Cryptocurrency Scams: Recover a Fraudulent Investment - Robinson and Henry (2024)

Cryptocurrency investment is the gold rush of the smartphone age. Techno-based currencies like Bitcoin and Ethereum allow people to purchase products and services anonymously, at any time, without paying fees to a central authority. That’s not all. The novelty and volatility of these digital assets attract investors — and scammers — who want in on the action. The rewards can be significant, but there are risks. Here are some steps you can take if your cryptocurrency investment went south.

In this Guide:

• What is Cryptocurrency?
• Cryptocurrency Investment Risks and Pitfalls
• How to Spot and Avoid Crypto Scams
• Can I Recover Funds from a Cryptocurrency Investment Scam?
• Pursuing Cryptocurrency Recovery through Litigation

Note: Before considering the legal issues, it is worth highlighting some of the technological and practical features of cryptocurrency to better understand the context of the legal attempts to recover them.

What is Cryptocurrency?

Cryptocurrency is virtual money. The ‘crypto’ in the name refers to its transactions being highly encrypted. It is decentralized in nature, unlike traditional currencies such as the dollar, yen, or peso, which are controlled by central banks and governments. Cryptocurrency can be bought and traded, used to buy goods and services, or held as an investment.

A blockchain tracks and stores all cryptocurrency transactions.

What is a Blockchain?

A blockchain is a string of powerful, peer-to-peer computer networks which act as a permanent, public ledger of all cryptocurrency transactions. This technology confirms crypto transactions without a central authority stepping in to delay, regulate, or charge a fee.

Cryptocurrency: Virtual but Spendable

Crypto coins,exist solely in virtual form. They are not minted. You can accumulate them, spend them, save them up, and even lose them, but you never hold them in your hand.

If you own cryptocurrency, you use a coded ‘key’ to access it and move units of it from one person to another without involving a third party.

Bitcoin, the original cryptocurrency, emerged in 2009 as a peer-to-peer electronic cash system. It remains the most mainstream crypto in terms of market capitalization, but it has since spawned thousands of altcoin competitors, such as Ripple, Ethereum, and Litecoin, whose values have skyrocketed.

More than 12,000 specific cryptocurrencies were listed as of mid-2022, however, most of them exist solely to make their developers more money. Investors, beware.

Buying and Saving Crypto Coins

It takes real money to buy, store, and accumulate encrypted digital altcoins. These assets can be bought and sold over a centralized cryptocurrency exchange, such as Kraken, Binance, or Coinbase, or through decentralized finance (defi) such as Uniswap or Sushi and stored in either a hot wallet or cold wallet.

• Hot wallets store your crypto coins online so you can access them anytime through your computer or smartphone – anywhere you have an internet connection. The downside to having this access, however, is that any kind of internet storage is vulnerable to hacking.
• Cold wallets store your cryptocurrency on an external device similar to a hard drive. They can store larger amounts and varieties of coins, and for longer periods of time. A cold wallet is more secure since the altcoins are not connected to the internet, but the external wallets themselves must be kept safe.

Cryptocurrency Investment Risks and Pitfalls

The volatility of cryptocurrency represents both danger and opportunity for daring investors. Even through 2021 and 2022 — more than a decade since Bitcoin emerged — the original and most mainstream cryptocurrency saw wild fluctuations in value. It rocketed to an all-time high of $64,000 in the first half of 2021, then dipped back below $30,000 by the summer of that year, only to peak at another all-time high, $68,000, in November of 2021. By January of 2022, Bitcoin was back below $35,000 and continued dropping. It was hovering around $20,000 by November of 2022.

That’s quite the rollercoaster ride, and, yet, that’s not the biggest risk when making an altcoin investment.

A Rising Tide of Crypto Scams

The Securities and Exchange Commission (SEC) began issuing investor alerts about potential fraud in the cryptocurrency marketplace in late 2017. The SEC warned that these digital assets provide far less investor protection than traditional securities markets, with “correspondingly greater opportunities for fraud and manipulation.”

