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Cryptocurrency Scams: What to Watch For

previously published in the Summer/Spring 2024 issue of Dakota Digital Review, published by the North Dakota University System https://dda.ndus.edu/ddreview/

By ARICA KULM, PHD Director of Digital Forensics Services

Cryptocurrency scams continue to increase. According to the Federal Trade Commission’s fraud reports, cryptocurrency scams totaled over $1.4 billion in 2023 alone.i In my capacity as Director of Digital Forensics Services at Dakota State University, the cryptocurrency scams described below occur too commonly today. The names in these accounts are fictional, but the stories are real.

Investment/Romance Scam

Michael had always wanted to invest in cryptocurrency, which he found interesting but didn’t know where to begin. One day, a woman on Facebook named Isabella direct messaged him to start a friendly conversation. Soon flirtation blossomed, moving from the social media site to messaging privately on WhatsApp. As they learned more about each other and their relationship deepened, Isabella eventually shared that she’d made money investing in cryptocurrency.

Isabella offered to teach Michael what she knew, providing a link to a site where he could purchase cryptocurrency. It appeared that Michael’s money was going into a wallet held on the Coinbase Exchange. However, unknown to Michael, the link Isabella provided wasn’t really to Coinbase but to a fake site. Initially, he made a small investment, which appeared to make significant gains. He made a few small withdrawals and, encouraged by the results, he invested larger and larger amounts. Michael invested most of his life savings and then watched as his money quickly tripled in value.

When Michael wanted to withdraw some of his money, he was informed that his account was frozen due to suspicion of money laundering and insider trading. Confused, Michael reached out to Isabella who also seemed confused. Michael then began receiving emails saying he had to pay a retainer fee to prove that he wasn’t insider trading. Panicked, Michael again messaged Isabella who pleaded with him to pay the fee so she wouldn’t lose her money as well.

Michael paid the 10 percent fee of the balance of his account and then received another email stating that he now owed a fine. Michael realized he’d been scammed but continued communicating with Isabella. Eventually, he began to realize she too was not real. When Michael last checked his account, the balance was $0.

Tech Support Scam

Linda was browsing through Facebook one day when a popup screen appeared, and a blaring sound came from her speakers. The popup message claimed her computer was infected with a virus and she needed to call for technical support. Concerned, Linda called the number on the screen and talked to Gabriel, who acted very helpful and explained that her computer protection was out of date. Linda’s computer was quite old, and she knew little about technology. So, she trusted Gabriel who instructed her how to give him remote access to her computer.

After a few hours, Gabriel fixed Linda’s computer and said her new protection would cost $299 and that he would call the next day to check on her. Linda provided Gabriel with her debit card information and believed her computer was fixed.

The next day, Gabriel called to make sure the computer was running smoothly and let her know she would be getting a $299 refund because after checking his records, he discovered she had previously had some protection on her computer. Gabriel then popped open a screen on Linda’s screen that appeared to be her bank account with the refund and an additional $50,000.

At this point, Gabriel seemed to panic and yelled at Linda saying she needed to return the money, or he would lose his job. She said she would get him a cashier’s check, but he insisted on cash, saying a cashier’s check would take too long. Linda refused to send cash and helplessly watched as Gabriel zeroed out her account on the screen before her. She screamed for him to return her money, so he returned the money in the accounts on her screen and said she needed to go to the bank to get $25,000 today and another $25,000 the next day to send to him.

It seems the reason she was targeted by the scammers was that they found her financial records and knew she had at least $50,000 in her account. As part of the tech support scam, they had access to her computer, then looked for and located her bank statements.

Linda lived in a small town, and it was late in the day, so the local bank was closed, forcing her to drive for miles to get cash. Gabriel then convinced her to drive five more hours to deposit the cash in a town with a Bitcoin ATM. Acting kindly, he walked Linda through the steps to deposit $25,000 into his crypto wallet account. He stayed on the phone with her the entire time, through the long drive and while she deposited the money.

The ATM would only accept $15,000 per day so Gabriel instructed Linda to return home, then he would call her in the morning to help her deposit the rest. He stayed on the phone with her the entire drive home and insisted she tell no one.

