As the appeal of cryptocurrency has grown, so has the opportunity for scammers to part naive investors from their money. 2020 has been no exception, with cryptocurrency and blockchain forensics company Ciphertrace dubbing it “the year of the exit scam.” What Are The Biggest Crypto Heists And How Much Was Stolen? (#GotBitcoin?)
Exit scams are not a new phenomenon, with a 2018 report conducted by Statis Group revealing over 80% of initial coin offerings (ICOs) in that year to have been fraudulent. Here, we explain exit scams and how to spot them, as well as a look at some of the biggest scams that have been discovered by various researchers.
What Are Exit Scams?
The premise of cryptocurrency is simple, a new ICO launches, claiming to offer lucrative returns for investors. Investors can’t believe their luck and clamor to buy in. The business runs for some time on the back of the invested capital, but, sooner or later, disaster strikes and the company shuts down, often with no explanation.
After a while, it becomes obvious that the company is gone for good, along with the invested funds. The poisoned chalice of crypto’s decentralized nature often means that investors are left in the dark when trying to recoup or trace their pilfered funds.
How To Spot An Exit Scam
Many exit scams have tell-tale signs that investors should look out for. The financial content site Investopedia has a handy list of key characteristics.
First, exit scams often have inconsistent or misleading information about the team behind the project. When scouting potential investment opportunities, investors should scour for information on key members of any ICO.
It’s important to remember that online credibility can be faked by purchasing likes, profiles and followers on social media. Celebrity endorsements with verified accounts could also ring alarm bells for investors. A fake Twitter account purporting to be Elon Musk, with a supposedly verified twitter account, raised over $155,000 as part of a 2018 Bitcoin scam.
Investors should verify the credentials of backers, team leaders and promoters of cryptocurrency projects. Although individuals may seem to be legitimate at first glance, brand new social media profiles and few followers or connections should raise eyebrows.
The most significant characteristic unifying exit scams in cryptocurrency is the promise of a huge return on investment (ROI) — chances are that it’s probably too good to be true.
Investors should always look through even the smallest details of what they are required to invest and what the company purports to be able to give back to them.
ICOs usually come with a white paper, setting out the design details of the project along with a business plan and other information. Investors should pursue all available information for ICOs, as any vagueness in the white papers should signal a big red flag.
When investing in an ICO, it’s vital to get an understanding of the business model. Investopdia writes that anything powered by concept alone should be a warning to anyone tempted to buy in. Although cryptocurrency projects can and do launch off the back of technological advances, investors should be wary of projects looking to gather millions of dollars before taking a sober look at the project’s ability to return the investment from the published information.
Heavy promotion of an upcoming ICO can also be a sign of an exit scam. Past scams have employed bloggers to promote via numerous forums. Ads both online and in print media could also be suspicious.
SEC Charges Former State Senator Over Digital Asset ‘Scam’
The Securities and Exchange Commission (SEC) has pressed charges against a former state senator for his role in a $4.3 million token sale that promised outlandishly high returns.
The SEC confirmed Friday it had filed a complaint against David Schmidt, a former Republican state senator for Washington State, as well as two other people for their role promoting the sale of “Meta 1 Coins.”
Filed in the Western District of Texas on March 16, the complaint accuses Robert Dunlap and Nicole Bowdler, as well as Schmidt, of violating antifraud and securities regulations when promising investors returns of nearly 225,000 percent. They also claimed the coin was risk-free and would never lose value.
The SEC said defendants made “numerous false and misleading statements,” including that Meta 1 Coin was backed by an art collection valued at $1 billion, or a gold deposit valued at $2 billion, that was regularly audited by an accounting firm.
“The defendants made audacious claims about the Meta 1 Coin and would say almost anything to separate investors from their money,” said David Peavler, the SEC’s regional director at the Fort Worth Regional Office. “Investors should always look skeptically at promoters who claim that their investment cannot lose value or that investors will receive massive returns.”
In total, Meta 1 Coin raised $4.3 million from around 150 investors, some based in the U.S. The digital assets were never distributed to investors, however. Some of the proceeds were funneled to a Chicago-based fund, Pramana Capital, as well as to another individual, Peter Shamoun. The SEC claims defendants used investors’ money to fund lavish lifestyles, including the purchase of a $215,000 Ferrari.
Launched in 2018, Meta 1 Coin’s website doesn’t include a description of what the purpose of the coin is. Its Twitter page is filled with pictures and short clips of physical Meta 1 Coins, talking about the disruptive potential of blockchain technology.
“The only participants of META 1 Coin Trust and the named websites are for Live Natural Man and Women, flesh-and-blood Almighty God-created private Humans sui juris sentient being; and an Ambassador of God Almighty Domiciled in the ARIZONA Republic and on religious sojourn through the UNITED STATES.”
Schmidt, a moderate Republican, was initially elected as a representative for Washington State back in 1994. After serving four terms, he became a state senator in 2002, before losing his re-election bid in 2006. Now based in Arizona, he works as a consultant, writer and radio program host, according to his LinkedIn page.
In 2012, Washington’s electoral watchdog, the Public Disclosure Commission (PDC), fined Schmidt $10,000 for improperly using more than $41,000 in donations to reimburse himself for lost wages between 2003-2006, as well as mortgage repayments and personal travel costs.
Schmidt denied misusing campaign dollars, claiming in 2011 that campaign funding rules were “very open to interpretation.”
Schmidt could not be reached for comment on the SEC complaint.
The SEC is seeking civil penalties and permanent injunctions against Schmidt and the other two defendants, as well as for investors to be refunded. The regulator also wants Pramana Capital and Shamoun to hand over any funds received from the Meta 1 Coin Trust sale.
CoinDesk reached out to both Meta 1 Coin Trust and Pramana Capital for comment, but had not received a response by press time.