Cryptocurrency Fraud

Cryptocurrency is a decentralized digital asset and designed to use cryptography to secure financial transactions. The difference between a decentralized (e.g., Bitcoin) and centralized (e.g., Dollar, Euro) medium of exchange is that the former has no one controlling it. The U.S. Dollar, for example, has a supply that is controlled by the U.S. central bank who can increase or decrease the supply. A decentralized currency relies solely on its users and scarcity to influence its worth through supply and demand.

For those who own cryptocurrency, there is a chance, if not paying attention, that you will find yourself a victim of crypto-fraud. The largest form of fraud occurs when a cryptocurrency exchange is hacked and the cryptocurrency being stored at the exchange is stolen. A well-known example is Mt. Gox, who was the world’s largest Bitcoin exchange. Mt. Gox stated that they had lost nearly 850,000 Bitcoins, worth around $470 million at the time, when their crypto-mining platform was hacked.[1] Mt. Gox declared bankruptcy in February 2014. Online theft at cryptocurrency exchanges is a serious threat. People having an exchange hold their assets likely face a risk of loss.

A way to protect oneself from the hacking threat is to store cryptocurrencies offline in an electronic hard wallet. Hardware wallets are believed to be immune to computer viruses. Various kinds of hardware wallets exist. Examples of these wallets include KeepKey (large size), Nano Ledger S (medium size), and Trezor (small size). 

Another source of cryptocurrency fraud is through ICOs or Initial Coin Offerings.  A start-up company behind an ICO creates virtual tokens and sells them to fund their new business. Such firms generally avoid traditional funding sources of bank borrowing and selling shares of stock.  Investors in the start-up receive crypto-tokens rather than shares of stock hoping they will increase in value.  This kind of activity is a big opportunity for fraudsters to launch a fake ICO company where unsuspecting eager investors receive worthless tokens and the company founders run off with the money. A famous example is PonziCoin, a 2014 scheme. People invested in this cryptocurrency despite its suspicious name and the ICO fraudsters ran off with the money.  In 2017, Rishab Hegde created a cryptocurrency and also named it PonziCoin. What was unique about this version of PonziCoin was its founder openly said on his website that it was a Ponzi scheme.  Nevertheless, many investors bought the cryptocurrency despite being warned it was a scam.  In January 2018 Hegde closed the operation without returning any money to the investors and has not faced any criminal charges. Other recent examples of scam ICOs are Bitconnect, OneCoin, Plexcoin, Centratech, and Pincoin and iFan.[2] 

Fake ICOs and fake platforms have many examples. Buyers of cryptocurrencies should educate themselves, use well-known platforms, and watch for red flags such as promises of high returns and pyramid-like schemes.  Moreover, prospective investors in ICOs should research the project they are about to fund. Such research could include:[3]

  • Reading the firm’s white papers and assessing whether the idea makes sense. 
  • Reviewing information on the management team.
  • Verifying that the sale of coins or tokens is registered with the U.S. Securities and Exchange Commission (SEC).
  • Checking whether the professionals and the firm offering the coins are licensed.

For information and assistance, SEC created, a website to educate people about investments and fraud. In addition to SEC, more information can be found in the Financial Industry Regulatory Authority (FINRA) and the North American Securities Administrators Association (NASAA).


[1] Pollock, D. (2018, March 8). The Mess That Was Mt. Gox: Four Years On. Cointelegraph. Retrieved on November 20, 2018, from
[2] Jenkinson, G. (2018, April 18). Unpacking the 5 Biggest Cryptocurrency Scams. Cointelegraph.  Retrieved on November 7, 2018, from
[3] SEC’s (2017, July 25).  Investor Bulletin: Initial Coin Offerings. Retrieved on November 20, 2018, from