The dangerous universe of crypto scams

Lili discovered she had been conned as she was enjoying her birthday. The 52-year-old Londoner and her daughter, a hedge fund employee, were having high tea when the conversation went to a frustrating financial issue. In March 2021, Lili—not her real name—began trading cryptocurrencies with the help of online acquaintances she had made.

She was once in the black by $1.4 million. But later that year, a terrible trade destroyed the majority of her winnings. Still, she had close to the total money she had invested—$300,000—in one of her cryptocurrency trading accounts. The setbacks had Lili ready to give up. Lili was informed that she had to make a tax payment in order to liquidate her remaining tokens and cash in. However, the money bounced back when she attempted to wire it to the trading site.

After hearing enough, Lili’s daughter became concerned. And Lili realized her newfound acquaintances and foray into cryptocurrency had all been part of a sophisticated con. This epiphany marked the beginning of a grueling battle for justice. As more people gained interested in cryptocurrency investment during the Covid-19 outbreak, thousands of victims were swept up in a wave of deception, including Lili.

According to the blockchain analytics organization Chainalysis, scammers stole $6.2 billion from victims globally in 2021, a rise of around 80% annually. In comparison to 2020, losses from cryptocurrency-related frauds reported to Action Fraud, the UK’s national reporting center for fraud, more than doubled to £190 million. Additionally, losses by the end of August are 25% larger than they were during the same time previous year.

Even while fraud instances are increasing, investigators are underfunded to look into them, especially given that the average amount of each scheme is tiny. Additionally, UK officials warn that another favorable atmosphere for con artists may be on the horizon as the cost of living problem is expected to get worse. Nausicaa Delfas, interim chief executive of the Financial Ombudsman Service, says, “We are concerned that, in the current economic circumstances, consumers could be enticed to invest in false ventures.”

Lili’s fight for justice and compensation highlights the stark difference in consumer safeguards between those who use regulated financial institutions and those who utilize digital currency. Scams involving cryptocurrencies take place outside of the framework of regulated financial institutions and legal safeguards that protects consumers. Additionally, law enforcement officials and other investigators have enormous difficulties in tracking down the global networks of anonymous criminals responsible for this fraud.

According to Rich Drury, ombudsman manager at the FOS, which deals with complaints against financial companies, “Inevitably, because to the nature of cryptocurrency — that it’s irreversible, anonymous, and global — it’s obviously tempting to fraudsters.”

The two “friends” who introduced Lili to cryptocurrency did not exist; they had only gained her trust via months of online communication while she was isolated during lockdowns. It’s probable that one scammer used both aliases.

Sharing photos of their fluffy white dog sporting a Burberry scarf and posing in front of a Bugatti Veyron vehicle, they displayed their luxury. They continuously pushed Lili to invest more money in her ostensibly profitable crypto trades. She raised money for investments by selling one of her two London apartments. Later, Lili learned the trading website and apps she had downloaded from her ‘friends’ were spoofs.

Lili has lost a considerable portion of her life savings, but she and the other victims are unlikely to get much assistance. Their losses aren’t deemed large enough to warrant paying hordes of attorneys and consultants for criminal or civil cases, or to become a higher priority for overworked police crypto experts.

Cryptocriminals take advantage of the fact that minor scams with several victims in various nations can go unnoticed by national authorities. Asset recovery expert Carmel King, a director at Grant Thornton, claims that fraudsters can take advantage of economies of scale. Because it hasn’t escalated to the point where it would be worthwhile to commit a large amount of resources in an investigation, you are invisible to all authorities around the world.

That frequently means that those who experience a financially devastating loss have nowhere to turn. There aren’t many possibilities if your loss is little on an individual basis, King continues. “It makes no sense to spend £300,000 to make back $100,000.”

Lawyers overwhelmed by the demand

Despite the difficulties they encounter, law enforcement and attorneys have defeated prominent cryptocurrency offenders in a number of high-profile cases. Following a slew of decisions since 2019, British courts, in particular, have started to create a playbook for recovering stolen cryptocurrency.

