What they are, some examples and tips for spotting them

While the pseudonymous and decentralized nature of cryptocurrencies has its advantages, it also attracts the interest of bad actors. This is evident from the fact that crypto fraudsters took a record $14 billion in 2021, a figure that is expected to rise further this year.

What’s also disturbing is the number of different schemes these crooks run – it’s almost like there’s a new one every day. Fortunately, many of these attacks rely on human error to succeed. Therefore, with proper knowledge and diligence, they can be avoided.

Exit fraud is an example of such schemes. They rely on hype and oversight to fool multiple investors at once, often resulting in millions of dollars in lost cryptocurrency. But once you know how these schemes work, it’s much easier to spot and avoid them.

So, what is an exit scam?

An exit scam is a fraudulent practice where bad actors promote and/or run a fake crypto outfit and then disappear once they’ve collected enough money. A common type of exit scam is strawmen, where scammers hype a project and abandon it after filling their pockets.

Another type of exit scam is where fraudsters operate some sort of Ponzi scheme under the guise of a crypto exchange or investment company. They keep the scheme going until the truth is revealed, and then they disappear with all the investor holdings.

They can also raise funds through an ICO and divest with investor funds. In some cases, they may even run the project for a while, promoting and pumping prices before exchanging tokens for fiat currency and taking off. Either way, they head for the door once they’ve made their money, which is why these operations are known as exit scams.

Examples of exit fraud

There are several cases of exit scams where investors have lost tons of money. For example, earlier this month the Commodity Futures Trading Commission (CFTC) sued Cornelius Steynberg, the founder of Mirror Trading International Proprietary Limited (MTI) for fraud, misrepresentation and misappropriation.

Steynberg had operated MTI for almost three years before it was discovered to be a Ponzi scheme. During that period, Steynberg is said to have amassed at least 29,421 BTC worth $1.7 billion in a scheme he ran through MTI, according to the CFTC.

But when the authorities began cracking down on the fraudulent trading platform, Steynberg fled the country and orchestrated a classic exit scam. A year or so later, he was arrested in Brazil for using false identities.

Another example of a Ponzi scheme was Plus Token. This fake cryptocurrency was launched in May 2018 and was very popular in China and Korea. It lured investors under the promise of high returns with low investments and even introduced fake products, such as the Plus Token Wallet. In effect, it paid old members with investments from new members.

Eventually, many investors had trouble withdrawing their profits in June 2019. Unable to make payments, the entire team behind the project disappeared with $2.9 million in their pockets. A year later, the Ministry of Public Security in China arrested more than 100 people in connection with this scheme.

How to spot an exit scam?

Thorough research is essential when investing in any asset, more so in cryptocurrencies, given their volatile nature. And while evaluating a project, it’s important to look for potential red flags, some of which include:

Sketchy credentials – Pseudonymous or questionable credentials are a big red flag. A good project will have an established team behind it. They will have LinkedIn profiles where you can review their previous projects and work experience. Do not judge the potential of the team based on social media, as followers can be bought and fake profiles are more likely.

Mottled White Paper – A good project will have a well-thought-out whitepaper that explains every single aspect of the project. It will detail the technology behind the project, including its consensus mechanism, tokenomics, governance protocols, etc. It will also have impeccable language and grammar. If it’s lacking in any of these areas, it could be a red flag.

Use Cases – With a blockchain-based cryptocurrency, valid use cases are extremely important. The project should try to fix some problems or offer to fill some gaps in the industry. Projects that do not have valid use cases may be fakes and it is best to stay away. Even if it’s not a scam, it will eventually fizzle out as it doesn’t add value in any way.

Excessive Promotions – If a project tries hard to sell itself, it may point to a scam. Good projects will start with their whitepaper and launch presentations to make a good impression and attract investors. On the other hand, dubious projects will depend on crypto influencers and resort to strategies like shilling to build hype around the launch.