BBB Study: Cryptocurrency is ripe for fraud and financial loss

Cryptocurrency is the hot new trend in investing, and much is still not understood about this buzzy, volatile digital payment system. Because cryptocurrency doesn’t rely on banks to verify transactions, this has created a fertile ground for scams, according to a new, in-depth investigative study by Better Business Bureau (BBB).

The BBB cryptocurrency study examines the many facets of cryptocurrency, and the variety of ways criminals are exploiting the digital token market to steal from investors and victims of common scams.

Many have heard of Bitcoin, developed in 2009, which remains the most popular form of cryptocurrency. Bitcoin is available for purchase at tens of thousands of Bitcoin ATMs and increasingly accepted as payment in certain retail transactions.

Ethereum is the second most common cryptocurrency, and is centrally involved in the increasingly popular non-fungible tokens (NFTs)—digital assets such as pictures or music that are purchased with cryptocurrency as an investment.

“Critically, cryptocurrency operates outside the traditional banking system and is not subject to the same protections as bank deposits or credit card transactions,” said Jane Rupp, President and CEO of BBB. Cryptocurrency is stored in the digital realm and does not exist like paper money. Instead of banks, digital tokens are stored in lines of computer code in a “crypto wallet,” protected by a master key called a mnemonic seed phrase. Because cryptocurrency is supported by a decentralized computer system known as the blockchain, often seen as a cryptocurrency perk, there is no way to recover your assets if your seed phrase is stolen.

“Think of the seed phrase like your bank account routing and account number, PIN and password. Only in crypto, once that phrase is stolen or lost, scammers will take your money and there's nothing you can do to get it back. There's no recovery of your account,” Rupp said. "If someone has access to your seed phrase, they have equal access to all of your cryptocurrency assets. It's like a blank check."

Reports from victims of large financial losses to cryptocurrency-related scams are skyrocketing. In 2021, BBB received more than 2,400 complaints with monetary losses of nearly $8 million involving cryptocurrency. BBB Scam Tracker reports about cryptocurrency fraud numbered more than 1,200 in 2021 and likewise totaled nearly $8 million in losses. Scam Tracker reports to BBB tripled between 2019 and 2021, and reported losses also tripled with it.

One Washoe County man lost $32,500 in a cryptocurrency scam after being contacted on the instant messaging service WhatsApp. He was promised dramatic increases to the initial investment.
 
“Please do not fall for this! It is a scam and you will not be able to get your money back,” the man told BBB Mountain West.
Cryptocurrency accounted for the second highest scam losses reported to the FTC in 2021, with losses of $750 million. The FBI’s Internet Crime Complaint Center also faced major increases in reports received and amounts lost. BBB’s research shows that most people do not make a report when they are scammed, making actual losses likely substantially greater.

“Cryptocurrency is attractive to scammers because it’s relatively unregulated and difficult for their victims to get money back. It’s also wildly popular, endorsed by some celebrities, and is not well understood by the general public,” said Rupp. BBB’s study states the cryptocurrency market offers new opportunities for tried-and-true investment frauds, like Ponzi schemes and fraudulent initial coin offerings (ICOs).

Many victims report that after purchasing cryptocurrency, they were directed to websites where they had to create an account to monitor their investments. The websites are sophisticated, with many offering live customer service chats. But victims who want to withdraw their “earnings” are told to contribute more money first—to cover taxes, commissions, or other fees. Ultimately, they can never withdraw money.

BBB Scam Tracker data shows that most cryptocurrency scams originate on social media, with the FTC finding 25% of cryptocurrency fraud reported in 2021 began on social media. Scammers may impersonate a victim’s friends or family, boasting about success in investing or promising big gains.

“Cryptocurrency scams do not just target investors,” said Rupp. “We’ve seen romance scammers who have started to convince their victims to send money or invest through crypto.”

Ransomware scams also demand cryptocurrency payments in many cases, as well as fraudulent online sales, advance fee loan scams, employment scams, extortion scams, government imposter fees and more. Illicit transactions on the so-called dark web are often conducted using cryptocurrency. It’s also used in money laundering.

Law enforcement agencies have pursued cases involving large cryptocurrency losses and the use of cryptocurrency in criminal activity. The U.S. Department of Justice has made arrests this year in cases involving billions of dollars in cryptocurrency laundering.

“Crypto is becoming so prevalent that it’s nearly impossible to avoid. It’s only going to grow. People need to educate themselves now so they can avoid these scams later,” said Rupp.

BBB tips to avoid cryptocurrency scams:

• Guard your crypto wallet. If you buy cryptocurrency, the security of the wallet is of prime importance. If you lose the key, then your funds are gone permanently.
• Look carefully at email addresses and website addresses. Phishing scams often try to trick you into logging in to an imposter site so they can capture your login information. Looking for a cryptocurrency exchange with an internet search engine may lead to fake sites. Be especially careful when viewing these on a mobile device.
• Do not pay for products with cryptocurrency. Be careful if someone asks you to pay with Bitcoin or another cryptocurrency. No one with the government will ever ask for this form of payment.
• Beware of fake recovery companies. Scam companies sometimes claim that they can recover stolen cryptocurrency for a fee. These are usually scammers.
• Watch out for fake reviews. Scammers often create fake reviews for their own companies.
• Be wary of celebrity endorsements. It can be tempting to rely on a prominent figure who has invested in cryptocurrency. But those endorsements are often not authorized, and even if they are, the celebrity may be paid for the effort and not know more about it than you do.
• Be careful about claims made on social media. This is the most common place for people to encounter investment scams. Be wary of “friends” who reach out to you on social media and tell you how they made money with cryptocurrency. Accounts are frequently compromised. Call your friend by phone to see if it’s really them.
• Only download apps from Google Play or the App Store. Trusted app stores do not eliminate the threat of app scams, but they do offer a basic level of protection. Be careful with apps. Some contain malicious software.
• Do not believe promises of guaranteed returns. No one can guarantee how an investment will perform.
• Seek help and support. Cybercrime Support Network offers a free, confidential support program to help victims of cyber scams.

Beyond these tips, BBB’s study suggests recommendations for the industry and its regulators:

• Social media should do more to:
  • Prevent hijacking of profiles
  • Stop scam ads for cryptocurrency investment schemes
  • Prevent the illegal use of celebrity names to promote cryptocurrency scams
• Regulators should carefully monitor Bitcoin ATMs to prevent use by scammers.
• BBB, media, trade groups and government agencies should continue to educate the public about risks.
• U.S. Department of Treasury and security regulators should provide stringent oversight and regulation of cryptocurrencies.

Where to report a scam or register a complaint:

• Better Business Bureau. File a complaint with BBB Mountain West at BBB.org if you lost money. Report a scam online at BBB.org/ScamTracker.
• Federal Trade Commission. File a complaint online at ReportFraud.FTC.gov or call 877-FTC-Help.
• Internet Crime Complaint Center. File a complaint online at ic3.gov/complaint and include:
  • All transaction IDs
  • Where you sent your crypto from (private wallet, etc.)
  • Where you believed you were sending your funds
  • Any details regarding the scam and scammers
• U.S. Securities and Exchange Commission. Go to SEC.gov/tcr to report online fraud and wrongdoings.