Cryptocurrency Exit Scams; Here are the Red Flags.

Cryptocurrency Exit Scams; Here are the Red Flags.


There is a growing mix of excitement and anxiety over the emergence and growth of cryptocurrency popularity in different countries around the world and Uganda is no exception. The internet and press are awash with stories of individuals who have mined and reaped big from the trade enough to lure new investors to this ‘digital revolution’. However, the same media is filled with tales of other less fortunate investors who have lost their money in ‘exit scams’. A few days ago in neighbouring Kenya, Bitcoin investors fell prey to a Brazilian pyramid scheme and lost tens of thousands of dollars that they had invested in it . The company known as Velox 10 was run by a Brazilian national and claimed to trade in bitcoins, promising investors that they would earn millions of shillings in profits . This is just one of many similar scams that many have fallen prey to because of a lack of knowledge of what to look out for to discern a genuine cryptocurrency establishment from a scam.
A number of questions and concerns have arisen out of the complex nature of cryptocurrency. How does one protect themselves from falling victim to exit scams? Is there a way to spot an exit scam miles away from a genuine cryptocurrency trade? Is it legal and crucial to note, with no central regulatory authority, how exit scam victims are helped and the remedies are available to them? This article focuses on exit scams in cryptocurrency and how one can spot one and protect their money from the reptilian reach of sly fraudsters. Here are the red flags you should always look out for.

What is a cryptocurrency?
A cryptocurrency is a digital or virtual currency that uses cryptography for security. A currency is money in any form when in use or circulation as a medium of exchange, especially circulating banknotes and coins . A currency therefore refers basically to a system of money (monetary units) in common use, especially for people in a nation or country . Digital currency means the money is only available in digital form, not in a physical nature like usual bank notes or coins. While exhibiting properties similar to physical currencies, these currencies also allow for instantaneous transactions and borderless transfer-of-ownership. Cryptography is the cryptocurrency’s major outstanding characteristic separating it from other forms of digital or virtual currencies. Cryptography refers to techniques for secure communication in the presence of third parties and is generally concerned with constructing and analysing protocols that prevent third parties or the public from reading private messages.
It is this feature that makes a cryptocurrency difficult to counterfeit. Cryptocurrency‘s other alluring feature is its decentralised nature that is; it is not issued by any central authority, rendering it theoretically immune to government interference or manipulation. According to Investopedia, the year 2009 was the year that Bitcoin, the first cryptocurrency to capture the public imagination was launched. A brainchild of an individual or group known under the pseudonym Satoshi Nakamoto, it has continued to be a global success and to engage investors from all over the world including Uganda. As of May 2018, there were over 17 million bitcoins in circulation with a total market value of over $140 billion. Over the years other cryptocurrencies such as Litecoin, Namecoin and PPCoin have also crept up.
Cryptocurrencies have advantages that appeal to many for instance, the fact that they assist in saving money. Since fund transfers between two people are facilitated through the use of public and private keys, minimal processing fees are incurred allowing users to avoid the steep fees charged by most financial institutions for wire transfers.
Cryptocurrency projects raise money through ICOs, an unregulated means by which funds are raised for a new cryptocurrency venture. An (ICO) is used by start-ups to bypass the rigorous and regulated capital-raising process required by alternative capital options like venture capitalists or banks. In an ICO campaign, a percentage of the cryptocurrency is sold to early backers of the project in exchange for legal tender or other cryptocurrencies for example Bitcoin.
Bitcoin, one of the more prominent cryptocurrencies, employs a block chain technology to store an online ledger of all the transactions that have ever been conducted using bitcoins, providing a data structure for this ledger that is exposed to a limited threat from hackers and can be copied across all computers running Bitcoin software. The requirement to verify every new block generated by the ledgers of each user minimises chances of forging transaction histories. This platform may, infact be ‘too secure’. Early this year the press was screaming with news of $137.21 million in cryptocurrencies that was frozen in a user account of Canadian digital platform Quadriga after Gerald Cotten, the founder and the only person with the password to gain access, died suddenly in December .
However, it’s not all roses as cryptocurrencies are vulnerable to hacking. Bitcoin has been subject to over 40 thefts with some exceeding $1 million in value. The currency is also a target for digital theft, phishing, fraud, and hacking. According to the Bitcoin official website, it is reported that around $1.36 billion worth of cryptocurrency was stolen by fraudsters during the first two months of 2018. Fraud constituted the majority of virtual currency scams (30%) followed by hacking attempts (22 %), theft and exit scams (17 %), and phishing (13 %).
Various governments around the world have reacted differently to the growing digital currency wave. In January 2018, the government in China ordered a shutdown of all cryptocurrency mining operations. Tunisia on the other hand had a warmer response by embracing it with an announcement that it would launch a digital currency based on block chain technology. South Africa has so far embarked on research to ascertain the technology's feasibility. Uganda has however cautioned its citizens against the currency in a warning sounded by the central bank. Bank of Uganda warned citizens that investing in bitcoin and other digital currencies amounted to, "taking a risk in the financial space where there is neither investor protection nor regulatory purview." Kenya and Nigeria have issued similar concerns and Namibia took a more radical stance when it banned cryptocurrency use for commercial purposes.

