Clever Geek Handbook

Why are there so many scams in crypto projects?







This text is based on the opinion of CoinCenter analyst Ben Dornberg and several other authors and confirms that there is nothing new under the moon: scamma is the good old Ponzi scheme in brilliant cryptocurrency packaging. And although scams are a problem, but a cultural one, not a technological one.







The public debate around cryptocurrency is growing. Some say that cryptotechnology laid the foundation for breakthrough solutions in all industries, others narrow the focus of prospects to the unlimited financial freedom of the owner of the crypto wallet, others are afraid of rampant crypto anarchy. But when it comes to cryptocurrency fraud, all parties agree on one thing - the schemes used are completely innovative and not breakthrough.







Surprisingly, of course, but the prevalence of fraudsters among cryptocurrency is enormous. This is true if you look at the percentage of the monetary base that has been lost or stolen, the percentage of bitcoins associated with fraudulent activities, or the number of shocks that these schemes create in digital currency circles. At a time when Bitcoin users are multiplying, the blockchain technology itself brings little benefit to scammers when compared to fraud volumes in regular money or PayPal. Probably the main benefit here is a large user base and legal and financial marginalization of the rules for working with cryptocurrencies.







Why doesn't anonymity help fraudsters?



Many believe that the blockchain technology itself has become attractive to fraudsters, primarily because of the supposedly anonymous, untraceable nature of transactions. Many early Bitcoin users, including criminals, also bought into this statement.







Actually there is no anonymity.







Because of the particular blockchain, it remains to be a completely transparent registry, thousands of copies of which are located around the world and which can be verified by victims, security researchers and law enforcement agencies, and even anonymous wallet user can easily track all actions. Now, any judicial review of cryptocurrency fraud is much easier, because all transactions in the blockchain are saved forever and the trail of fraudsters is never "cold."







Again, Bitcoin itself has no value and must be cashed. Digital currency network users do not provide their name or other identifying information when making transactions within the blockchain only because there is no such need. Personal data is usually necessary for the purchase of goods and services or the exchange of digital currencies for fiat, this rule has not gone away.







It would seem that one can “lead” cryptocurrency through a chain of exchanges for other tokens and cover traces. Unfortunately for fraudsters, PoW, PoS and other principles of miner motivation make "hare tracks" only more slowly and [slightly] more expensive. Preserving anonymity with such an exchange is rather difficult, but possible.







This is not just a hypothesis: in American judicial practice, Bitcoin blockchain factories are increasingly used. As TheVerge has successfully said in the title of the publication : "The best friend of a policeman on the Silk Road is Bitcoin ". This article describes forensic analysis using Bitcoin's public registry analysis, which was made by IRS agency Tigran Gambaryan. This investigation was key in the conviction against Karl Fors, who is accused of money laundering and fraud on the Darknet site Silk Road, where the prohibited goods were sold for bitcoins.







But the case is not limited to judicial instruments. When the trial of Carl Force was underway, the Bitstamp Luxembourg Stock Exchange prepared a report stating that every fifth cryptostandard introduces a KYC procedure in token design, which makes it difficult to use their tokens for anonymous cashing.







Is blockchain technology a problem in itself?



If the blockchain technology does not allow fraudsters and scams to easily withdraw money, then why are so many scam projects successful? The work of young scientists from the Southern Methodist University in Dallas, USA can be considered the first known study of this issue. The article provides an analysis of Bitcoin-based scam projects known from 2011 to 2015 and highlighted four popular fraud schemes:







  1. highly profitable investment programs
  2. investments in mining tokens
  3. fake wallets
  4. "left exchangers"


Add the growing direction of "quasi-escrow" services when, in order to increase self-confidence, the crypto project temporarily freezes investors' funds on the wallets of "reliable" people or organizations, and then they hide themselves with the collected investments. The technology of " multiple EDS " is constantly "hacked", so the reputation of these very "reliable" attorneys, though spoils, but not as much as possible.







Fraudsters use the technical and financial illiteracy of their victims: the latter often do not have sufficient expertise to assess the feasibility of a technical or business project. As you can see, the blockchain technology works here more as an additional factor complicating the perception of the overall picture, but it does not help the scammers by themselves.







Custody disasters



Andrei Antonopoulos, a blockchain expert, thinks that ordinary people just need to get used to: “ humanity has been using physical security for thousands of years, and cryptography was invented only half a century ago .”







Today, people simply do not have any other technical means of preserving their digital assets, except for wallets or stock exchange accounts. However, while there are no socially significant methods, mechanisms of self-regulation, state licenses or other means of confirming the reputation of a particular method of protection, all known solutions are too young. Moreover, the overwhelming number of producers of such funds have already lost their clients' funds due to technical or organizational imperfections of their decisions.







Fortunately, the digital asset protection industry is developing at least as quickly as scam projects are multiplying. In addition to improving the technical excellence of the applied solutions, there are specialized suppliers in the field of security of distributed digital assets. Their business is to support the reputation of experts in the protection of digital assets, in fact, in the absence of hacking of protected purses, and not in the business of transactions.







Theft of private deposits is not a new topic. If you follow the activities of the Russian Central Bank, more than 95% of banks currently closed in our country have stolen the money of their depositors. Less widely, but this story is also widespread in the banking systems of other countries. That is, the fact of trust of an asset of some organization is the main reason for creating the risk of theft of this asset , and not the blockchain technology.







Too good to be true!