The SEC warning made little difference, however, as the crypto gold rush continued to accelerate. Cryptocurrency crime exploded over the ensuing years. According to blockchain data firm Chainalysis, scammers tricked investors and buyers out of $7.8 billion of crypto assets in 2020. In 2021, scammers stole a staggering $14 billion in crypto money.

The U.S. Federal Trade Commission (FTC) reported that more than 46,000 consumers lost more than $1 billion in cryptocurrency between January 1, 2021, and March 31, 2022. Duped investors accounted for $575 million of that $1 billion total.

Features that Make Crypto a Fraudster Favorite

Three aspects of cryptocurrency invite criminal exploitation. They are:

• no bank or central authority to flag suspicious transactions before they happen,
• most investors are unfamiliar with how cryptocurrency works, and
• cryptocurrency transfers cannot be reversed.

When these features are combined with the power of social media, messaging apps, and the increasing ubiquity of pro-crypto television ads, scammers can count on a steady herd of eager but inexperienced investors to swindle.

How to Spot and Avoid Crypto Scams

Cryptocurrency fraud mirrors standard financial fraud in many ways, except that scammers are after digital assets instead of cash.

Of course, if you’ve got significant amounts of cash invested in altcoins, that money disappears too. Another difference, for the time being, is that digital currency is still relatively new. Until regulations catch up, criminals have a head start on their potential victims.

Criminals don’t have to get the jump on you. Here are some tell-tale signs of cryptocurrency scams to watch for before you sink money into them:

• Promises of a Guaranteed Return: To an experienced investor, this is an obvious red flag. No credible offering can guarantee a future return.
• Lackluster or Non-Existent Whitepaper: One of the most important things about an initial coin offering (ICO) is a whitepaper that details how this specific cryptocurrency was designed and how it’s supposed to work. If the whitepaper seems vague or doesn’t make sense — or worse, if there is no whitepaper — keep your investment funds in your pocket.
• Demanding Crypto-Only Payments: This has less to do with investing and more to do with common sense. Bitcoin and other altcoins are a still-developing asset class. Credible institutions will not accept only cryptocurrency, unless they are attempting to hoard it for themselves, which begs the question of whether the investment opportunity is real.
• Overzealous Marketing: Every business must promote itself. Crypto scammers try to attract investors by hyping their coin as much as possible. Exaggerated claims and heavy-handed advertising tactics point to shady characters trying to make money fast. It hardly indicates a safe investment.
• Anonymous or Unnamed Members: A sound investment opportunity should have real people with searchable names and an active social media presence backing it up. Why wouldn’t an investment’s backers want to be found and contacted in case something goes wrong?
• Free Money: Any investment opportunity promising free money is probably fake. A good investment offering should look promising on its own merits.

Can I Recover Funds from a Cryptocurrency Investment Scam?

The awful realization you have been scammed out of a large sum of money or digital currency is a waking nightmare. While there’s no guarantee you can recover all your cryptocurrency, you can increase your chances.

Five Ways to Try to Get Your Funds Back from a Scammer

1. Look for the Transaction ID Code

Blockchain technology records all cryptocurrency transactions, even fraudulent ones. A scammer cannot take your cryptocurrency without this ID code.The ID code allows you and the authorities to see where the money is going. The codes can speed up the investigation and boost your odds of recovery.

Where do I find the transaction ID code? Look for the unique string of numbers and letters showing crypto movement from a particular address to another. Once you have them, you and the investigators can track sending and receiving addresses, transaction amounts, and fees. This information can help catch the scammer as quickly as possible.

2. Monitor Your Credit Score

After realizing you’ve been scammed, immediately check your credit report. It will alert you if any fraudulent accounts have been opened in your name. Details of those accounts can help you track down the scammer and possibly recover your funds.

Of course, it’s also a good idea to alert the credit agency to the fraud. This will prevent the fraudsters from opening a new credit account in your name.

3. Document the Scam

It’s important to remain clear-headed and document the situation properly and accurately. Keep all emails, text messages, and other correspondence connected to the scammers. Prioritize the following information:

• transaction ID codes,
• information about the scam, including the scammers, how the fraud started, the amount of money lost, exchanges involved, and when the scam happened;
• all other relevant information.

