Cryptocurrency scams: pitfalls to avoid

What is cryptocurrency?

Cryptocurrencies are a digital asset (virtual currency) that can be exchanged for certain goods or services. Some investors treat cryptocurrency as an asset whose value can rise or fall like shares on the stock market.

However, digital currency is generally considered more volatile than stocks. There are several cryptocurrencies out there, but Bitcoin and Ethereum are the most well known.

What are crypto scams?

In most cases, cryptocurrency scams are variations on common schemes with the age-old objective of squeezing money out of you. These scams are becoming increasingly common for a number of reasons:

• Virtual currencies are generally less regulated by government and regulatory authorities.
• They enable virtually anonymous transactions.

Cryptocurrency therefore represents an easier target than traditional currency, which is regulated by the banking system.

What are the different types of cryptocurrency scams?

While there are several types of scams related to cryptocurrency, they can be grouped into two main categories:

• The transfer of funds: scammers use a number of techniques to convince you to send them money.
• Information theft: scammers attempt to obtain your personal information in order to steal your identity and embezzle your funds.

These scams often rely on a technique called “social engineering,” whereby a scammer contacts you – usually by phone, text message, email or social media – and tries to earn your trust. They then trick you into providing personal information or have you click on a fraudulent link, for example.

→ Read our article on how to avoid social media fraud

What are the most common cryptocurrency scams?

Scams tied to the launch of a new cryptocurrency

Initial coin offerings (or ICOs), are extremely risky and highly volatile forms of investment.

Why? Because they take place in an environment conducive to manipulation and fraud. From a technological standpoint, it’s easy to create coins and market them on certain platforms without any third party authorizing or overseeing the practice.

Cryptocurrency investment scams

This type of scam is a variation on investment fraud, only it uses cryptocurrency as a payment method or investment product. It involves offering to make (fake) investments in a virtual currency, promising you substantial, guaranteed returns with no financial risk.

There are also fake exchange sites: if you buy cryptocurrency on these platforms, you’ll definitely lose your money.

Like most scams, these schemes are usually based on a sense of urgency: for example, you’ll be told that this is an exclusive offer for a limited time only. To ensure a steady stream of new victims, scammers often use Ponzi schemes and other pyramid structures to get you to recruit new targets from your circle.

Phishing and SIM card theft

If you make transactions on a legitimate cryptocurrency platform, ill-intentioned people could get hold of your username, password or digital wallet key – through phishing, for example – just as they could get the login to your online bank account. This scheme, combined with a SIM swap, would enable them to take control of your account and steal or misappropriate your cryptocurrency.

→ Read our article on phishing to learn how to recognize fraudulent communications and avoid taking the bait

Transactions requiring payment in cryptocurrency

Shopping sites or classified ads: Be vigilant when you’re asked to pay in cryptocurrency for any product, good or service. If you’re sent a hyperlink to make the transaction and never receive what you paid for, you won’t be able to contact the person who sold it to you.

What best practices should you adopt to protect yourself from crypto scams?

You can protect yourself from crypto scams by developing good reflexes. Here are a few to keep in mind:

• If you receive a suspicious proposal from someone you trust, contact them by another means (by phone, for example) to find out if they really sent you the message.
• Beware of tactics that create a sense of urgency, whether they’re limited-time deals or offers that sound too good to be true, like investments with huge returns and no risk.
• Don’t use a cryptocurrency site that you discover through an unsolicited message or that you’ve never heard of before. Check if the platform is valid by making sure it’s registered with the regulatory agency in your province (for example, the Autorité des marchés financiers or the Investment Industry Association of Canada [IIAC]).
• Never divulge the password or private key (or the 12- to 24-word recovery phrase) for your digital wallet for any reason whatsoever.
• Be wary when the only option for making a transaction is via cryptocurrency. This is probably a scam, as no credible institution requires its customers to make this type of payment exclusively.

What should you do if you fall victim to a cryptocurrency scam?

Anyone can be deceived. If you think you may have been scammed, stay calm and follow these essential steps to protect yourself.

• Contact your financial institution so they can secure your bank accounts and keep an eye out for any suspicious activity.
• Change the passwords to all your accounts.
• Report the fraud by following the instructions provided by the Canadian Anti-Fraud Centre.
• File a complaint with your local police station, which may choose to open an investigation.

Beyond cryptocurrency scams, it’s important to take every step you can to protect yourself from all types of financial fraud.

Want to learn more? Our fraud prevention page will provide you with a wealth of other useful information.