Crypto scams the ‘biggest source of revenue for criminals’ in the industry: Expert

Chainalysis Director of Research Kim Grauer joins Yahoo Finance Live to discuss the challenges crypto exchanges are facing amid the alarming increase in crypto scams, as well as the outlook for crypto regulation.

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BRIAN SOZZI: As the crypto world deals with violent selloffs and heightened volatility, crypto scams continue to be a rising concern. From bogus investments to business imposters to even dating apps, these scams are taking people for a lot of money. For more on this, we welcome in Kim Grauer, Chainalysis Director of Research, alongside Yahoo Finance's crypto reporter David Hollerith. Kim, how severe is this problem?

KIM GRAUER: Scamming's always been one of the biggest crime-related issues when it comes to cryptocurrencies. So we can break out all the different types of criminal activity happening on the blockchain, darknet market, ransomware, hacking, sanctioned activity. And scamming always has been and probably will continue to be the biggest source of revenue for criminals just in terms of the value they're receiving. It's about $7.7 billion in 2021. And it's still a pack leader in 2022. So it's a big problem for the industry.

DAVID HOLLERITH: Kim, hey. Thanks for coming on the show. I was sort of curious in terms of last year's numbers versus now. I the FTC sort of came out with the number of scams reported by US investors, which peaked last year and is on pace to be even larger this year, at least just judging by Q1 2022. So I was curious, what kind of trends have you seen since the beginning of this year in terms of crypto-related scams and maybe how things have changed?

KIM GRAUER: So I think to answer that question, of all of the types of illicit activity that I just mentioned, scamming tends to move the most with the market, which I think makes sense. What is a scam? It's someone willingly parting with their funds, oftentimes, in hopes of seeking a higher return.

So the ebb and flow of scamming tends to, of all the types of criminal activity, move the most with the market. And you can compare that to something like ransomware, where there's not really a market basis for the amount of type of ransomware attacks there are. It's really just continually happening all the time.

And so because of that, we've actually seen a pullback, during the bear market, in the amount of funds going to these scam addresses. But there's also something else happening in addition to these market dynamics.

2021 was a big year for law enforcement wins against scamming. And we saw a lot of takedowns, a lot of proactive efforts by law enforcement to take down non-registered scams and to really go after them. So we've seen also of a reaction against these scams. And that has also worked to reduce the amount of scamming that has been happening.

But again, in reaction to those great efforts from law enforcement, the scammers have become more sophisticated. Everyone is always adapting in this ecosystem and in crime in general. So we've seen a rise in scams such as the pig venturing scams, which are much more sophisticated because of the links and the efforts that are required in order to get someone to part with their funds, whereas before you could just say, hey, send money to this crypto scam. And people would kind of do it. Now you have to work a little bit harder because there's all this awareness around scamming.

BRAD SMITH: And so to your point, it seems like after every crypto winter, scammers have gotten smarter, and needed to get smarter as well, about how they are trying to solicit finances, solicit cryptocurrency, and ultimately scam users out of their money. And so after this crypto winter, how can somebody adequately spot a scam that is trying to solicit cryptocurrency from them?

KIM GRAUER: It's a really good question. And one thing that is true in cryptocurrency and non-cryptocurrency alike, there are typical red flags of a scam that the SEC tends to highlight. What do you know about the founders? Do they promise unreasonable returns? Do you have any information on where they're incorporated?

And all of these things together can paint a picture of whether or not this service that you want to invest in is a scam. But there's also increasingly, specific to cryptocurrency, solutions that we're seeing exchanges adopting that take advantage of the transparency of blockchain and actually are really promising in terms of ending or at least reducing the amount of scamming happening.

For example, one exchange called Luno, what they do is they take the public blockchain data, which Chainalysis-- which we partner with them. And they can actually alert a customer if they're sending to a scam.

So if you think about it, Chainalysis spends-- one of the core things we do is we search for scams. And we get them identified in our system. And imagine that if you're a customer on an exchange, you can actually know if what you're sending to has been flagged as a scam or likely scam in our software.

So there's industry solutions that are popping up to help and support customers that is really unique to the crypto space in addition to these typical kind of SEC flags that help people make the decision themselves.

DAVID HOLLERITH: Kim, yeah, I've encountered victims who have been prey to these pig butchering scams. Obviously an awful term. But can you sort of tell us more about it? It sounds kind of like a different flavor on like these romance scams.

KIM GRAUER: Yeah, so a pig butchering scam, yes, it's a terrible term. But basically, it's a type of scam when the scammer puts in weeks or months of work to build a fake relationship with a victim, I guess metaphorically fattening them up. And so they will put in lots and lots of effort. And that is something that is more challenging because it does go after kind of the more vulnerable people, the people who are--

We've seen a lot of romance scams. And this is certainly a type of scam that has evolved because these criminals need to adapt. And they're certainly on the radar of law enforcement pretty much all over the world. Anyone who investigates scams, this is their focus right now. And so it's a priority area. And we're certainly all working together to figure out how to identify them and prevent people from sending to these scams.

BRAD SMITH: Right now, we're looking at so many different projects that are getting washed out in this crypto winter, particularly for the projects that move forward with some of the focus that you were mentioning earlier, building into their blockchain kind of an anti-scam or a scam detector. How is how is that going to be kind of implemented so that consumers, they're protected, but then at the same time, that regulators feel comfortable enough with the different types of blockchains that are being engaged with by consumers?

KIM GRAUER: I really see this as a huge possibility to overcome-- or not totally overcome. You'll never stamp out crime entirely. But scamming is such a part of our world, and not just in cryptocurrency but in day to day. You hear about scamming happening to your relatives, to your grandparents, to a lot of people.

And so how do you stop that? Well, you raise awareness around scams. You prosecute scammers. And in the case of cryptocurrency, you leverage this incredibly, incredibly powerful data set where you can-- if you are customer on an exchange and this exchange is utilizing compliance software-- and Chainalysis has identified-- we've identified thousands and thousands of global scams all around the world.

And you can basically get a notification. Hey, did you know that Chainalysis has identified this as a scam? Here's some documentation. This scam is being investigated right now around the world. And then you can make the decision if you still want to invest or not.

We've also seen, increasingly, other types of scams where that might not be as effective. Like, let's talk about the rug pull where something is operating as a legitimate business. And then the founder will just suddenly run away with the funds. And that is a problem. But the good news with the blockchain is that those funds that they ran away with, we can see exactly where the funds went.

BRAD SMITH: Sure.

KIM GRAUER: There's still that opportunity to recoup the funds after an investigation.

BRAD SMITH: Well, yeah, that rug pull certainly happened a couple of years back with Litecoin, with the founder of it selling out such a massive stake that it actually had really collapsed the value of it. But it's taken some time for Litecoin to build back up. So we've seen that over the course of the past couple of years. Kim, we'd love to continue this conversation in the future. Thanks so much for joining us here today.