Also, secure access to the accounts where the funds originated. Investigators will want you to prove you owned the crypto account that was breached so they can move more quickly.

4. Notify the Crypto Exchange

All cryptocurrencies are bought, sold, and traded on a crypto exchange. The specific exchange where the scam occurred should know what happened. Tell the exchange managers that a scammer received your money. The exchange platform can beef up the security of your account. Of course, using decentralized finance all but eliminates this possibility.

This step doesn’t guarantee recovery, but it will encourage the exchange managers to look for patterns that will help them trace the scammers, and, at the least, prevent them from striking again.

5. Report the Scam to Law Enforcement

Report the scam to financial law enforcement and your area’s designated law enforcement authorities. If you’re a United States citizen, report any fraudulent activity involving crypto to the Securities and Exchange Commission (SEC), the Commodity Futures Trading Commission (CFTC), and the Federal Trade Commission (FTC).

This won’t assure that you recover all funds, but the government will still make every attempt. Even if authorities can’t succeed, they have been made aware of the scam and can establish guardrails to hopefully prevent it from happening again.

Pursuing Cryptocurrency Recovery Through Litigation

Cryptocurrency and blockchain litigation is a developing area of law. Private citizens and the federal government file cases every week against crypto exchanges.

Due to the high cost of pursuing blockchain litigation, many firms won’t take a case unless at least $100,000 or $200,000 is at issue. Because of this, many individuals who have been harmed by a dishonest crypto exchange or fraudulent investment opportunity tend to band together and bring class action suits. This way, they can assist everyone who has been affected.

More than 90 percent of cryptocurrency lawsuits settle without going to court. However, a resolution can take two to three years and result in tens of thousands in legal fees.

Common Cryptocurrency Disputes

Illegal Securities Offering

One way you can try to get your money back is to claim securities fraud. You can do this by demonstrating that the ICO (initial coin offering) was illegal because it was an unregistered securities offering masquerading as a utility token sale. In fact, in July of 2022, the SEC determined that nine tokens being offered by Coinbase were unregistered securities.

Misuse of Investment Funds

This occurs when investment proceeds are spent on personal luxury items and vacation homes instead of legitimate business needs. It’s fine to throw a team-building investors’ party now and then. Even salary packages for the founders of a particular investment can be permissible. Using investment funds to purchase high-priced racing cars and tropical island villas is another matter.

Selling Fraudulent Crypto

“Pump-and-Dump” is a serious issue in the blockchain marketplace. Tokens are sold to investors based on fraudulent and exaggerated claims, and then the investment ‘founders’ disappear with the money. These cases often cross the threshold into criminal territory, but pursuing the scammers can be difficult unless they have been reliably identified.

Note: A factor to consider when pursuing either a lawsuit or criminal charges against a group of crypto scammers is that these frauds tend to be international and cross multiple government jurisdictions. This can make pursuing justice or recovery extremely difficult and time-consuming, depending on the governments involved.

Ask the Right Questions Before Investing in Crypto

The SEC recommends asking yourself the following questions before you sink actual money in a cryptocurrency or ICO opportunity:

• Who is issuing or sponsoring the product?
• Where is my investment money going?
• What will the investment money be used for?
• Will I receive financial statements?
• Is there trading data?
• How, when, and at what cost can I sell my investment?
• Does the investment comply with securities laws?
• Do I have legal protections if something goes wrong?

The SEC advises that you not invest in a token — no matter how promising it seems — before getting satisfactory answers to these questions.

The only surefire way to recover a bad cryptocurrency investment is to avoid it in the first place.

Talk to a Litigation Attorney if You Have Been Scammed

The Wild West atmosphere of cryptocurrency and ICO markets can lure even careful investors into fraudulent schemes. Robinson & Henry’s Civil Litigation Team will work to help you recover digital coin investment losses. Cryptocurrency fraud harms thousands of investors every year. Don’t be a statistic. Call 303-688-0944 to begin your case assessment.