The increasing investment in crypto currencies and crypto markets has led to a significant rise in crypto scams and thefts, with a loss of over $10 billion globally in 2021, a new report has revealed.
The “Crypto Hacks & Scams Report 2021” was released on Wednesday by Crystal Blockchain, a firm involved in investigative analytics for block chain and crypto currencies. It showed over 80 per cent rise in crypto scams and thefts in 2021.
The Central Bank of Nigeria (CBN) had banned banks and other key players in the financial sector from crypto currency transactions.
The latest report said the crypto currency markets had seen a volatile 2021, starting with a strong rally that took some prices to all-time highs over the spring before they crashed in May and attempted a recovery over the summer.
Bitcoin jumped to a new high in November but took a bearish turn in December, defying predictions that it would continue to make gains.
Despite the CBN ban, Nigeria was rated the second country most interested in bitcoin after El Salvador, notwithstanding the difficulty in accessing the trillion-dollar crypto in the country.
South Africa and Kenya were identified as two other top markets for crypto currency on the continent.
The new report revealed that there were 115 security attacks, 40 attacks on DeFi protocols, and 26 fraudulent schemes as of December 17, 2021, which resulted in the theft of approximately $10 billion worth of crypto assets in the year.
According to the Crystal database, over a third, or 39 per cent of all stolen funds (in Bitcoin or BTC) were distributed via fraudulent exchanges, which are defined as having been involved in exit scams, some illegal behaviour, or that have had funds seized by the government.
Exit scams involve a crypto currency profiting from early investors by “pulling out” all their funds from the market.
Amid the growing uncertainty due to the COVID-19 pandemic, crypto currencies, like Bitcoin and Ethereum, gained significant fame among investors.
Investment in the crypto market has been growing across the globe, with the crypto currency market size expected to grow from $1.6 billion in 2021 to $2.2 billion by 2026, at a compounded annual growth rate (CAGR) of 7.1 per cent, based on a report released in April 2021 by Markets and Markets Research, a market research firm.
According to the report, many countries, even banks have started buying cryptos. It added that banks in the United States of America were creating their own block chain-based systems, including digital currencies, to enable B2B crypto-currency payments between their customers.
While on one hand, it noted that there had been a huge loss of wealth through crypto assets, the latest research report by International Monetary Fund (IMF) found that crypto posed a threat to global financial stability.
The market value of the ecosystem increased dramatically in 2021 and expanded beyond Bitcoin.
According to the IMF report, the financial stability challenge posed by crypto broadly include operational, cyber, and governance risks, integrity, and Anti-Money Laundering and Countering of Financial Terrorism (AML/CFT) risks, data availability/reliability issues, and challenges from cross-border activities.
The report noted that with increase in crypto scams and frauds, the financial system would be more vulnerable.
A recent report by Chainalysis, a crypto currency exchange platform, also said crypto crimes rose by 81 per cent in 2021, with a loss of over $7.7 billion worth of crypto currency worldwide.
One of the major factors that led to the rise in crypto scam was the emergence of what the report described as “rug pulls”.
Rug pull is a new type of scam where “developers of a crypto currency project, typically a new token, abandon it unexpectedly, taking users’ funds with them.”
Despite a significant fall seen in crypto scams between 2019 and 2020, rug pull spiked the number in 2021, the report pointed out, stressing that in all the scams, users lost over $2 billion worth of crypto currency, which represents nearly 90 per cent of all value stolen in rug pulls.
The Chainalysis report noted that the number of financial scams active at any point in the year rose by more than 60 per cent, from 2,052 in 2020 to 3,300 in 2021.
Being active means their addresses are receiving funds.
The Chief Economist, Care Ratings, a credit rating agency, Madan Sabnavis, said, “Several gullible people are investing in this fictitious currency and will be losing money as all trading is a zero-sum game.
“Crypto is fuzzy as there is no underlying that backs the price. For gold there is a metal, for equity there is share but for crypto, there is no such thing.”
There has been a steady increase in the amount being stolen through the crypto assets, it noted.
But the total number of reported incidents of thefts against crypto entities did not change much and stood at 31 in 2021.
Decentralised finance (DeFi) hacks have become the most popular way to steal crypto during 2020-2021 and the total amount of stolen virtual assets in crypto being stolen through DeFi hack doubled in this period, said the Chinanalysis report.
The emergence of rug pulls, a relatively new scam type facilitated the growing DeFi hacks.
Apart from DeFi breaches, crypto frauds and security breaches are common.
So far, $2.86 billion had been stolen through security breaches, while $6.8 billion had been stolen through scams and frauds.
So, crypto scams or frauds account for more than 65 per cent of the total amount stolen.
The anonymity of crypto assets and limited global standards lead to significant data gaps for regulators.
Sabnavis added, “The problem is that all such transactions are opaque and one cannot be sure if the money is being diverted to drugs or other illicit activity. Today a lot of financial savings are getting diverted to the crypto markets which is not good for the country.”
Ndubuisi Francis in Abuja
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