Everyone has heard the term "HYIP" is the designation of the universal advertising of something, the "hot" phase of interest. The usual financial term - “highly profitable investment product” ( HYIP ) - sounds almost identical to it, and fraudsters do just that. HYIP is one of the forms of the Ponzi scheme , which promises incredibly high rates of return and builds its activities, returning funds from later investors to early investors. Our American counterpart Sergei Mavrodi - Bernie Madoff sat down for 150 years in 2009 for the implementation of this scheme in his abnormally successful investment fund on Wall Street. Already at the end of zero the topic moved to the Internet. The largest project, which collected $ 850 million over 2 years, was the MLM company Zeek Rewards (eng), Paul Burks, which was closed by the SEC in 2012. They promised income of 1.5% per day from an investment of $ 10.







The ICO boom, which began in 2016, according to Isabella Kaminska in her publication in the Financial Times, is associated with the advent of smart contract technology. She calls them "smart ponzi contracts". Her opinion deserves a separate coverage, however, let's say that smart contracts make it possible to mask multi-level Ponzi schemes in such a way that it is practically impossible to identify them.







Although, of course, the fraudsters started earlier than Acne released his Ethereum. Here are some examples:









Another common form of investment fraud is related to companies dealing with unregistered securities. Such companies offer strangers on the Internet the opportunity to invest in some "super-profitable" securities and receive a share of future profits. As these offerings became more popular, digital stock markets such as Havelock appeared to facilitate this process. While some of these companies returned profits to their investors (for example, the gambling site Satoshi Dice), many of them simply disappeared with money. In the first Bitcoin Bank in the world, Neo & Bee reached the point where they opened an office in Cyprus before it turned out that the funds had disappeared and the founder had fled the country .







But we continue to assert that these schemes have absolutely nothing to do with the blockchain technology itself.







But what about altcoins?



After the success of Bitcoin, hundreds of other digital currencies, called altcoins, were created. Most of them are based on a modified Bitcoin protocol, where several variables are changed. For example, the main innovation behind 42coin was that it has a maximum of 42 coins, as opposed to 21 million coins from Bitcoin. Others promise more significant changes, such as faster transaction processing, increased confidentiality, or an alternative way to distribute decision-making authority over the network.







While some cryptostates are working hard to produce something really useful, about 9 out of 10 coins this year were issued only for quick profit. The most frequent tricks of scammers are:







  1. Secret issue of tokens by the authors of the project before a public launch
  2. Artificial slowdown of mining algorithms, while the protocol owners themselves own optimized algorithms
  3. Participation in the so-called. "pampas" of the exchange rate of the issued coin before its official listing on cryptobirths (and even after - on the exchanges - pampyat be healthy)
  4. Promise of delivering physical goods in exchange for tokens
  5. Launch of our own "more comfortable / protected" cryptocables with backdoors
  6. Lies about partnering with big companies like Amazon


The complexity of understanding the blockchain technology helps fraudsters to mislead people without revealing the technical capabilities of their coin and unnoticeably manipulating code. Otherwise, this behavior is not very different from any other form of investment fraud.







If not technology, then what?



If digital money technology is not the cause of the spread of fraud in the ecosystem, then what? There are seven main cultural and historical factors that explain this:







  1. The lack of clarity and widespread confusion regarding the legal and regulatory status of the blockchain. Many criminals and victims believed that, since Bitcoin is not “recognized by the government”, it is not a crime to steal it or dishonestly assign it. In addition, it is widely believed that law enforcement agencies cannot find and arrest perpetrators of crimes related to digital currencies. After a series of past court cases involving fraud on the blockchain, these views have changed.
  2. In the situation of lack of state licensing, as well as effective and independent press coverage, ICO participants can rely solely on their own opinion to evaluate the investment opportunities of crypto projects. With a clear effect, of course.
  3. Marginalization of business using digital currencies, almost discredit on the part of major financial institutions, as well as an unclear regulatory framework makes the ICO format unappealing for honest entrepreneurs. In other words, it’s almost impossible to get any confirmation from the Central Bank of the “whiteness” of your project right now because all around are scams, and all this “works on tokens”. The only way that cryptocurrency projects like Coinbase and Circle, which care about their reputation, use is associated with the complication of participant checks (KYC), as well as blocking transactions at the slightest suspicion of money laundering ( AML ). Such tactics are unpleasant to the townsfolk and pushes them towards the gray and black markets.
  4. Historically, the Bitcoin user base was unusually risky and even risk taking. Many Bitcoin mines because they were interested in online gambling or they wanted to buy drugs on the darknet. They even earned on the growth rate of Bitcoin. In any case, the first owners of Bitcoin were not afraid to take risks and invest these coins "as is customary in venture" (1 out of 10 projects will take off and well). Only now cryptoinvestors are becoming more experienced and cautious ...
  5. Most ICOs immediately offer illegal schemes. These are all reservations "only not for the citizens of the United States and Singapore" - an excellent sign (although not defining). The same instrumental design blurs the distinction between gray market operators and scammers. It may also cause users to reluctantly cooperate with law enforcement agencies in the event of persecution of the latter.
  6. Ecosystem historically anonymity and avoided blacklisting, which facilitated the withdrawal of stolen funds. But times change, because on the stock exchanges begin to withdraw transactions and block suspicious accounts. Why, the owners of the exchanges are already being planted .
  7. Finally, the incredible bitcoin price jump at the end of 2013 created an all-pervading “departing train” feeling that opens the way to risky, impulsive decisions and makes many self-confident.


The picture described does not concern a new technology that is unable to provide security and consumer protection, but rather a young ecosystem, moving from its rebellious roots to closer co-ordination with the traditional financial industry. True, the times when this reconciliation is complete have not yet arrived.







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