Cryptocurrency Fraud: How to Keep Your Crypto Exchange Safe

June 16, 2022

Over the past 13 years, cryptocurrency’s overall development and proliferation have taken the world by storm. Since the original introduction of Bitcoin in 2009, cryptocurrency has gone from a once somewhat obscure asset class to one worth more than $1 trillion.

Though the asset class as a whole is quite volatile, it is clear that the use of cryptocurrency continues to increase. However, there is yet to be a three-year period where if someone were to invest in a diversified cryptocurrency portfolio, they would have lost money. And with new currencies, protocols, regulations, and infrastructures being developed every day, plenty of people still want to “bet big” on cryptocurrency as a whole.

Of course, if crypto is ever truly to become a permanent component of the global economy, it will be necessary for these currencies to remain 100% secure. Security is one of the most important things people will consider when exploring the ever-changing crypto-sphere, and it is often the deciding factor when holders are selecting the exchange they use.

For any cryptocurrency exchange to remain competitive, it will need to take steps to prevent any crypto fraud proactively. Luckily, there are a lot of excellent fraud detection resources that exchanges and platforms can use to promote crypto exchange security. 

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What is Crypto Exchange Fraud?

The broad term “crypto exchange fraud” is used to describe any fraudulent effort that presents an illegitimate cryptocurrency exchange as one that is legitimate. As the most popular cryptocurrency in circulation, Bitcoin, is often featured in fraudulent sales, though there are plenty of other cryptocurrencies that can be found in these exchanges.

Many actions and schemes could be broadly categorized as crypto exchange fraud. For the action to be classified as fraudulent, the person or entity committing the fraud must:

  • Deliberately try to steal from, lie to, or otherwise manipulate another party
  • Commit the fraud with the intent of financial or some other type of personal gain
  • Knowingly misrepresent their identity, intentions, or some additional important information
  • Commit the fraud within the context of a crypto exchange

With the broader growth of cryptocurrency as a distinct alternative asset class, the prevalence of crypto exchange fraud has also been steadily increasing. 

In fact, between 2020 and 2021, the number of reported cases of crypto exchange fraud increased by more than 115%. Moreover, the magnitude of fraud (the amount of value being stolen) has been growing in many cases.

Types of Cryptocurrency Fraud

The mere existence of crypto exchange fraud should not deter interested investors from exploring the broader crypto marketplace—in most cases, these exchanges are very safe and have developed robust protocols and use high-quality fraud prevention solutions in order to keep each of their users safe from potential fraud schemes. 

However, it is still essential to be mindful of the risks that come with using these platforms, including some of the most common types of fraud:

Hacking Theft: 

This theft involves the simple transfer of cryptocurrency from one digital wallet to another. While the blockchain is, ideally, supposed to make hacking theft nearly impossible, perpetrators of crypto fraud schemes have been developing increasingly sophisticated approaches to hacking.

Pump and Dump Schemes: 

These schemes are used to artificially prop up the value of a cryptocurrency, followed by a significant sell-off that allows perpetrators to “cash in.” These schemes—which involve high volumes of buying followed by high volumes of selling—are prevalent in all volatile asset classes, including cryptocurrency.

Ponzi Schemes: 

The purpose of a Ponzi scheme is to funnel money to an original holding source. The originator of the scheme will often collect money, usually in layers (like a pyramid scheme), promising that “if you can recruit more people, you’ll get even more money back”—eventually, the number of potential “recruits” will run out and the Ponzi scheme will begin to fall apart.


In the digital world, it is straightforward for various malicious parties to conduct impersonations and pretend to be someone else. In the context of the world of crypto, this might involve a party that acts to be the founder of a coin or company, a financial advisor, or another party that might ask for personal information. Once the information has been acquired, the fraudulent party may be able to access digital wallets.

Giveaway Scams: 

There is no such a thing as a “free lunch,” and this is especially true in the increasingly competitive world of crypto. Anytime someone offers free cryptocurrency, unsolicited advice or financial services, or anything else that seems too good to be true, crypto users should be skeptical.

Fake Initial Coin Offerings (ICO): 

The initial coin offering (ICO) is often the most lucrative component of a cryptocurrency’s lifecycle—if you are considering investing in a brand-new coin, be sure to confirm it is real.

