A new blockchain protocol to make crypto scams impossible
For those who discovered crypto early, between 2009 and 2019, getting ripped off seemed like a right of passage through space. At the time, very little information was available about navigating the crypto space; unsurprisingly, we have seen some of the biggest crypto scams.
While the crypto space is still nascent, there have been significant changes since Bitcoin’s inception. Several exchanges, such as Binance and Quidax, have made it somewhat easier to access, trade, and use cryptocurrencies.
However, even with the availability of information, scammers have advanced and crypto scams are almost common.
According On-chain analysis, crypto scams increased by 900% – $1.4 billion to $14 billion – between 2017 and 2021. It is important to note that this does not mean that bigger scams are happening, but it does mean that more people use cryptocurrencies; therefore, crypto scammers have more targets.
In today’s edition of the Emerging Tech Africa series, Adedeji OwonibiCryptocurrency forensics expert and founder of blockchain company, Convexity, spoke about the science behind crypto scams and how easy it will soon be to find scammers.
Some of the biggest crypto scams in history
The OneCoin scam
The OneCoin scam is perhaps the biggest and most creative crypto scam on record. Indeed, while other scams involved crooks doing technical work such as creating ICOs and launching tokens, OnceCoin promised investors something that never existed digitally or physically.
In 2016, the mastermind behind the scam, a doctor of international law, Ruga Ignatova, appeared in front of 90,000 people at Wembley Stadium, London, to sell the OneCoin deceptive dream.
The OneCoin scam was massive not only because Ignatova took home $4 billion, but also because it caused unsuspecting multitudes to genuinely rally behind a Ponzi scheme.
Even after allegations surfaced that it could all be a sham, the unwitting victims, specifically the fans, defended the scheme.
After OneCoin was launched in 2014, the scam continued until 2017 when German authorities have issued cease and desist orders against.
In the case of OneCoin, investors were not buying tokens; they were sold plagiarized crypto educational materials costing between €100 ($101) and €225,000 ($228,000).
The scam almost doesn’t deserve to be called a crypto scam, but the promise of a coin as valuable and even better than Bitcoin qualifies it as a crypto scam. The crypto and blockchain were just a smokescreen to hide the true nature of the scam.
In 2019, all of the critical actors behind the scam were arrested except for Ignatova, who remains at large.
This scam, which happened in 2016 during the initial coin offering (ICO) boom, saw investors say goodbye to $2.4 billion.
An ICO is a way for crypto projects to raise funds; it’s the crypto industry’s equivalent of an initial public offering (IPO), but without the regulations. With ICOs, anyone can submit a project proposal and get millions of dollars in funding without any regulatory consequences.
To raise funds, the project or company launches a token, which interested investors buy. Tokens are like shares or equity in the company, which can sometimes represent ownership of the project.
Founded by Indians, Satish Khumbani and Divyesh Darji, the BitConnect ICO was very compelling and promised investors a guaranteed return on investment (ROI) of 40%; investors willing to take greater risks could earn significantly more.
In the volatile world of crypto, nothing is guaranteed. Still, BitConnect assured investors that it has proprietary “trading and volatility robot software” that would trade Bitcoin and make a fortune out of it.
For context, the promised return on investment meant that a $1,000 investment could grow to $50 million in three years. These figures appealed to investors who continued to buy BCC, the native coin of the project.
However, these returns were not sustainable, and in 2018 BitConnect suddenly came to a halt. The US and UK governments caught wind of the sleazy affair and began investigating the company. Initially valued at over $400, the BCC coin dropped to $1 in less than a month.
International Trading Mirror
Mirror Trading International (MTI), headed by Cornelius Steynberg, a South African, has been charged with a fraud of 1.7 billion dollars by the United States Commodity Futures Trading Commission (CFTC) on June 30, 2022.
MTI’s scam was similar to BitConnect, as investors were tricked into investing in a pool of commodities that could earn them a daily return on investment of 0.5%, with Steynberg claiming the trading would be done by artificial intelligence (IA) without error.
The fraud scheme, which began in 2018, caught the attention of regulators in 2020. By then, Steynberg had already collected over 20,000 bitcoins worth over $1.7 billion.
South Africa’s Financial Sector Conduct Authority (FSCA) has launched an investigation into MTI and found the company to be operating without a licence.
Authorities are currently helping liquidators recover funds from investors and hopefully repay victims of the billion-dollar fraud.
Tracking criminals on the blockchain is easy
Adedeji Owonibi is a cryptocurrency forensic investigator, and he thinks it’s easy to track the criminal activities of scammers on the blockchain, but the hardest part is putting a face or a name to who is doing the deed .
For context, a quick visit to blockchain explorer – a website that displays transactions on the blockchain – will give you real-time updates on all transactions that occur on the Bitcoin blockchain. You can even enter an address you’ve sent bitcoin to and find out what the person is doing with it.
However, if you follow the money long enough, you might be able to track down the scammers. Turning cryptocurrency into legal tenders such as the dollar, rand, or naira might require sending the crypto to centralized exchanges with know-your-customer (KYC) protocols.
While the blockchain keeps track of everything, Owonibi said there are tools that criminals use to confuse government agencies, called crypto mixers.
Crypto mixers, also known as tumblers, are used to scramble transactions and make it difficult to track who sent what.
Think of them as a cement mixer. After the dirty bitcoin has been poured in, it is mixed with another large pile of bitcoins, and then the clean bitcoins are delivered in smaller pieces to a chosen address. Looking at this through an ordinary banking lens, ₦20,000 ($47) placed in a blender will be mixed with billions of other transactions bouncing around different parts of the world and paid into a specified account in small amounts until ‘they reach ₦20,000.
According to Owonibi, Wasabi is one of the most popular mixers used by scammers. Other blenders include Blender, Anonymixand Bitcoin Laundry.
“Wasabi is a way to obfuscate exchanges and make it difficult for investigators like us to track.”
Owonibi said that in the MTI scam, 29,000 bitcoins were sent to the popular Wasabi mixer. These mixers have made it easier for crypto scams to leak; however, he assured that there are sophisticated tools that can still make these transactions traceable.
Interestingly, he revealed that anonymity in the blockchain space would not be so forever, as the Financial Action Task Force (FATF) – an intergovernmental organization founded to combat money laundering – is working to put a face to blockchain transactions.
“It’s called the Travel Rule Protocol or the Travel Rule Standard. We (Owonibi and the FATF) have been working on this since 2019 and have developed a standard called IVMS 101, and over 130 of us around the world have worked together to bring this standard to light.
Although still a work in progress, Owonibi says the standard could bring something similar to banking KYC to the blockchain.
Decentralization, the main tenant of cryptocurrencies, makes it almost impossible to eliminate the concept of anonymity, but if Owonibi and the FATF can make the travel rule protocol a reality, it will be a watershed moment for the crypto industry. the blockchain.