What is an exit scam?
Many naïve and unsuspecting investors have been conned of their money through exit scams. An exit scam is when unethical cryptocurrency promoters vanish with investors’ money during or after an initial coin offer (ICO). The decentralised, anonymous nature of digital currencies hinder any efforts to trace scammers who dupe the investors as opposed to if there was a central authority managing the system/currency.

Mode of Operation;
• Promoters introduce a new cryptocurrency platform with overly favourable concepts for investors.
• It then proceeds to raise money from the investors through an ICO.
• The business may or may not run.
• The promoters then disappear with the collected ICO money leaving the investors with nothing.
This new form of forgery lurks and preys on unsuspecting investors and feeds on the decentralised and anonymous nature of the system to grow. According to Investopedia’s Shobhit Seth, approximately $9 Million is lost each day in cryptocurrency scams. Many such scams are on the increase today since naive investors are lured into placing their savings into “the next big thing,” after being promised absurdly high rates of return. While Bitconnect and OneCoin scams received the highest media coverage because of the high amounts of money lost due to them (the latter is alleged to have generated over €3.3 billion in fraudulent sales ), there have been other less known scams that had indicators the investors should have paid attention to.
In November 2017 Confido, an escrow-related cryptocurrency startup disappeared overnight after collecting $175,000 through its initial coin offering (ICO). This incident led to the market cap of the cryptocurrency to fall from about $6 million to $70,000 within that week. LoopX, another crypto startup abruptly shut down in February 2018 after raising $4.5 million from investors through a combination of bitcoin and Ethereum. Its ICO promised ‘guaranteed profits every week which they boasted to be due to “the most advanced Trading Software out there to date.”
Giza Device, another scam vanished in March 2018 after raising US$2 million in cryptocurrencies in a fake ICO. The funds were said to be for the purpose of funding the development of a “super secure storage device” for cryptocurrencies. Bitconnect, a cryptocurrency-lending scheme, shut down its operations in January and vanished, leading to an exit scam with an estimated loss of around $250 million. In India, the promoters of OneCoin who had previously allegedly moved about $350 million offshore through a payment processor in Germany were arrested. A common denominator in all these is the promise of a super return or advanced advantage making the particular scheme superior to others.
The most publicised scam last year was probably the PinCoin and I-fan scam (Singapore and Dubai respectively) which conned an estimated 32,000 investors of an alleged $660 million in tokens. They bought tokens for money, allegedly injected into I-Fan marketed to be ‘the most advanced social media network’ with a very high success probability, whose function included linking athletes and entertainers to their fans. The multi-level marketing Ponzi schemes were under the control of Vietnam-based outfit Modern Tech. I visited the website and found it well-done with a captivating visual appearance which can easily sway any investor who is not cautious but wants a quick piece of the pie. The site however bears no mention of any founders or advisors and even their multi-lingual white paper, has no clear founder information.
In the East African neighbouring country of Kenya in March 2019, Brazilian scam Velox 10 pulled its “exit scam,” by disappearing and stealing tens of thousands of dollars from a number of local cryptocurrency investors in the process . Since September 2017, the scheme had been luring people into contributing money to its supposedly sound “Bitcoin investment fund,” Ricardo Rocha, the founder had promised investors up to $4,000 in daily profits depending on the “membership fee” paid and pledged to take the biggest contributors on an all-expenses paid trip to the United Arab Emirates for a meeting with “top global business gurus.”

The Red Flags; How to spot a cryptocurrency exit scam?

