This year has been an important year for the cryptocurrency industry when it comes to mass adoption. A recent report by Grayscale Investments showed that more than a quarter of American investors (26%) expressed their opinion on Bitcoin (BTC), up from 23% in 2020. As the holiday season approaches, financial services provider MagnifyMoney has also found that nearly two : A third of Americans surveyed hope to get free encryption this year.
While the rise of cryptocurrencies is notable, fraud in digital assets has also increased. An article on the Chainalysis blog highlighting the Crypto Crime Report 2022 showed that fraud was the dominant form of cryptocurrency in terms of transaction volume this year. The report states that over $7.7 billion worth of cryptocurrency has been seized from fraud victims worldwide. According to previous research from Chainalysis, this number represents an 81% increase from 2020, when fraudulent activity decreased significantly from 2019.
Source: String Analysis.
Fraud is the biggest threat to building trust in cryptocurrency
Kim Grauer, Head of Research at Chainalysis, told Cointelegraph that while there have been many different crimes related to cryptocurrency, the fraud has become the largest in terms of value that criminals receive. She added that fraud poses a serious threat to building trust in the crypto ecosystem as it can prevent people from investing in digital assets.
Grauer also mentioned that there has been a rise in the number of decentralized finance (DeFi) fraud cases this year. With annual revenue estimated at $5 billion across all DeFi protocols, this should come as no surprise. But what is more interesting is that Chainalsyis found that fraudulent activity this year contributed to its fraud profits. According to Grauer, Chainalysis gives an example of a drag buddy where a person or developer suddenly decides to stop a project and run away with the money:
“Pulling the carpet has accelerated crypto scams this year. Apart from financial fraud, scammers have also taken advantage of several vulnerabilities in the crypto world. In total, they stole $2.8 billion in cryptocurrency.”
While fraud is a relatively new crime, Grauer believes such incidents are becoming common in the growing DeFi ecosystem. To put this in perspective, a blog post from Chainalysis notes, “Trukmatter has become a scam in the DeFi ecosystem, accounting for 37% of all crypto-related frauds in 2021, up from 1% in 2020.”
The Chainalysis blog also provides examples of some of the biggest scams of 2021. For example, the AnubisDAO case has been called the second largest scam of the year, with more than $58 million worth of cryptocurrency stolen. According to the post, AnubisDAO was launched on October 28, 2021 with the aim of offering a decentralized currency backed by a number of assets. However, the project had no website or technical document, and all developers worked under pseudonyms. Miraculously, AnubisDAO managed to raise nearly $60 million in one night, but after 20 hours, all of that money was gone from AnubisDAO’s liquidity pool.
While AnubisDAO showcases the widespread DeFi carpet feature, new cases occur almost daily. One of the early investors in Ethereum and DeFi, who wished to remain anonymous, told Cointelegraph that on December 19, 2021, they fell victim to a scam. An anonymous source said the project is called “up1.network,” noting that several early Ethereum investors discussed Up1 in a Discord group chat. they added:
“People I trust mentioned the project, so I checked it out. I found it strange to see the Up1 gift, but thought it might have something to do with my DeFi token. Then I connected to my MetaMask wallet and clicked get distribution. But I kept I get the error. I did this three times and gave the project access to my account.”
Unfortunately, as soon as Up1 gained access to his account, three DeFi tokens worth $50,000 were immediately seized. They stated, “I have revoked access to the Etherscan ex post so that they cannot steal the tokens.” An Ethereum investor then examined the DeFi platform Zerion as he announced that DeFi tokens had left their wallets. Zerion also gave them the address of the wallet where the money went, with a message:
“0xc28a580acc42294787f44cffbaa788eaa4958056; You have given the Smart Contract Page 3/ Unlimited access to your funds (check who you have given access and cancel it here).”
While AnubisDAO and Up1 are examples of DeFi carpet pulls, it is important to note that the Non-porishable Token (NFT) ecosystem is also vulnerable.