Cryptofraud – hackers, false promises and fairytale returns

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Investors are turning to the FMA on an increasingly frequent basis, who have invested their money in crypto assets and fear that they have been the victims of fraud. In the monitoring of the markets certain particularly frequently used models for fraud have been identified, which are described briefly below.

Ponzi Schemes

In this form of fraud, customer deposits are collected in the form of Bitcoin, Ripple, Ethereum etc. with the promise of unrealistically high returns and a low risk. Profits are frequently also actually paid out at the start, however such profits are not actually made by the selling of a specific asset. Instead profits are paid out to existing customers from the funds received from new customers. However, as soon as larger proportion of the investors demands profits to be paid out at once, or where the stream of new customers dries up, then the system breaks down.

Fabian F. discovers a platform on the Internet, on which he is made the following offer: He should transfer 10 Bitcoin to the entity for investment purposes. For doing so, he is promised a monthly return of 35 percent as well as an additional daily return of 0.2 percent. After a while these profits are no longer able to be paid out, contact to the entity is broken off, and Fabian F. has lost his investment.

Exit Fraud & Pretend Hacker

“Exit Fraud” is a scam tactic, in which an entity first of collects funds, usually by means of an Initial Coin Offering (ICO) and thereby creates the impression of normal business operations. After a while, all contact is broken off, the responsible parties can no longer be traced and the customer deposits have disappeared.

In the “Pretend Hacker” the customer is informed that the entity has been the victim of a hacker attack and that the customer deposits/crypto assets have been lost. Subsequently all contact is broken off to the entity, and investors often sustain considerable losses.

Phillip R. learns about the imminent ICO of an entity, which is wanting to launch a new kind of virtual currency on the market. The promised profits are so high that Phillip R. invests. A while later, the entity informs Phillip R. about a hacker attack, in which all deposits have apparently been lost. Then the contact is broken off and Phillip R. has lost all of his money.

Using digital technology to create a false pretence about rising prices

Investors are attracted via social networks towards trading platforms for over-the-counter products (CFDs, binary options, crypto assets…). The promise: minimal risk, as well as insurance against losses in capital, which kick in from a certain level of investment.

The platforms are operated using software that the fraudsters themselves have developed, which influences prices and are presented in a positive manner. As soon as investors make an investment, their virtual securities account increases dramatically in value, “returns” are not however paid out. The invested funds frequently disappear in a construction made up of front and dummy companies.

This leads to a total loss of the capital paid in.

Mr. S. is invited to join the Facebook group “Proffitt 7000”, which promises to make him rich quickly. In the group there are adverts for an online platform, which promises high returns for a minimal risk. And best of all: from an investment of Euro 7,000 the investor is even insured against losses in capital. Mr. S. originally only wanted to invest Euro 5,000, but doesn’t want to miss out on the insurance, so he therefore invests Euro 7,000.

Once the first transactions had been made, the value of his virtual securities account increased dramatically. When he then wanted his credit balance paid out, he was placed under pressure over the phone not to do so, but to invest more money instead, which he then also did.

A few weeks later he reads in the media about a case of international cyber trading fraud. One of the platforms named in the media reports is “Proffitt 7000”. Mr S. sustains a total loss. His money has disappeared in a money laundering network made up of front and dummy companies.

Pump and Dump

A group of people buys up large amounts of an unknown crypto asset. Then genuine investors are attracted by the targeted spreading of false information via social media, which causes the price to rise (“pump”). Then the fraudsters sell all their coins and the price crashes (“dump”). The members of the early bird group have realised a profit, while the genuine investors suffer a massive loss.

Further information:

Current warnings about fraud on the Internet in general can be found on Watchlist Internet (in German only).