Market Analysis

Beware of sophisticated scams and rug pulls, as thugs target crypto users

The year 2021 has seen an increase in “rug pulls,” a new scam capable of luring both early adopters and new crypto investors.

This year has been monumental for the cryptocurrency sector in terms of mainstream adoption. A recent report published by Grayscale Investments found that more than one-quarter of United States investors (26%) surveyed own Bitcoin (BTC), up from 23% in 2020. With the holidays around the corner, financial services provider MagnifyMoney also found that nearly two-thirds of surveyed Americans hope to receive cryptocurrency as a gift this year. 

While crypto’s growth is notable, there has also been an increase in the number of scams associated with digital assets. A Chainalysis blog post highlighting the company’s “2022 Crypto Crime Report” revealed that scams were the dominant form of cryptocurrency-based crimes by transaction volume this year. The post notes that over $7.7 billion worth of cryptocurrency has been taken from scam victims globally. According to Chainalysis’ previous research, this number represents an 81% increase compared to 2020, a year in which scamming activity dropped significantly compared to 2019.

Beware of sophisticated scams and rug pulls, as thugs target crypto users

Source: Chainalysis

Scams are the biggest threat for building trust in crypto

Kim Grauer, head of research at Chainalysis, told Cointelegraph that while there are many different crypto-related crimes, scamming has become the largest in terms of value received by criminals. She added that scams represent a significant threat to building trust within the crypto ecosystem, as this may prevent people from investing in digital assets.

Grauer further mentioned that scams related to decentralized finance (DeFi) have been on the rise this year. With an annualized revenue in all DeFi protocols estimated at around $5 billion, this shouldn’t come as a surprise. More interesting, though, is that Chainalsyis has discovered that “rug pulls” have contributed to this year’s increase in scam revenue. According to Grauer, Chainalysis defines rug pulls as an instance when a person or developer decides to unexpectedly cease a project and run away with funds:

Read more:  World Bank refuses El Salvador's request for help on BTC transition

Jessica Yang, an NFT photographer, told Cointelegraph that when Miss Universe announced the launch of an NFT project, she didn’t question whether it was a scam or not because the pageant is widely known. “The price of each NFT was 0.06 Ethereum. That translates to around $230 for one. The artwork also has the beauty contestant’s face and country they are associated with plastered on it,” she remarked.

Yang also mentioned that the project was geared toward women, noting that Paula Shugart, the president of Miss Universe, previously stated:

“Miss Universe is going to be the first brand in the NFT space that is about women, about women’s empowerment, and embracing the technology, and moving forward. I love it; this is the first one that is away from other more male-oriented spaces.”

Given the brand’s reputation and appeal, Yang and many others minted Miss Universe NFTs, connecting their wallets to the platform. Yet Yang noted that the next day, Miss Universe deleted its official Instagram account. She then noticed that her funds disappeared entirely. Yang added:

​​”One red flag I saw was coming from their Discord. The moderators kept trying to get everyone to buy Miss Universe NFTs, promising that they were going along with the roadmap. Their roadmap promised monthly AMAs, signed prints, and much more. Even Steve Harvey vetted the project.”

Do your own research

As the DeFi and NFT ecosystems continue to mature and grow, these environments will, unfortunately, be prone to rug pull scams until industry solutions are developed. In the meantime, the best course of action is for users to do their own research.

For instance, Grauer shared that every DeFi project should have a code audit available to make investors feel safer. “Many of the DeFi platforms that have been hacked don’t have code audits,” she remarked. The Chainalysis blog post also pointed out that “rug pulls are prevalent in DeFi because with the right technical know-how, it’s cheap and easy to create new tokens on the Ethereum blockchain or others and get them listed on decentralized exchanges (DEX) without a code audit.”

Read more:  Okcoin secures regulatory approval in Malta and the Netherlands

In addition to code audits, the anonymous Ethereum investor shared that after reviewing the Up1 site more closely, they could tell that it was fake. “For instance, the team was all anonymous, with just first names that couldn’t be clicked on to open a Twitter or LinkedIn profile.” Even with these precautions the anonymous source mentioned that wallet providers also need to do a better job of keeping users safe:

“If there is a questionable site, wallets should seek them out. I believe this technology can scale, but it has to be able to handle these scams. Otherwise, people will lose all their money.”

Following the Up1 rug pull, the anonymous source contacted MetaMask and shared that they got a response noting that it would flag the website.

It’s also important to point out that while a clear industry solution is yet to be developed, Grauer noted that, unlike fiat-related crimes, crypto payments can be traced to their source. With this in mind, she added that some cryptocurrency platforms are starting to take action to keep users safe from scams.

For example, crypto exchange Luno partnered with Chainalysis in 2020 to protect against a scam targeting South African crypto users. Eva Crouwel, head of financial crime at Luno, told Cointelegraph that one of the requirements from a regulatory framework point of view is to be able to monitor and act upon transactions that have a suspicion of money laundering, terrorist financing, sanctions or any other type of illicit activity. She noted that on-chain transactions must be monitored, as well as the design and the development of case management and user interface.

In terms of crypto investors keeping themselves safe from scams, Crouwel recommends staying away from offers that sound too good to be true, adding:

“Start by doing as much due diligence as possible. Look at the company’s/token’s social media profiles to see what other users’ experiences have been. You should also go through the company directors’ personal social media pages and look into their industry connections and employment background so ensure their history is sound.”

Leave a Reply

Your email address will not be published. Required fields are marked *

Back to top button