Cryptocurrency has been on the rise, and despite offering a wealth of opportunities, the sector, which remains largely unregulated, contends with an uptake of scams and fraudulent activity. 

The most prevalent types of crypto scams in the GCC region are phishing attacks, fake Initial Coin Offerings (ICOs), and Ponzi schemes disguised as lucrative investment opportunities remain rampant. 

According to Nicola Buonanno, Area VP of Southern EMEA, Chainalysis, such scams exploit the chain’s weakest link — humans. “Social engineering attacks are often successful despite security solutions being in place because, ultimately, it is the trust of humans that is exploited rather than gaps in the technology infrastructure.” 

“Social engineering tactics often involve manipulative messages that create a sense of urgency or offer too-good-to-be-true returns. Unfortunately, as the popularity of cryptocurrency grows, so does the sophistication and frequency of these scams,” adds Raghav Reggie Jerath, Founder and CEO of Hydro Online.

Observers say scammers are taking advantage of the volatility in the industry by manipulating emotions and the desire for quick money. They create a sense of urgency, showing unrealistic returns and utilizing social media to build a facade of being real, says Omer Khan, CEO of Helply, a UAE-based mental health platform. He adds that fake endorsements and influencer marketing have only increased the phenomenon. “Scammers are adept at playing on our cognitive biases. They dangle the prospect of financial freedom, preying on our hopes and dreams.”

EXPLOITING LONELINESS

Romance scams are among the most nefarious among the different kinds of fraudulent cryptocurrency activity. According to Chainalysis report, this grew significantly in 2023, doubling revenue year-over-year. “Our data suggests that romance scam activity has grown 85 times since 2020,” says Buonanno. 

Romance scammers start by building a relationship over time with the victim, often initiating contact by pretending to have text messaged a wrong number or via dating apps. As the relationship deepens, the scammer will eventually push the victim to invest money, whether cryptocurrency or fiat, in a fake investment opportunity and continue until they eventually sever contact. “They prey on trust and exploit loneliness,” he adds.

While financial losses from these scams can be devastating, they are only a part of the damage. “The psychological impact on victims often goes unnoticed because it is not as tangible,” Khan says. “Feelings of shame and embarrassment are common, leading victims to isolate themselves. There is also stigma associated with these crimes; people might feel like they should have known better, leading to a sense of inadequacy and a blow to their self-esteem.” 

These factors often drive victims to suffer in silence, causing severe mental stress. Citing a study by the University of Calgary, Khan says the victims are three times more likely to experience symptoms of depression. “This is the harsh reality for many falling victim to crypto scams.”

CHALLENGES IN COMBATING CRIMES

Combating them presents several challenges. The first is transactions’ global and often anonymous nature, which can bypass traditional financial monitoring systems. The rapid evolution of technology, often outpacing existing laws and regulations, also makes enforcement difficult, adding another layer of complexity.

Jerath asserts there is a need for greater international cooperation and consistent regulatory frameworks across borders to tackle these issues effectively. “To better protect professional communities, urgent government interventions should include the development of clear regulatory frameworks that define and enforce crypto transactions.” 

Introducing mandatory certifications and licensing for crypto businesses can help ensure compliance with financial laws. Additionally, investing in public awareness campaigns and capacity-building initiatives is crucial to educate investors about the risks involved in crypto investments.

Buonanno says efforts are also underway to reduce online anonymity. “There is a tendency to think that cryptocurrencies float from untraceable owner to untraceable owner in transactions that evaporate as soon as they are closed. Nothing could be further from the truth. Every unit of cryptocurrency retains a complete history of creation, ownership, and movement, stored on public, immutable ledgers known as blockchains, with access to the entire transaction history made available for anyone that wants it.” 

Determining which individuals lie behind crypto transactions can be challenging but possible. Speaking on the company’s initiatives in this space, Buonanno says they have developed a data set through machine learning and human intelligence that powers real-time transaction monitoring and investigation tools to detect and follow illicit funds on blockchains. “This allows for cooperation between law enforcement, service providers, and forensic analytics firms to scrutinize hundreds of billions of dollars of transactions each month and trillions of dollars in named value.”

Such initiatives go a long way in creating a safer cryptocurrency space. “Police authorities and regulatory bodies must have the necessary tools and training to detect and act against crypto-related crimes effectively,” Jerath says. “This includes technological tools to trace and analyze cryptocurrency transactions. There should also be clear procedures for reporting crypto crimes and swift actions to investigate and prosecute offenders.”

RED FLAGS TO WATCH OUT

Awareness and education are especially critical for individuals, says Khan, who urges people to increase awareness of security measures and scams to protect themselves better.

Jerath advises individuals to be cautious of unsolicited offers and any communication demanding urgent action or payments. Other red flags include promises of guaranteed high returns, lack of clear information about the project or its leaders, and the need to be registered with any financial regulatory authority. “It’s crucial to verify the company’s legitimacy and to be skeptical of investments that cannot clearly explain how returns are generated.”

Buonanno also highlights that no one is immune to this. “Due to the seemingly innocent nature of the initial interaction, it’s easy for most people to write it off as ‘something that won’t happen to me’,” he says. “It is, therefore, important to stay on guard and be especially wary of communications from people you weren’t expecting to hear from – no matter how innocent their messages may seem.”

Keeping up to date with news on the latest threats and scams will benefit both individuals and businesses. 

It is important not to underestimate the long-term emotional impact of crypto scams and the financial trauma they have to deal with. This can range from isolation and social withdrawal, post-traumatic stress disorders that give way to nightmares, flashbacks, and difficulty trusting others, or even increased risk of substance abuse, with victims turning to self-medication to deal with financial trauma. 

Khan encourages victims to contact support groups or get personalized help through mental health platforms. “Cryptocurrency holds potential, but it’s vital to be aware of the associated risks.”