Comprehensive Guide to Crypto and Blockchain Scams and Frauds
Understanding Crypto Scams and Frauds: What You Need to Know
Although crypto is rapidly evolving, along with investment and innovation comes a darker side: a rise in crypto-related scams and frauds. At Dynamis LLP, we’ve seen an uptick in cases involving individuals and businesses falling victim to these schemes and we are here to help.
In this legal resource guide, we’ll explore some of the most prevalent crypto scams, including SIM swaps, “pig butchering” schemes, and sophisticated hacks, to help you understand the risks and take proactive measures to protect yourself.
SIM Swapping: Gaining Control of Your Digital Identity
SIM swapping is a form of identity theft where fraudsters manipulate mobile carriers into transferring a victim’s phone number to a new SIM card under their control. Once they have access to the phone number, scammers can intercept two-factor authentication codes, gaining entry to cryptocurrency wallets, exchange accounts, and even personal emails.
How it Happens:
- The attacker gathers personal information about the victim through phishing, social engineering, or data breaches.
- Using this information, they convince the mobile carrier to transfer the number to a SIM card they control.
- With access to the victim’s phone number, they can reset passwords and drain crypto accounts.
Notable Case:
U.S. v. Truglia (SDNY 2021): Nicholas Truglia was charged in the Southern District of New York for orchestrating a SIM swapping scheme that resulted in the theft of over $20 million in cryptocurrency from a Silicon Valley executive. Truglia exploited vulnerabilities in mobile carrier systems to gain access to the victim's digital wallets. He was ultimately sentenced to several years in prison and ordered to pay restitution. This case highlighted the severe impact of SIM swapping and prompted broader discussions about regulatory reforms in telecommunications security. Additionally, federal authorities have pursued similar cases, such as U.S. v. Clark (2022), where Graham Clark faced charges for a SIM swapping attack leading to a major cryptocurrency theft from high-profile users.
Preventative Steps:
- Use app-based authentication methods like Google Authenticator instead of SMS-based two-factor authentication.
- Add a PIN or security code to your mobile carrier account.
- Regularly monitor your account activity for any unusual changes.
2. Pig Butchering: The Long Con in Crypto
“Pig butchering” is a term for a scam where fraudsters groom victims over time, building trust before executing the fraud. These scams often begin on dating apps, social media platforms, or messaging services, where perpetrators pose as wealthy investors or financial advisors.
How it Works:
- The scammer establishes a personal connection and convinces the victim to invest in a fake cryptocurrency platform.
- Initial investments appear to yield high returns, encouraging the victim to invest more.
- Once the victim has invested significant sums, the scammer disappears, and the funds become unrecoverable.
Notable Case:
- U.S. v. Liao: Federal prosecutors charged Liao with conspiracy to commit wire fraud and conspiracy to commit money laundering. Liao and others conspired to open shell companies and bank accounts to launder victim proceeds of cryptocurrency investment scams –known as “pig butchering” – and other fraudulent schemes. Then, they allegedly transferred the funds involved in the fraud schemes to domestic and international financial institutions. Each of the charges for conspiracy to commit wire fraud and conspiracy to commit money laundering carry a maximum statutory sentence of 20 years in federal prison.
Protective Measures:
- Be skeptical of unsolicited investment advice or invitations.
- Research any platform or individual claiming to offer high returns.
- Avoid sharing personal financial information with strangers online.
3. Hacks and Exploits: Breaching Crypto Security
The decentralized nature of cryptocurrencies and their underlying technology, blockchain, is a double-edged sword. While blockchain offers security, it also presents vulnerabilities that hackers can exploit. High-profile exchange hacks and vulnerabilities in smart contracts are common methods used to steal funds.
Notable Examples:
- Mt. Gox Hack (2014) One of the earliest and most infamous exchange hacks resulted in the loss of 850,000 Bitcoins, valued at hundreds of millions at the time.
- Poly Network Exploit (2021): Hackers exploited a vulnerability in Poly Network’s smart contract, stealing over $600 million in cryptocurrency before eventually returning most of the funds.
Legal Precedent:
- U.S. v. Clark (2022): Graham Clark, a teenager, was sentenced in federal court for orchestrating a massive hack on a cryptocurrency exchange, leading to significant losses for users. This case highlighted the vulnerabilities in exchange security protocols.
Staying Safe:
- Use reputable exchanges with robust security measures.
- Store your crypto assets in cold wallets (offline storage) rather than keeping them on exchanges.
- Regularly update your wallet software and be vigilant about phishing attempts.
Legal Recourse for Victims
If you’ve fallen victim to a crypto scam, it’s crucial to act quickly. Document all communications, report the fraud to relevant authorities, and consult legal professionals experienced in cryptocurrency-related cases. At Dynamis LLP, we specialize in navigating the complexities of digital asset fraud, helping clients recover their assets and hold perpetrators accountable.
4. 51% Attacks: Undermining Blockchain Integrity
A 51% attack occurs when a malicious entity or group of hackers gains control of more than 50% of a blockchain network's mining power or computational resources. This enables the attackers to manipulate the blockchain by preventing new transactions from being confirmed, reversing transactions, and even double-spending coins.
How It Works:
The attacker amasses sufficient mining power to dominate the network.
With control of the majority, the attacker can reorganize the blockchain to their advantage, including invalidating legitimate transactions.
Smaller blockchains with lower hash rates are more vulnerable due to the reduced computational power required to execute such an attack.
Notable Example:
Ethereum Classic Attack (2020): Ethereum Classic (ETC) suffered multiple 51% attacks, with one attack reversing over 4,000 blocks and resulting in double-spends totaling millions of dollars. These attacks exposed the vulnerabilities of smaller blockchain networks and led to significant losses for users and exchanges.
Bitcoin Gold Attach (2019): Bitcoin Gold is a Bitcoin hard-fork that aims to be GPU-mineable by using the Equihash algorithm with parameters (144, 5) also known as "Zhash". The Bitcoin Gold website claims Zhash "uses more memory than an ASIC can muster, but runs fine on many graphics cards". Bitcoin Gold was previously 51% attacked in May 2018 when it was estimated that up to $18 million worth of BTG was double-spent.
Legal Precedent:
While no specific federal cases have been directly tied to 51% attacks, affected parties have pursued claims of negligence and breach of duty against exchanges that failed to implement adequate security measures for smaller blockchains. Such cases highlight the emerging legal challenges surrounding blockchain integrity and user protections.
Protective Measures:
Choose blockchain networks with high hash rates and robust security.
Diversify your crypto investments to reduce exposure to vulnerabilities in a single blockchain.
Monitor network activity for signs of unusual concentration of mining power. The decentralized nature of cryptocurrencies and their underlying technology, blockchain, is a double-edged sword. While blockchain offers security, it also presents vulnerabilities that hackers can exploit. High-profile exchange hacks and vulnerabilities in smart contracts are common methods used to steal funds.
Final Thoughts
The cryptocurrency market presents exciting opportunities, but it’s essential to remain vigilant against evolving threats. By understanding the tactics scammers use and implementing preventative measures, you can significantly reduce your risk. If you or your business has been affected by a crypto scam, contact Dynamis LLP for expert guidance and support. Dynamis has significant experience guarding against the attacks, reporting the attacks to law enforcement, and working to recover crypto-assets.
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