23.03.2022
Author: Anna Raczkowska - attorney at law trainee, Jarosław Kruk - attorney at law, managing partner
The Chainalysis Cryptocurrency Crime Report, published in February 2022, highlighted an increase in crime in two categories - stolen funds and fraud. Moreover, fraud revenues increased by as much as 82% in 2021. According to Chainalysis, $ 2.8 billion comes from a new type of scam. "Rug pulls" meaning "to pull the carpet" is the new type of cryptocurrency scam including drawing as many funds as possible just to leave users with a worthless token. A rug pull scam involves developers creating an apparently legitimate cryptocurrency project for the purpose of investing. DeFI (Decentralized Finance) is a system based on blockchain technology that enables the transfer of financial services based on smart contracts. DeFi uses cryptocurrencies and smart contracts to provide financial services without the involvement of banks. For obvious reasons, such an environment is susceptible to numerous abuses and is an ideal field for fraud.
As Chainalysis shows, around 90% of the total value of money lost as a result of the rug pulls scam can be attributed to rogue centralized exchange - Thodex, whose CEO disappeared shortly after the exchange stopped users from withdrawing funds.
Rug pulls in most cases is a major scam designed as a promising project that attracts users. When liquidity flows into the project and the price rises, developers use all the liquidity they can, eventually crushing the capital of those who remain in the project.
Another group of cryptocurrency crimes are those involving NFT (non-fungible token) - a cryptographic token that has no equivalent in other currencies or objects. Unlike other NFT tokens, they cannot be exchanged. What additionally distinguishes NFT is that the data collected on the blockchain can be additionally associated with images, movies. Chainalysis has observed two forms of illegal activity: wash trading to artificially increase the value of NFT transactions, and money laundering by purchasing NFTs. Wash trading involves situations where one person sells with himself in order to create a false picture of the value and liquidity of an asset. This is to make the NFT look more valuable than it really is. There have also been cases of using illegally obtained funds to purchase NFT. According to information released by the government organization Her Majesty Revenue & Customs (HMCR) responsible for collecting UK taxes and social security contributions, it was the first time that the HMRC seized three non-exchangeable tokens (NFT) as part of a tax fraud investigation VAT on 250 bogus companies, three people were arrested on suspicion of fraudulent activity in the amount of £ 1.4 million. Fraudsters used a special method to conceal their identities, including false and stolen identities, fake addresses, unregistered prepaid cell phones, virtual VPNs, and fake invoices - all with the aim of seemingly engaging in business.
In 2021, there were also numerous thefts of cryptocurrencies, the ten largest hacks resulted in the theft of funds with a total value of $ 1.81 billion. According to Chainalysis, seven out of ten attacks have been targeted at DeFi platforms. Actions aimed at counteracting cryptocurrency crime are the introduction of smart contract security, code audits, and above all, a rigorous approach to platform security.
Summarizing the statistics related to cryptocurrency crime, it is noticeable that prosecuting authorities are increasingly involved in this type of crime, especially when blockchain technology is still a relatively new object of interest. This should of course be assessed positively. However, users should take special precautions due to the increasing number of fake accounts.
