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Crypto scams on the rise: how to fight back

By Gaia Lamperti

December 23, 2021

  • Bitcoin
  • Blockchain
  • Chainalysis
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Crypto

Scams were once again the largest form of cryptocurrency-based crime by transaction volume, with over $7.7 billion worth of crypto taken from victims worldwide, research by Chainalysis has found.

The blockchain data platform which aims to build trust in the crypto world has released a preview of its forthcoming 2022 Crypto Crime Report with new, original research that analyses scams in cryptocurrency, one of the biggest threats facing the sector when it comes to building trust.

This year, scams grew by about 81% compared to 2020 (a year in which scamming activity dropped significantly compared to 2019) largely due to the absence of any large-scale Ponzi schemes and the emergence of rug pulls, a relatively new scam type particularly common in the DeFi ecosystem.

How to fight back

As the largest form of cryptocurrency-based crime and one uniquely targeted toward new users, scamming poses one of the biggest threats to crypto continued adoption. But some businesses are taking innovative steps to leverage blockchain data to protect their users before potential victims make deposits.

Courtesy of Chainalysis

Mainstream cryptocurrency exchanges are in the perfect position to fight back against scams to grow more trust in cryptocurrency by warning users or even preventing them from executing risky transactions. Exchanges using Chainalysis KYT for transaction monitoring are able to see this activity in real-time, and take action to prevent scammers from cashing out.

Another successful example is Luno, a leading cryptocurrency platform operating in over 40 countries, that in 2020, took action in partnership with Chainalysis to protect its userbase, largely based in South Africa. The first step was a warning and education campaign using in-app messages, help centre articles, emails, webinars, social media posts, YouTube videos, and even one-on-one conversations. Luno showed users how to spot the red flags that indicate an investment opportunity is likely a scam and how to avoid pitches that appear too good to be true.

The company then began preventing users from sending funds to addresses it knew belonged to scammers using data collected by Chainalysis. With that data, Luno was able to halt users’ transfers to scams before they were processed.

Scams represent a huge barrier to successful cryptocurrency adoption, and players in the FinTech industry as a whole should know that fighting them cannot be left only to law enforcement and regulators. Crypto businesses, financial institutions, and data platforms have an important role to play as well.

After this report, Chainalysis will release a series of crime-related reports in January which will include analysis of crime trends across various typologies including malware, ransomware, money laundering, NFT Fraud, and nation-state activity.

Key findings of the report

  • Scams were once again the largest form of cryptocurrency-based crime by transaction volume, with over $7.7 billion worth of crypto was taken from victims worldwide (representing a rise of 81% compared to 2020, a year in which scamming activity dropped significantly compared to 2019)
  • The emergence of rug pulls, a relatively new scam type particularly common in the DeFi ecosystem, contributed to 2021’s increase in scam revenue. Rug pulls is a scam in which the developers of a crypto project – typically a new token – abandon it unexpectedly, taking users’ funds with them
  • Centralised exchanges are the most popular cryptocurrency services (especially for new users) so it’s no surprise that most scam victims send funds to those scams from their exchange accounts

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