A Puerto Rican billionaire’s mansion was filled with over a hundred people intent on making big money in January. In formal attire, billionaires, cryptocurrency founders, and high-powered tech executives mingled over cocktails and hors d’oeuvres poolside. A high-stakes private poker game cost them $80,000 each. Cash tables worth $2 million were available for some players.
Although the event was attended by high-profile guests, it turned out to be a disaster. The buy-in money was managed in a cryptocurrency wallet, and whoever managed that wallet soon disappeared with the $5 million pot—all in untraceable cryptocurrency. Everyone who put up money lost it, and those who won never got to take home their winnings.
The wealthy players, including five people from Utah, had long touted the virtues of cryptocurrency and blockchain—run on decentralized platforms that are secure and private. Now they found themselves flabbergasted. None of them, many of whom run crypto funds, wanted to speak on the record about the scam.
The Puerto Rico fraud is among a long list of crypto cons running rampant across the world, duping even the brightest minds and most successful people in the burgeoning cryptocurrency industry.
“Fraudsters love crypto because the scams are harder to track and decentralized.”
According to a new analysis by the Federal Trade Commission, consumers have lost more than $1 billion from cryptocurrency fraud from January 2021 through March 2022, which suggests that cryptocurrency is quickly becoming the payment of choice for many scammers. An average of one out of every four dollars is reported lost to fraud paid in cryptocurrency.
Blame the hype around the sector; Bitcoin, Dogecoin, and Etherium deals have created a huge number of millionaires in the past couple of years. Americans earned $4 billion from crypto last year, according to a report by software company Chainalysis. The markets began to crash last spring, but plenty of people still see cryptocurrency with dollar signs in their eyes.
“Everyone wants to get rich quick, and a lot of people will take your money,” says Scott Paul, founder of Utah-based Convoi Ventures, which provides pre-seed funding to crypto startups.
Fraudsters love crypto because the scams are harder to track and decentralized. Many of these scams start with an ad, post, or message on a social media platform promising guaranteed profits or requiring participants to buy or pay in crypto, according to the FTC. Others involve a love interest who wants to show you how to invest in cryptocurrency or to send them cryptocurrency.
These scams often falsely promise potential investors that they can earn huge returns by investing in their cryptocurrency schemes, but people report losing all the money they “invest.”
This spring, a Utah woman lost nearly $200,000 to a man she met on a dating site who promised to invest her money in crypto. Another man from Jordan says he lost several hundred thousand dollars after he “invested” that money in crypto—it turned out he was using a look-alike crypto app that gave a hacker access to his digital wallet.
Another woman, Crystal Racassi of Price, says she lost hundreds of dollars last fall after a girl reached out to her on Facebook. A UK company told her to put $300 into Coinbase, a cryptocurrency app, and to send those funds to the company. She never got the initial investment back and was told she had to pay a fee to withdraw her money.
According to the FTC, people aged 20 to 49 are five times more likely than older people to report losing money to a cryptocurrency investment scam. Within a six-month period last year, people in their 20s and 30s lost more money to investment scams than any other form of fraud. More than half of their investment scam losses were in cryptocurrency.
As evidenced by the aforementioned poker game, even experienced crypto investors have been duped by crypto rug pulls. National media outlets touted the Squid Game Token last year, which looked compelling on the surface: People would buy their tokens and invest in projects with the potential for significant returns. Instead, investors unknowingly permitted people to take tokens out of their wallets indefinitely.
Last fall, the Squid Game Token creators removed the $3.36 million that had been invested into the coin, making it worthless. Even after the token went out of business, the scammers had access to people’s wallets and took even more money, says Dan Young, an early Bitcoin miner in Salt Lake City, founder of Xidax PCs, and the founder of Ugly Unicorn Fund, which helps accredited investors invest in crypto.
“Within a six-month period last year, people in their 20s and 30s lost more money to investment scams than any other form of fraud. More than half of their investment scam losses were in cryptocurrency.”
“There are thousands of projects out there. Some are legitimate, and others are not,” Young says. He has also been scammed over the years. After accidentally giving infinite permissions to his Ethereum wallet, Young lost $200,000 to a scammer. He has since built approval protocols for people to protect themselves.