The next morning, after talking with her husband and then her local bank, Linda realized what had happened and did not answer Gabriel’s call. He called repeatedly and finally giving up after 13 attempts. In total, Linda lost $15,000.

Warrant Scam

One day, Steve got a call seemingly from his local sheriff’s office saying his warrant needed to be paid immediately, or he was going to be arrested. The caller-ID number on Steve’s phone indicated it was from the sheriff’s office. He didn’t want to be arrested, so he followed directions, went to a local cryptocurrency ATM, deposited cash and sent the funds to the requested wallet address. He brought the receipt to the sheriff’s office as requested, only to find out that he’d been scammed.

Same Story, Different Method

These three stories have one thing in common: scams involving cryptocurrency. These stories aren’t new. These and similar scams have been circulating for a long time with victims losing traditional currencies or gift cards. The difference is scammers are now using cryptocurrency to facilitate the scam. Cryptocurrency on its own isn’t a scam, people invest money in cryptocurrency for the same reason they invest in anything, hoping it will rise in value.

Cryptocurrency 101

Cryptocurrency is a digital currency, meaning it exists only electronically. It is decentralized in that no bank or other government authority backs or controls the currency. It is a direct transaction sent and received electronically between peers. Transactions are recorded on a blockchain, which is a digital public ledger of all transactions. The ledger is distributed, meaning it doesn’t exist on just one computer; anyone can download a copy of it onto his or her computer. The transactions on the blockchain are secured by encryption using cryptography.

The word ‘cryptocurrency’ is a combination of cryptography and currency. Cryptography uses complex mathematical algorithms, requiring massive amounts of computational power, to provide security for cryptocurrency transactions. ‘Miners’ generate new coins and confirm cryptocurrency transactions by solving those cryptographic algorithms.

Bitcoin was the first cryptocurrency, debuting in 2009, and remains the most popular. There are now more than 9,000 different cryptocurrencies,ii including Ethereum, Litecoin, Dogecoin and Monero. The top 20 cryptocurrencies make up approximately 90 percent of the total market. Bitcoin’s market cap is approaching $1 trillion, which is greater than the other 19 cryptocurrencies combined.iii

Purchasing Cryptocurrency

Cryptocurrency can be purchased using an app on your cellphone, on a website on your computer or by using a cryptocurrency ATM. Transactions are linked to individuals by their wallet address, which is a long string of numbers and letters.

Hardware Wallets: The Trezor Hardware Wallet is “a super secure, physical piggy bank for your cryptocurrencies,” according to the website (trezor.io). As a digital vault, the wallet enables online and offline transactions. If the wallet is lost, its data can be recovered by contacting Trezor.

Cryptocurrency exchanges help match buyers and sellers, or exchange one type of cryptocurrency for another. Available exchanges include Coinbase, Gemini, Crypto.com, BitMart and Binance. Exchanges can also be accessed via cellphone or computer and support a variety of payment methods, including cash, bank transfer, debit card, credit card and PayPal.

Cryptocurrency ATM machines—also known as Bitcoin ATMs or BTMs—can be found in many locations. In 2023, there were more than 63,000 BTMs in the U.S., some of which enable Bitcoin purchases only, and others also allow selling Bitcoin.iv Transactions in other cryptocurrencies must be made on an online exchange.

Purchasing from a BTM requires a wallet address. Methods of purchase include cash—which guarantees anonymity—and, depending on the BTM, credit cards and payment apps. As a result, these BTMs are the focus of scammers.

Another two considerations to note when using a crypto BTM are fees and purchase price. Transaction fees range from 3 to 20 percent, which could amount to $2,000 for a $10,000 purchase simply for using the machine. As well, be aware that many BTMs inflate the purchase price for Bitcoin from $48,040.70 on February 11, 2024, for example to $53,805.58, a 12 percent hidden fee.

Wallets

Transactions don’t have names connected to them but rather transaction identifiers, connecting a sending wallet and receiving wallet, as well as the transaction amount and timestamp. A cryptocurrency wallet is where a user’s public and private keys are stored. Unlike a traditional wallet that stores cash, a crypto wallet doesn’t store the actual currency but rather the keys to that currency. The public key is open to anyone in the system to see and allows users to receive transactions. The private key is matched with the public key and proves ownership of the wallet. The private key should be stored separately from the public key and kept secret.v

There are different types of wallets, hot and cold, the key differences being whether they are connected to the internet.

