How to dodge investment fraud and protect your money
High-flying cryptocurrency exchange FTX filed for bankruptcy in early November. Billions of dollars are missing or unaccounted for according to reports, and the eventual financial ramifications of the FTX collapse remain to be seen. There are some serious lessons for novice investors here about financial frauds and scams, especially in the world of cryptocurrency.
Holders of cryptocurrencies like Bitcoin and Ethereum are right to be concerned when something like this happens. In addition to allegedly loose or non-existent financial controls, missing or unaccounted for funds in the billion-dollar range (perhaps more), FTX was apparently also hacked soon after it declared bankruptcy, and some $600 million disappeared from FTX crypto wallets, leaving many wallet holders with a zero balance. Various authorities are conducting securities and criminal investigations, and assorted lawsuits have been launched, one in particular against celebrities who endorsed the FTX exchange in high-profile ads.
The FTX collapse highlights the dangers of speculating in assets that are heavily promoted and little understood. This makes it a perfect breeding ground for hucksters, conmen, scammers, and fraud artists of every variety.
Cryptocurrency scammers typically entice potential victims with a come-on that “guarantees” some impossibly high rate of return virtually overnight. The pitch might involve slick websites and glossy brochures, meetings and presentations in luxury settings, and high-profile endorsement or testimonials. All of it is fake. Victims who fall for this and hand over their money will most probably never see it again. And with another level of insult to injury, their identity and financial information are usually also compromised, leading to even greater financial losses.
If you are considering a cryptocurrency investment, remember that these are unregulated and are independent of central banks. There’s no guarantee at all as there is with a GIC or even a government bond. And there is absolutely no protection against fraud as there is with most credit cards. The Canadian Anti-Fraud Cnetre has reported documented “data breaches, thefts, exit scams, and frauds tied to initial coin offerings.”
How to protect yourself
The Canadian Anti-Fraud Centre (CAFC) offers some solid advice if you’re considering jumping into the cryptocurrency market.
Research the cryptocurrency before you commit funds and ensure the services they use are reputable. A quick Google search will generally reveal complaints and problems.
Cryptocurrency transactions are usually irreversible, so exercise caution when sending cryptocurrency anywhere.
Cryptocurrency is stored in one of two types of digital wallet: hot wallets and cold wallets. Hot wallets are connected to the internet, while cold wallets are only connected to a local computer’s hard drive and not connected to the internet. With a cold wallet, you solely control your cryptocurrency. With a hot wallet, you rely on an external exchange to manage your cryptocurrency, which can lead to losses as seen recently with the collapse of the FTX crypto exchange.
When using cryptocurrency wallets, be aware of security concerns. Using strong passwords and public and private keys may not be enough, especially with exchanges where crypto assets may be stored on their servers in a separate account. These are more vulnerable to hacking and loss than cold wallets, again as seen just recently with the FTX collapse. In addition, passwords, passphrases, and keys should be stored securely. If these are lost, you will generally also lose your cryptocurrency.
Four signs of investment fraud
In the final analysis, holding cryptocurrency is a risky business. And like any risky business it is vulnerable to the fraud and theft. The CAFC says it’s a good idea to always look for the four basic signs of investment fraud, which apply to any kind of investment pitch you might get.
1. A promise of high returns with little or no risk. This is virtually impossible. In the world of legitimate investments, risk rises with expected return. So GICs are guaranteed, but the return is minimal. Returns in the stock market can be higher, but the risk of loss is considerable. Remember, it sounds too good to be true, especially in cryptocurrency, it is.
2. Hot tips or “insider information.” “Hot tips” and “insider information” usually come from a source attempting to sell you something, usually unsavoury. Think about why you are getting the so-called tip, and who benefits by passing it on. A false hot tip will result in the loss of most or all of your investment, such as you would suffer in a “pump and dump” scheme or a cryptocurrency con. Inside information about a public company is illegal to act on under insider securities laws.
3. Pressure to buy or act immediately. This is one of the biggest caution lights of all. Cyberscammers, especially, rely on creating a sense of urgency to get you to hand over your money or personal information quickly and without thinking. Don’t fall for it. Legitimate investments will be there tomorrow and the next day and so on. Pressure to make a decision right away without a chance to research the offer means the pitch is not in your best interests.
4. Not registered dealers or advisors. Scams are mostly run by fraudsters who aren’t licensed to sell any securities at all. So before you even think about sending funds for that “once-in-a-lifetime” cryptocurrency investment, check the registration and background of the salesperson. Anyone who sells securities or offers investment advice must be registered with their provincial securities regulator. This information is freely available through a search on the Canadian Securities Administrators’ (CSA) National Registration site. This will also reveal if the person has been in trouble or has been disciplined in the past.
Ultimately, there is only one final line of defense against cryptocurrency or any investment fraud: you. As always, if in doubt about any kind of investment offering, stop and think. Consult with a reputable, independent licensed investment advisor before you make a move into a sketchy investment or put your money at risk.