Young tries to avoid scammers today by never using “hot wallets,” digital wallets that are always connected to the internet and allow users to store, send, and receive crypto tokens. Instead, he uses a “hard wallet,” a key that looks like a USB stick and stores account information. He says it adds a second layer of security because you must click a button on the stick and confirm on your computer to complete a transaction.
Young now protects himself by never using phones for crypto trades and instead relies on a dedicated crypto computer used for nothing else—not even email. He won’t connect to unknown websites or click onto sites from links, either. “A lot of times, you’ll get a message on social media, and you connect your wallet to it, and they steal all your money,” Young says.
Young has also heard of people who go to online forums to seek help with their crypto wallets, where scammers offer that help and say they need the “seed phrase” of other’s wallets. This phrase comprises 12 to 24 words that allow users to restore their crypto wallets. With it, the scammers take all their money.
Another of Young’s rules is that he takes all emotion out of any deal and vets crypto deals like any other startup. He wants to know the real people behind the project and ensure they have plenty of experience in tech or crypto. “I ask whether what they’re building has actual functionality in the real world,” he says, “And I run any investment by my CPA.”
In the case of the Puerto Rico poker scam, the problem wasn’t about the cryptocurrency itself. It was about trust in individuals, says one anonymous participant. The man who ran the wallet had organized multiple games in the past with no problems, so the players trusted him. The players could have avoided huge losses by employing a multi-signature crypto wallet, in which multiple people have to sign a transaction for it to take place.
“The issue wasn’t the crypto,” says the participant, who lost $40,000. “The problem here was that everyone trusted one guy with the crypto.”
Large investors also trusted Terra Luna, one of the most popular US dollar-pegged stablecoin projects, only to be stunned by the loss of billions of dollars in May. The coin, TerraUSD (or UST), was meant to mirror the price of the US dollar, and investors made a killing on the platform until the price—which would be controlled algorithmically—became unstable. Investors rushed out of the tokens, sending prices off a cliff. A total of $60 billion was lost.
“People want to know, was it a hack? A business failure?” Paul says.
The SEC is now investigating whether Terraform Labs, the Singapore firm behind the coin, broke the rules for securities and investment products. Regulation is also on the horizon. Early this summer, the US Senate introduced the Responsible Financial Innovations Act, which would develop clear standards, define jurisdictional boundaries, protect consumers, and provide more clarity for the crypto industry and regulators.
“The issue wasn’t the crypto. The problem here was that everyone trusted one guy with the crypto.”
G7 finance ministers and central bank governors called for the regulation of crypto assets last spring, with European Central Bank President Christine Lagarde saying crypto is “worth noting and should be regulated.” Other officials who gathered for the World Economic Forum in Davos, Switzerland, called crypto a “pyramid scheme,” “worth nothing,” and “not reliable.”
Now, the US Federal Reserve is discussing the release of a digital US dollar—a government-backed stable coin—and recently released a report about a central bank-issued digital currency. Federal Reserve Chief Jerome Powell recently spoke about how the US digital dollar could co-exist with stablecoins. Experts say a US digital dollar could be used as a more efficient method for collecting taxes and could be key to tracking inflow and outflow for crypto transactions.
In addition, President Biden issued an executive order mandating every federal department to investigate a digital currency, and Treasury Secretary Janet Yellen touted the promise of digital currency, saying the growth of digital services “has opened a world of possibilities and risks that would have seemed fantastical only a few decades ago.”
Large financial institutions are developing their own crypto strategies, and big chip manufacturers are looking into how to implement crypto security on chips. In Utah, loads of startups are popping up around the sector. Paul of Convoi Ventures says he reviews 50 crypto businesses by Utah entrepreneurs plans per month for pre-seed investments of $50,000 to $100,000. In late May, he hosted Cryptopia, a Utah crypto conference, which brought together hundreds of Utah crypto companies.
“There will be mass adoption [of crypto],” Young says. “It’s a tidal wave coming.” But with crypto’s growing popularity, you can expect more scammers, too—going forward, there will be far more digital money to steal.
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