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Crypto Scams: A Financial Institution’s Guide to Fraud Prevention

Terri Luttrell, CAMS-Audit, CFCS
January 4, 2023
Read Time: 0 min

Guidance for banks on the lookout for crypto scams and fraud

The turbulent cryptocurrency scene should put bankers on high alert. The FTC's top ten scams to watch for can help. 

You might also like this whitepaper, "Understanding cryptocurrency."



Increased crypto use means increased crypto scams

As cryptocurrency becomes more integrated into our financial system, the rise of crypto scams and crypto fraud has become a significant concern. Financial institutions and consumers alike must be vigilant in navigating this evolving landscape safely. The Federal Trade Commission (FTC) has outlined some of the top crypto scams to watch out for, highlighting the importance of recognizing cryptocurrency AML red flags. 

Despite not being universally adopted, the use of cryptocurrency has surged, leading to an alarming increase in crypto fraud. The Federal Bureau of Investigation (FBI) has noted that cryptocurrency is fast becoming a favorite for scammers, not just in the murky realms of the dark web but in everyday transactions. 

Growing popularity

The Crypto Market: A Breeding Ground for Fraud

Reports from CNBC reveal that an estimated 59 million Americans have engaged with cryptocurrency. The FTC has found that since early 2021, over $1 billion has been lost to crypto scams. This figure represents a significant portion of financial losses compared to other payment methods. According to Chainalysis, by mid-2023, attackers had already siphoned off an additional $175.8 million through ransomware, highlighting a year-on-year increase in such fraudulent activities. 

U.S. banking regulators recently warned financial institutions that dealing with cryptocurrency exposes them to an array of risks. "The events of the past year have been marked by significant volatility and the exposure of vulnerabilities in the crypto-asset sector," read a joint statement from the Federal Reserve, FDIC, and the OCC. The comments come just weeks after the spectacular collapse of crypto exchange FTX. 

The regulators said the risks include: "fraud and scams among crypto-asset sector participants" and "contagion risk within the crypto-asset sector resulting from interconnections among certain crypto-asset participants." 

There are several reasons why cryptocurrency markets allow fraud to flourish: 

  • There is no bank or centralized authority to flag suspicious transactions and attempt to stop fraud before it happens, as there is with fiat currency.
  • Crypto transfers cannot be reversed – once the money is gone, users cannot get it back even if they report a fraudulent transaction.
  • Many people are still unfamiliar with how digital currency works, leading first-time users to fall victim to crypto scams due to a lack of understanding.

Top 10 crypto scams

Crypto scams to watch for in 2023

According to the FTC, the top ten crypto fraud trends to watch in 2023 are:

Investment scams: Investment scams come with "get rich quick" and "no risk" promises, often initiated through social media or online dating apps. In these scams, crypto can be the investment offered or the payment method. The invested crypto goes straight into the scammer's wallet.

Romance scams: Romance scams prey on relationships and have both an investment and payment angle. After gaining trust, the perpetrator pretends to have wealth and casually offers investment tips to get their scheme rolling. Once a rapport is established, the victim is asked to send crypto to the scammer.

Business, government, or job impersonation scams: In a business, government, or job impersonation scheme, the perpetrator presents themselves as a trusted online source, such as Amazon, FedEx, or a user’s bank, and convinces users to send them funds by buying crypto. The crypto offered by the scammer is fraudulent.

Rug pull scams: So-called rug pull scams are when investment scammers propose a new crypto opportunity or nonfungible token (NFT) that requires funding. After the project initiators receive payment, they disappear, leaving their investors no avenue to get money back.

Phishing scams: Phishing scams use emails with malicious links to gather personal details, such as users’ crypto wallet key information. If they obtain enough information, the scammer can gain unfettered access to victims’ crypto. This type of fraud can also be perpetrated via text message in a method known as “smishing.”

Social media scams: The FTC reports that half of those who have reported crypto losses since 2021 said the scam began with an ad, post, or message on social media. The most identified platforms used were Instagram, Facebook, WhatsApp, and Telegram.

Ponzi schemes: Ponzi schemes via cryptocurrencies work the same way they do with traditional payment methods. Scammers collect funds from new investors in order to pay the older investors, creating no legitimate investment opportunity and leaving investors with no recourse.

Upgrade scams: Crypto platforms are a form of software that, at times, requires upgrades. Consumers are accustomed to upgrades as part of innovative technology. They can easily be scammed into giving up their private keys as part of an "upgrade" that turns out to be fraudulent.

SIM-Swap scams: SIM-swap scams occur when someone obtains a copy of your cellphone's SIM card to access your phone data. With a user’s data in hand, scammers can the steal two-step authentication codes required to open their crypto wallet, allowing the scammer access to account funds and information.

Fake crypto exchanges and crypto wallets: Inexperienced crypto users may be lured into investing in a new high-value cryptocurrency exchange opportunity or a "cheap" Bitcoin that doesn't exist. Scammers advertise the investment at a price under market value, and the victim is unaware that the exchange is fake until their investment is lost. A fake crypto wallet is a malware scam that infects a computer and eventually steals the user's private key.

Recognizing Cryptocurrency AML Red Flags 

The Financial Crimes Enforcement Network (FinCEN) regulates all virtual currencies for anti-money laundering and countering the financing of terrorism (AML/CFT) programs. The U.S. Securities and Exchange Commission (SEC) governs crypto assets that could be considered securities. When educating yourself or your clients about potential fraud, consider using these red flag tips from the FTC to protect against becoming a victim: 

  • Scammers will guarantee profits or significant returns. No crypto investment is guaranteed to make money, let alone big money.
  • No legitimate entity will require you to buy crypto. Not to solve a problem, not to protect your money. That's a scam.
  • Never mix online dating and investment advice. If a new love interest wants to show you how to invest in crypto or asks you to send them crypto, be wary of a scam.
  • No legitimate business or government will ever email, text, or message you on social media to ask for crypto. Legitimate fundraisers will never demand that you buy or pay with crypto.
  • Never click on a link from a random text, email, or social media message, even if it seems to come from a company you know.
  • Don't pay anyone who contacts you unexpectedly, demanding payment with crypto. Urgency is a red flag.
  • Never pay a fee to get a job. If someone asks you to pay upfront for a job or says to buy crypto as part of your job, it's a scam.

In a recent notice, the Office of the Comptroller of the Currency (OCC) stated that in 2024, their examiners will pay attention to risk assessments relating to crypto custody services and other distributed-ledger technology products and services. 

Conclusion: Mitigating the Risk of Crypto Scams 

The threat of crypto scams underscores the need for constant vigilance. Whether it's investment opportunities that seem too good to be true or the peculiar urgency of a stranger's request for crypto, recognizing the red flags can help prevent falling victim to crypto fraud. As the industry continues to evolve, staying informed and cautious is paramount for anyone involved in the digital asset space. 

Learn more about cryptocurrency and the digital asset space.

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About the Author

Terri Luttrell, CAMS-Audit, CFCS

Compliance and Engagement Director
Terri Luttrell is a seasoned AML professional and former director and AML/OFAC officer with over 20 years in the banking industry, working both in medium and large community and commercial banks ranging from $2 billion to $330 billion in asset size.

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