The Cryptocurrency and Digital Asset Fraud Casebook

201 Pages·2023·3.463 MB·English

by  Jason Scharfman

THE CRYPTOCURRENCY
AND DIGITAL ASSET
FRAUD CASEBOOK
Jason Scharfman
The Cryptocurrency and Digital Asset Fraud
Casebook
Jason Scharfman
The Cryptocurrency
and Digital Asset
Fraud Casebook
Jason Scharfman
Corgentum Consulting, LLC
New York, NY, USA
ISBN 978-3-031-23678-5 ISBN 978-3-031-23679-2 (eBook)
https://doi.org/10.1007/978-3-031-23679-2
© The Editor(s) (if applicable) and The Author(s), under exclusive license to Springer Nature
Switzerland AG 2023
This work is subject to copyright. All rights are solely and exclusively licensed by the Publisher, whether
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This book is dedicated to the victims of cryptocurrency fraud.
Preface
Cryptocurrencies and digital assets have continued to gain widespread accep-
tance from both retail and institutional investors. With this rapid growth in
both the crypto and digital asset spaces, there has also been an unfortunate
steady drumbeat of fraudulent activity. It has been reported that in 2021
alone over $14 billion in crypto was stolen from investors. This figure nearly
doubled the 2020 figure of $7.8 billion in crypto thefts. In August 2021, the
largest DeFi hack in history took place with a theft of over $600 million.
Estimates indicate that the instances of crypto fraud continue to increase
over 40% every year. In February 2022 it was announced that two indi-
viduals were arrested in conjunction with money laundering efforts related
to a $4.5 billion crypto hack of Bitfinex. Frauds have touched all aspects of
the crypto universe ranging from outright Bitcoin theft and wallet phishing
to DeFi rug pulls, exchange hacks, mining scams, and NFT fraud. 2022
concluded with the revelation that FTX, one of the largest centralized cryp-
tocurrency exchanges, was a multi-billion dollar fraud led by former CEO
Sam Bankman-Fried and Caroline Ellison, the former CEO of an affiliated
quantitative trading firm named Alameda Research.
The first section, Chapters 1–4, begins with providing an overview of cryp-
tocurrency and digital asset fraud and crime. As part of this discussion, we
provide background on the ways in which frauds have historically undertaken
outside of the cryptocurrency space. As part of this discussion, we focus on
the motivations for fraud through models such as Creesey’s fraud triangle as
well as analyzing popular cryptocurrency fraud topologies including romance
vii
viii Preface
scams and pig butchering scams. Chapter 2 then proceeds to discuss cryp-
tocurrency exchange fraud and hacks. As part of this analysis, we discuss
the different aspects of centralized exchanges (CEX), decentralized exchanges
(DEX), smart contracts, and decentralized apps. We then analyze case studies
in crypto exchange hacks including the CoinCheck hot wallet hack and
the role of tumblers. Case studies in DEX hacks including Kyber Network,
GMX, and Transit Swap were discussed. Chapters 3 and 4 provide an analysis
of case studies in Ponzi, pyramid, and multi-level-marketing schemes. As part
of this discussion, we analyze the growth of cryptocurrency scams outside of
the United States in locations including Africa and Brazil.
The next section of the book, Chapters 5–8, focuses on frauds and hacks
in the Non-Fungible Token (NFT), DeFi, and crypto hedge fund spaces.
Specifically, Chapter 5 begins by discussing the common NFT fraud typolo-
gies. These included direct NFT theft, bait and switch NFT fraud, and
meme NFT fraud. The remainder of the chapter focused on case studies
in NFT fraud including the cases involving beer with Bill Murray, Frosties
and Embers, Baller Ape Club, and Vulcan Forged. It also discusses artist
impersonation issues, Meebits, and the OpenSea Insider Trading Case. Chap-
ters 6 and 7 provide an introduction to decentralized finance (DeFi) frauds
and hacks. It begins by providing an overview of the DeFi space and anal-
