste problem created new assets but not new crimes. Money laundering is still money laundering, and theft is still theft. A “ rugpull ” is the crypto-verse word for pump-and-dump: create an asset, hype it up, sell it on an exchange, then disappear with the funds. An “ evil contract ,” a name worthy of inclusion in future Marvel movies, describes a crime as old as time: tricking someone to give something to the wrong person.

Crimes have always been about fakes; we’ve just expanded deception from physical to online. None of us wants to be deceived. Crime has not changed, only identity.

As crypto-markets inevitably expand, many criminals will remain in cash; aspiring kingpins will find exchange-as-a-service in corruptible jurisdictions; but great criminals will happily continue current practices: use fake data and money mules to bank safely within regulated financial institutions. Put aside the hype of coins, blocks and tokens; making markets safe requires confidence that markets can identify people and enforce rules.

So, the question remains: Be brave or be safe? Super Bowl 2022 crypto commercials, (“ fortune favors the brave ”; LeBron James telling his younger self to take big risks; laughing at “don’t be Larry” ) gave an intoxicating rush of courage. I’d prefer a less stressful decision.

The work of safe and trusted markets – where bravery is not required – requires establishing known or knowable identities and enforcing rules . Biographic data, biometrics and behavioral patterns all contribute to identity verification, behavioral being the most difficult to steal or fake. With cryptography and privacy-preserving uses of machine learning, public-private partnerships and financial institution crime-fighting collaborations can happen immediately. This is where Secretary Yellen’s “foundational” documents must focus. Source: The Hill .

Thousands stolen in London ‘crypto muggings’ crime wave

Sun, 10 Apr 2022 19:46:56 GMT

Police have warned digital asset investors of a wave of “crypto muggings” in London, following a series of crime reports sent to The Guardian.

While cybercrime usually takes place online, London police have revealed that criminals are stealing mobile phones on the street specifically to steal cryptoassets such as Bitcoin.

One of the cases includes a phone stolen near Liverpool Street station. The phone was returned, but the victim said £5,000 of Ethereum had been taken from their Coinbase account.

Many of the police reports saw thousands in digital currency stolen. Among the largest individual losses was a man who had £28,700 stolen after a mugger forced him to unlock his phone using the fingerprint lock.

“It’s a sort of crypto mugging,” David Gerard, author of Attack on the 50 Foot Blockchain, told The Guardian.

“If I get robbed and they force me to make a bank transfer, the bank can trace where the money has gone and there are all sorts of comebacks. You can reverse the transaction.

“With crypto, if I transfer it to my crypto wallet, I’ve got your coins and you can’t get them back.”

Gurvais Grigg, public sector CTO of Chainalysis and former FBI employee, said that despite the differences between crypto transfers and bank transfers, there is in theory enough of a digital paper trail to solve these kinds of crimes.

Grigg said that in order to transfer stolen assets, criminals “have to provide a wallet address and, most likely, they’ll use that wallet address again in the future. You also need to bring it to an exchange if you want to turn it into fiat currency”.

The nature of regulating crypto trading in the UK remains unclear. While some measures have been made, regulators are still expressing concerns.

Last month, the Financial Conduct Authority chief Nikhil Rathi gave a speech outlining his own concerns over cryptocurrency regulation , saying “if you invest in crypto, you need to be prepared to lose all your money”.

However, there is also a considerable amount of crypto confidence from UK politicians, with Chancellor Rishi Sunak and former Health Secretary and Conservative MP Matt Hancock both expressing optimism for UK crypto’s future. Source: UKTN

Crypto theft is on the rise. Here’s how the crimes are committed, and how you can protect yourself

Thu, 03 Feb 2022 07:51:09 GMT

News emerged overnight of the potential theft of more than US$326 million of Ethereum tokens from a blockchain bridge (which connects two blockchains so cryptocurrency can be exchanged between them).

It’s no surprise. Crypto crime has been on the rise – especially since the pandemic began. How are these crimes committed? And what can you do to stay ahead of scammers?

Direct theft vs scams

There are two main ways criminals obtain cryptocurrency: stealing it directly, or using a scheme to trick people into handing it over.

In 2021, crypto criminals directly stole a record US$3.2 billion (A$4.48 billion) worth of cryptocurrency, according to Chainalysis . That’s a fivefold increase from 2020. But schemes continue to overshadow outright theft, enabling scammers to lure US$7.8 billion worth of cryptocurrency from unsuspecting victims.

Crypto crime is a fast-growing enterprise. The rise of the crypto economy and decentralised finance (or DeFi), coupled with record cryptocurrency prices in 2021, has provided criminals with lucrative opportunities.