Why Are Crypto Exchanges Targets for Fraud?

Compared to many other speculative asset markets (bonds, etc.), the cryptocurrency market is particularly prone to fraud. Though crypto’s decentralized and public nature represents one of its biggest appeals, it can also be problematic for those involved in the marketplace.

There are quite a few reasons why cryptocurrencies are likely to be exposed to fraud. But, perhaps most importantly, the highly volatile and decentralized nature of the entire industry tends to attract people who have an exceptionally high level of risk tolerance—this makes it very easy to get excited about a new coin but also relatively easy to become a victim of digital fraud.

Additionally, cryptocurrency transactions are digital and irreversible, which tends to make it much simpler for bad actors to “take the money and run.” And because most people in this space are anonymous, victims of fraud will tend to have very little recourse. 

This creates a challenging situation where the risks of fraud are relatively low, and the potential gains from a well-executed fraud are much higher.

5 Steps to Protect Your Crypto Exchange from Fraud

If you have recently launched a crypto exchange, it can be very tempting to want to hit the ground running and begin recruiting new users. However, it is essential to realize that the early stages of launching a crypto exchange are critical—if your exchange gets a reputation for fraud, risk, or any other kind of dysfunctionality, your launch will inevitably fail.

Because of this, all crypto exchanges need to invest heavily in security and fraud prevention methods.

1. Use Fraud Detection Software

The best way to minimize the risk and consequences of crypto fraud is to identify ongoing instances of fraud as early as you possibly can. The longer it takes to notice that a fraud is being committed on your platform, the more users that fraud will affect and the more damaging it will be. Learn when the best time is to integrate a compliance software to ensure you keep the platform secure.

Fortunately, there are a lot of great resources available that can help minimize these widespread risks. By using digital fraud detection software, you can monitor for potential red flags and stop various schemes right in their tracks. Plus, your users will also be happy to see that their platform of choice is being proactive. Some solutions are so adept that they can actually help prevent attempts at account takeover, which is ideally suited for crypto platforms where criminals look to exploit accounts.

2. Allow for Direct Bank Transfers

By diversifying how capital can be accessed, exchanged, and distributed across your platform, you can effectively allow your users to move their accounts into their own hands. 

Despite the structural nature of the currency itself, many crypto users prefer to use direct bank transfers, which are easier to reverse and potentially monitor. Though not all transactions will need to require the use of a bank, offering additional options can help.

3. Keep Your Users Educated

Many crypto exchanges don’t like to use the word “fraud” at all. But the more an exchange is willing to open up and educate its users, the more likely they will be able to identify fraud and avoid costly problems. 

Additionally, transparent exchanges are much more likely to be considered worthy of their users’ trust.

4. Be Willing to Accept Identification

One draw of the crypto-sphere is that users can usually remain anonymous. But in certain situations, verifying identification can help provide an additional layer of security. 

This is why Binance and many of the world’s other largest crypto platforms will ask users for proof of identification. 

5. Enrich All Your Data

The importance of data enrichment cannot be overstated. 

Data enrichment is a process that helps platforms (like crypto exchanges) acquire additional info about their users—phone numbers, emails, even social media, etc.—without directly asking them. 

This process not only helps weed out potential fraudsters but also helps keep current users more secure.

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Keeping Your Crypto Exchange Safe From Fraud: Key Takeaways

Combatting fraud is an ongoing battle that all cryptocurrency exchanges must take seriously. New fraud schemes are emerging regularly, and cryptocurrency exchanges and platforms are one of the core targets in the Fintech space.

It’s not enough to hope that all crucial information will remain secure—exchanges must take direct action. But with the right resources and protocols in place (such as Regtech software designed for crypto), these exchanges can create a better user experience and significantly reduce the likelihood of a costly fraud-based event. High-powered solutions like link analysis are ideally suited for cryptocurrency, allowing you to analyze networks seamlessly for patterns.

Learn how a third-party integration can be leveraged in your risk and compliance infrastructure to protect crypto transactions and accounts. For more information about how Unit21 can help your crypto company combat fraud, get in touch today.

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