ysis of the magnitude of DeFi hacks. The chapter then proceeds to discuss
case studies in DeFi hacks. These included hacks, rug pulls, and exploits
at Binance Blockchain, Meerkat Finance, BadgerDAO, Rari Capital/Fei
Protocol, KuCoin, Akropolis DeFi, and Origin Dollar. We conclude this
section with Chapter 8 that provides an introduction to crypto hedge funds.
Next it discusses the relationship between anti-money laundering compliance
and virtual asset service providers in the cryptocurrency space. Finally, the
chapter analyzes case studies including those at Robinhood Crypto, LLC,
Q3 Trading Club, EmpiresX, and VQR.
The third section, Chapters 9–12, continued the analysis of cryptocur-
rency and digital fraud hacks. This section began by analyzing case studies
of initial coin offerings (ICOs) and statistics concerning their rapid growth
beginning in 2017. Case studies discussed include those of celebrity rappers,
actors, and influencers. In Chapter 10 the analysis of case studies continues
with cases related to market making and the unregistered offer and sale of
securities. The chapter next discusses the Sparkster case. The analysis of this
case also deals with allegations of the promotion of unregistered offer and sale
of crypto assets and the requirements of influencers to disclose compensation
for promoting ICOs and token sales.
Preface ix
When any new technology or way of doing business becomes popular, such
as cryptocurrency, the metaverse, Web3.0, the scammers tend to come out of
the wood work to capitalize on all the money flowing into it. A key goal
of this book is to attempt to promote awareness of fraud in the crypto and
digital asset space. Ultimately, all of us that participate in the crypto space
bear some responsibility for ensuring that our colleagues and perhaps more
importantly those entering the space for the first time are not victimized by
scammers. As you read through the voluminous amounts of cryptocurrency
frauds and hacks, consider what lessons can be learned about future prac-
tices to ensure that the crypto universe is a safe place where criminals cannot
thrive.
New York, NY, USA Jason Scharfman
Contents
1 Introduction to Cryptocurrency and Digital Asset Fraud
and Crime 1
Introduction to Cryptocurrency and Digital Assets 1
Introduction to Fraud 2
Distinguishing Criminal and Civil Fraud 4
Distinguishing Theft and Fraud 5
Motivations for Fraud 5
Comparing Crypto Fraud with Traditional Fraud 7
Crypto Fraud Statistics 8
Crypto Romance Scams 9
Crypto Phishing Scams 12
Giveaway/Multiplier Scams 13
Chapter Summary 15
2 Cryptocurrency Exchange Fraud and Hacks 17
Introduction to Cryptocurrency Exchanges 17
Hackers and Crypto Exchange Centralization 17
Introduction to Cryptocurrency Exchanges 18
Case Studies in Cryptocurrency Exchange Fraud and Hacks 20
Decentralized Exchange Hacks 23
Ascendex 24
MM.Finance 24
Bitfinex 25
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xii Contents
Crypto.Com 28
Cryptocurrency Exchange Hack Future Perspectives 30
Chapter Summary 31
3 Cryptocurrency Ponzi, Pyramid, and MLM Schemes:
Part 1 35
Introduction to Cryptocurrency Ponzi Schemes 35
Introduction to Pyramid and MLM Schemes 36
Case Studies in Cryptocurrency Ponzi and Pyramid Schemes 36
Brazilian Cryptocurrency Scams 37
African Crypto Scams 41
OneCoin 45
Chapter Summary 50
4 Cryptocurrency Ponzi, Pyramid, and MLM Schemes:
Part 2 55
Cryptocurrency Ponzi Schemes and Pyramid Schemes
Continued 55
Turgut V 55
Profit Connect Wealth Services 56
Coinbase Former Employee 59
BitConnect 64
Chapter Summary 67
5 Non-Fungible Token (NFT) Fraud 69
Introduction to NFTs 69
Common NFT Fraud Typologies 70
Meme NFT Fraud 70
Case Studies in Cryptocurrency Ponzi Schemes 71
Beer with Bill Murray 71
Frosties and Embers 72
Baller Ape Club 74
Vulcan Forged 75
NFT Minting Fraud 75
Pranksy 76
Artist Impersonation 76
Meebits 77
Marble Cards 77
OpenSea NFT Insider Trading Case 77
Chapter Summary 79