The US Federal Bureau of Investigations (FBI) has a specialist Internet Crime Complaint Centre (IC3) which has published a standalone report into fraud with a cryptocurrency 'nexus' (Cryptocurrency Report) and quite a few media outlets have been repeating as statement in the report that 50% of all financial losses involve cryptocurrency. This is a stunning number, but looking deeper into fraud reporting, the figures aren't so clear.
In December 2023, the IC3 published their Internet Crime Report (December Crime Report) which said that:
investment fraud with a reference to cryptocurrency rose from $2.57 billion in 2022 to $3.96 billion in 2023, an increase of 53%
The IC3's December Crime Report stated that 880,418 complaints were received in 2023 and showed an increasing number of fraud complaints and losses totaling USD$12.5B in 2023:
The Crime Report also shows how the FBI categorises complaints and uses a 'descriptor' to link if cryptocurrency was involved across multiple different crimes (so looking for any reference to crypto in the report. What this means is that when a crime is reported, first the type of crime is chosen for categorisation, and then a descriptor may be added.
Turning to the recent Cryptocurrency Report, the number of complaints in 2023 which had a reference to cryptocurrency (it's unclear if this was in the descriptor or a new analysis has been done) was 70,000, or 7.9% of reports to IC3 which had a reference to crypto. There is no explanation as to why the figures between the two reports differ. Total losses involving these complaints is reported to be US$5.6B:
Given the December Crime Report states losses were US$12.6B, making the US$5.6B of losses of complaints referring to crypto 44.8% of the total. It's clear that the driving force of these are almost all investment scams, as reported in the December Crime Report, and that crypto-investment scams are a huge component of this:
Investment scams are a particularly insidious form of scam where victims are groomed on ways to make money, and it's unclear how many of these scams are using cryptocurrency as the lure (i.e. offering yield, trading or mining using crypto which is fake) or is using crypto as a form of payment to the scammers (this is likely to be significant). Behind every one of these losses are real people who have lost precious and hard earned wealth, and from the age distribution many of the victims are near or approaching retirement.
While those offering investment products in the USA and other jurisdictions likely already require some kind of registration or licensing, the absence of clear regulation for crypto businesses, permitting traditional investment advisors and trusted brands in crypto being able to demonstrate their compliance risks creating just the kind of vacuum where scammers can operate, while legitimate businesses struggle with laws that in many cases simply cannot be complied with. Victims in turn struggle to differentiate between a scam and a legitimate business.
This also has a second order effect of feeding a narrative that crypto is associated with crime, which may delay or create oppressive approaches to regulation which unfortunately can have the opposite effect to protecting consumers.
On a brighter note, researchers have found that the average crypto-related scams lifespan has been dropping dramatically overtime, which may suggest that scams have become more sophisticated and organised, in many cases using trafficked persons in 'slave' like conditions:
It's clear that an industry wide approach, with numerous vectors of approach, are needed urgently to combat these scams, including:
sensible fit-for-purpose regulation without undue cost and burden to help differentiate compliant businesses and give customers affordable options for crypto investments which are clearly in demand;
industry endorsements and voluntary codes of conduct and certification;
fast enforcement against misleading and deceptive operators (whether or not in crypto, as it is expected AI referencing investment scams will undoubtably be on the rise);
co-ordination between law-enforcement and industry and policy makers to help combat new scams as they arise; and
relentless education for the community to provide a last line of defense.
Australia has had some good success with a direct attack on the top of the funnel, with thousands of scam websites being taken offline and co-ordination between Chainalysis and the Federal Policy in Operation Spincaster, with a corresponding fall in scam figures. Perhaps something the US can learn from?
By Michael Bacina
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