Old Tricks, New Currency: How Classic Scams Have Evolved with Cryptocurrency
Common Tactics Used in Cryptocurrency Scams
- Pump-and-Dump Investment Scams: A pump-and-dump scam in cryptocurrency involves fraudsters artificially inflating the price of a digital currency or token by creating hype through social media channels. The scam typically involves group chats or message boards where an organizer signals when to buy, followed by a sell-off once the price spikes, leaving other participants with worthless assets. These schemes take advantage of unregulated markets and are often promoted using fake news or misleading claims. Victims lose money when they fail to sell before prices plummet.
According to the FBI, losses from cryptocurrency-related investment fraud schemes surged from $2.57 billion in 2022 to $3.96 billion in 2023—a staggering 53% increase. In many cases, victims have incurred significant debt to recover lost funds to these scams.
- Pig-Butchering Scams (Romance Scams): Originating from the Chinese term “shā zhū pán /殺豬盤,” this scam involves bad actors building a romance relationship with the victim over time, fattening them up with the illusion of trust before leading them to invest in fake cryptocurrency platforms. Once the victim has invested substantial amounts, the scammers abscond with the money.
In the past, financial scams mostly targeted senior citizens via robocalls or social engineering tactics, such as Grandparent Scams, where fraudsters pretended that the victim’s grandchild was in trouble. However, with the rise of modern technology, these schemes have migrated to dating apps and online chatrooms, often resulting in devastating financial losses, with some victims losing as much as $1 million. Moreover, the demographic of victims has extended from older generations to individuals in their 30s and 40s.
- Tech Support and Government Impersonation Scams: Fraudsters pose as tech support agents or government officials, claiming the victim’s accounts are compromised and directing them to transfer funds into a “secure” cryptocurrency wallet, which the scammers control.
One case involved 76-year-old Marilyn LoCascio, who was defrauded of $31,500 by a fraud group posing as an Apple tech support specialist to convince her that her accounts were compromised and direct her to transfer funds. These examples highlight the deceptive tactics, where fraudsters pose as legitimate parties to manipulate victims into transferring funds into cryptocurrency wallets under their control.
Detection and Prevention by Law Enforcement
Law enforcement agencies worldwide increasingly leverage advanced technologies and strategic collaborations to detect and prevent cryptocurrency-related crimes. Below are specific examples illustrating these efforts:
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FBI’s Creation of a Cryptocurrency Token to Investigate Market Manipulation
In a groundbreaking move, the FBI developed a cryptocurrency named NexFundAI to investigate price manipulation within crypto markets. By collaborating with cooperating witnesses, this Ethereum-based token was used to gather evidence against individuals and entities involved in fraudulent activities. The investigation led to charges against multiple cryptocurrency market makers and individuals for deceptive trading schemes, with the Department of Justice recovering $25 million in fraudulent gains to return to investors. -
IRS-CI’s Dismantling of the xDedic Marketplace
The IRS Criminal Investigation (IRS-CI) unit utilized advanced blockchain analytics to dismantle the xDedic Marketplace—a platform that sold stolen credentials and facilitated over $68 million in fraudulent activities, including tax fraud. This operation emphasizes the critical role of intelligence analysis in identifying and prosecuting cybercriminals. -
Operation Shamrock: Combating ‘Pig-Butchering’ Scams
Former California prosecutor Erin West who specializes in cybercrime and initiated Operation Shamrock, has successfully recovered $3 million stolen from 26 Americans with her investigative task force to combat ‘pig-butchering’ scams. -
Europol’s Strategic Approach to Cryptocurrency and Financial Crime
Europol has developed a strategic approach to ensure security in the realm of cryptocurrencies and financial crime. By collaborating with international law enforcement agencies, Europol has enhanced its capabilities in detecting and preventing various forms of financial crime, including those involving cryptocurrencies.
Challenges in Combating Cryptocurrency Fraud
Despite these efforts, several challenges persist:
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Anonymity and Decentralization: The very features that make cryptocurrency appealing—anonymity and decentralization—also make it attractive to criminals and challenging for law enforcement to track illicit activities.
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Rapid Technological Evolution: The fast-paced development of new cryptocurrencies and technologies can outstrip the ability of regulatory frameworks and law enforcement to keep up.
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Jurisdictional Boundaries: Cryptocurrency transactions often span multiple countries, each with its own legal systems, complicating enforcement efforts.
Practical Solutions to Solve These Hurdles
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Enhancing Investigative Analysis Despite Anonymity: To combat the challenges of anonymity and decentralization, law enforcement can adopt more advanced transaction analytics technologies. These tools can help identify suspicious patterns and trends across various platforms, allowing investigators to trace illicit transactions. As mentioned earlier, the IRS-CI used blockchain analysis to dismantle the xDedic marketplace. By diagnosing transaction flows, authorities can link fraudulent activities to specific perpetrators.
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Adapting to Technological Change: Due to the quick evolution of new cryptocurrencies and fraud tactics, investigators must stay ahead of these developments. Regular training and partnerships with crypto experts are vital. Additionally, understanding the usage and application of advanced AI tools can help spot emerging trends, flagging potential scams before they become widespread.
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Overcoming Jurisdictional Hurdles: To address the international nature of crypto-related fraud, law enforcement agencies need to collaborate across borders. Sharing intelligence and investigation findings in real-time can expedite actions like the FBI’s market manipulation probe and Operation Shamrock’s response to “pig-butchering” scams.
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Utilizing Data Mapping and Automated Case Management: Technologies like Hubstream’s case management system can help investigators automatically connect the dots between fraudulent activities. By organizing data across multiple sources, investigators can focus on the most significant threats, detect patterns, and track trends in real time to prevent large-scale scams.
How Can Hubstream Help You?
Collaborates and shares information in real time, crucial to track cases related to fraudulent cryptocurrency activities.
Automatically identifies and maps connections between fraudulent activities, helping to dismantle large-scale cryptocurrency schemes.
Flags high-risk transactions and patterns for investigation, helping teams focus on the most urgent threats.
Maintains government-grade compliance, ensuring the secure handling of sensitive financial data.
Provides a holistic view of all relevant investigative data in a single data hub.