Rip-off scam with cryptocurrencies

10. Februar 2023

Rip-off scam with cryptocurrencies

Blockchain is considered an ingenious invention as a technical accounting system. But without regulation, the crypto sector seems like the proverbial Wild West? In an interview with Valentin Markus Schulte – law firm Dr. Thomas Schulte from Berlin.

Good day Valentin Schulte, today we want to talk about a much discussed topic: Cryptocurrencies. The financial and banking world is in constant change. The cryptocurrency market is growing, new cryptocurrencies are being introduced. Choosing the right cryptocurrency for investments is difficult, as there are more than 20,000 options today. Experts believe that in the traditional financial markets can be integrated crypto. Financial experts keep pointing out that cryptocurrencies are purely private ventures without a trustworthy control structure and still too few regulations. 

What is cryptocurrency?

Valentin Schulte: Good afternoon. This is an interesting topic for me from both an economics and a legal perspective. To a layperson who thinks of cryptocurrency, the first term that comes to mind is probably „bitcoin.“ Besides Bitcoin, there are many other cryptocurrencies; Ethereum or Ripple are well-known currencies in this regard. 

All of these cryptocurrencies exist exclusively digitally. Comparable to the money in a bank account, digital or virtual currencies do not exist physically. The difference here is that money in a bank account can always be converted into cash in the best case. This is not the case with cryptocurrencies. Placatively, one could say: as with „normal“ money, only the belief of the person generates that the currency has a value.

But how is it possible that virtual money cannot simply be copied? In the case of cash, the bills are equipped with security mechanisms designed to prevent counterfeiting. Data records are not exactly difficult to copy.

Valentin Schulte: Virtual currencies do not need a bank. Transactions take place on the so-called blockchain. The blockchain is like a big open book. It is open for everyone to see which „wallet“ (this is the equivalent of a simple bank account) has how many cryptocurrencies. It also documents any transactions between these „wallets.“ All of this data is aggregated into huge data sets. The system behind why a Bitcoin, which is also just a data set, is not counterfeitable is the so-called „proof of work“ or „proof of stake“. The amount of Bitcoins is limited. No bank or individual in the world can change anything about the total amount of Bitcoins at this time. Every time a Bitcoin changes hands, a new code is appended to the Bitcoin’s record. Every user becomes the backup of the Bitcoin with his computer, so to speak. So you could only counterfeit a Bitcoin if all the backups ever involved were known to the counterfeiter and put together correctly. This requires an incredible amount of computing power and makes a cryptocurrency even more difficult to counterfeit than the cash we know.

Valentin Schulte - Blockchain

So if cryptocurrencies seem to be so secure in this regard, why do cryptocurrency scams occur more frequently?

Valentin Schulte: The answer can be summarized briefly: Anonymity, lack of regulation, and victim ignorance.

The crypto space is a space with little to no regulation. Due to the decentralized nature of cryptocurrency, no third parties are involved in transactions. When money is transferred from account to account, as is the case with banks, banks are always involved. In the case of erroneous or fraudulent transactions, banks can freeze accounts and reverse transfers. This is not the case here. In addition, the counterpart remains almost completely anonymous. No regulations have yet been made by the legislature that would make it necessary to identify wallets with a person

How exactly can you imagine a crypto fraud? How does something like that play out?

Valentin Schulte: In most cases, scammers rely on the assistance of their potential victims. Contact is made through social media channels or via email. Promises of quick money within the cryptospace are made. Often, „normal“ capital investments are also touted. The scammers are looking for fiat money (e.g. euros) to be exchanged for cryptocurrencies and then transferred to them. To do this, the euros must be converted into cryptocurrencies by the subsequent victims. This is done on so-called crypto exchanges such as „Binance“ or „Coinbase“. 

With crypto exchanges, just like with „normal“ brokers, you can think of providers who exchange money for cryptocurrencies. This is all legal in itself, which is why everything usually seems trustworthy to victims. Often, in legal practice, it can be observed here that the scammers log onto the victim’s device „for help“ using programs such as Teamviewer or Anydesk and perform the necessary steps themselves, because the victims are not capable of this exchange process due to lack of experience. Once the money is converted and managed within the crypto exchange, the scammers try to get their victims to send their freshly acquired cryptocurrencies to so-called „streaming wallets“. This is nothing more than one of their crypto wallets. For example, promises are made that the more „money“ sent to the streaming wallet, the more Bitcoins could be „mined.“ After the currency has changed the wallet, it is too late. The cryptocurrencies have now entered the foreign wallet just like a wire transfer. Since blockchain technology is a decentralized invention, there are no third parties involved here, as is the case with banks. No one is able to reverse a transaction.

Other scams are aimed at hacking the wallets. This involves malware that is installed on the target’s computer using links or downloadable files. The scams can vary greatly, but these are the most common ones, so they usually target the victim’s ignorance. 

How can you protect yourself from such scams?

Valentin Schulte: For reasons of caution, the following is advisable: 

Keep your hands off cryptocurrency investments if they don’t know a trustworthy person who can properly instruct them or have no experience in this field themselves. Otherwise, the general precautions to take on the Internet apply.

Don’t do business with people they don’t know.

Do not click on links and downloadable files that you are not familiar with.

Additionally, they can use a so-called hardware wallet for their cryptocurrencies. This is a hardware that is connected to their digital wallet, and on which „their credentials“ to the blockchain are stored. Each time transactions occur, a code must be entered on this hardware wallet. Much like the 2 step authentication of banks.

What can aggrieved parties do if a scam succeeds?

Valentin Schulte: Affected persons should act immediately – time is money. In order to get their money back, the fraudsters should not be given any time to continue transferring the money. Affected persons should immediately save all communication data, change all login data of the affected accounts, secure online banking, save blockchain transaction data and then try to recover the money with an investment fraud expert. It is technically possible to track lost money on the blockchain. For example, we are working with other law firms as part of the ABOWI-Law project. Furthermore, criminal investigations can be initiated. A civil claim against the recipients or third parties involved should also be investigated. Incidentally, the police forces of the federal states and the public prosecutors‘ offices have, in some cases, very strongly upgraded and are active.

Thank you for this very informative insight.

V.i.S.d.P.:

Jean-Pascal
Law Student at the Viadrina (L.L.B)

About the author:

Jean-Pascal is a law student at Viadrina (L.L.B) and blogger for ABOWI UAB since 2022. Jean-Pascal is future-oriented in terms of what blockchain technology will still bring. Digitization is creating new ways for profitability and efficiency in all sectors, which we are addressing in our communication and discussion. You can reach us at abowi.com.

Contact:

Law Office Dr. Thomas Schulte
Malteserstrasse 170
12277 Berlin

Phone: +49 30 221922020
E-mail: dr.schulte@dr-schulte.de

The Kanzlei Dr. Schulte attorneys is successfully civil-legally since 1995 emphasis in the area of the Internet, Reputations- and competition right active. It represents country widely the interests of individual investors. Supplementary sender information with the office location can be found in the imprint on the website www.dr-schulte.de.

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