Digital Fraud & How to protect Yourself: From ICOs to Bitcoin Scams
Digital fraud continues to grow apace. More worryingly, the increasing variety and sophistication of the scams themselves has seen the number of people falling victim to scams growing just as fast. And we are no longer just talking about standard phishing. Today’s digital criminals are highly developed and extremely quick to jump on the latest online trends to take full advantage of every opportunity.
As dispute resolution specialists we are often the first port of call for clients who have found themselves in particularly difficult situations. Unsurprisingly more and more of these situations involve digital fraud and we wanted to use this opportunity to outline some of the fastest growing and most regular scams and offer a little advice as to how you can separate scams from genuine opportunities.
1. Binary options (also known as all-or-nothing options, digital options and fixed return options) trading
A binary option is basically a financial option in which the pay-off is either a fixed monetary amount or nothing at all. There are two types of binary option:
§ A ‘cash-or-nothing’ option which will pay a fixed amount of cash if the option expires in profit
§ An ‘asset-or-nothing’ option which will pay the value of the underlying security
It is the ‘or nothing’ that’s attracted fraudsters and there are now hundreds of trading platforms operating outside the regulated financial markets.
The scam is simple. A fake company owns a website that makes them look like a legitimate binary options broker and offers users access to a ‘live’ trading environment whilst promising accuracy, transparency and guarantees designed to settle the nerves of a would be investor. The investor then makes an initial deposit which they will see grow online at which point they’ll be asked to deposit more.
Eventually, despite the appearance of healthy growth, the website will suddenly fold taking all of your deposits with it. Alternatively if you have asked to withdraw your investment, you may be asked to top up your account to take your balance to the minimum required to make a withdrawal … at which point the website will fold taking all of your deposits with it.
If you fall victim to a binary options scam, resolution can be tricky. As these are fake companies, it’s very hard to find out who the owners are never mind begin the process of recovering your money. Waters are muddied further by the fact they will most likely be operating outside the UK (Israel has the dubious honour of housing the majority of these fraudsters) and operating in an area with little or no regulatory environment.
2. Initial Coin Offerings (ICOs)
The easiest way to explain it is that it’s a type of crowdfunding that has grown out of the current growth in popularity of Bitcoin and other cryptocurrencies. However instead of providing a shareholding in return for an injection of capital, the company seeking investment will release a fixed number of its own crypto-tokens then sell those tokens to investors. Usually the investors will pay for these tokens in Bitcoin but some will accept the major international currencies.
There is a common misconception that an ICO is the same as an IPO (an Initial Public Offering) but there are actually two major differences:
§ In an IPO the shares purchased by an investor are representative of their voting power and their level of ownership. This isn’t always the case with an ICO and just having the company’s cryptocurrency doesn’t guarantee voting or management rights; they are just something to be exchanged for other currencies at a later date.
§ As IPOs are an integral part of the world’s trading exchanges, they are heavily regulated. As cryptocurrency crowdfunding is new it does not yet enjoy the same protection which means any involvement carries as much risk as opportunity for an investor.
As this is still a developing area and an area that’s creating a bit of a buzz in the tech market, digital fraudsters have been quick to take note and fake investment opportunities are springing up at an increasing rate. Experience of resolving disputes after the fact has taught us a few lessons as to how to tell a real opportunity from a scam so if you are attracted by an ICO we would urge you to:
§ Make sure your investment will provide all of the ownership and voting rights you want
§ Understand the risks and if you are uncomfortable making a significant investment via a platform that sits outside the usual market regulations, this may not be for you
§ Do your due diligence and make sure the company offering the ICO is a going concern, has a recognised legal entity and that the project you want to invest in has the required research and staffing behind it
§ Make sure any investment you make will be is deposited into an escrow wallet and that at least one of the keys to that wallet is held by a trusted third party
§ Ensure you have a complete and professionally drafted set of legal terms and conditions signed both by you and by the company you are investing in
§ Ask around or search the internet in case no one has ever heard of the company launching or there is no record anywhere of the company and/or the entrepreneurs behind it
§ Ask to see both the business plan and a record of any work-in-progress (WIP); a negative or evasive response should be treated as a red flag
3. Bitcoin scams
Having hit its highest ever price, Bitcoin is currently in greater demand than it has ever been which means criminals have never been as active in finding different ways to exploit it for their own gain.
As it is so attractive the range of Bitcoin scams has grown almost impinged and the rise and rise of social media has provided the perfect platform for scammers to promote every variation. The list of scams we have come into contact with includes:
§ Malware downloads
Hugely attractive Bitcoin transactions are used to persuade you to download damaging software designed to damage or gain access to your computer.
§ Bitcoin phishing ‘impersonators’
Criminals use the Bitcoin logo to gain a victim’s trust then, once that trust is established, a phishing website entices users to enter their private Bitcoin key to check it exists in their database then the key is then phished and the associated account is emptied.
After you pay a joining fee to exchange bitcoins and double any investment you make within a very short time-frame you find your bitcoins have been simply stolen.
§ Bitcoin pyramid schemes (also known as Multi-Level Marketing or MLM Schemes)
A high level of return is promised for a low level investment but the size of the return is linked to you sending the links to your friends to get them to join too. However once a few hundred people have signed up paid the joining fee, the scheme folds.
§ Fake Cloud Mining Services
Bitcoin “miners” validate transactions in the blockchain using complicated mathematical equations in exchange for new bitcoins. Scammers promise the same service then collect the ‘mining fees’ without actually doing any mining. Initially they will probably pay out a few small amounts but these soon dry up as the scammer disappears with the funds.
§ Bitcoin Investment Schemes
Again these scams promise high levels of return in return for providing low levels of capital for ‘investors’ who purport to trade digital currency. Like cloud mining scams they tend to pay out a few small returns then the payments stop and the scammer absconds with everything their victims have invested.
§ Fake Exchange Scams
Bitcoin exchanges (marketplaces that trade Bitcoin for traditional currency or other cryptocurrencies) are legitimate but fake exchanges are springing up every day. The fake exchanges will ask users to deposit funds to purchase Bitcoin whilst enjoying lower transaction fees than regular exchanges. The only thing is as these exchanges aren’t real, they never realise the promised return.
§ Bitcoin Donation Scams
In the wake of recent events, this is without doubt the most cynical type of scam. More and more scammers are creating fake donation pages asking people to donate in bitcoin rather than via better policed platforms like PayPal.
So how do you protect yourself? With all of these scams there is a basic rule, if it looks too good to be true, it probably is. If someone sends you a hugely attractive offer out of the blue, you need to immediately be on your guard.
Here are 4 basic rules we would urge you to follow:
§ Never trust any unsolicited email or social media post
§ Never click on any associated URL however high the potential return is claimed to be unless you know and trust the sender (and remember it’s now easy to replicate a social media account)
§ Never engage with or provide personal information in response to an email or social media account until you have checked to make sure the sender is 100% genuine.
§ Never enter into any type of financial transaction on the back of an email or a direct message on social media until you have completed all off your due diligence.
And if you do fall victim never try to resolve the situation on your own.
These may be criminals but they are highly sophisticated criminals and will be hidden behind layers of cleverly created camouflage. Always engage an experienced lawyer with a proven success record in resolving cross-border multi-jurisdictional disputes involving digital fraud. If you are going to recover lost funds, putting the right strategy in place immediately will be key to your success.