A new blockchain protocol to make crypto fraud impossible

For those who discovered crypto early, between 2009 and 2019, getting scammed seemed like a right of passage into the space. Back then, very little information was available about navigating the crypto space; Surprisingly, we saw some of the biggest crypto scams.

While the crypto space is still nascent, significant changes have occurred since the creation of Bitcoin. Several exchanges, such as Binance and Quidax, have somewhat simplified access, trading and use of cryptocurrency.

However, even with the availability of information, scammers have advanced and crypto scams are almost a regular occurrence.

According to Chainalysis, crypto fraud increased by 900% – $1.4 billion to $14 billion – between 2017 and 2021. It is important to note that this does not mean that bigger frauds are happening, and it means that more people are using cryptocurrencies; Therefore, crypto traders have multiple goals.

On today’s edition of The Emerging Tech Africa Series, Adedeji Owonibi, Cryptocurrency Forensics Expert and founder of blockchain company, convexity, talked about the science behind crypto fraud and how easy it will soon be to find fraudsters.

Some of the biggest crypto scams in history

The Onecoin Scam

The Onecoin scam is perhaps the biggest and most creative crypto scam ever recorded. This is because other scams involved the fraudsters doing technical work such as creating ICOs and launching tokens, promising Oncecoin investors something that never existed digitally or physically.

In 2016, the mastermind behind the scam, international law PhD graduate Ruga Ignatova, appeared in front of 90,000 people in Wembley Stadium, London, to sell the deceptive Onecoin dream.

The Onecoin scam was massive not only because Ignatova carted away $4 billion, but because she got unsuspecting multitudes to collect really behind a Ponzi scheme.

Even after accusations surfaced that the whole affair could be a sham, the unwitting victims, more accurately, fans, defended the scheme.

After Onecoin’s launch in 2014, the scam continued until 2017, when German authorities issued a cease and desist order against it.

In Onecoin’s case, investors didn’t buy tokens; They were sold plagiarized crypto educational materials that cost between €100 ($101) and €225,000 ($228,000).

The scam hardly deserves to be called a crypto scam, but the promise of a coin as valuable and even better than Bitcoin makes it qualify as a crypto scam. Crypto and blockchain were just a smokescreen to hide the true nature of the scam.

In 2019, all critical players behind the fraud were arrested, except for Ignatova, who remains largely at large.

BitConnect scam

This scam, which happened in 2016 during the initial coin offering (ICO) boom, saw investors kiss $2.4 billion goodbye.

An ICO is a way for crypto projects to raise money; It’s the crypto industry’s equivalent of an initial public offering (IPO), but without the regulations. With ICOs, anyone can present a project proposal and get millions of dollars in funding without any regulatory consequence.

To raise funds, the project or company launches a token, which interested investors buy. Tokens are like company shares or equity, which can sometimes represent project ownership.

Founded by Indians, Satish Khumbani and Divyesh Darji, BitConnect ICO promised investors a guaranteed return on investment of 40% guaranteed return (ROI); Investors who are willing to take on more significant risk can earn much more.

In the volatile crypto world, nothing is guaranteed. Still, BitConnect assured investors that it had a proprietary “trading bot and volatility software” that would trade Bitcoin and turn them into a fortune.

For context, the promised ROI meant a $1,000 investment could turn into $50 million in three years. These numbers appealed to investors who continued to buy BCC, the project’s native coin.

However, these returns were unsustainable and by 2018, BitConnect suddenly shut down. The American and British governments got wind of the shady business and began investigating the company. Initially valued at over $400, the BCC coin dropped to $1 in less than a month.

Mirror Trading International

Mirror Trading International (MTI), run by Cornelius Steynberg, a South African, was charged with a $1.7 billion fraud by the US Commodity Futures Trading Commission (CFTC) on June 30, 2022.

MTI’s scam was similar to BitConnect, as investors were lured into investing in a commodity pool that could make them 0.5% daily ROI, with Steynberg claiming that trading would be done by flawless artificial intelligence (AI).

The fraud scheme, which began in 2018, caught the attention of regulators in 2020. By that time, Steynberg had already amassed over 20,000 Bitcoins worth over $1.7 billion.

South Africa’s Financial Sector Conduct Authority (FSCA) launched an investigation into MTI and revealed that the company was operating without a licence.

Authorities are currently helping liquidators recover investor funds and hopefully repay victims of the billion-dollar scam.

It is easy to track down criminals on the blockchain

Adedeji Owonibi is a forensic cryptocurrency investigator, and he believes that it is easy to track the criminal activities of fraudsters on the blockchain, but the hard part is putting a face or name to who is transmitting the act.

For context, a quick visit to Blockchain Explorer—a website that displays transactions on the blockchain—will give you real-time updates on all the transactions happening on the Bitcoin blockchain. You can even enter an address you sent Bitcoin to and find out what the person does with it.

However, if you follow the money long enough, you may be able to track down scammers. Turning cryptocurrency into legal tender like the dollar, rand or naira may require sending the crypto to centralized exchanges with know-your-customer (KYC) protocols.

While blockchain keeps track of everything, Owonibi said there are tools criminals use to throw government agencies off track called Crypto Mixers.

Crypto mixers, also known as tumblers, are used to confusing transactions and making it difficult to figure out who sent what.

Think of them as a cement mixer. Once the dirty bitcoin is poured in, it is mixed with another large pile of bitcoins, and then clean bitcoins are delivered in smaller chunks to a chosen address. Looking at it through a normal banking lens, 20,000 ($47) put into a mixer will be mixed with billions of other transactions bouncing off different parts of the world and paid into a specified account in small amounts until they reach 20,000.

According to Owonibi, Wasabi is one of the most popular mixers used by scammers. Other mixers include Blender, Anonymix and Bitcoin Laundry.

“Wasabi is a way of obscuring trades and making it difficult for investigators like us to trace.”

Owonibi said that in the MTI scam, 29,000 bitcoins were sent into the popular Wasabi blender. These mixers have made it easier to get away with crypto scams; However, he guaranteed that there are sophisticated tools that can still make these transactions traceable.

Interestingly, he revealed that anonymity in the blockchain space would not be like this forever, as the Financial Action Task Force (FATF) – an intergovernmental organization founded to fight money laundering – is working to put a face to transactions on the blockchain.

“It is called the travel gel protocol or the travel gel standard. We (Owonibi and FATF) have been working on it since 2019 and have developed a standard called IVMS 101, and over 130 of us globally worked together to bring that standard forward. ”

While this is still a work in progress, Owonibi says the standard could bring something akin to Bank KYC to the blockchain.

Decentralization, the primary tenant of cryptocurrency, makes it nearly impossible to eliminate the concept of anonymity, but if Owonibi and the FATF can make the travel agent protocol a reality, it will be a watershed moment for the blockchain industry.