$4b dodgy coins fraud and other scams which lured crypto investors in 2021
There has also been big growth in DeFi protocols being used to launder dirty money: illicit internet addresses hold at least $US10 billion worth of cryptocurrency, according to previews of the report published on Chainalysis’ blog in the past month.
“DeFi is one of the most exciting, innovative areas of the cryptocurrency ecosystem, and there are clearly big opportunities for early adopters,” the report said. “But the newness of the space and relative inexperience of many investors provides a prime landscape for scamming opportunities by bad actors.”
“New, less-savvy users attracted by cryptocurrency’s growth are more likely to fall for scams than more seasoned users.”
One of the newest techniques used by shysters is the “rug pull”, which refers to investors getting the rug pulled out from under them. This scheme sees developers of a cryptocurrency project – typically a new token – abandon it unexpectedly, taking users’ funds with them. It is easy for those with the right technical skills to create new DeFi tokens and get them listed on exchanges, and many are unaudited.
Rug pulls have emerged as the go-to scam of the DeFi ecosystem, Chainalysis said, accounting for 37 per cent of all cryptocurrency scam revenue in 2021, versus 1 per cent in 2020. Rug pulls took in more than $US2.8 billion worth of cryptocurrency from victims in 2021.
“Scamming will always be a big part of cryptocurrency investment, just like scamming has been part of any financial market,” Chainalysis’ director of research, Kimberly Grauer, told The Australian Financial Review from New York on Tuesday.
“I would be surprised if the number of attacks on DeFi continues at this rate, as we are in a period of major growth of DeFi businesses coming online. But there is no doubt going to be more rug pulls over the years. These trends will continue.”
When Commonwealth Bank said it would add 10 crypto coins to its banking app this year, it appointed Chainalysis to help it monitor compliance with anti-money laundering laws that became a major headache for CBA in 2018.
Chainalysis is working with US law enforcement including the Federal Bureau of Investigation, Internal Revenue Service and Drug Enforcement Administration, and Europol, Europe’s law enforcement agency. It has opened an office in Canberra and is keen to provide its software that monitors blockchain transactions to the public sector.
Australian investors are also being caught up in the scams. The Australian Competition and Consumer Commission said in the eight months to the end of August 2021, it received 3007 reports of scams involving cryptocurrency investment, with losses of $53.2 million.
Not all rug pulls start as DeFi projects: the biggest rug pull of the year involved Thodex, a Turkish centralised crypto exchange whose chief executive disappeared soon after it stopped users withdrawing funds, leading to more than $US2 billion of losses. This fraud represented almost 90 per cent of all the value stolen in rug pulls. All the other rug pulls in 2021 began as DeFi projects.
The second-biggest was AnubisDAO, with over $US58 million lost. There was no website or white paper and its developers went by pseudonyms. The Twitter account that had acted as the public face of AnubisDAO went offline and the DeFi token ANKH plummeted to zero within 24 hours.
“AnubisDAO should serve as a cautionary tale to investors evaluating similar opportunities. The most important takeaway is to avoid new tokens that haven’t undergone a code audit,” Chainalysis said.
Other rug pull scams involving DeFi were: Uranium Finance, DeFi100, Meerkat Finance, SnowdogDAO, StableMagnet, SaturnBeamFi, SQUID, Luna Yield, Evolved Apes, Turtledex, PopcornSwap, WarOnRugs and Polybutterfly.
ASIC chairman Joe Longo told local crypto investors they are on their own, but Chainalysis has some proactive tips, including ensuring a code audit by an outfit like OpenZeppelin has been conducted before investing, and ensuring promoters of the coins are not hiding. It is working with the exchange Luno to reduce scamming activity.
In terms of the overall crypto landscape, transactions involving illicit addresses are small, representing just 0.15 per cent of all cryptocurrency transaction volume in 2021. The report calls for the public and private sectors to work together “to ensure that users can transact safely, and that criminals can’t abuse these new assets”.
Separately, the US Government Accountability Office on Monday released a report that found virtual currency was increasingly used in human and drug trafficking.
The GAO said the number of suspicious activity reports filed with the Financial Crimes Enforcement Network involving virtual currency and drug trafficking increased by five times, from 252 to almost 1,432, between calendar year 2017 and 2020. FinCEN and the IRS will now review virtual currency kiosk registration requirements.
