What is a Cryptocurrency Crime, and How Does it Affect Trading?

Cryptocurrency crime is as sinister and upsetting as most financial crimes. The crimes that are perpetrated range from ordinary theft of cryptocurrency to money laundering and market to market fraud. Investors and consumers are subject to phishing and scams, where they are instructed to send cryptocurrency to a specific location for ransom. Like all financial crimes, buyers must be aware and educate themselves about potential crimes.

Stealing Cryptocurrency

Cryptocurrency crimes are on the rise. During the pandemic, more people were exposed to cryptocurrency trading as lockdowns occurred. Thieves use two different tactics to try to steal your cryptocurrency. They either attempt to break into your cryptocurrency wallet and steal your cryptocurrency directly, or they try to induce you to send your cryptocurrency to them. According to Chainalysis, in 2021, cryptocurrency criminals stole a record 3.2 billion in cryptocurrencies. The volume of cryptocurrency stolen increased 500% year over year. Most of the theft was through scams instead of directly stealing cryptocurrency by breaking into cryptocurrency wallets.

Stealing from Your Wallet

Some cryptocurrency theft occurs when a thief steals directly from your cryptocurrency wallet. A cryptocurrency wallet is a safe place where you store your cryptocurrency, using a digital address to determine the amount of cryptocurrency you have in your account. Each cryptocurrency you own will have a different address. Most consumers hold a custodial wallet at an exchange where they have a private key that controls the cryptocurrency. These custodial wallets differ from bank accounts in that no financial claims operation guarantees the amount of money held in the account. For example, if you hold a bank account with a bank insured by the FDIC (nearly all the banks in the United States), your deposits are guaranteed up to a certain dollar amount (usually $250,000). So if you trade crypto using a digital wallet, you have exposure to these issues.

Unfortunately, there have been issues where certain exchanges have been hacked, and funds were stolen from customer accounts. In December 2021, BitMart announced that the company was hacked and revealed that approximately $150 million U.S. dollars were stolen from cryptocurrency wallets. A strategy that a consumer can use to avoid this scenario is to move their cryptocurrency from a software wallet to a hardware wallet. This device can be disconnected from the internet.

Theft Using Scams

Cyber scams are pervasive. One of the most common is email and text phishing scams. These are scams where you receive an email that asks you to open some form of attachment or a link. These emails look like real emails from either your employer, your bank, or even friends and family. Many employers will provide their workers with cybersecurity scam training and how to avoid a scam. You can look at the email address from which the phishing email comes and check to see if anything is misspelled. If there is a call to action asking you to click a link or open an attachment, you should think twice before you proceed.

Once you click on the link, you might be providing thieves access to your computer. They might be able to track the password you use for your digital wallet and directly steal your cryptocurrency. Alternatively, some scams ask you to send money to avoid a penalty. In the United States, there are several types of Internal Revenue scams, in which people are asked to send money immediately to avoid a penalty. You might even get an email from a relative (a scam) asking you to send money to help bail them out of jail. If something does not look right, stop, think, and evaluate your actions before proceeding.

Some scams can appear as legitimate investment opportunities, but they are not, such as fraudulent trading platforms that ask you to deposit cryptocurrency. Specific scams are set up to encourage you to open up a cryptocurrency account that can then mislead victims into installing hacking software on their hardware, allowing scammers to access a cryptocurrency or bank account.

Money Laundering

Money laundering is another crime that has been linked to cryptocurrencies. “Bad actors,” a term used to describe perpetrators of fintech scams, will use cryptocurrency, which is hard to track, to fund unlawful businesses. Organizations that sell illegal drugs or firearms require that their contacts purchase these items using cryptocurrency. Money laundering has made it more difficult for cryptocurrencies to gain legitimacy. When retail customers think about a product that could be used for nefarious activities, the commentary sours their view.

Market to Market Cryptocurrency Values

As large investment companies increase their exposure to cryptocurrencies, they have added trading desks. Some of the cryptocurrency that is bought and sold is for extended periods. The value of these cryptocurrencies can vary. Trading desks can use models to create values similar to those used to value Collateralized Loan Obligations (CLO) before the financial crisis. When it comes to these values, any fraudulent activity can create issues for the companies that are running these trading desks.

The Bottom Line

The upshot is that fraud, scams, and theft are part of the world of crypto trading. Thieves try to gain access to your computer to steal cryptocurrency from your account. Presently, no oversight body provides insurance like the FDIC on funds held in a cryptocurrency account. Hundreds of phishing scams are used to convince you to turn over your cryptocurrency directly to a thief. Cryptocurrencies have been tied to money laundering, where bad actors try to wash their illegitimate funds for cryptocurrency and then use it for legitimate purchases. In summary, as cryptocurrency becomes more mainstream, there will be a need for greater protection for the retail consumer to make sure they can trust cryptocurrency like a sovereign currency.