Why do most cases of cryptocurrency fraud occur in China and the United States?
Cryptocrime has become a major concern for regulatory authorities. There have been sharp increases in crypto crime, especially fraud-related hacks, in recent years as Web3 has become an integral part of everyday life. But the prevalence is not equal and there are many emerging trends and patterns of crypto crime, which can be better understood through deep blockchain analytics.
Crypto CrimeTrends and Statistics
Hacks on (or dApps built on Ethereum) are popular due to their smart contract capabilities and widespread dApp usage. Last year, the Ethereum-based Ronin network was hacked for $625 million.
Ethereum currently has 10 times more transaction volume than the second blockchain (Tron), with nearly 70% of the market. DeFi scammers often target cross-chain bridges when tokens are transferred from one chain to another, and these bridges are usually established on the Ethereum network. Binance and Ethereum have the most active unique wallet (UAW) addresses, as measured from January 2022 to January 2023.
Crystal Blockchain’s Crypto Crimes Report outlines some statistics related to the theft of digital tokens, highlighting that China and the USA are the two most affected by scams and hacks. The United States ranked first in terms of the total number of incidents against entities, with 14 major attacks since 2011.
However, China is the most affected in terms of total value. This is due to two high-profile hacks, PlusToken in 2019 ($2.25 billion) and WoToken in 2020 ($1 billion). The UK, South Korea and Japan are most affected by crypto scams. Since 2011, there have been 461 high-profile incidents in 45 countries, with a total of $16.7 billion in stolen cryptocurrency, mainly ERC-20 tokens.
Why do some jurisdictions face high levels of crypto fraud?
The top five areas of cryptocurrency-related security breaches are the USA, China, Japan, South Korea, and the UK.
There were many exchanges in China in the early days of cryptocurrency before the government cracked down on it. Binance, one of the largest exchanges in the world, moved out of China after the government ban on trading in 2017. Huboi, another Chinese exchange, moved its headquarters to South Korea.
The USA has also seen high levels of cryptocurrency fraud. It was later revealed that many of the token offerings launched in the US violated the Securities and Exchange Commission (SEC) rules for selling securities. While some had good intentions and simply fell for opaque regulations, many were outright Ponzi schemes.
Essentially, cyber criminals will follow the money, and take advantage of any opportunities. It makes sense, then, that areas with more centralized exchanges would be targeted more frequently. In the event that there are strict rules on the movement of funds, more people will turn to crypto, which can lead to more fraud incidents.
Different types of crypto fraud
There are many ways that cyber criminals can conduct a scam. One of the most common is the rug pull. This is where a team of scammers lures investors into a particular project and runs off with the money. They are basically scam projects.
There are also many subcategories of rug pulling. For example, a pump and dump scheme is where investors are encouraged to invest in a certain token, and then scammers sell everything, reducing the price to nothing. This can be very profitable if scammers also place options on the token or use various mechanisms to take advantage of the price drop.
Developers can also defraud investors by tokenizing tokens so that they can only be sold by them. Rug withdrawals are not always illegal in the sense that early investors have the right to sell at any time. But if allegations are made to investors that turn out to be completely false, legal authorities can easily launch an investigation.
According to the same Crystal Blockchain report, most crimes happen through decentralized protocols that include smart contracts. In 2022, more than $2.6 billion was lost through 132 DeFi attacks. He lost $277 million due to security breaches in 13 cases, while losing $1.3 billion in fraud schemes. The report also noted that rug withdrawals were the most popular scam mechanism in 2022 and that Ethereum was the most popular chain for rug withdrawals, followed by BNB.
Cryptocurrency fraud prevention
Preventing cryptographic fraud is an ongoing problem that requires cooperation between regulatory authorities, Web3 developers, and exchanges. Investors continue to be deceived by simple methods and do not do their due diligence to investigate projects, and are usually easily misled in the hope of making huge profits. With artificial intelligence and other technologies, fraud will become more sophisticated with time.
Exchanges and Web3 providers will also need to have an internal compliance team in place along with risk mitigation measures to ensure that customer funds are safe, secure and secure. Blockchain analytics can go a long way to understanding the path that stolen cryptocurrencies travel and how to prevent a breach from occurring in the first place.
The post Why Most Cryptocurrency Frauds Happen in China and the US first appeared in Coin Edition.