How crypto fraud works – and why businesses need to take note

For the crypto market, 2022 has seen both clear declines and uncertain increases. Last month, an analysis from TIME predicted that things may not change anytime soon – saying some experts say “Crypto prices could fall even further before any sustained recovery.”

Although the market hit all-time highs in 2021, crypto’s future depends on a combination of factors, including regulations — such as those proposed by the Biden administration this spring.

Part of President Biden’s executive order (EO) on cryptocurrency focused heavily on protections, both for businesses and consumers looking to take part in the hot digitized financial market – which is still very much in its infancy.

The cryptocurrency market’s infancy is precisely why the protections are necessary. Biden’s EO notes that “around 16% of American adults — roughly 40 million people — have invested in, traded, or used cryptocurrencies.” There is of course room for innovation, but also the potential for fraud, threats and bad actors.

Cryptocurrency’s threat landscape

A new report from digital trust and security company, Sift, paints a grim picture of how widespread crypto fraud is, revealing that 43% of those who got involved in the crypto market have encountered fraud. Shockingly, it also found that 22% of those who encountered a scam actually lost money because of it.

Sift’s report also notes that victims of crypto scams tend to skew younger, and that social media is the most prevalent place for scams.

“Fraudsters don’t discriminate based on age, they follow the flow of money. That said, our research found that there was a direct correlation between a person’s age and the likelihood of encountering crypto fraud,” said Jane Lee, Trust and Safety Architect at Sift. “59 percent of Gen Zers and 51% of millennials have encountered crypto scams. The percentage decreases with each older generation.”

Lee noted that Gen Z and millennials also tend to be duped by these scams most often due to their social media-savvy, connected lifestyles. Lee pointed to the FTC’s 2021 Loss Report, which found that social media like Facebook and Instagram are typically where a significant percentage of crypto scams start — specifically, 23% on Facebook and 13% on Instagram.

Sift’s report underscores the FTC’s findings, revealing that 30% of Gen Zers and 25% of millennials who encountered such scams also say they’ve lost money to them.

The FTC report cites how much of a breeding ground for these scams are social media platforms: “Cryptocurrency was listed as a payment method in 64% of 2021 investment-related fraud reports that indicated social media as the contact method.”

Pig slaughter

What do these scammers offer that is so compelling that they win over typically tech-savvy generations? How do they entice users to give up their money? Often through a method known as “pig slaughtering,” Lee explained.

“Pig slaughter scams are run by crypto scammers who trick dating apps into their targets. The scam works by ‘padding’ targets for their potential profits through love bombing (ie romantic gestures, constant attention and the promise of getting rich by investing in cryptocurrency),” she said.

These bad actors will usually falsify information, refer to lavish vacations, share photos engaging in their luxurious lifestyles, and promise expensive gifts. They usually try to move conversations from apps or social media platforms to encrypted messaging tools like WhatsApp to maintain anonymity. From there, according to Lee, they use psychological tactics to make the victim feel insecure or that they owe something. Then, what might have been flirtatious, friendly conversation quickly turns into financial leverage.

“They will tell how much they have made investing in crypto and offer to coach their target so they can make some extra money. This is a successful scheme because so many people want to invest in crypto but don’t know how start,” Lee said. “The scammer then instructs their target to create an account on a legitimate crypto platform. They are then sent a link to a fake crypto trading exchange completely controlled by the scammer, who claims it is better for trading than other platforms. This fake third-party trading site is simple in design, but mimics a real crypto trading platform, displaying accurate real-time cryptocurrency values ​​and a responsive customer service live chat.”

Earlier this year, a woman in Texas was the victim of the pig slaughter described above – she lost $8 million.

Losing hundreds of thousands or millions to this type of scam is not an isolated incident. It is happening more and more all over the country. Sift’s Q2 Digital Trust & Safety Index underscores that cybercriminals continue to prey on consumers’ lack of knowledge about cryptocurrency to make money.

Where the company comes in

Crypto and blockchain are a big focus for professionals looking at the Web3 and the metaverse – so understanding the ways consumers are being burned by the technologies and pivoting to ensure safe and secure interactions will rebuild trust.

“It is up to the crypto industry to increase its fraud defenses to protect against the rise of cybercriminals targeting the industry,” Lee said.

The crypto space also shows no signs of slowing down. A Bitstamp report found that 80% of institutional investors believe crypto will overtake traditional investment vehicles. Additionally, for now, investors remain optimistic with 60% saying they have a high level of confidence in crypto.

Lee recommends that businesses and consumers follow the age-old advice: “If it seems too good to be true, it probably is.”

Read full report from Sift.