DeFi Cryptocurrency Faces All-Time High Fraud Reports

If you read the hype, you will have read that lack of regulation, speed of transactions, irreversibility of transactions, and hidden identities are positive characteristics of the crypto world. Crypto enthusiasts say that finance can only be improved by avoiding banks, regulators and rules. But faster and looser isn’t always better when it comes to your investments. In fact, it’s a recipe for scamming you out of your money.

Moving money quickly is the essence of crypto. It is also the essence of any organized fraud scheme. And once caught, cryptocurrency can be moved quickly and laundered to avoid detection.

CNBC reports that crypto fraud and scams cost $14 billion in 2021 “thanks in large part to the rise of decentralized finance (DeFi) platforms.” This is separate from the $3.2 billion in cryptocurrency stolen in simple crypto theft hacking schemes. “Over $2.8 billion of this [fraud] total originated from a relatively new but very popular type of scheme known as “rug pull”, in which developers build what appear to be legitimate cryptocurrency projects, before eventually taking money from investors. and disappear. This “relatively new” scam resembles one of the oldest frauds in the book – the bogus investment plan. CNBC also notes that many of the new DeFi protocols have code vulnerabilities that hackers can exploit.

Who takes your cryptocurrency and what do they do with it? According to the BBC, North Korean hackers stole nearly $400 million in cryptocurrency in 2021 alone from crypto exchanges and investment funds. A United Nations panel that monitors sanctions against North Korea has accused Pyongyang of using stolen funds to support its nuclear and ballistic missile programs to avoid international sanctions. The Secret Service noted that Romanian crypto scams last year targeted nearly 1,000 American victims last year, taking crypto payments for non-existent luxuries. NBC News reported that Russian cybercrime syndicates are using crypto to launder their funds, transferring stolen Bitcoins to stablecoins to avoid volatility in their stolen price. Fortune favors the brave.

Moving money quickly is the essence of crypto. It is also the essence of any organized fraud scheme.

Much of crypto fraud is a classic old fashioned scam based on selling investors “fear of missing out”. Like the Ormeus Coin company whose sibling leaders have just been slapped with criminal and civil charges by the Department of Justice. The SEC says Ormeus Coin executives raised $124 million from more than 20,000 investors, lying about the source of Ormeus Coin’s value and spending the money on travel, real estate and personal expenses . The company’s CEO has been arrested and faces 65 years in prison. Like Stephan Curry, you don’t have to be an expert to invest. But it might help to avoid being scammed.

And some of these scams are creative. For example, a DeFi cryptocurrency project called Beanstalk held hundreds of millions of dollars worth of stablecoins that were advertised as being worth $1 each. They are worth nothing now. Who would have expected a disastrous investment from a company whose business model is described in the press as an “honest Ponzi”, which relies on the promise of future investments to ensure the coins’ claimed value? ‘today ? The disaster may have been foreseeable, but not the entirely legal scam that resulted in the losses.

DeFi and crypto enable a financial tool called flash loans, borrowing large sums to make a purchase, then reselling at a profit and repaying the loan very quickly. Flash loans can provide immediate access to large sums to take advantage of a short-term investment opportunity. In this case, the loan was used to buy out at least a supermajority of voting rights in the “decentralized autonomous organization” that controls Beanstalk. Once in control, Beanstalk’s new controller submitted a proposal for a vote, voted the controlling shares in favor of the proposal, and then when work on the proposal was quickly completed, according to the Guardian “he sold the rights, regranted the loan, and began the process of laundering the proceeds. And what did the newly voted proposal do? At first glance, it looked like the proposed program would simply give $250,000 to Ukrainian aid, but once passed, the program quickly transferred almost all of Beanstalk’s investor funds, $180 million, to the personal account of the person who just bought the shares.

The shareholder took control of the company for a while, proposed and successfully adopted a stock to pay himself all the money held to repay the crypto investors, then sold the shares and repaid the borrowed money to buy control of the business. Nice trick. It’s basically the same as buying out a community for $5 million, withdrawing $30 million in account holder deposits to pay you, then selling your shares in the bank once all of its accounts have been reduced to zero by you. This would go against banking rules as banks are highly regulated. But crypto isn’t, so maybe running this scam here won’t break any laws. That doesn’t make it OK.

Games without rules can work for you or against you.

On the day of the attack, the founders of Beanstalk wrote, “I honestly don’t know what to type. We’re f-cked… It’s highly unlikely that there’s any sort of bailout coming. The Guardian wrote: “By real-world rules, there is almost certainly a crime here, though it’s not easy to pinpoint which one. Maybe a fraud? You probably can’t hand someone a computer code that says in fairly plain English that it’s a proposal to donate $250,000 to Ukraine, but actually gives you a $180 million donation, then when they execute it, say “haha suckers” and don’t get into any kind of legal trouble. But the deeper you get into the crypto industry, the less real-world rules apply. In the real world, you also can’t start a wild bank that mints its own currency to pay double-digit interest rates on customer funds.

This is the central problem. Games without rules can work for you or against you. People looking to defraud others like a world like the crypto-verse because it moves fast and has fewer rules. Just like people who want to cheat in basketball or football would prefer to play without referees. The fewer real authorities there are, the more you can get away with. But what happens when someone bigger, meaner, and more willing to cheat takes advantage of you?

If there’s one thing we can count on in the world, it’s that the bad guys will use the lack of rules or the non-enforcement of standards to invade their neighbors, enrich themselves and prey on others. Crypto investors may not intend to fund North Korea’s nuclear program or the Beanstalk bandits, but the scarcity of rules and enforcement allows that to happen and makes a significant amount predictable. fraud and theft.

The Biden administration has called for explicit regulation of cryptocurrencies and the blockchain-based economy. The EU has voted to remove anonymity from crypto transactions so law enforcement has a better chance of tracking criminal and fraudulent transactions to their source. There is reason to believe that these policies will improve the Crypt Sphere rather than degrade it. A land without rules is a place ruled by lawless people, and that leaves less room for the rest of us.

Copyright © 2022 Womble Bond Dickinson (US) LLP All rights reserved.National Law Review, Volume XII, Number 117

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DeFi Cryptocurrency Faces All-Time High Fraud Reports


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