Have you acted upon crypto investment tips from a person you met on an online dating site? Or opened an account on a platform that promised ‘guaranteed’ returns? Have you invested in an unknown cryptocurrency just because it is named after a popular TV series? These might be traps set by faceless criminals in which you risk losing money.
Globally, crypto criminals made a record $14-billion haul in 2021, up nearly 80% from about $8 billion in the previous year, according to blockchain data platform Chainalysis. Just over half of the $14-billion illicit crypto transactions were attributed to scams, while theft, ransomware attacks and money laundering made up the rest. Even if you have proceeded with caution and avoided scamsters, there is still a risk of the digital wallet, where you stored your Bitcoin or an NFT (non-fungible token), getting hacked.
How they trick you
The terms ‘guaranteed’ and ‘free’ should raise an alarm in any investment. Crypto scamsters still manage to pull in some targetsas most investors are new to this asset class. The anonymous nature of crypto and lack of regulation also aids them.
“The encrypted and anonymous nature of digital assets makes them well-suited to being tools of scams and fraud. Along with the ‘get rich quick’ promise that is often the reason for investors being drawn to digital assets,” said Probal Bhaduri, managing partner, Lumiere Law Partners.
Legal experts said that in most instances of fraud in India, the cause has not been a security vulnerability in the underlying blockchain technology itself. They were usually confidence tricks where victims were manipulated into purchasing crypto assets by misrepresenting their value.
“The underlying technology of virtual assets is based on encryption but that does not mean it is not susceptible to fraud. For instance, the underlying technology of OTP and PIN too is secure, but frauds still occur,” said Gaurav Mehta, founder of Catax, a crypto tax and audit platform.
Another common scam is fake ICOs (initial coin offerings — the equivalent of an IPO in the crypto world), where developers flee after collecting money. Abhishek Malhotra, managing partner at TMT Law Practice, said, “People are defrauded when they land on imposter websites, fake mobile apps, or when they act on any scamming emails, which announce fake ICOs.”
Lumiere Law Partners’ principal associate Nitin Sharma said, “In the Morris Coin scam, which is being investigated by the Enforcement Directorate (ED), the perpetrators had sold the currency promising high returns, but the coin itself was not listed on any cryptocurrency exchange, making it impossible to trade and realise its value.” “
NFT users primarily use marketplace-hosted wallets and the platforms also have records of private keys (strings of alphanumeric characters that give ownership of crypto assets). This can be a security issue if the hacker breaches into the platform, hence, protecting private keys against unauthorised access is crucial,” Deloitte India partner Gaurav Shukla said.
Hacking of e-wallets is another problem, which leads to theft of digital assets. TMT Law Practice’s Malhotra said that in the case of NFT investments, there are other considerations too. Investors should evaluate who owns the IP in the underlying work, he said.
Phishing for trouble
“Phishing attacks have become refined. There are fake offers and websites, which seem so authentic that people easily fall prey to them. Stealing digital assets by luring people to such fake sites is the most common trick of cyber criminals. Cybersecurity awareness is key here,” Shukla added. Industry watchers said technologies can fail if there is a lack of awareness. Large crypto exchanges in India have started to address this concern with guidelines for newbie investors.
Experts added that crypto investors should follow basic cyber hygiene steps like keeping strong passwords and authenticating websites before transactions. Before making any financial commitment, even to known persons, crypto investors should consult with experts, they said.
Savvy crypto investors said that they refer to educational sites like RugDoc, which ranks crypto projects based on risk.
No Stock-Like Regulations
The RBI has been cautioning the public about cryptos since 2013. In the absence of legal backing for cryptocurrencies, there is no investor protection mechanism like for stock market investors, who are protected by Sebi’s regulations.
Since there is no specific law dealing with crypto, the recourse available to a victim of a digital asset scam is primarily under existing provisions of the Indian Penal Code (IPC) like cheating, breach of trust or criminal conspiracy, legal experts said. The Advertising Standards Council of India too has come out with guidelines for crypto ads aiming to inform users of various risks.
Lumiere Law Partners’s Bhaduri said that given the risk involved, investors should restrict their investments to amounts that they can afford to lose.
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