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Exit Scams

The Web 3 Cryptocurrency or Decentralised Finance (DeFi) distributed environment was reported as losing over $2,500,000,000 in the year up to September 2022 by CertiK.  The majority of attacks that could be categorised were exit scams.  98 documented incidents and losses of $56,000,000.

The exit scam is where a cryptocurrency launches or plans to launch and attracts investor’s funds through the initial coin offering.  The whole coin infrastructure either never materialises or swiftly vanishes together with the investors’ money.  This is a variant of the Ponzi schemes dating back over 100 years. Indeed exit scams have been referred to as crypto ponzi schemes.  It depends on relatively inexperienced investors and offering attractive returns on investment.  Some of the money invested is used to finance the scheme and to pay off early investors; most will be drawn off by the criminal never reaching the Blockchain, if such a chain ever existed.  Between 2014 and 2017 the OneCoin campaign publicity included a high profile event at Wembley Arena and another in Dubai.  Investors were drawn in by slick publicity and healthy returns.  The pyramid selling (or multi-line marketing) model was followed with existing companies promoting OneCoin.  These would be paid partly in cash and partly in (worthless) OneCoin.   Ruja Ignatova the author of the scam vanished and is now on the FBI’s most wanted list for her part in the OneCoin scam. Initial Coin Offerings are still not regulated in the UK. Exit scams should be treated as a current not historical risk to investors.

The nature of cryptocurrency and electronic media makes it easy to launch an exit scam.  Cryptocurrency is a relatively new field and significant financial gains have been made in the medium especially in its early days.  The unwary investor is drawn in with the promise of being on the cusp of an emerging market.  The scam does require the criminal to invest heavily in publicity and sales tactics but with a correspondingly large potential pay-out. 

Here are some suggestions to minimise the risk of exist scams:

  • Think before investing.  If something seems too good to be true it probably is.
  • Be aware of time pressure; discounts or opportunities that are only available for a short time period.  Unfortunately it is the nature of genuine initial coin offers that there will be a limited period of availability.
  • Look at the publicity.  Poor grammar, spelling or the whole just not making sense are warning signs.  Also search for other campaigns and look for similarities.  The scammer may be cutting corners and lacking dedicated writing and layout staff instead re-badging publicity from other campaigns.  On the other hand very high profile obviously costly campaigns might be a danger sign.  Money spent on publicity is not being spent on the core product itself.
  • Research how credible is the launch organisation is.  There will be Social Media accounts and posts but followers, likes, comments and re-tweets can all be purchased.  Even content from genuine known figures could mean that these people have themselves be drawn in or had their accounts hacked.  A brand new campaign may indeed be run successfully by unknowns but some degree of activity prior to its beginning should instill confidence.
  • Any scheme should be seen as more reliable if it showcases some sort of working model.  This should not be expected to be fully featured but will demonstrate that someone in the organisation can code within a Blockchain environment.  Investors should expect more than an outline proof of concept.

The mantra of investment should always be to never invest funds that you are not prepared to lose.  Investors should accept some degree of risk and ensure they research any cryptocurrency investment rather than rely on any publicity from within the scheme itself.

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