Digital Asset Frauds

Digital Assets Banner

Digital asset frauds, such as involving bitcoin, ether, etc., come in many flavors; each promise too good to be true returns. Regardless of whether the profits come from frauds involving financial grooming, trading platforms, pump-and-dumps, or Ponzi schemes, you can side-step these frauds by making sure you understand the underlying asset and how the supposed profits are to be made.

The Setup

Most digital asset frauds originate on social media. Criminals create or hack profiles and use them to tout their investing know-how, trading platform, investment plans offering guaranteed returns, or the latest digital token or decentralized finance project.

Maybe you’ll see a post or video from a “crypto millionaire” flaunting sports cars, private jets, yachts, lavish vacations, or successful trading charts. You might see a recommendation in the comments, or the altruistic “millionaire” just wants to share his or her secrets and help make everyone rich! You might also receive a random “wrong number” text. If you respond, the sender wants to chat and be friends.

One of the first tip-offs to fraud is the scammers pushing you to move off the main social platform to another messaging application. This is to avoid detection by platform algorithms that search for fraudulent posts. The messaging apps also allow the scammers to control the environment, and kick out anyone who raises doubts or fact-checks.

Common Frauds

The CFTC has enforcement authority over fraud and market manipulation in the cash or “spot” digital commodity markets and full regulatory and enforcement authority over derivatives markets, including futures or options contracts that use digital commodities — such as bitcoin or ether — as underlying assets.

In addition to financial grooming frauds, referred to by the organizers as “pig butchering,” common crimes causing harm to digital asset investors are:

Trading platform frauds. These sites commonly offer “investing programs” — discretionary or pooled accounts the site’s operators will use to fund trading in digital commodities. Commonly the programs promise huge guaranteed returns: Put in $100 and in two weeks get $1,000; put in $500 to get $5,000; and so on. The more victims invest, the bigger the alleged risk-free returns will be.

But, there is no such thing as a risk-free transaction or a guaranteed money-making opportunity. Leverage amplifies risk and can substantially increase losses.

Platform frauds often occur incrementally. First, you register on the fraudster’s website with your email address. You receive a welcoming email with an invitation to join a webinar or receive personalized help during your free trial. The introductions are designed to build rapport and get you to commit a small initial payment. Once you’ve put money on the line, the pressure increases.

But no trading actually takes place. The money you give is stolen by the scammers. If you appear to make money, you’re pressured to put in more; if you lose money, you may be offered additional classes, upgrades, or “loss insurance.” When victims try to withdraw their earnings, suddenly there is a problem, or they are told they must pay out-of-pocket to cover exorbitant undisclosed fees or fake taxes.

Pump-and-dump schemes. Pump-and-dump scammers use social media platforms, messaging apps, or message boards to hype up little known tokens or decentralized finance (defi) projects they control or can easily manipulate. The scammers begin by manipulating the price upward and telling their followers “It’s going to the moon!” As more people join the buying, the price goes higher. When the tokens’ prices reach a target high (only known to the scammers), the scammers sell off the worthless tokens, the price falls, traders run for the exits, and many customers are left with nothing.

Pump-and-dump scammers might use hacked or imposter profiles or hide behind anonymous usernames. Some pump-and-dump groups and chat rooms may contain thousands of members, but it may be difficult to identify who is a real person and which accounts are set up by the scammers to build credibility.

Ponzi schemes – Ponzi schemes involve traders soliciting money to invest in digital assets and usually come with the promise of guaranteed returns. These solicitations are typically conducted through social media or through affinity fraud, a type of fraud where the trader targets a group of individuals based on things such as church membership, race, or other affiliation. ;

Instead of investing the money, the trader uses money from new investors to pay fake “returns” to prior investors. The traders also spend the money for themselves, typically on luxury items such as expensive cars or vacations. Eventually, the Ponzi scheme unravels and typically the investors lose most of their money.

Do's and Don'ts
The Do's The Don'ts
  • Do thoroughly check out people or firms before you trade. 
  • Do Remember, there is no such thing as a risk-free investment.
  • Do fully understand what you are being sold, including the risks of losing money, costs, and fees.
  • Do pause and carefully consider exciting “opportunities.” The fear of losing out is commonly a bigger motivator than potential gains, so fraudsters commonly fake urgency to boost responses. Don’t take the bait.
  • Don’t trust strangers you meet online.
  • Don’t rely on tips or claims you see online.
  • Don’t click on links or QR codes contained in email. It could be a phishing attempt to send you to a look-alike or “spoofed” site designed to steal your money or information. If you receive an account warning, search for your provider’s website and contact customer support.
  • Don’t pay more money out-of-pocket to get you’re your profits or principle back. If you are involved in a platform fraud, remember, no trading took place, the gains are not real, and the fraudsters are only trying to get more money out of you.
  • Don’t expect something for nothing. Trading is difficult and requires a great deal of information, knowledge, and experience. Shortcuts or surefire methods and the people who sell them are likely frauds. Afterall, if someone could reliably predict the markets, why share that information with the world?
For More Information

Customer Advisory: Use Caution When Buying Digital Coins or Tokens

Customer Advisory: Risks of Virtual Currency Trading

Customer Advisory: Beware of “IRS Approved” Virtual Currency IRAs

Customer Advisory: Beware Virtual Currency Pump-and-Dump Schemes

Customer Advisory: There’s Nothing to Like about Scammers on Social Media

Customer Advisory: Beware of Fee Scams Targeting Workers Sidelined by COVID-19

Investor Alert: Watch Out for Fraudulent Digital Asset and “Crypto” Trading Websites

Brochure: 10 Signs of a Scam Crypto or Forex Trading Website [PDF]

Brochure: Curious About Crypto? Watch Out for Red Flags [PDF]

Brochure: 14 Digital Asset Risks to Remember [PDF]

Brochure: 10 Digital Asset Terms You Should Know [PDF]