The Good, The Bad and The Crypto

How cryptocurrency creates new opportunities for fraudsters

The age of the cryptocurrency, according to some, has not handed fraudsters a way to perpetrate new types of fraud. Instead, it is a means to perpetrate the same old schemes, updated for the new era. At an industry event recently, I heard cryptocurrencies described not as a new warhead, but as a new ballistic missile – a fresh delivery system for old payloads, not a new payload in itself.

I believe that it would be folly to assume that as the technology develops and human ingenuity is brought to bear there will be no new knots to unpick.

There are unquestionably tried-and-tested frauds to which cryptocurrencies offer new possibilities. Many suggest that they may be particularly susceptible to pyramid or Ponzi schemes. For my part, I have reservations that I will cover in a future blog about the applicability of these terms in most cases.

A far better fit is the pump-and-dump. It is in the nature of many cryptocurrencies that they are thinly traded at low prices and prone to excess hype – everyone wants to be in at the ground level on “the new Bitcoin”, potentially making them “Penny Stocks 2.0”. Examples of such schemes are already showing themselves. In an academic paper on the subject, a group of researchers recently identified no fewer than 4,818 cryptocurrency pump and dump schemes being coordinated across two popular internet messaging platforms in just a six month period. In April 2018, Bill Harris, the former CEO of PayPal, wrote an article in which he claimed that Bitcoin itself is “a colossal pump and dump scheme, the likes of which the world has never seen.”

Whatever one’s view, cryptocurrencies undoubtedly offer the fraudster a new sandbox in which to play with old toys. But we are in danger of falling into a psychological trap. It is all very well to say that “all we are seeing is the same old schemes,” but might it not be the case that new schemes are there and it is our vision that is defective? Experience is an invaluable commodity but it is also “the Angled Road”, in the gnomic words of Emily Dickinson, which the mind is too often content to follow when it should be leading. The schemes we have identified so far tend to be the ones we already knew how to look for. Of course they do. But what else, beyond the current scope of our vision, may be out there?

I can well imagine a technically adept fraudster burying a treacherous piece of code deep within the bowels of a smart contract governing a new cryptocurrency, which begins after a suitable period quietly to extract coins for the fraudster, even if I would need substantial technical assistance to find such a device. Fascinating research has been carried out by Sarah Meiklejohn and others into schemes that could be used to bribe coin miners and thereby to hijack the proper working of the Ethereum blockchain. One particularly intriguing (if largely tongue-in-cheek) smart contract, also on the Ethereum blockchain, was called “POWH (proof-of-weak-hands) coin”. This coin deliberately built Ponzi-style booms and busts into its valuation profile, without quite being a Ponzi scheme in its classic sense. It was brought to a crashing halt when someone identified a flaw in its code and used it to steal most of the money invested in it. 

It is naturally difficult to write about types of fraud that nobody yet knows anything about. However, none of the schemes above would have been conceivable in a pre-cryptocurrency world. Doubtless, as the endless imagination of the criminally-inclined is applied to the new technology, more schemes beyond the ambit of our current understanding will develop. It is the responsibility of the fraud investigator, as well as to be watchful, to be equally imaginative.

Having said that, the website for that last contract carried the following disclaimer: “This is literally a pyramid scheme, be aware you are fairly likely to lose money. Are you sure you would like to perform this transaction?” Perhaps the investigations will be easier than I think.



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