Courts are now willing to issue broad orders to cryptocurrency exchanges to freeze and eventually restore illegally obtained money as well as reveal the names of alleged con artists. Barristers can get freezing orders the next morning in court if blockchain forensics can quickly identify an exchange as the source of stolen assets.

If you are a victim of crypto asset fraud, England and Wales is the best jurisdiction in the world, according to barrister Racheal Muldoon, who has handled these cases.

Phoebe, a New York-based healthcare professional who had been conned by con artists posing as Christians experiencing persecution in the Middle East, found solace in the development in the UK. She donated hundreds of thousands of dollars in cryptocurrency to help them. “I was among those who believed that I could never experience this. How naive can these folks be, I wondered. However, the con artists are quite skilled”, says Phoebe, who also requested that her real name not be used. They would gain your trust by making references to the Bible before robbing you.

In order to take advantage of their expertise in recovering stolen cryptocurrency, Phoebe contacted a British attorney as certain transactions occurred through UK banks. Phoebe eventually came to the conclusion that taking private legal action would be pointless, even with damages of $800,000.

Muldoon and other cryptocurrency-focused attorneys say they receive numerous requests for assistance, but most victims cannot afford the strategies that have resulted in a few successful legal lawsuits in England. Muldoon adds, “I can’t help everybody. Frequently, the amount of cryptocurrency is so minimal that I am unable to recommend that they pay the court costs.

Lawyers claim that claims with losses under £1 million are typically not financially feasible.

Lili reported her crime to the police as well, including the Metropolitan Police of London. However, the detective sent an email to indicate that the scammers’ Facebook profiles had been erased and the social media trail had dried up nearly eight months after the con had ended.

According to lawyers and industry insiders, the UK police have developed competence in crypto, which has resulted in a few multimillion dollar busts. However, they lack the capacity to handle the enormous volume of smaller instances.

“The market has absolutely no faith that the police can be of use. Sam Goodman, a barrister who filed some of the initial cases involving crypto recovery in UK courts, believes that the issue is one of resources rather than of abilities.

A transfer of power

There is some irony in the fact that Lili’s best hope of recovering some of her money has come through suing banks. The cryptocurrency industry was founded on the premise that traditional financial institutions take advantage of the small guy.

When customers are duped into sending money to a con artist, “authorised push payment” frauds, the UK financial services sector implemented efforts to combat them in 2019. Ten of the biggest banks and payment companies in the UK have agreed to pay compensation to fraud victims out of their own pockets, with some exceptions, such where a customer disregarded a warning. Companies may also be required to reimburse victims if they failed to recognize suspicious activity and take steps to alert the client.

The system has come under fire for being inconsistent and only honoring a small portion of claims, which has prompted requests for the standards to be tightened. However, it has given victims of minor scams, whose cases are unlikely to be looked into by authorities, a sizable safety net. According to the most recent data from the financial trade group UK Finance, banks paid out £238 million to victims in 2021, or over half of all losses due to APP fraud.

Because bank transfers were used to send some of the money Lili lost to the scammers, the two banks involved in her case have promised to reimburse her for around 30% of her losses overall. She is fighting for more and has complained to the Financial Ombudsman Service.

Because the first transaction leaving the victim’s bank account does not travel straight to the fraudsters, Drury at the Ombudsman Service notes that crypto cases frequently fall outside the reach of these protections. Instead, they direct their victims to purchase cryptocurrency on a reliable exchange, after which the tokens are sent to their wallet.

According to Drury, one of the problems with many complaints is that the code disallows payments that don’t first go to another person. “Getting your money back is never easy, but it’s especially difficult with cryptocurrency. You almost always rely on your payment source for compensation.”

The fact that banks act as a line of defense against losses to con artists highlights how strongly the current strategy for combating con artists depends on regulated financial institutions. “You control the middlemen as a measure of safety. A serious issue arises if they are not present. To disintermediate finance is the core of the entire [crypto] effort”, according to Marc Jones, a partner at the legal firm Stewarts who specializes in fraud cases.

Banks are most likely to be replaced by cryptocurrency exchanges, which offer simple services for purchasing, storing, and trading digital assets. The only thing that now bridges the divide, Jones continues, is the exchanges.