A hot wallet generally takes the form of an app or software installed on a computer that stores your private keys. There are web-based, desktop-based and mobile hot wallets, all of which are connected to the internet. Hot wallets are faster and more convenient to access than cold wallets and generally operate without cost. Storing large amounts of cryptocurrency in a hot wallet, however, is not recommended since they are vulnerable to attack.

Cold wallets are stored offline and are generally more secure than hot wallets. They can be hardware based, on paper or in a separate offline computer. Hardware wallets often resemble a small USB stick. Unlike a hot wallet, hardware wallets can cost anywhere from $50 to $200, a small price to pay for security if you own large amounts of cryptocurrency. Cold wallets take longer to access, so they are not ideal for making frequent trades. Paper wallets are a type of cold wallet in which you print out your public/private key pair. Sending money to a paper wallet requires the public key, while receiving money from a paper wallet requires the private key. The risk of having a paper wallet is losing or destroying the paper. Once lost, there is no possible way to recover any funds.

Anonymous?

Some types of cryptocurrency claim to be anonymous. However, Bitcoin is not anonymous in that the transaction ledger is public, so anyone can download a copy. There are many websites available, both free and fee-based, that assist in tracing transactions, albeit some are easier to use than others.

Since the ledger is public, making the transactions traceable, how are these scams so prevalent and hard to track down?

Scammers obscure the money trail by using virtual services called ‘mixers’—also known as tumblers, shufflers or blenders—that ‘mix’ the targeted user’s cryptocurrency with crypto assets from multiple addresses for a period of time before sending the assets at random periods to their destination addresses. A ‘shapeshifter’ is a type of mixer that takes this process one step further by converting the funds into a different cryptocurrency for added anonymity.

Even if a mixer of some sort isn’t used in the scam, other obfuscation techniques might be employed, such as connecting to the internet using a virtual private network (VPN), which enables the perpetrator to hide the originating IP address. Also, there are unfriendly and/or unregulated cryptocurrency exchanges, which might be offshore, that may not cooperate with law enforcement in providing customer information. If the funds end up in an exchange controlled by a foreign country that will not cooperate with U.S. law enforcement, little can be done.

Cryptocurrency Recovery Companies

Many companies claim to recover lost cryptocurrency for a fee. These companies may be able trace the cryptocurrency using the methods described above. While they may be able to see where lost cryptocurrency may have gone, no private company can recover funds, only a law enforcement agency may be able to recover lost funds. Contacting law enforcement should be your first step. Recovery companies charge fees to trace funds, law enforcement does not. If a recovery company charges an upfront fee with promises of recovery, they are not legitimate. Their fee schedule should be clearly stated along with their capabilities.

Some recovery companies can be of assistance to law enforcement agencies that are not knowledgeable about cryptocurrency or don’t have the funds for the costly tracing tools, but using their services comes with significant cost.

Cryptocurrency Scam Protection

The first rule to protect against scams is an old one: If it sounds too good to be true, it probably is.

If you are going to invest in cryptocurrency, only invest what you are willing to lose since cryptocurrency’s value is highly volatile. Unlike traditional investing in stocks and bonds, there are no businesses nor physical assets backing cryptocurrency with earnings or products. The value of cryptocurrency is built on supply and demand.

Investing in cryptocurrency is not inherently bad, but be sure to know what you are getting yourself into. To understand Bitcoin more thoroughly, please refer to Prof. Marcus Fries’s article, “CBDC vs Bitcoin: Privacy & Freedom or Total Control?” beginning on page 13. There is also a comprehensive whitepaper, “Bitcoin: A Peer-to-Peer Electronic Cash System” by Satoshi Nakamoto, Bitcoin’s alleged creator.vi

Scammers are able to achieve anonymity because of the difficulty in tracing their illicit money trail, which they obscure with virtual services including ‘mixers’ that mix the target’s cryptocurrency with multiple addresses before sending the assets to their destinations. An advanced mixer, called a ‘shapeshifter,’ converts stolen funds into different currencies for added anonymity.

