Crypto Scams: How To Spot Them & What to Do If you Get Caught Out

mariam-abu-hussein
Mariam Abu HusseinLegal Assessment Specialist @ Lawhive
Updated on 30th November 2023

Cryptocurrency scams are on the rise: In 2023 Sam Bankman-Fried was able to fool the entire Silicon Valley tech elite, the US political landscape, and many members of the trading community in the same year, winning and losing the greatest personal fortune in the quickest time in history. 

crypto-scams-how-to-spot-them-&-what-to-do-if-you-get-caught-out

Worryingly, Brits are increasingly losing money to crypto scams.

Which? reported 9,709 crypto scam reports and consumer losses of £329,199,179 in 2022 alone. Up to November 2023, there have been 7,559 reports and a total loss of £136,468,004.

We’ve written this article to help you identify potential cryptocurrency scams and outline what you can do if you fall victim to them.

In this article, we’ll cover what you need to be aware of when it comes to crypto scams including:

  • How cryptocurrency is used

  • Where is it stored and what is a digital wallet?

  • Can anyone buy cryptocurrency?

  • How to identify and prevent falling victim to crypto scams

  • What you can do if you fall into a scammer’s trap

What is cryptocurrency?

Cryptocurrency is a digital currency; it only exists electronically, unlike the cash and coins that people still commonly carry around.

You can’t see or touch cryptocurrency, it’s only represented by digital numbers and banks have no input on its circulation ─ this has wide ranging implications.

What is cryptocurrency used for?

Bitcoin and Ether are the two most commonly known Bitcoin currencies, however there are thousands, and more and more are being created daily. 

Like regular currency, cryptocurrency can be used for the same purposes ─ as a store of wealth, a means to purchase goods and services and as a form of investment.

But it has other uses too:

  • Anonymity: hence the spread of scammers

  • Yield farming: a high-risk investment strategy

  • Security: blockchain, the technology that cryptocurrency is built on, can provide a permanent record of cryptocurrency movements - a ledger of sorts. This means law enforcement agencies can track illegal activities

  • Agency: crypto users can invent currency, fund it, invest in it, programme it and pay for services with it, all at once

  • Lower transaction fees: because it is digital, cryptocurrency can lower money transaction fees, automate them and make them seamless

How do you buy cryptocurrency?

You can buy it with your phone, computer or from a special cryptocurrency ATM, as demonstrated to children somewhat chillingly by Sam Bankman-Fried in the BBC panorama documentary Downfall of the Crypto King.

If you’re buying online you will need to follow this step-by-step process:

  1. Select your broker or crypto exchange – a broker is like an insurance broker where you can compare the costs and benefits of different cryptocurrencies on an online marketplace. A crypto exchange is slightly different – they are platforms where buyers and sellers interact to exchange cryptocurrencies.

  2. Sign up and open you account – as you would with most online experiences, you might have to verify your identity like when you buy restricted products online, but in the same way this can be done in a frictionless manner.

  3. Deposit cash – similar to a bank account, you will need to deposit cash and this will be exchanged for the relevant amount of the cryptocurrency you’re buying - something like a foreign or overseas money exchange. You can deposit cash by linking your bank account, wiring money, or making a one-off debit or credit card payment.

  4. Decide which currency to buy – with money in your account you can now buy cryptocurrencies.

Where and how do you store cryptocurrency?

As mentioned, you can purchase cryptocurrencies on crypto exchanges or through brokers.

Cryptocurrency can be stored in various ways. You’ll need to choose a storage method and there are various ways to do this. You can leave the money on the crypto exchange, a risky move, or select from various digital wallets.

There are ‘hot’ wallets and ‘cold’ wallets. 

Hot wallets are stored online and run by devices connected to the internet. This makes them convenient, but at risk of scams and hacking.

Cold wallets are more secure, and stored offline, meaning they are less susceptible to foul play. They are usually stored on external hard drives or USB sticks, which you’ll need to be careful don’t fall into the wrong hands, especially if bad actors have access to your key codes.

Additionally, you’ll want to guard against breakages, because if your external storage device or internet-connected device breaks, you might permanently lose your cryptocurrency.

Cryptocurrency vs Pound Sterling

The main differences between cryptocurrency and pound sterling and other forms of currency is summarised below:


Cryptocurrency

Pound Sterling 

Mediated by banks

X

Anonymous

X

Objective worth

X

High risk

X

Volatile

X

Security

X

Trusted

X

How do you pay for things with cryptocurrency?

Cryptocurrency is brought with regular ‘fiat’ currency via crypto exchanges. You don’t need to have an account with an exchange ─ like shopping on an E-commerce platform, you can check out as a guest.

Setting up an account, however, offers security. Once you set up an account with an exchange, make sure to choose a regulated exchange such as Coinbase, where you can make an exchange from your wallet.

You need a wallet to make an exchange. They are installed on your devices and are a go-between your device and cryptocurrency. The wallet doesn’t hold the crypto, instead it holds the keys, or passcodes.

