Preventing Crypto Fraud At An Early Stage Before It’s Too Late

Blockchain, News, Opinion | January 17, 2020 By:

Cryptocurrency fraud is a persistent problem. High-profile fraudulent ICOs and major scam offerings grab headlines, undermine public trust, and slow the pace of mainstream crypto adoption. 

OneCoin was the epitome of crypto fraud: lavish marketing spin masking the absence of any tangible blockchain technology, as investors were defrauded up to $15 billion in total.

Methodologies are constantly evolving as scammers try to avoid detection.New mediums are being found for their illicit activities, with many turning to Telegram in the bid to scam unsuspecting crypto holders. For example, North Korean state actors continue to threaten the crypto community worldwide, with recent reports suggesting they are turning to fake crypto trading groups on Telegram to lure in potential victims. 

The art of persuasion is only the first step in crypto fraud. Coins linked to a scam need to be ‘cleaned’ to avoid being traced back to the perpetrators. The transparent public ledgers which constitute blockchain makes laundering this money very difficult – every transaction on the chain can be read by anyone and remains on the ledger forever. 

Scammers are generally forced to ‘mix’ their coins. This approach involves either manually mixing transactions with other people’s to try and hide the funds’ origins, or using a centralised mixer service – such as Bitcoin Laundry – which utilises an algorithm to obscure transactions.

Government’s role

Cryptocurrency regulation is vital in order to  set enforcement standards against crypto fraud. On 10 January 2020, the Fifth European Anti-Money Laundering Directive (AMLD5) came into effect in the European Union, promising a strict new regulatory regime in the EU crypto sector. Under AMLD5, crypto exchanges must be registered with the local regulator and demonstrate compliance with know-your-customer (KYC) and anti-money laundering (AML) procedures. Whilst AMLD5 should be very useful for law enforcement and financial intelligence, the differing ways it is being implemented in law in individual European nations could prove a hindrance. This should be an asset for law enforcement and financial intelligence. Its value could be hindered, however, by the differing ways AMLD5 is being implemented in law in individual European nations.

The Financial Action Task Force (FATF) is another source of ambitious recommendations on combating crypto-fraud. Whilst AMLD5 only covers cash-crypto transactions, FATF includes crypto-crypto; the latter is notably encouraging the application of existing requirements for payment data-sharing to crypto-crypto transactions too. 

Several European countries are already crafting crypto regulations informed by both AMLD5 and FATF, and the global membership of the FATF should help to drive regulatory change outside the EU. Fundamentally, these changes will be crucial in improving trust in crypto within government circles, and encourage businesses that cryptocurrency is a reliable world for investment.

Tech-supported awareness

However, increased regulation is not the only measure that can be taken to counter crypto fraud – many instances can be stopped through end-user awareness. Businesses should train their staff to be critical and keep an eye out for key warning signs. These include; ensuring that transactions are made on reputable exchanges with regulatory accreditation, thoroughly vetting the credentials of any cryptocurrency’s development team and, in the case of an ICO, assessing the details of the whitepaper. When considering the impact of falling victim to crypto fraud, in-depth education on the subject is an essential, cost-effective part of any risk strategy for businesses.

Moreover, alongside awareness, technology solutions can provide the monitoring and analysis to minimise the risk of crypto fraud and respond quickly if it occurs. New capabilities in blockchain monitoring and analytics means a forensic approach can be taken for all transactions. For example, these types of monitoring tools would allow crypto exchanges to be notified about transactions in real time, or rapidly trace the origins of fraudulent or stolen coins. This approach is potent against coin-mixing as it can easily identify the classic patterns that indicate the mixing of transactions to mask illicit activity.

Stopped before it has even started

Overall, there is no one silver bullet to tackle the evolving threat landscape presented by crypto fraud. As with all technological advancements, scammers continue to evolve their tactics to trick unsuspecting targets into parting with their crypto. However, the tools to combat this threat are also evolving and they must continue to do so if we are to prevent bad actors from getting the upper hand. Through a sustained mix of regulation, awareness and technology solutions, we can prevent crypto fraud even before it begins.