What not to do may seem obvious after reading these stories, but these scams are prevalent. The traditional romance scams are turning into investment scams where instead of flat out asking for money, scammers are encouraging their victims to invest. Another term for this is “pig butchering.” The scammers initiate contact and build a relationship with the victim before getting them to invest a small amount of money through a fake site. They often let victims withdraw a portion of the money to build trust before encouraging them to invest more and more. The term “pig butchering” comes from the fattening process, the manipulation to invest more and more, before cutting them off completely.

What to Watch For

Fake Investment Scams

Unsolicited Offers: Avoid unsolicited offers of investment assistance. The so-called expert or very attractive person messaging you on social media is likely a scammer. They make you feel special for choosing you or pretending to give you information no one else has. Beware of someone you have never met in person giving you investment advice. If it was such a great deal, everyone would know about it.

Unrealistically High Returns: No one can predict future returns on an investment. Guaranteed returns on any investment are a giant red flag. Scammers lure their victims with “per day” returns given as percentages that could sound realistic, such as 2 or 3 percent per day. However, 3 percent per day equals 1,095 percent per year, which is a highly unlikely return on any investment.

Paying a Tax: Taxes are paid to the IRS, not to withdraw money. If anyone asks you to pay a tax to withdraw funds, know that it is a scam.

Investment Sites: Only use trusted sites, never use a link that someone sends you. Research trusted exchanges and use their apps or websites.

Popup Ads

Don’t call any number that appears in a popup. These are often accompanied by a loud sound telling you that your device has been hacked or that its protection is out of date. These ads attempt to impersonate Microsoft, Google or other tech companies to get you to call their phone number. Take a picture or screenshot of the popup window and then close it and shut down your computer if necessary. If you are concerned there is a virus on your computer, take it to a computer repair shop to be scanned.

No legitimate business is going to demand you send cryptocurrency in advance–not to buy something, and not to protect your money. That’s always a scam.

Warrants

Government agencies won’t call, text or email you without warning to demand payment immediately. They will never ask for payment in gift cards or cryptocurrency. Caller ID can be manipulated, so don’t trust that the caller ID you see on your phone is legitimate. Look up the phone number on the agency’s website or another trusted online source or better yet, go to the local sheriff’s office. Do not share personal information with someone who contacts you unsolicited.vii

Other Variations

Grandparent Scam: A person gets a call from someone claiming that their loved one is in trouble. They have been hurt, arrested or otherwise need help. The scammer will often fake the loved one’s voice or claim that he or she can’t talk. The scammer creates a sense of urgency to try to get the person to act quickly.

Lottery Scam: A scammer calls, texts or emails that you have won the lottery. You just have to pay a fee to claim your prize.

Where to Find Help

A list of other cryptocurrency scams can be found here at the State of California’s Department of Financial Protection & Innovation.viii If you or someone you know falls victim to one of these scams, report it to your local law enforcement agency. Additionally, to help other people from becoming victims, scams can also be reported to government agencies, including the Federal Trade Commission, FBI’s Internet Crime Complaint Center and the U.S. Securities and Exchange Commission.

There are also handouts available online articulating details about what to look for and how to avoid some of the common scams, such as Online Dating Scam,ix Grandkid Scamsx and Lottery Scams.xi


References

i https://public.tableau.com/app/profile/federal.trade.commission/viz/ FraudReports/PaymentContactMethods

ii https://www.statista.com/statistics/863917/number-crypto-coins-tokens/

iii https://www.bankrate.com/investing/types-of-cryptocurrency/

iv https://www.bankrate.com/banking/what-are-bitcoin-atms/

v https://crypto.com/university/crypto-wallets

vi https://bitcoin.org/bitcoin.pdf

vii https://www.morgantonnc.gov/public-safety/page/arrest-warrant-scams

viii https://dfpi.ca.gov/crypto-scams/

ix https://madlabs.dsu.edu/digforce/docs/Online_Dating_Scams.pdf

x https://madlabs.dsu.edu/digforce/docs/Grandkid_Scams.pdf

xi https://madlabs.dsu.edu/digforce/docs/Lottery_Scams.pdf

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