Scamming Poses One of the Greatest Threats to Crypto and Blockchain Sector’s Continued Adoption: Report

Chainalysis reveals that scams were once again the largest form of cryptocurrency-based crime by “transaction volume,” with more than $7.7 billion worth of crypto taken from unsuspecting victims globally.

As noted by Chainalysis, that represents an increase of 81% compared to last year, a year in which scamming activity declined considerably compared to 2019, “in large part due to the absence of any large-scale Ponzi schemes.”

That changed in 2021 with Finiko, a Ponzi scheme “primarily targeting Russian speakers throughout Eastern Europe, netting more than $1.1 billion from victims,” the Chainalysis team wrote in a blog post.

They added that another change that contributed to 2021’s increase in scam revenue: “the emergence of rug pulls, a relatively new scam type particularly common in the DeFi ecosystem, in which the developers of a cryptocurrency project — typically a new token — abandon it unexpectedly, taking users’ funds with them.”

As the largest form of crypto-based crime and one “uniquely targeted toward new users,” scamming poses one of the greatest threats to crypto’s “continued adoption,” the firm noted while adding that some virtual currency businesses are “taking innovative steps to leverage blockchain data to protect their users and nip scams in the bud before potential victims make deposits.”

Investment scams in 2021: More scams, shorter lifespans

Although total scam revenue increased considerably this year, it remained flat if we “remove rug pulls and limit our analysis to investment scams — even with the emergence of Finiko.”

At the same time, the number of “deposits to scam addresses fell from just under 10.7 million to 4.1 million, which we can assume means there were fewer individual scam victims.”

This also “tells us that the average amount taken from each victim increased.”

The company further noted:

“Scammers’ money laundering strategies, however, haven’t changed all that much. As was the case in previous years, most cryptocurrency sent from scam addresses ended up at mainstream exchanges.”

Exchanges using Chainalysis KYT for transaction monitoring can “see this activity in real time, and take action to prevent scammers from cashing out,” the firm explained.

The number of financial scams “active at any point in the year — active meaning their addresses were receiving funds — also rose significantly in 2021, from 2,052 in 2020 to 3,300.”

The company added that this “goes hand in hand with another trend we’ve observed over the last few years: The average lifespan of a financial scam is getting shorter and shorter.”

The average financial scam “was active for just 70 days in 2021, down from 192 in 2020,” the team at Chainalysis revealed.

They added:

“Looking back further, the average cryptocurrency scam was active for 2,369 days, and the figure has trended steadily downwards since then. One reason for this could be that investigators are getting better at investigating and prosecuting scams.”

For example, in September 2021, the CFTC filed charges “against 14 investment scams touting themselves as providing compliant cryptocurrency derivative trading services — a common scam typology in the space — whereas in reality, they had failed to register with the CFTC as futures commission merchants.”

Previously, these scams may have been “able to continue operating for longer,” Chainalysis noted while adding that as scammers become “aware of these actions, they may feel more pressure to close up shop before drawing the attention of regulators and law enforcement.”

The firm continued:

“We’re seeing the end of a long-standing statistical relationship between cryptocurrency asset prices and scamming activity. Scams typically come in waves corresponding with sustained price growth in popular cryptocurrencies like Bitcoin and Ethereum, which typically also lead to influxes of new users.”

Chainalysis also revealed:

“Rug pulls are most commonly seen in DeFi. … most rug pulls entail developers creating new tokens and promoting them to investors, who trade for the new token in the hopes the token will rise in value, which also provides liquidity to the project — that’s how most DeFi projects start.”

For more details on this update, check here.

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