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Things to know about blockchain fraud


Blockchain is an extremely innovative technology with a wide range of possible applications: payment processing without intermediaries, digital denomination of assets or proof of authenticity and ownership of artworks. Fraudsters’ schemes are correspondingly varied and not always obvious.

The enormous range of different application areas illustrates the great potential of this young technology. Unfortunately, it can also be abused, and many people have already suffered severe economic damage as a result. How can we recognise these fraud systems and protect ourselves against such abuses? Unimaginable wealth just a few clicks away – such are the promises that often lure potential victims into these scams. The scams themselves are usually very similar, as they almost always advertise above-average returns – sometimes to be paid out on a weekly basis. Users then register with these websites and “invest” in the system. In the user’s member area, the amount paid in and profits made are displayed as a nice visualisation on a so-called dashboard. This allows each user to follow their ever-increasing profits. The users are convinced that they have discovered the perfect investment and are thus encouraged to invest ever larger shares of their total assets. In truth, however, all of this is pure show, a simulation, a deception. In fact, at this point the investments are already in an off-shore jurisdiction and the amounts displayed on the dashboard are only programming that displays ever higher values which are detached from genuinely realised profits. 

If users want their invested amounts or winnings paid out, they are usually put off with excuses such as “a payout is currently not possible due to technical problems, please contact IT support”. Often these systems go one step further: the users are told that they have to make one or more further deposits to “unlock” a payout of the entire balance. Many users still trust the system at this point and sometimes make further deposits without ever getting a fraction of it back. The perfectly designed websites do not give rise to any doubt in the minds of many laypeople that what they see could be a dubious fraudulent system and of course this has devastating consequences. Many users are driven to financial ruin and reach the limits of their economic existence. 
What these systems have in common is that deposits can usually only be made in the form of bitcoins. There is a specific reason the deposit must be made in cryptocurrencies: The blockchain is transparent and can be viewed by everyone but only shows which transactions have been carried out and in which wallet the transferred bitcoins are located. However, it is not possible to determine who the owner of a particular wallet is. The exact movements of the invested and transferred BTC can be tracked and its ultimate storage location is available, but not whose identity is hidden behind it. This anonymity is a great advantage for fraudsters compared to conventional bank accounts, where wide-ranging regulations make account holders easy to identify. 

Anti-money laundering guidelines have somewhat improved this lack of transparency. EU-based service providers with a focus on virtual currencies, such as exchanges (= crypto trading platforms) must determine exactly who their new users are when registering them (“Know Your Customer”). With the cooperation of the respective platforms this allows a similar level of transparency to banks. 

In addition to such fraud schemes, there are also numerous cryptocurrencies that have been created and issued with abusive intent. For example, the “Squid Coin” was used to fraudulently exploit global hype surrounding the Netflix series Squid Game. The value of this coin soared until the founders then sold all of the coins they had retained when the currency was issued, causing the price to crash completely. This led to the total loss of corresponding investments. 

In order not to fall into such traps if you intend to invest in cryptocurrencies it is recommended that you invest via well-known large exchanges such as Kraken, Binance or Bison and to primarily buy well-known coins. One must always be aware that such cryptocurrency investments have been subject to very large price fluctuations to date. Such investments are therefore not for the faint-hearted. It is also recommended that you invest in different asset classes and to place only a small part of your total assets in cryptocurrencies.

Once you have successfully registered with a crypto platform, you are strongly advised to activate the maximum security standard of the respective platform operator. The general standard is two-factor authentication (2FA), which requires a one-time password to be entered in addition to the main password, which is created by a separate app (e.g. Google Authenticator). Another option similar to conventional online banking is to enter a TAN sent by SMS. 

Such security measures can be provided not only for logging into an account, but also for placing orders, making withdrawals or other actions. 

Legal support should be sought quickly if, despite increased caution and security, theft or fraud does occur.