Confidence frauds involving cryptocurrency

Different versions of cryptocurrency confidence frauds

In the crypto space, confidence frauds can take several forms. Of course, specific techniques may evolve over time, but they all involve a criminal trying to gain the trust of an individual and exploit that trust.

Impersonation

Scammers may impersonate reputable individuals or organisations, such as cryptocurrency exchanges, wallet providers, or even well-known figures in the crypto industry, in order to trick users into revealing their passwords or sensitive information. This can include deceptive emails and fake websites or social media profiles.

Ponzi Schemes

In a Ponzi scheme, fraudsters promise high returns on investments to attract new investors. They may claim to have a unique trading strategy, mining operation, or cryptocurrency investment opportunity. Early investors are paid with funds from new investors, creating the illusion that the investment is a profitable one. Ultimately, the scheme collapses when there aren't enough new investors to sustain the pay-outs.

Fake Initial Coin Offerings (ICOs) and Token Sales:

Scammers create fraudulent ICOs or token sales, promising the opportunity to purchase newly issued cryptocurrencies at a discounted rate. They may use false information, fake whitepapers, and misleading marketing tactics to make the project appear legitimate. Once people invest, the scammers disappear with the funds, leaving investors with worthless tokens.

‘Pump and Dump’ Schemes

In a pump and dump scheme, fraudsters artificially inflate the price of a low-volume or low-value cryptocurrency by spreading positive news, rumours, or endorsements. Once the price rises due to increased demand, the scammers sell their holdings at a profit, causing the price to crash and leaving other investors with losses.

‘Rug-pull’ Crypto Frauds

A variation of a pump and dump is a so-called rug-pull, when the founders of a new cryptocurrency promise investors that the code of the currency will not allow early investors to dump more than a fraction of their holdings in one go. This would prevent the currency losing all or a major part of its capitalisation to the loss of investors. The term ‘rug-pull’ can refer to when the founder or someone on the inside then rewrites the code to allow early exit for him or herself, or convinces investors to shift to a new platform without the protections in the previous code. Probably the most widely reported  example of a rug-pull is that of influencer Logan Paul and the CryptoZoo fiasco.

Malware and Wallet Theft

Malicious software, such as keyloggers or clipboard hijackers, can be used to steal cryptocurrency from unsuspecting individuals. Scammers may distribute infected software or phishing links, targeting users who download compromised wallets or visit malicious websites. This allows the fraudsters to gain access to victims' private keys or passwords and steal their funds.

Spoofing

Similar to Pump and Dump Schemes, this is the practice of placing multiple visible orders for an asset in order to manipulate the market's perception of supply of it. This could be a combination of buy and sell orders. Traditionally, spoofing in regulated financial markets come with a large risk to the trader as the transaction histories can be traced back to them. However, in more unregulated markets such as those relating to cryptocurrency, the potential for exploitation and manipulation increases significantly.

How the law works in cryptocurrency confidence cases

These cases are usually prosecuted as theft under the Theft Act 1968 or as fraud by misrepresentation under the Fraud Act 2006. Theft is often thought of as a physical act, for example when someone is mugged on the street. But digital frauds can also be prosecuted under the same law.

Fraud by misrepresentation under the Fraud Act is in for situations where a person communicates (usually by saying or writing) something false in order to get something dishonestly.

What’s the best way to defend a cryptocurrency confidence fraud case?

Every fraud case is in some way different, and so every fraud case will need a tailored approach. A lawyer who specialises in cryptocurrency fraud cases will start  to understand how a prosecution case is taking shape from the first police interview. The questions that an officer asks should provide clues as to what the client will face if the case gets to trial. Being alive to this at an early stage can give the defence advantage.

In crypto cases, thinking like the prosecution is important, but this does not mean accepting what the prosecution says. By understanding what approach the prosecution are taking, the defence can start to prepare their battle plan early. This is especially true in confidence fraud cases where the prosecution is likely to focus on finding, and in some cases even creating vulnerable victims, even if in some cases they don’t actually think of themselves as victims.

There are general defences available to a client in crypto cases which apply to all fraud cases. A massive question is whether the prosecution can even show that the client was definitely dishonest. Similarly, if others were involved, who was in charge and what the client actually knew about what was going on can both be very important.

Crypto fraud cases are technical. Perhaps the most important aspect of any crypto case is having a defence team who can understand what’s going on, and then make it easily understandable for a jury. An important step to achieving this is the solicitors bringing in a specialist crypto barrister with a track record of defending these cases.

What kind of sentence does a person get for crypto-related confidence fraud?

Confidence frauds always involve gaining someone’s trust, and then abusing that trust to commit the crime. The victims are generally consumers, and courts want to show the public that prison sentences can follow.

Fraud offences can carry a maximum sentence of up to 10 years, although this type of sentence would normally be reserved for the most serious types of very high value fraud. However, even lower level frauds can still carry lengthy prison sentences. There are various factors that the court will take into account when deciding on this. These are laid out in the Fraud, Bribery and Money Laundering Sentencing Guidelines.

The first factor the court will look at is something called ‘culpability’. This basically means how blameworthy someone is in the scheme of things. This has three levels - A, B and C. The judge may consider the following asepects when deciding what level of culpability someone is in a fraud case:

• What role a person played

• Whether there were many victims

• If the person recruited others to become involved in the crime

• If there was sophisticated planning

• If victims were particularly vulnerable

The court will then consider the value of the fraud, and the harm that the victim ended up suffering.

Generally speaking, where the complainants were not vulnerable, a court MAY be open to a suspended sentence for somebody who has committed a fraud in the tens of thousands, if the person has no previous convictions already. Sentences of 5 years or more are rare, and usually apply where somebody has pleaded not guilty after a trial, and the amount is in the hundreds or thousands or millions of pounds, or where the victims are vulnerable. Sentences vary massively depending on all these different factors, and this is the type of advice you should only take from a properly qualified crypto-fraud defence lawyer.