There is no particular laid down indicator or rulebook on spotting an exit scam but as an investor, you will do well to weigh the following before making investment decisions. These points should be a starting point;
1) Extremely Extravagant Return Projections and Guaranteed Profits:
The most important indicator of an exit scam is derived from the fact that to thrive, it has to possess the ability to lure new investors fast. These scams survive on the need for the potential victim to bet on them for an easy cut on the ‘next big thing’-a shortcut to prosperity. Therefore promises of crazily high and extremely generous return projections are a consistent feature. To escape this one must bear in mind that most times if something sounds too good to be true, it usually is. Forgetting this is the first step to getting conned in an exit scam. A case in point is the BitConnect scam which promised investors a steady 1% daily return. This meant that an initial investment of $1,000 would have been transformed into a return of more than $50 million within just 3 years! If the prospective returns sound like a financial miracle, simply stay away. Ponzi schemes use funds by the new victim investors to pay off the older ones and it is always just a matter of time before the whole house of cards comes crumbling down. In the case of the Kenyan based scam Velox 10, the founder, Ricardo Rocha promised investors up to $4,000 in daily profits.
High return projections aside, guaranteed profits are another obvious sure way of identifying a fraud or exit scam ICO. This is because, like a business, there are no certainties in the blockchain system, and no proven reliable, or guaranteed methods of generating profits. Flee from any ICO that promises returns to investors for “staking” their coin. BitConnect promised guaranteed profits and turned out to be a Ponzi scheme.

2) The Credibility of the founders:
It is an old adage that a product should be judged or weighed from the producer, owner, creator or founder. When you first hear about a cryptocurrency investment opportunity, look into the team that runs it. Many scams could easily have been avoided if only the victims had tried to do some homework research on the founders. Try to gather as much information as you can. Chances are that if it is genuine, this information will be readily available. They will be normal traceable people whose friends and online connections can lead them to you be it via social media or their alternate internet profiles. Expect plenty of connections and respectable past job experiences and accept nothing less. Accountability and ownership are already a challenge in this virtual world. Always verify the credentials of the crypto teams of those ICOs that look promising. Brand-new social media profiles with barely any connections should always be a red flag for any diligent investor. However, fake online credibility is also easy to attain with a few dollars to spend so discern cautiously.

3) The project’s white paper standards.
The white paper is probably the most important document for a cryptocurrency project or venture. This document must detail the project’s design and development, its evolution, and how it will generate business. Therefore, having no white paper, a bad white paper, or one that is blatantly plagiarised should be a flag red enough to give you your marching orders. If the white paper is unclear and ambiguously written, then the whole project ought to be treated with suspicion. You should be able to understand the business and the project from this paper and if incomprehensible, the project is just not for you. No shrewd investor injects his/her hard-earned money into a project they do not understand well and the role of that document is to give you a standard understanding of the scheme.

4) Extreme Promotion Activity;
Have you ever seen a new company searching for investment but seemingly carrying an advertisement and promotion campaign so big that you will wonder how good willed the founders are to want everyone to enjoy a piece of the cake? Big promotions indicate a big budget and it defeats common sense that a brand should go all the way to spend all their money on promotion except if the founders expect to reap the benefits in a very short term. Short term rewards ought to raise red flags as they scream a too good to be true message. Most exit scams really have extremely huge promotion campaigns. Full-page ads of new ICOs by lesser-known founders in the print media should always push you in the opposite direction. In India, the popular exit scam Confido reportedly paid bloggers to spread the word on various online forums. Kenyan scam Velox 10 started off with an extravagant colourful launch at the posh Intercontinental Hotel in Nairobi and several advertising campaigns on numerous media outlets ranging from radio stations and television. While big promotions themselves are no evidence of dubious intent, a prudent investor should investigate the claims made before investing.

5) Non-existent Working Model:
The working model of the cryptocurrency project should be of utmost importance to you as an investor as it is the only way your money will make returns. Does the model make sense to you or it’s a concept-only, with a non-existent product? Most cases where it is the latter, the project does not work. The team should prove their worth by convincing you of the viability of their model. Do not invest until the founders prove to you that their project is worth investing in.

6) Shaky or Unrealistic Roadmaps
A roadmap is a detailed list of what the initial coin offerings project team has achieved so far in the development of their project, as well as what they plan to achieve. This must be provided to the potential investors. If no roadmap is provided there is a high chance the only future plan is “exit” and “profit”. A roadmap also ought to be realistic. The absence of a working platform prototype or any code at all is a red flag you should never ignore as an interested investor. Roadmaps which include plans of using ICO capital to develop a prototype or those that make any references to a future token price are highly likely to be exit scams. If the ICO you’re considering investing in offers an unrealistic future roadmap and has not achieved anything significant, flee!

All in all, the same way you wouldn’t normally invest in the shares of a company whose business you don’t understand, or if you don’t trust the people behind it, don’t give cryptocurrency projects the benefit of the doubt. Always do your own research about the ICO you are considering. It is wise to rely on more than hearsay from other sources. Do your own due diligence and pay close attention to claims that are being made. Be very rigid when it comes to crypto investing. It may be what saves you from an exit scam.