While the traction gained by cryptocurrencies in past two years has led to the launch of alt coins, scammers have taken advantage of the hype to defraud uninformed investors. According to a survey by blockchain firm Chainalysis, Cryptocurrency theft rose 516% from 2020 to 2021 with $14B taken in cryptocurrency from investors through scams. In 2021 alone, fake crypto websites registered 9.6M visits from India, the report has claimed.
Types of Cryptocurrency Scams
Despite secure blockchain system, hackers gain access to exchanges, mining operations, and crypto wallets. $600M was transferred through the DeFi platform, Poly Network in 2021 by “Mr. White Hat” exposing the security flaws.
Fraudsters have created fake websites and apps to entice people to invest in or mine cryptocurrency or open fake wallets. In research by Akamai Technologies, it was uncovered a fraudulent campaign leveraging Amazon’s name to create a time sensitive lucrative opportunity for investors. The Bitcoin Gold wallet was a $3M dollar scam where the hacker convinced creators of Bitcoin Gold to promote mybtgwallent.com for storing the tokens.
Rug Pulls- Crypto engineers abandon a project and flee with the funding they were given. SaveTheKids rug pull included social media influencers creating promotional videos and lending images to the charity-based cryptocurrency scam. Squid Coin tanked soon after its release due to the massive sell-off leaving the token with holders worthless.
Protection offered by crypto exchanges and wallets
Cold and Hot Wallets- Cold wallets store the ownership data related to the cryptocurrency offline and this can be in a device or can be printed. and Hot Wallets store the ownership data online for use on a day-to-day basis. With multiple hot and cold wallets, users’ cryptos are more secure and loss in case of fall out with one wallet would not impact the funds in others.
Two/Three Factor Authentication- This is the most common security system adopted with multilayer protection- (i) a password and (ii) connected to email or mobile number for a one-time code verification.
Specific IP Address- Accounts are linked to specific IP address(es) and transactions from other locations are marked as suspected until identified safe.
Blocked withdrawals upon change of data- Blocking activity for a specific period after changes in identification data (such as email address or phone number) associated with the crypto exchange account or wallet avoids typical hacker behaviour- transfer of funds immediately after changing identification data.
Incorporation of multiple security elements reduces the risk of being exposed to scams.
Regulatory Perspective
United Arab Emirates (UAE) adopted Federal Decree Law No. 34 of 2021 on Combatting Rumours and Cybercrime which levies penalty on persons promoting, advertising unauthorized cryptocurrencies. Countries like China, Russia and Ecuador have completely banned them. Most countries remain unregulated with a need for specific laws.
In Singapore and the United Kingdom, common law principles of treating crypto assets as property have been applied. In Fetch.ai Ltd v Persons Unknown [2021] EWHC 2254, the United Kingdom Courts have issued “(i) a worldwide freezing order and proprietary injunctive relief against the unknown fraudsters; and (ii) orders allowing the claimants to receive information from the cryptocurrency exchange to assist them in a claim to trace the assets.”
United States of America’s State Security Boards have issued seize and desist orders against bogus companies offering “lucrative” returns upon crypto investment helping freeze the movement of funds over Blockchain.
In India, the judiciary in Hitesh Bhatia v. Kumar Vivekananda Case No. 3207 of 2020 has cited Internet and Mobile Association Vs. Union of India (2020 SCC Online SC 275) has stated that “transactions in cryptocurrency still have to comply with the general law in force in India including Prevention of Money laundering Act,2002 (PMLA), Indian Penal Code 1860 (IPC), FERA, Narcotic Drugs and psychotropic Substance Act 1985 (NDPS), Tax laws, and with the RBI regulations regarding KYC (know your customer), CFT (Combating of funding of terrorism) and AML (Anti-money laundering requirements).”
Funding of Cryptocurrencies was utilised for various serious offences, and these are already regulated by special laws as mentioned above. Using cryptocurrency for committing drug trafficking crimes would attract the same provisions of Narcotic Drugs and Psychotropic Substances Act, 1985. The NCB has gotten the accounts over cryptocurrency frozen for using them to buy illegal narcotic drugs.
Money laundering crimes through cryptocurrency attract the provisions of Foreign Exchange Management Act, 1973 and Anti-Money Laundering Act, 2002. Crimes occurring during conversion of INR to cryptocurrency over crypto exchanges attract Criminal law provisions under IPC.
Investors and users of crypto wallets and exchanges can approach local Cyber-Crime Investigation Cell or police station and register a complaint with relevant data and documents.
Know Your Customer (KYC) is the responsibility of the intermediary and cannot be left to the individuals. Customers can be cautious by using intermediaries complying with Customer Due Diligence as notified by RBI. A regulation is much awaited and necessary as cryptocurrencies impact national security by offering anonymity to terror funding and are a ground for criminal activities. According to blockchain data provided by Chainalysis, India’s digital currency market rose to $6.6B in 2021 from $923M in 2020. Even though complete ban is not expected, several limitations are expected for cryptocurrency transactions. Domestic cryptocurrency sector remains opaque, and it remains to be seen whether the Cryptocurrency and Regulation of Digital Currency Bill, 2021 provides clarity or not.
This is only for informational purposes. Nothing contained herein is, purports to be, or is intended as legal advice and you should seek legal advice before you act on any information or view expressed herein. Endeavoured to accurately reflect the subject matter of this alert, without any representation or warranty, express or implied, in any manner whatsoever in connection with the contents of this. This isn’t an attempt to solicit business in any manner.
Sources: Livemint, IndianExpress and RBI