Frauds in the Cryptocurrency raising questions on the Blockchain Technology

With an increasing number of investors in crypto markets, there has been a significant rise in crypto scams and thefts. Crypto scams have led to a loss of over $7.7 billion. Cryptocurrencies like Bitcoin and Ethereum have gained significant fame among investors. Crypto and central bank digital currencies as a sector are prime targets for hackers and there has been a quantum jump in Cryptocurrency fraud.

The Federal Trade Commission (FTC) received nearly 6,800 complaints of cryptocurrency investment scams from October 2020 through March 2021, up from 570 in the same period a year before. Cryptocurrency exchanges are vulnerable to cyberattacks, which could lead to an irreparable loss of your investment.

Cryptocurrency can be vulnerable to scams. In many countries even banks have started buying cryptos, says a report. It mentions that banks in the US are creating their own blockchain-based systems, including digital currencies, to enable B2B cryptocurrency payments between their customers. Cryptocurrency hacks are a threat to both the blockchain sector and the rest of the economy.

For now, those hacks are mainly affecting crypto traders. However, with a growing number of companies such as Visa and Mastercard integrating cryptocurrencies in their platform, there is a risk that these hacks will start to affect the rest of the economy. A report from Crystal Blockchain report published in December 2021, shows there were 115 security attacks, 40 attacks on DeFi protocols, and 26 fraudulent schemes till December 17, 2021, which resulted in the theft of approximately $10 billion worth of crypto assets in the year.

While on one hand, there has been a huge loss of wealth through crypto assets, the latest research report by International Monetary Fund finds that crypto imposes a threat to the global financial stability. The growing popularity of the crypto sector has made it a prime target for hackers that are aware of the limited fraud prevention measures on those platforms. Indexed Finance wasn't alone. One of the major factors that led to the rise of the crypto scam is the emergence of rug pulls. Rug pull is a new type of scam where “developers of a cryptocurrency project — typically a new token — abandon it unexpectedly, taking users’ funds with them”, as per the report from Chainalysis.

Crypto hackers managed to steal more than $2 billion from cryptocurrency exchanges and DeFi platforms in 2021, and just over $1.5 billion in the first half of 2022 alone. Crypto frauds and security breaches are common. So far, $2.86 billion has been stolen through security breaches, while $6.8 billion has been stolen through scams and frauds. So, crypto scams or frauds account for more than 65 per cent of the total amount stolen.

Both cryptocurrencies and central bank digital currencies (CBDC) are built on blockchain technology. Countries that are actively working on introducing their own CBDCs should make sure that they put fraud prevention solutions in place. CBDCs could eventually replace fiat currency, however, manipulations and hacks will happen unless infrastructure flaws are ironed out.

Blockchain technology can be applied to various sectors from finance to big pharma. In order to see a large adoption of this technology, security issues and design flaws need to be resolved.

S Mohini Ratna, Editor, VARINDIA