Cryptocurrencies are an elusive mythical creature for some, but for others, they are a viable investment strategy that carry a huge gains potential. For the latter, investors tend to assume the higher risk that goes along with the possibility of substantial returns. Fraud does not constitute a major component of risk assessment when it comes to most investments. However, Edgewater CPA Group wants you to know some cryptocurrencies are rife with fraud, and a new term has even been coined: cryptofraud. Here are the top three ways cryptofraud occurs.  

Cryptofraud: The Top Three Examples and Case Studies

1. Digital Wallet Theft

Cryptocurrency exists virtually in online wallets secured by a password. Breaching their security requires savvy hackers. Needless to say, for every security measure put in place, cyberhacker thieves find an opening. If your password is compromised, it is a sure bet your wallet is, too. In fact, some hackers have gained access to numerous wallets within an exchange and wiped them clean. Because all crypto transactions and trades occur anonymously, it is challenging to identify who stole the electronic currency and where it went. That being said, most thieves are greedy, and they often steal significant volumes that lead FBI agents to their ultimate discovery and arrest. Perhaps that’s why more recent cryptofraud cases have resorted to other methods. 


2. Cryptofraud via Ponzi Scheme 

Mining requires immense computing power and electricity. Homero Joshua Garza started GAW Miners, ZenMiner, and ZenCloud to perform the complex computing necessary to mine cryptocurrency, mainly for those who weren’t tech-savvy. Along with that, Garza also presented investors with an option to house the currency miners at his data center. The entire model started legitimately; however, he didn’t have the equipment to produce the returns he promised his investors. As a result, Garza allegedly began creating new investment vehicles and using them to pay off the original investors until the whole thing collapsed.  


3. Unregistered Currency (AKA Fake)

In addition to Garza’s scheme to cover GAW Miners losses, he also created his own virtual currency called PayCoin. Then, he enticed investors by touting corporate partnerships and a $100 million reserve that would provide a safety net to cover the currency until it proliferated. In time, both promises proved untrue. Furthermore, Garza never registered PayCoin, so it had zero value regardless of the other factors. 

U.S. Fine Investment Arts Inc. (USFIA) CEO Steve Chen, delivered a more creative illusion with a digital currency called “Gem Coins”. Chen said the company owned mines worldwide. He also said the mines contained amber and gemstones, which backed the digital currency. Unfortunately, neither the currency nor the mines actually existed. Chen duped investors out of approximately $147 million before federal authorities arrested him. In addition to his other charges, he never paid taxes on his cryptocurrency earnings.


Cryptocurrency Accounting and Tax Help

Cryptocurrency is speculative and, as a result, is a volatile investment where huge gains and losses occur. Many people enjoy its addition to their investment portfolios and benefit as a result. It would be best to do your research before making any investment, though, and cryptocurrency is no exception. If you own cryptocurrency and live in Carmel, Indianapolis, or Evansville, IN, contact Edgewater for expert accounting and tax services. Call us today at (888) 317-4835 or schedule a consultation online to discuss your cryptocurrency questions.