There are hundreds of wallets available - some work with many currencies, others only a few.

Here’s the process of making a payment with Coinbase as a representative example:

  1. Open wallet app

  2. Click ‘Send Payment’ 

  3. Enter the amount

  4. Enter the QR code or wallet address of the recipient

  5. Click ‘send’ 

Common crypto scams

There are two main categories of cryptocurrency scam:

  1. Efforts to get hold of a target’s digital wallet and security codes, or physical hardware such as computers, mobile phones or external storage devices

  2. Attempts to get a cryptocurrency user to transfer currency directly to the scammer, including phishing, ponzi schemes and fake business schemes

Social engineering 

This is a tactic of manipulating someone to do something through the science of human motivation, using someone’s emotions to get them to share information they wouldn’t otherwise.

Scammers will often pose as a trusted figure: the Government, a friend, a colleague, tech support, a high-recognition business.

There were many examples of social engineering scams during COVID-19. Scammers impersonated the Center for Disease Control or the World Health Organization with promises of non-existent vaccines in order to extract cryptocurrency from unwitting members of the public.

Phising 

Probably the main type of financial scam online. Fraudsters will send a message through a trusted communication medium, such as email or SMS with links prompting them to take urgent action to protect their assets which are under threat. 

The links in the message will take the reader to a website designed to capture the information entered by the person being scammed ─ usually their private key.

Business opportunities

Ever seen a promise too good to be true online? Cryptocurrency platforms will promise ‘guaranteed returns of 115%’ for instance with little to no information about how the returns will be made. Run a mile!

You’ll be asked to invest large sums with the lure of larger returns. Often people enter their life savings only to learn they can never get their money back.

Ponzi schemes

A ponzi scheme is type of investment fraud that lures investors to join, and pays profits to earlier investors, or the business owner with funds from more recent investors. This type of scam has been happening since the 1800s. 

In 2018, Canadian crypto exchange Quadriga had been found to be running a ponzi scheme. The OSC determined that the company had been defrauding their investors after the founder suddenly died leaving $215 CA missing. In essence, the founder of the exchange Gerald Cotton had been opening accounts on other exchanges and transferring his user’s funds to himself.

The OSC described the scam as: “What happened at Quadriga was an old-fashioned fraud wrapped in modern technology." 

Sam Bankman-Fried, briefly the poster boy of crypto and owner of FTX a crypto exchange, used investor’s money as his own personal piggy bank transferring funds to a company he used to own. He also spent millions on political donations, at least $40 million, and funded his luxury lifestyle all with FTX user’s deposits.

Billions were lost and many people will never get their money back. He’s facing up to 110 years in prison.

How to spot crypto scams

It might be hard for some people to spot scams when investing their hopes into cryptocurrency.

When trying to get rich quick, people often overlook red flags. However, there are many which can be spotted with a healthy dose of scepticism and scrutiny:

  • It’s too good to be true – if someone offers you guaranteed returns or free crypto, these are likely to be scams. With some research you can disprove claims that offer big returns for little investment. Talk to other investors, if you have doubts reach out to the crypto community through message boards. As they say in crypto circles, ‘Don’t trust, verify’.

  • Read documentation – new cryptocurrencies go through a development process. An important part of this is to create a whitepaper detailing how the currency works, its protocols, how the blockchain operates and how the network functions. Fake cryptocurrencies won’t have a detailed whitepaper, and the numbers usually just won’t add up.

  • Research the individuals involved – you’ll be able to find out who is behind a cryptocurrency from the whitepaper. This will give you an opportunity to research their past. The project might be open source which means anyone can be involved in its development - in this case you can join forums like Discord which will show you the currencies’ development history. Also, GitHub and GitLab allow you to see the code base of the project which will allow you to scrutinise it for anything suspicious

How to report crypto scams 

The FCA can help here. They have a wide range of advice on their website about what to do if you think you have been scammed. 

You can start by reporting the suspected scam to the FCA by calling them on 0800 111 6768 or get in touch on their online contact form.

What to do if you are a victim of a crypto scam

There are some recommended steps you might take:

  • Collect your transaction IDs and write a report of what happened

  • Contact the scammer and ask for your money to be returned

  • Report the scam to the exchange you used (remember they could be the scammer) and the FCA

  • Contact law enforcement and submit a complaint

  • Ask financial investigators if they can get your money back

The FCA mention that fraudsters may attempt to scam you again, if they have successfully scammed you once, or sell your details to other scammers.

Bear in mind that if they do attempt to scam you again, the second scam may be different to the first and it may pose as a chance to get your money back pretending to be the FCA, an offer to buy back your investment, or something outside the crypto space.

Take your time before doing or replying to anything to be absolutely sure it is legitimate.

Do you need help getting your money back?

If you have fallen victim to a cryptocurrency scams, our solicitors are on hand to provide advice and help you in potentially recovering money you have lost. To get started, tell us about your case to get a free fixed-fee quote.

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