DIGIVESTASI - Crypto Asset Fraud Becomes a Major Threat to the US Economy, Crypto asset fraud is increasingly becoming a serious threat to the US economy due to its growing impact on draining public savings. Most recently, the US Securities and Exchange Commission (SEC) filed a lawsuit against crypto investment firm NovaTech Ltd on August 12, 2024. The company was found to have used a multi-level marketing (MLM) scheme to attract crypto investors since 2019. Before its bankruptcy in 2023, NovaTech managed funds exceeding US$650 million from approximately 200,000 investors worldwide.

NovaTech's collapse is believed to be a result of its pyramid scheme practices, where funds to pay old investors and cover operational costs were sourced from new investor contributions. "Such a large MLM scheme requires promoters to run it, and we will hold accountable not only the main architects of the scheme but also the promoters who spread the fraud to victims," said Eric Werner, Regional Director of the SEC in Fort Worth, Texas, in an official statement on Monday, August 19, 2024.

According to the SEC's official site, this is not the first case of crypto investment fraud in 2024. In March 2024, the SEC sued 17 individuals involved in CryptoFX LLC for using a Ponzi scheme to defraud people in the Latin American community, with total losses reaching US$300 million from about 40,000 victims. Additionally, earlier in the year, the SEC exposed a pyramid scheme named HyperFund that siphoned up to US$1.7 billion from global crypto investors.

Increasing Investment Fraud

The Federal Bureau of Investigation (FBI) Internet Crime Report 2023 highlights that investment fraud in the US continues to surge. In 2023, losses from investment fraud and similar schemes totaled US$4.57 billion, a 38% increase from US$3.31 billion in 2022. Breaking it down further, crypto-based investment fraud dominated, with losses reaching US$3.96 billion in 2023, up 53% from US$2.57 billion in 2022. These cases include various schemes, from Ponzi schemes to personal scams like pig butchering, fake crypto fundraising, or rug pulls.

Vulnerable Targets

New crypto investors, who do not fully understand blockchain technology, are easy targets for local and global fraudsters. The 2024 Crypto Crime Report by Chainalysis estimates that illegal crypto activities or crime-related crypto reached US$24.2 billion in 2023. Although this figure is lower compared to US$39.6 billion in 2022, Chainalysis warns that the figure might still increase. "For example, our report last year estimated illegal crypto transactions for 2022 at US$20.6 billion before it was revised to US$39.6 billion," said Kim Grauer, Director of Research at Chainalysis, in the report.

The research released in early March 2024 also shows that illegal crypto activities from scams, hacking, and theft targeting individuals remain prevalent. Specifically, illegal crypto from ransomware hit a record US$1.1 billion in 2023, nearly double from the previous year. Meanwhile, illegal crypto from scams decreased from US$6.5 billion in 2022 to US$4.6 billion in 2023. Scam trends in 2023 included investment fraud via pig butchering, NFT scams, rug pulls, giveaway frauds, and phishing. On the other hand, token theft due to hacking also decreased from US$3.7 billion in 2022 to US$1.7 billion in 2023. However, Chainalysis notes that hacking attempts remain high and are likely increasing.

The Importance of Vigilance and Education

Crypto education provider Pintu Academy emphasizes that pyramid schemes can occur in the crypto world. This business model typically relies on recruiting new members who must pay upfront fees and purchase products to join. The last members to join are often the most disadvantaged. "New members then recruit others to earn commissions, creating more offers than demand. This scheme often promises high returns with low risk and requires upfront costs," explains Pintu Academy. Ponzi scheme investment programs often show unusually consistent returns, use complex and secretive business strategies, rely on recruiting new members, and require purchasing large amounts of products.

However, while crypto is often used in fraud, Pintu Academy stresses that not all crypto assets are scams. For instance, Bitcoin (BTC) is a commodity designed as a digital asset with intrinsic value. Bitcoin’s price is determined by supply and demand, not by recruiting new members. Bitcoin is also open-source and transparent, unlike complex and closed pyramid schemes. Anyone can view Bitcoin's code and participate in its development. "Bitcoin is also fairly distributed without an initial allocation for its creator, Satoshi Nakamoto, who had to mine Bitcoin like other participants. Bitcoin has no leaders or organizational structure, making it a global decentralized network," explains Pintu Academy.

Bitcoin is a rapidly growing monetary network. Its development is overseen by global programmers and miners working together to secure the network. Lastly, Bitcoin does not rely on recruiting new users because it operates on a proof-of-work (PoW) protocol. Bitcoin is secure and easily accessible to anyone. "The rapid rise in Bitcoin’s price might lead some to believe it is a pyramid scheme. However, Bitcoin is not a pyramid scheme as it is open-source, transparent, leaderless, and fairly distributed," the Academy affirms.

Despite the presence of fraudulent practices using fake tokens, known as pump and dump schemes, where investors are tricked into investing in worthless altcoins, Bitcoin is not involved. When the price of these altcoins crashes, investors who bought in at high prices are the most affected. Therefore, it is crucial for both new and experienced crypto investors to remain vigilant and verify every investment offer or information received. Understanding fundamental analysis of tokens, project developers' backgrounds, technical aspects, and on-chain activity of the coin is essential before investing.

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