Crypto Frauds Target Investors Hoping to Cash In on Bitcoin Boom

Scams are rampant in the cryptocurrency markets as a huge rally in Bitcoin, lack of regulation, and the anonymity of digital money have created a ripe environment for scammers.

According to the Federal Trade Commission, consumers said they lost nearly $ 82 million to crypto fraud in the fourth quarter of 2020 and first quarter of 2021, more than ten times the amount over the same six-month period last year.

From October through March, Bitcoin’s price soared 450% to nearly $ 59,000, while competing coins like Ether and Dogecoin also soared. Bitcoin has since declined to around $ 36,000, still significantly higher than all of last year.

Scammers have targeted everyone from retail investors scouring social media for investment tips to Wall Street veterans helping an Australian crypto fund manager recently charged with $ 90 million fraud.

Sebastian, a 28-year-old pharmacy technician, is still kicking his own pants after losing about $ 10,000 in ether to a crypto company whose anonymous creators disappeared in May, leaving hundreds of unfortunate investors.

The makers of “LUB Token” stated that they would set up a crypto exchange based on the Telegram messaging app. On their now defunct website and in a press release distributed on several crypto websites, they advertised LUB, a new cryptocurrency that promised daily returns of up to 10%.

Sebastian, who lives in suburban London, said that he usually does careful research on crypto projects before investing, but he broke his own rule and got involved. He’s made multiple deposits into a LUB-controlled digital wallet, and the company even put the company on Reddit beforehand, with others warning him it was a scam. By then it was too late. Unlike credit card purchases, crypto transfers are generally irreversible.

“I’m ashamed and still can’t imagine how stupid I was,” says Sebastian, who asks not to publish his last name so that he is not targeted by Internet trolls.

China’s recent warning about cryptocurrencies has left the market in a tailspin. WSJ’s Aaron Back explains why recent changes in the value of Bitcoin, Dogecoin, Ether and other cryptocurrencies could point to barriers to mainstream adoption. Photo: Dado Ruvic / Reuters

Hundreds of people with similar stories, mostly in Europe, have since joined Telegram groups like “LUB Token = SCAM !!!” An administrator of a group that uses the name Tobias estimates that the victims in Germany lost between 500,000 and 1.5 million euros (600,000 to 1.8 million US dollars). The German police are investigating complaints about the LUB program across the country, said a police spokesman for the city of Aalen, which received a complaint in May.

It’s hard to tell how much money investors are losing to crypto scams. The FTC figures are based on self-reported fraud victims and are largely limited to the US, so they are likely to only reflect a fraction of the total losses. Fraudsters are taking in less than they used to – from $ 4.1 billion in 2019 to $ 432 million in the first four months of this year, according to CipherTrace, a blockchain analytics firm that tracks cryptocurrency reports around the world. CipherTrace’s numbers for 2019 and last year were up due to the discovery of some major Ponzi schemes in Asia.


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Still, CipherTrace says fraud is increasing in the bustling area of ​​DeFi or decentralized finance. DeFi is a broad term for efforts to provide financial services – such as lending, asset trading, or insurance – using blockchain, the technology behind Bitcoin.

DeFi projects offer returns on investors’ crypto assets well above traditional rates, and even some legitimate DeFi projects are run by anonymous teams. This makes it easy to carry out “rug pulls”, a scam in which unscrupulous operators collect money for a project and then flee with the money from investors.

From January through April, DeFi scammers stole $ 83.4 million, more than double the entire previous year, according to CipherTrace. DeFi “exploded and there are many innovative products out there, but it is also ripe for fraud,” said Dave Jevans, CEO of CipherTrace.

Crypto hedge fund manager Stefan Qin, seen here in 2018, faces 20 years in prison after pleading guilty in February of committing a $ 90 million fraud.


Billy HC Kwok for the Wall Street Journal

Scams frustrate crypto advocates who have pushed for mainstream digital currency adoption.

“Bad guys will always follow the money,” said J. Christopher Giancarlo, a former chairman of the Commodity Futures Trading Commission who is now on the board of directors of crypto startup BlockFi. “As the industry matures and the surveillance tools get better, hopefully the cops will catch up.”

Even seasoned investors can fall prey to crypto scams. In February, crypto hedge fund manager Stefan Qin pleaded guilty to securities fraud. Before a New York federal court, the 24-year-old Australian confessed to years of lying to investors about the returns on his $ 90 million flagship fund, the Virgil Sigma Fund LP. He is now facing up to 20 years imprisonment.

Mr Qin had claimed a near-perfect profitability record, saying the fund had achieved monthly returns of sometimes more than 20% through arbitrage trading – using computers to take advantage of price differences between crypto exchanges. He was featured in an article in the Wall Street Journal in 2018 that reiterated some of his false claims.

“Mr. Qin has taken full responsibility for his actions and is determined to do everything in his power to make amends,” his attorneys at Kaplan Hecker & Fink LLP said in a statement.

Virgil attracted dozens of well-heeled investors with balances between $ 103,000 and $ 5.7 million, according to a court record. Two of those investors who spoke to The Journal on condition of anonymity are finance professionals from the New York area who have worked for multinational banks.


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In retrospect, the two investors said they missed a red flag: the fund has never produced audited returns, a situation Mr. Qin attributes to the emerging nature of crypto. “Being at the forefront of the industry has put us ahead of regulators and accounting firms, and often there are no standard paths,” Virgil told investors in a 2019 email.

Court records show that Mr. Qin came under pressure last year after investors tried to raise money from the Virgil Sigma Fund. In December, Mr. Qin tried urgently to withdraw money from a separately managed sister fund, Virgil Quantitative Research, and told his staff that he had to pay off Chinese loan sharks, according to a lawsuit filed against him by the Securities and Exchange on December 22nd Commission.

Alerted staff alerted the SEC about what triggered Mr. Qin’s fall, a person familiar with the matter said. An SEC spokesman declined to comment.

One of the investors texted Mr. Qin after learning of the SEC’s lawsuit. In a response seen in the Journal, Mr. Qin said he could not discuss the lawsuit. “It kills me to say that, but I firmly believe that things will be fine and the judicial system will prevail,” he added.

Six weeks later, he pleaded guilty.

Digital dollars

More WSJ coverage of cryptocurrency, selected by the editors.

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