Protecting your company from cryptocurrency fraud

According to blockchain data company Chainalysis, cryptocurrency transactions associated with illegal activity topped $14 billion in 2021. That’s almost double 2020 numbers – and the momentum shows no signs of slowing. In addition to outright cryptocurrency theft, these crimes include investment fraud and ransomware scams that affect businesses.

Yet cryptocurrency offers several advantages to entrepreneurs and established companies, including instant, low-fee transactions and access to new sources of capital. If you use cryptocurrency – or want to – understanding the risks can help prevent financial losses.

The basics

Cryptocurrencies use blockchain technology, a shared electronic ledger that records and stores transactions in the nodes of a computer network. Most cryptocurrencies use public blockchains, making it possible for anyone to see a digital wallet’s balance and transactions, including criminals. But such transparency means that it’s also possible to trace the proceeds of a cryptocurrency scam.

Although law enforcement is still largely trying to catch up with this fast-evolving technology and the scam artists who exploit it, there are some promising developments. In late 2021, IRS Criminal Investigations reported the seizure of over $3.5 billion worth of cryptocurrency from nontax investigations.

Guarding your wallet

Several practices can help protect your cryptocurrency assets, starting with securing your “wallet. Cryptocurrency wallets are used to house proof of digital asset ownership and secure them with public and private keys. As you would assume, public keys are known to others and private keys are generally known only to the wallet’s owner. Anyone with a public key can encrypt data, but only a private key holder can decrypt or unlock the data.  

Although this system is highly effective at protecting cryptocurrency holdings, it’s not invulnerable. So consider using a “cold” wallet, or hardware that’s not consistently connected to the Internet. Just keep in mind that you’ll need to make your wallet “hot” (connect it) to conduct cryptocurrency transactions such as buying and selling.

To prevent theft, keep only small amounts of cryptocurrency in your hot wallet. Larger amounts are more likely to attract criminals. Also keep your security software up-to-date and store your password securely.

More antitheft strategies

Other best practices for preventing financial losses when using cryptocurrency include the following:

Watch your apps. Some scammers create fake cryptocurrency mobile apps that they make available through Google Play or the Apple App Store. Scrutinize descriptions of apps for misspellings and inauthentic looking graphics. And download them only after you’ve read reviews by actual users.

Be wary of celebrity endorsements. Exercise skepticism about cryptocurrency marketing emails and social media posts referencing a celebrity or claiming a celebrity endorsement. As with all unsolicited email, resist the temptation to click on any links or attachments it contains.

Spot spoofed websites. Before buying new or established digital currency on a website, validate the site’s address, look for the encryption icon (a lock) and be on the alert for red flags. For example, the site shouldn’t direct you to a new platform for payment.

Make time for due diligence. If you’re eyeing a cryptocurrency initial coin offering (ICO), don’t invest until you’ve taken the time to vet the creators of the currency. ICOs typically aren’t offered by companies and don’t have financial records, so you’ll need to research the individuals behind them. At the very least, an ICO should be accompanied by a business plan or white paper. But even legitimate ICOs are extremely risky investments.

Criminal magnet

Cryptocurrency is a magnet for criminals thanks to its anonymity, a lack of government oversight and other factors. Although digital currencies have become mainstream in the past couple of years, businesses need to take precautions to prevent fraud. Our forensic accounting team might be helpful regarding both prevention and detection.

Further reading:

Forensic accountants provide crucial help in resolving financial disputes

C-suite fraud: Prevention and detection