Cash News
Crypto crime is on the rise
Even as cryptoasset and associated products continue to make inroads and gain traction within the TradFi sector, crypto scams and frauds continue to represent a significant challenge to even broader adoption. In a report released by the FBI Americans lost more than $5.6 billion due to cryptocurrency scams in 2023. These losses comprise approximately 50% of total investor losses from financial fraud, and represent a 45% increase in crypto scams when compared to 2022. It is worth noting that the dollar figure associated with these scams and frauds is driven by both an uptick in incidents as well as the recovery in crypto prices that has driven much of the 2023-2024 market narrative. The fact that frauds and scams remain so prevalent, and actually increased year-over-year, should be noted and noteworthy for all members of the crypto community.
Specifics of the crypto-related scams included some of the methods more traditionally associated with the space, such as pump-and-dump tactics, but also included a number of other tactics as well. These include, but are not limited to criminals setting up entire call centers from which to run scam organizations from, fraudsters impersonating government agents, and making use of online dating sites to defraud investors of crypto holdings. While the report from the FBI centered around investors, and not specifically institutions, there are several important lessons that entrepreneurs and institutions looking to integrate and/or expand crypto operations should keep in mind.
Counterparty Risk Is Real
For entrepreneurs or even larger institutions looking to use crypto for payroll purposes, treasury management purposes, or for paying vendors it is unlikely that the organization will self-custody cryptoassets. As the utilization of crypto has expanded it is virtually guaranteed that fraudulent crypto custodians will enter the marketplace, especially given the price recovery that has already occurred in 2024 alongside optimistic forecasts centered around the U.S. Presidential election. Given the fast moving nature of the crypto sector, few custodians or third party service providers will have a long track record, but there are items that institutions should look out for evaluating a counter party with which to engage.
These items include but are limited to inquiring about regulatory licenses and compliance records, completed third-party audits or at least attestations, cold storage procedures and controls, insurance coverage and limits, and evidence of client asset segregation. As the collapse of FTX demonstrated these items, among others, should not be assumed but rather should be investigated prior to entrusting funds to a third party.
Clear Reporting Is Needed
Building on the first point it is difficult to overstate the importance of clear and standardized reporting, and consistent channels of communication. Every investor benefits from better reporting, but the institutional and entrepreneurial investors stand to benefit even more than individual investors. In addition to providing better information for business decision making, providing on-demand reporting and analytics can also help these same investors avoid projects that are either unable or unwilling to provide the necessary information.
For example, even if the concept of proof-of-reserves is still very much a work in progress this is something that any investor seeking to integrate crypto into operations should be aware of. For stablecoin issuers, or any other token that is offered to the marketplace, one of the first things that should be provided to potential partners and investors is some sort of report on the status of tokens and reserve assets. Since institutional and entrepreneurial users of crypto are concerned with liquidity and transparency, better accounting and reporting is a must have.
Scam Risks Will Not Go Away
The unfortunate reality is that as the crypto market continues to mature, expand, and increase in value the cybercriminals and other unethical across the globe will continue to take advantage of loopholes in security and internal controls. Especially as institutions seek to integrate crypto payment options – in the form of stablecoins or other tokenized assets – this will provide another avenue for bad actors to gain access to these financial transactions and other data within the organization. Appropriate controls, employee training, and periodically updating policies around how crypto integration occurs will only become more important going forward.
Crypto crime is back on the rise, and investors need to take proactive steps to avoid failing victim.