The risk of fraud involving cryptocurrencies

Action Fraud recently reported that “once the price of Bitcoin started to surge in mid to late 2017 we started to see a massive increase in the number of frauds. These new investment scams are exploiting a lack of general understanding about Bitcoin and, it being the flavour of the month, to make money before moving on to the next investment craze”.

A few weeks ago we advised a digital currency trader who had a dispute with his broker following an especially volatile day. The broker decided to close his position with no warning in order to minimise their own risk, causing the client to incur losses. Having reviewed the regulatory and contractual position we were able to advise the client that he had a claim against his broker and advised him to pursue his losses.

At present there are about 1,000 digital currencies of which about 260 are actively traded on the digital currency market. Live bid and sell prices for digital currencies are now quoted by all major financial brokers. The nature of these digital currencies, otherwise known as cryptocurrencies with Bitcoin being the most well know, are created by digital hardware and software. These price increases has meant that demand for GPUs (graphics processing units), and consequently the cost of processing power, has soared recently thanks to cryptocurrency mining. The fact that cryptocurrencies are not regulated by any financial authority, makes digital currency very attractive for the risk takers in current market conditions.

Unfortunately, these same characteristics have made them also very attractive for the criminally minded. The currencies only exist online and are highly anonymised, making it difficult to identify users and to track payments. This has resulted in Bitcoin being seen as the preferred currency of drug dealers, cyber criminals and online ransomware demands, such as last year’s WannaCry cyber attack!

Some financial brokers offer their clients derivative contracts based on digital currencies, but do not offer physical ownership of the digital currency. This was the case for our client. Recently a U$500m theft at the Japanese cryptocurrency exchange Coincheck highlighted the risks connected with safeguarding digital currencies. In that case even holders who had their digital currencies recorded in what is called “wallets” were defrauded.

Our client’s dispute was handled by one of the firm’s team, an experienced former trader. They are available to assist in disputes between traders, financial brokers and cryptocurrency exchanges either as a result of theft, errors in transaction record keeping or market manipulation. We can also help with disputes where derivatives are based on digital currencies are the subject of the trade.

For further information, or if you have a dispute where we may be able to help, please contact us on: enquiries@veroconsulting.expert.

Charles Lazarevic

23 February 2018