Cryptocurrency fraud: Pitfalls to avoid

30 June 2022 by National Bank
A female victim of crypto fraud is at her computer.

Crypto fraud are becoming increasingly common. In 2021, the Canadian Anti-Fraud Centre reported cryptocurrency scams losses totalling $75 million. If you are interested in or already own cryptocurrency, here are some tips to protect yourself and pitfalls to avoid.

What is cryptocurrency? 

A cryptocurrency is a digital asset (virtual currency) that can be exchanged for certain goods and services. Some investors treat cryptocurrency as an asset that can rise and fall in value, somewhat like publicly traded stocks. However, digital currency is considered more volatile than stocks. There are many cryptocurrencies, but Bitcoin and Ethereum are among the best known.

 

What is a cryptocurrency fraud?

The name says it all—they are common scams that involve so-called virtual currencies. In most cases, fraudsters use variations of common scams with the sole purpose of stealing your money. 

Fraudsters target cryptocurrency for a number of reasons, namely the fact that this new type of virtual currency allows for largely anonymous transactions and is generally less regulated by government and regulatory authorities. It is used as a viable alternative to traditional currency, which is managed and regulated by the traditional banking system.

 

What are the different types of cryptocurrency fraud?

Although there are several types of cryptocurrency scams, they fall into two main categories:

  • Tricking you into sending money to con artists.
  • Manipulating you to get your personal information, take control of your account and embezzle your funds.
     

It can happen to anyone. You could fall victim to a scam whether or not you own any cryptocurrency.  Fraud can take many forms, such as:

These scams often use a technique called social engineering. It involves gradually gaining people’s trust and using it to access their information or get them to do something. Con artists will often contact you by phone (including text), by email or on social media.

 

What are the most common cryptocurrency scams? 
 

Cryptocurrency exit scam

Initial coin or token offerings, or ICOs, are very risky and highly speculative investments. Why? ICOs operate in an environment conducive to manipulation and fraud. From a technology standpoint, creating tokens and marketing them on certain platforms is easy, requiring no intervention or authorization from a third party. 

 

Cryptocurrency investment scams

Investment scams

They are a variation of the fake investment scams that use cryptocurrency as a payment method or investment product. Con artists lure you with fraudulent investment opportunities involving virtual currency and promises of guaranteed risk-free returns.  

Fraudsters create a sense of urgency by sharing exclusive offers available for a limited time only. They need a steady stream of new victims to invest, so they often use Ponzi schemes and other pyramid systems to get you to recruit people you know for their scams.  
 

Fake investment sites 

The growing popularity of the cryptocurrency market has led to a number of new cryptocurrency exchange platforms on the web.  All too often on these platforms, fraudsters try to convince you to trade by enticing you with possible, or expected, high returns (legitimate websites usually charge high fees for cryptocurrency exchange transactions). 

You will lose money on cryptocurrency purchase and exchange transactions on these fake sites. Transactions will never go through, and if they do, fraudsters alone stand to gain.
 

Account takeovers, phishing and SIM swapping

As with online banking platforms, fraudsters can steal your usernames, passwords or private keys if you have cryptocurrency accounts on legitimate trading platforms using practices such as phishing. It can be used in combination with SIM swapping to take control of your account and steal or embezzle your cryptocurrency.

What is SIM swapping?

SIM swapping, also called SIM jacking or splitting, is a type of fraud where fraudsters contact your mobile phone operator and impersonate you to gain use of your phone number. They can bypass the two-factor authentication required on many sites.

 

Cryptocurrency-only transactions

Beware of classified ads, online purchases, advertisers or sellers listing cryptocurrency as the only payment method for goods and services. For example, fraudsters will send you a web link to complete the transaction. Once the transaction is completed, there will be no product or service delivery. You will be unable to reach the contact person and will have lost your money. 

Job opportunities: Fraudsters may also pose as recruiters or headhunters in the job market. They send you an attractive job offer requiring mandatory training, at your expense, only payable in cryptocurrency. 

 

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How do I protect myself from cryptocurrency fraud?

To avoid fraud, always steer clear of:

  • Unsolicited investment offers (even from friends and family)
  • Promises of higher than normal returns or offers that are too good to be true, such as high risk-free returns
  • Fake cryptocurrency sites
  • High-pressure sales tactics, for example, limited-time offers to create a sense of urgency
  • Requests for payment in cryptocurrency

 

Consider developing the following reflexes: 

  • If you get a suspicious offer from a relative or trusted friend, contact them using another means of communication (e.g., phone) to confirm that they were the ones who sent it.
  • Beware of websites or phone numbers listed in documents you receive without having requested them. Do your own research using multiple sources, including investment firms and trading platforms. Steer clear of companies managing platforms with no Canadian address or with their primary contact abroad. 
  • Never share the password or private key (or the 12/24-word seed phrase) linked to your wallet with anyone for any reason whatsoever. 
  • Check that the contact person, investment firm and/or cryptoasset trading platform are registered with a reputable provincial securities regulator (e.g., Autorité des marchés financiers (link to external site)) or the Canadian Securities Administrators, CSA (link to external site).
  • If the only way to pay for a transaction is by cryptocurrency, it is likely a scam, as no trustworthy institution will impose a single payment method on its clients.

 

What recourse is there after falling victim to a cryptocurrency scam? 

Traditional payment methods such as credit cards, bank cards and payment service providers such as PayPal® and Interac e-Transfer® provide purchase protection that includes the non-delivery of goods and services. With cryptocurrency, there is no way of getting your money back.

However, you can:

  • Contact your financial institution to secure your personal bank accounts and monitor all activity on your bank and email accounts 
  • Use different passwords for different accounts 
  • File a complaint according to the Canadian Anti-Fraud Centre instructions (link to external website) 
  • File a complaint at your local police station for investigation 
  • Get a protection service to help you recover your identity such as SECURIZONE®, which includes file monitoring and alerts of suspicious activity like accounts being opened in your name.

 

It’s important that you do everything you can to protect yourself from all financial fraud, not just cryptocurrency fraud. 

We’re here to answer your questions.

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