Reports published by Chainalysis and CipherTrace this week demonstrated that security remains a critical concern in crypto. Despite crypto prices falling dramatically in 2018, stolen crypto surged by more than 400% to $1.7b.
Roughly 57% of losses were comprised of thefts from exchanges and wallets, with the remaining 43% comprised of “exit scams” such as fraudulent ICOs or Ponzi schemes.
About scams in ICOs, Daria Generalova, ICOBox co-founder, recently commented that “Unfortunately, fraud in ICOs remains a very real problem, so I am not surprised by the number of “dead” tokens.” She was citing a study, conducted by specialised sites Coinopsy and DeadCoins, where they concluded that more than 1000 of this capital-raising venture were either scam or “true abandonware.”
On the other hand, Ponzi schemes are fraudulent investing scams promising high rates of return with little risk to investors. The Ponzi scheme generates returns for older investors by acquiring new investors. “This is similar to a pyramid scheme in that both are based on using new investors’ funds to pay the earlier backers. For both Ponzi schemes and pyramid schemes, eventually there isn’t enough money to go around, and the schemes unravel,” cited the specialised site Investopedia. Just to have a clear picture of how a Ponzi scheme is perpetrated, Bernard Madoff carried out the largest Ponzi scheme in history, defrauding thousands of investors out of tens of billions of dollars over the course of at least 17 years, and possibly longer.
Although not all cybersecurity risks in the crypto market stops there. Despite the infamous shutdown of the Silk Road in 2013, Darknet Activity has continued to climb in recent years – with authorities losing a constant game of whack-a-mole. In 2018, $603m worth of bitcoin were used to trade illicit goods and services – with activity late in the year matching peak levels from early 2017.
So as the technology and regulation mature, why does it remain so difficult to crack down on the crypto criminals?
One key reason is the lack of coordination across exchanges on a KYC (“know your customer”) regime – with many international exchanges remaining unregulated. According to CipherTrade, 97 percent of criminal bitcoin flows through unregulated cryptocurrency exchanges.
Lest we believe that crypto has a unique problem, KYC is a core issue across digital financial services. In an interesting non-crypto example, the smash hit game Fortnite recently came under fire for rampant credit card fraud related to in-game purchases.
So while KYC isn’t uniquely a crypto issue, crypto has unfortunately remained a useful tool for criminals to move money and commit frauds of all kinds.
Hernaldo Turrillo is a writer and author specialised in innovation, AI, DLT, SMEs, trading, investing and new trends in technology and business. He has been working for ztudium group since 2017. He is the editor of openbusinesscouncil.org, tradersdna.com, hedgethink.com, and writes regularly for intelligenthq.com, socialmediacouncil.eu. Hernaldo was born in Spain and finally settled in London, United Kingdom, after a few years of personal growth. Hernaldo finished his Journalism bachelor degree in the University of Seville, Spain, and began working as reporter in the newspaper, Europa Sur, writing about Politics and Society. He also worked as community manager and marketing advisor in Los Barrios, Spain. Innovation, technology, politics and economy are his main interests, with special focus on new trends and ethical projects. He enjoys finding himself getting lost in words, explaining what he understands from the world and helping others. Besides a journalist he is also a thinker and proactive in digital transformation strategies. Knowledge and ideas have no limits.