Fraudsters are exploiting blockchains and digital currencies

Fraudsters are beginning to find the cracks in the armor of blockchains and cryptocurrencies. Initial coin offerings, Simple Agreements for Future Tokens and fake currencies are vulnerable areas. Here’s practical information for warning your organizations and clients.

When email was first introduced to the world, most thought it would to be immune to fraud. Of course, that was only wishful thinking. Now we routinely deal with ransomware, business email compromises and hundreds of phishing attempts. Sometimes, new technologies can seem to be fraud-proof only because we don’t completely understand them. Or the security around the technology hasn’t matured enough so bad actors can exploit them for lucrative payoffs. The more popular and fashionable the supposedly immutable and tamper-proof “blockchain” becomes, the more fraudsters are comprehending it and taking advantage of its weaknesses.

Blockchains, which are shared digital ledgers where transactions (such as purchases made with bitcoin) are recorded, still don’t have a central regulator. Of course, lack of regulatory oversight “when no one’s watching” often can be a recipe for scams and fraud. For example, Bulgarians Konstantin Ignatov and his sister, Ruja Ignatova, created OneCoin in 2014 as a supposed cryptocurrency competitor to Bitcoin. They called it “Bitcoin Killer,” but it was allegedly a get-rich-quick scheme that defrauded more than three million investors worldwide of more than $4 billion.  (See US fed prosecutor tells court OneCoin is a $4 billion Ponzi scheme, behind MLM, Jan. 23, 2019.)

Ruja Ignatova, the so-called “OneCoin Queen,” disappeared in 2017 from Sofia, Bulgaria. Police in Mumbai, India, charged her in July 2017 of running a Ponzi scheme. (See Indian Police Prepare Charges Against OneCoin Founder Ruja Ignatova, coindesk, July 12, 2017.) The U.S. Department of Justice charged her later with wire fraud, bank fraud and money-laundering offenses. (See Manhattan U.S. Attorney Announces Charges Against Leaders of ‘OneCoin’ … March 8, 2019.)

Her brother, Konstantin Ignatov, the leader of the international pyramid scheme, was arrested March 6, 2019, on a wire fraud conspiracy charge after his indictment by the Department of Justice U.S. Attorney’s Office of the Southern District of New York. He entered into a plea agreement on Sept. 27, 2019, and he pleaded guilty to the charges in November 2019. Ignatov, who could face up to 90 years in prison, has agreed to testify against his sister, Ruja, and others in the scheme. (See Details of Konstantin Ignatov’s OneCoin guilty plea, behind MLM, Nov. 15, 2019.)

OneCoin is a multilevel marketing network; it promised commissions to members for inviting potential investors to purchase cryptocurrency packages. “As alleged, these defendants created a multibillion-dollar ‘cryptocurrency’ company based completely on lies and deceit,” said Manhattan U.S. Attorney Geoffrey S. Berman. “They promised big returns and minimal risk, but, as alleged, this business was a pyramid scheme based on smoke and mirrors more than zeroes and ones.” Their activities are also under scrutiny in China and India.