Crypto Fraud
Learn about the different types of crypto fraud.
Table of Contents
Cryptocurrency is a digital or virtual form of currency that uses cryptography for security, making it difficult to counterfeit or double-spend. Most cryptocurrencies are decentralized networks based on blockchain technology—a distributed ledger enforced by a network of computers. This decentralization means that cryptocurrencies operate independently of a central authority, such as a government or financial institution. Bitcoin, created in 2009, was the first and remains the most well-known cryptocurrency, but since then, thousands of alternative cryptocurrencies have been developed, each with its own unique features and uses. Cryptocurrencies are used for various applications, from online transactions and investment to decentralized finance (DeFi) and smart contracts, revolutionizing traditional financial systems.
Whistleblowers who report crypto fraud may be eligible to receive a share of the government’s recovery as a financial reward.
Here are some of the most common types of crypto fraud:
Financial Crimes
Financial crimes in the cryptocurrency space can include a wide array of illegal activities, such as money laundering, fraud, and terrorist financing. Cryptocurrency’s decentralized nature and its potential for anonymity make it attractive for bad actors to engage in these crimes. The Commodity Futures Trading Commission (CFTC) can be alerted to such activities, especially when digital assets are used to mask illicit financial transactions or when fraudulent schemes are perpetrated under the guise of legitimate cryptocurrency businesses.
Scam Initial Coin Offerings (ICOs)
Scam ICOs are fraudulent fundraising schemes where a new cryptocurrency or token is offered to investors with false promises of high returns. In many cases, the individuals behind these ICOs either have no intention of creating a functional product or disappear with investors’ funds. These scams often involve exaggerated claims about the technology or team behind the project. Reporting scam ICOs to the CFTC can help prevent further victimization of investors and bring perpetrators to justice.
Pump and Dump Schemes
In pump and dump schemes, a group of individuals artificially inflates the price of a cryptocurrency through misleading promotions, only to sell off their holdings once the price has peaked. Once they "dump" their tokens, the price of the cryptocurrency plummets, leaving other investors with significant losses. These schemes are illegal market manipulations, and whistleblowers can report such activities to the CFTC for enforcement action.
Market Manipulation
Market manipulation in the cryptocurrency space can take many forms, such as spoofing (placing fake buy or sell orders to deceive the market) or wash trading (executing trades with oneself to create a false impression of market activity). These tactics distort prices and can mislead investors, making it difficult to assess the true value of a cryptocurrency. The CFTC monitors such manipulation closely, and whistleblowers play a key role in exposing these illegal practices.
Ponzi Schemes
In a cryptocurrency Ponzi scheme, fraudsters promise high returns to early investors, using the funds from new investors to pay off earlier participants rather than generating profits through legitimate business operations. Eventually, the scheme collapses when there are not enough new investors to sustain it. Ponzi schemes are illegal, and whistleblowers can report them to the CFTC to help protect others from financial loss.
Traditional Theft
Traditional theft in the cryptocurrency space involves the unauthorized access to digital wallets, exchanges, or private keys to steal funds. While some of these crimes are committed by external hackers, others may involve insiders at exchanges or other platforms. Theft of cryptocurrency can have devastating financial consequences, and reporting such incidents to the CFTC can aid in recovering funds and bringing the criminals to justice.
Broker-Dealer Fraud
Broker-dealer fraud involves deceptive practices by individuals or firms that facilitate cryptocurrency trades. These brokers may mislead clients about fees, fail to execute trades properly, or engage in unauthorized transactions. Because broker-dealers are in a position of trust, their fraudulent behavior can result in significant losses for investors. Reporting such fraud helps ensure accountability and regulatory oversight in cryptocurrency markets.
Unscrupulous Promoters
Unscrupulous promoters are individuals who use misleading advertising or false claims to promote specific cryptocurrencies or crypto-related projects. These promoters may use social media, email campaigns, or other platforms to entice investors into fraudulent schemes. In many cases, they receive compensation for their endorsements but fail to disclose this fact, creating a conflict of interest. Reporting these activities to the CFTC can help prevent further fraud and ensure that investors have accurate information.
Pig Butchering Schemes
Pig butchering schemes involve a form of long-con fraud in which the perpetrator builds a relationship with the victim, often through social media or dating platforms, and gradually gains their trust. The fraudster then convinces the victim to invest in a fraudulent cryptocurrency scheme, "fattening" them up with small returns to build confidence before ultimately stealing their entire investment. These schemes are highly manipulative and can result in significant financial losses for victims, making it crucial to report them to the CFTC for investigation.