However, attorneys and fraud investigators claim that exchanges’ cooperation in combating fraud is spotty and that businesses occasionally fail to properly identify their customers. In the majority of anti-scam cases, identifying the fraudster through a court order to an exchange is a crucial step.

“It’s great at times. You obtain a real passport or a bank account that is linked”, claims Goodman. “Very frequently, the information is total trash. That’s all it is: a bogus energy bill or passport.”

Know-your-customer (KYC) checks are a legal necessity for the majority of financial organizations, and they are becoming more common for cryptocurrency companies in many jurisdictions, including those with headquarters in the UK. Due to their offshore locations, several of the biggest cryptocurrency exchanges are exempt from these regulations. For instance, OKX permits users to withdraw up to 10 bitcoin every day without completing KYC, which is over $200,000.

Cryptocurrency exchanges that are located in far-flung locales aren’t held to the same strict requirements as banks, however. Thus, even when you can obtain KYC information, the quality is frequently quite low, according to Goodman. In an email sent to five of the biggest exchanges in August, a US congressional committee expressed worry over “the apparent lack of action by cryptocurrency exchanges to protect customers performing transactions through their platforms.”

Exchanges assert that their KYC procedures are reliable, that they work closely with law enforcement, and that their capacity for fraud detection and tracing is superior to that of many conventional financial institutions.

Tigran Gambaryan, global head of intelligence and investigations at Binance and a former special agent at the US Internal Revenue Service, claims that “the quality of information and the support that we provide is so much greater than I was ever able to receive from a bank.”

He continues, “I think some of the criticism that bitcoin exchanges receive is out of date and not supported by facts.”

Detectives on the blockchain

Fraud investigators recognize the opportunity for simpler fraud detection provided by more transactions being recorded on open, unchangeable blockchain ledgers.

According to Danielle Haston, a former asset recovery lawyer who now works at Chainalsyis, a business that creates blockchain tracking tools, “With blockchain-based schemes, you have a unique toolbox accessible to you.”

While tracing cash through the financial system can take weeks or even months, it is far easier to do so with digital assets. The likelihood that a case will become an investigation priority or a strong basis for a combined legal action grows if blockchain detectives can connect one victim to a network of other criminals responsible for a sizable collective loss.

Phoebe claims that a network of wallets managing millions in illegal activities is connected to her stolen money. She thinks that’s why police are looking into her case. I’ve been working on this for nearly a year now, she says. Although unpleasant, I believe that I have made progress.

Linking cryptocurrency wallets using stolen money to actual names is a problem for detectives. This, according to investigators, is why more stringent KYC check regulations are so important. “Right now, there’s a really significant war going on. The premise that you should keep things secret from the state is the philosophical foundation of cryptography”, according to Goodman. “It would be extremely beneficial if there was a regime that was as severe as banks.”

The extensive Markets in Crypto-Assets regulation in Europe, which is anticipated to go into effect starting next year, includes stricter requirements for “virtual asset service providers,” such as exchanges. In order to serve customers in the EU, businesses will also need to be physically present there, preventing offshore cryptocurrency companies from evading regulation.

In the UK, progress has been slower. When Boris Johnson was the prime minister, Rishi Sunak served as chancellor and John Glen as city minister, and the Treasury began work on comprehensive crypto regulation. A redress plan needs to be an element of any future regulatory framework, according to Lisa Cameron, the MP who leads the UK parliamentary group on cryptocurrencies.

Although the courts have advanced in their application of the law to cryptocurrency issues, regulators, according to lawyers like Muldoon, are not keeping up. “Seemingly old dusty judges — all due respect to them — are getting their heads around it far quicker than young bright things at the FCA, Revenue and in government,” she says. “It needs to change.”

She believes public and regulatory pressure will eventually force exchanges, like banks, to do more to tackle fraud. “They will have to spend more money and time,” she says. “It can’t carry on as it is.”

For Lili, the battle for restitution has dragged on for as long as the fraud itself, with little prospect of resolution. For months, she was unable to talk about the losses without bursting into tears. That her case is unresolved makes it difficult to move on.
“I feel horrible. Really, really horrible. I can’t believe I’ve been fooled at my age,” she says. People like her are in urgent need of justice.

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