Crypto scams: Don't ignore the red flags

From phishing and copycats to fake lotteries and dating scams, scams continue to target everyone regardless of age, race or education. Web 2.0 made it easy for scammers to trick people into giving away their money and personal information and made millions off individuals becoming their victims. Web 3.0 has been no different, with many believing that digital scams are having something of a renaissance.

By the time many of us learned how to identify the usual online scams, Web 3.0 had emerged. Despite trust being a core element of Web 3.0 world, as all transactions on the blockchain are recorded publicly in an immutable digital ledger, there is no requirement that people attach their real names or identities to those transactions. This anonymity feature, in addition to Web 3.0’s novelty and complexity, has unfortunately opened the door to a whole new layer of fraud.

Last year was record-breaking for crypto scams, with scammers reportedly taking over $14bn worth of crypto. With the rise of blockchain technology last year, it’s not a surprise that fraudsters have spotted new opportunities for illicit activities. In contrast to Web 2.0, this new wave of scams has tricked many sophisticated and tech-savvy individuals, which has raised concerns as to whether this new technology is truly capable of protecting consumers.

While the above statistics might discourage some investors from getting into this space, Web 3.0 provides a lot of opportunities, including security and we just need to learn the red flags to watch out for. To start, let’s take a look at some of the most famous crypto scams and explore what we can learn from them.

OneCoin 

We can’t talk about crypto scams without mentioning one of the most famous, OneCoin. Ruja Ignatova, a businesswoman and self-proclaimed ‘CryptoQueen’, convinced millions she and her team had created a cryptocurrency that would revolutionise the Web 3.0 space, by allowing anyone to make payments everywhere. Ruja called OneCoin a ‘Bitcoin Killer’, with the intention of replacing the first cryptocurrency and giving its investors high and fast returns. 

Crypto was still a fairly new concept at that time and many individuals who were looking to get involved in this space bought into this ‘too good to be true’ project. As of today, OneCoin has raised over $4.4bn, with British people spending over $30m on OneCoin in the first six months of 2016.

Unfortunately, OneCoin was a scam from the outset as it wasn’t even run on blockchain, but rather it existed on a standard server database. This means that OneCoin wasn’t even a cryptocurrency so it couldn’t be minted, traded or used as a payment method as can bitcoin. The result? OneCoin investors lost their money as they simply bought into numbers typed into a spreadsheet which weren’t possible to convert into real money.

Once the issue started unravelling in 2017, Ruja Ignatova disappeared and her whereabouts are still unknown today. While this crypto fraud scheme was quite elaborate, losses could have been prevented had the investors done due diligence on OneCoin’s technical capabilities and the team behind the project. 

Squid Coin
OneCoin was one of the first major crypto fraud schemes and is still one of the biggest scams in history. It has been half a decade since the OneCoin fiasco, but we continue to see a growing number of crypto scams each year. In November 2021, ‘Squid Coin’ was launched, attempting to capitalise on the infamous Netflix show Squid Game. To date, ‘Squid Coin’ and has robbed its investors of $3.38m. In contrast to OneCoin, Squid Coin was in fact a real token, but the team behind it were fraudsters.  As soon as they had raised enough money from sales, the team stopped Squid Coin’s trading activity and disappeared. This kind of scam is commonly called a ‘rug pull’.

Similar to OneCoin, Squid Coin showed signs of a scam from the beginning, including the numerous spelling and grammatical errors in its whitepaper. Their website had only been registered just one month before going live, a sure sign that something was afoot. To make matters worse, mainstream news outlets such as BBC, CNBC and Fortune were advertising the project’s success, luring in many inexperienced crypto investors. 

Signs to watch out for

Both OneCoin and Squid Coin have taught us a few valuable lessons when it comes to investing into crypto projects, including highlighting key red flags to watch out for.

Firstly, you should always do due diligence on a project before investing money into it. Typographical errors, obvious misspellings, poor document formatting and a lack of essential information in whitepapers and social media posts are some of the common signs of fraud.

Secondly, it’s a good idea to get to know the team behind a project. While the crypto industry has been built on anonymity and not all projects that don’t disclose their founders are scams (for instance, Bitcoin was created by a mysterious figure or figures who went by the pseudonym Satoshi Nakamoto), many anonymous projects unfortunately turn out to be scams. As such, extra caution should be taken when the project refuses to be transparent on the team that developed it.

Thirdly, any claim of a guaranteed return, especially promises to multiply your money or receive free money, should always be treated as a potential scam. There are practically no legitimate crypto investments that can double your money in a week or a month. To add to that, never lock yourself into holding crypto without being able to sell it. If you cannot trade your coin at any point you want (as happened with OneCoin), the project is likely to be a scam.

Lastly, you should not blindly trust influencers, promoters or news advertisements hyping up the project. Instead, check the project’s discord channel and twitter. Most legit projects use these social platforms as the main point of communication and have a strong community built around them. In contrast, projects like Squid Coin didn’t not have these channels or did not allow comments from outsiders, directly restricting the ability of investors to raise any queries.

Legal concerns

Even with legitimate crypto projects there are still quite a few legal issues that should be understood before investing your money.

One of the main issues facing crypto investors is that there is no requirement for people to attach their real names or identities to blockchain transactions, which makes it hard to get recourse if money is stolen from the project. Even if the fraudster or thief can be found, determining applicable laws and selecting the correct jurisdiction for bringing a dispute can be very difficult as a result of a lack of physical location of a crypto ledger.

Moreover, most crypto projects are not regulated by local authorities. For instance, cryptocurrencies do not constitute ‘securities’ in the UK, hence they can be sold on various unregulated exchanges. Making maximum use of this unregulated status, scammers lure people into investing into bogus crypto schemes like OneCoin. While the lack of regulation might seem appealing to some, this status can result in legal complications. 

And, while an increasing number of crypto fraud cases are now being seen by the courts, the court officers still lack understanding, willingness, and powers to act in such matters. 

The future

While many believe scams are part and parcel of Web 3.0, it’s too early to disregard this space as it will transform the way we manage our online identities, provide a higher level of security for banking transactions, and increase transparency across business networks. The scams will continue to happen whether we stick to Web 2.0 or move to Web 3.0.

There are many legitimate projects in this space that do good for our society, economy, and environment. Therefore, investors should watch out for obvious reg flags and take some extra time to do proper due diligence to avoid giving their hard earned money to fraudulent projects like OneCoin or Squid Coin.

Yuliya Prokopyshyn is a solicitor at Stephenson Law Stephenson.law