Outside the law. Why is it so easy for a crypto investor to become a victim of scammers and it is so difficult to return the stolen

The cryptosphere is a space free from the power of regulators and financial institutions. Thanks to this, it attracted a lot of retail investors… and scammers. According to Chainalysis, in 2021, the volume of stolen funds amounted to $6.2 billion.

It is not easy to track these schemes, and if the amount of damage is not so large as to justify the costs, law enforcement officers may simply refuse to investigate. How the cryptosphere will develop and what is necessary to ensure security — in the retelling of the FT material.

52-year-old resident of London Lily realized that she had become a victim of fraud on her birthday. Sitting at the table, she told her daughter, who works in a hedge fund, about her financial problem.

Lily (this is not her real name) started trading cryptocurrencies in March 2021 thanks to friends she met online.

At one point, her earnings reached $1.4 million, but later she lost most of the money due to an unsuccessful transaction. However, there was still about $300k left on one of her cryptocurrency trading accounts, about the same amount as she had invested during all this time.

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The failure upset Lily, and she decided to withdraw the money. She was told that in order to liquidate her remaining tokens and cash them out, she would have to pay some tax. But when she tried to transfer funds to the trading platform, they came back.

It was enough for her daughter to be alarmed. So Lily realized that her new friends and successes in trading were an elaborate scam. And from that moment she began to fight for the return of her money.

Lily is one of thousands of victims. During the pandemic, more and more people began to be interested in investing in cryptocurrencies, and scammers could not help but take advantage of this.

According to the blockchain analysis group Chainalysis, in 2021, fraudsters stole $6.2 billion from victims around the world, 80% more than last year.

Action Fraud, the British fraud reporting center, estimated losses on complaints recorded by it for 2021 at 190 million pounds. This is more than twice as much as a year earlier. And at the end of August 2022, the damage was 25% higher than in the same period last year.

However, investigators lack the resources to investigate the concomitant increase in the number of fraud cases — especially when the amounts involved in individual scams are considered relatively small. And as the economic crisis raises the cost of living, regulators warn that another favorable environment for scammers may appear on the horizon.

“We are concerned that in the current economic environment, people may be tempted to invest in fake investments,” says Nausicaa Delfas, interim executive director of the UK Financial Ombudsman Service.

Lily’s struggle demonstrates how big the gap is in protecting the rights of consumers who use regulated financial institutions and those who prefer digital currencies.

The cryptosphere is not controlled by official financial institutions, and legal protection of consumers does not apply to it. The task of tracking down international networks of anonymous criminals is a huge problem for law enforcement agencies and investigators.

“Obviously, scammers are attracted by the very nature of cryptocurrency — it is irreversible, anonymous and global,” explains Rich Drury, manager of the ombudsman at FOS, which handles complaints against financial companies.

There were no friends who introduced Lily to the cryptosphere, gaining her trust over months of online communication. Perhaps both aliases belonged to the same fraudster.

They sent photos that showed their wealth: they posed in front of a Bugatti Veyron supercar and showed a fluffy white dog in a Burberry scarf. All this time, they encouraged Lily to invest more in supposedly successful cryptocurrency transactions.

She sold one of her two apartments in London to raise money for investment. She later discovered that the website her friends recommended and the apps she downloaded were fake.

Despite the fact that she lost a significant part of her savings, Lily and the other victims are unlikely to receive much compensation. Their damage is considered not serious enough to justify the involvement of lawyers and consultants for criminal or civil investigations — or to realign the priorities of the UK’s police crypto experts.