Australian data confirm the global trends. The Australian Consumer and Competition Commission reported more than A$26 million was lost to scams involving cryptocurrency in 2020 from 1,985 reports. In December, federal police told the ABC crypto scam losses for 2021 exceeded A$100 million. That’s despite many incidents likely left unreported, often due to embarrassment by victims.

Theft from exchanges

Most consumers obtain cryptocurrency from an exchange . This involves opening an account and depositing currency, such as Australian dollars, before converting it to a chosen cryptocurrency.

Typically the cryptocurrency is held in a “custodial wallet”. That means it’s assigned to the consumer’s account, but the private keys that control the cryptocurrency are held by the exchange. In other words, the exchange stores the cryptocurrency on the consumer’s behalf.

But just as a bank doesn’t hold all of its deposits in cash, an exchange will only hold enough cryptocurrency in “hot” wallets (connected to the internet) to facilitate customer transactions. For security, the remainder is held in “cold” wallets (not connected to the internet).

Unlike a bank, however, the government does not have a financial claims scheme to guarantee cryptocurrency deposits if the exchange goes bust.

The recent BitMart hack is a cautionary tale. On December 4, the exchange announced it had “identified a large-scale security breach” resulting in the theft of about US$150 million (A$210.6 million) in crypto assets from hot wallets.

BitMart temporarily suspended withdrawals and later promised it would use its “own funding to cover the incident and compensate affected users”. It’s unclear when this will happen, with the CNBC reporting in January that customers were still unable to access their cryptocurrency. BitMart wasn’t the first exchange to be hacked, and it won’t be the last.

Similarly, consumers may be left with losses if an exchange fails for commercial reasons, rather than theft. Australians were left stranded in December when liquidators were appointed over Melbourne-based exchange myCryptoWallet .

One way consumers can protect themselves from exchange theft, or insolvency, is to transfer their cryptocurrency from the exchange to a software wallet (a secure application installed on a computer or smartphone) or a hardware wallet (a hardware device that can be disconnected from the computer and internet).

The cryptocurrency will then be under your direct control. But be warned, if you lose your private keys, you lose your cryptocurrency .

Types of scams

Drawing on the ACCC’s latest edition of the Little Black Book of Scams , the following types of scam are commonly observed in the cryptocurrency space, where the scammer is not personally known to the target:

Email phishing
The scammer sends unsolicited emails asking for personal login details, which can be used to steal cryptocurrency. Alternatively, they may offer “prizes” or “rewards” in exchange for a deposit.
Investment scams
The scammer creates a website that resembles a legitimate investment trading platform. It may be a fraudulent copy of a real business, or a completely bogus one. They may even post fake advertisements on social media platforms, with fake celebrity endorsements. In the latest news , billionaire mining magnate Andrew “Twiggy” Forrest has launched criminal proceedings against Meta (previously Facebook) for allowing scam ads using his image.
More sophisticated operations will have multiple scammers emailing and calling victims to give the impression of being a legitimate organisation. After cryptocurrency deposits are made, victims may be able to “trade” on the fake platform but can’t withdraw their supposed earnings. Delay tactics include asking for further deposits to be made for fees or taxes.
Romance scams
The scammer creates a fake profile and matches with victims on a dating app or website. They may then ask for funds to help them with a personal crisis, such as needing a surgery. Or they may say they’re trading cryptocurrency and encourage the target to get involved, leading the victim into an investment scam, as described above.

If a victim doesn’t already have a cryptocurrency exchange account, scammers may also coach them on how to open one. Some will mislead victims into installing remote access software on their computer, granting the scammer direct access to their internet banking or exchange account.

Practical challenges

There are practical legal challenges in the crypto crime environment. While reporting scams can be helpful in providing data and intelligence for regulators and law enforcement, it’s unlikely to result in the recovery of funds.

Taking civil legal action may be possible, too, but identifying perpetrators is difficult. Since cryptocurrency is by its very nature global and decentralised, payments are often made to parties outside of Australia.

So prevention is easier than a cure. The main way to avoid being scammed is to ensure you know exactly who you’re dealing with, transact through a reputable exchange and ensure all the channels you go through are verified. If an offer sounds too good to be true, it almost certainly is.

Regulation on the horizon

In Australia, cryptocurrency exchanges must be registered with AUSTRAC , in compliance with anti-money laundering and counter-terror financing obligations. But there are currently no other licensing requirements (such as capital requirements or cybersecurity, for example).

Last year, the Senate Select Committee into Australia as a Technology and Financial Centre recommended a more comprehensive licensing framework. The Australian government agreed with the recommendation , and the federal treasury department is due to begin consulting on what this will look like.

Mandatory measures to curb cryptocurrency crime at the exchange level will likely be high on the agenda. Source: theconversation.com