Extract: Crypto Crime Report by Chainalysis

Chainalysis released a report on crime in the cryptocurrency ecosystem. The report, which  was released in January 2019, highlights the different types of illicit activities taking root in different cryptocurrencies. The report delves into how decoding hacks shed light on two prominent groups and their laundering strategies, how Darknet markets demonstrated resilience, and how Ethereum scams are small in scale but evolving fast.

In this article we extracted the section that talks about Ethereum scams. The full report can be found here.

Fewer scams, bigger revenues: a radically changing landscape for Ethereum crime

In 2018, only 0.01% of ether was stolen in scams, worth $36 million, double the $17 million take for 2017. This makes scamming on the Ethereum blockchain one of the lowest-earning types of crypto crime analyzed in this report for 2018. Furthermore, the number of scams declined through 2018, although those that remained were bigger, more sophisticated, and vastly more lucrative.

Why focus on Ethereum scams?

Ether has long been known as the cryptocurrency of choice for scams, for a variety of reasons. The Ethereum smart contract platform created a new phenomenon of decentralized investment via initial coin offerings (ICOs). People grew accustomed to parting with their ether coins in hopes of receiving outsized returns from these ICOs during the crypto hype of late 2017. Scammers took advantage of this new willingness—and of people’s fear of missing out—by creating phishing scams involving fake investment pages into which people enter their personal details.

These types of scams are not inherent to Ethereum’s smart contract functionality, but since 82% of all ICOs are built on the Ethereum blockchain, it quickly became a go-to favorite for scammers. In addition to phishing scams, other common types of scams include ICO exit scams, hidden among the many genuine ICOs, and ponzi schemes.

Types of Ethereum scams

Most scamming activity falls into one of three categories:

Phishing scams

These are the most common type of Ethereum scams. The target receives email or other communication that tricks them into sharing personal financial information that allows access to their Ethereum wallets.

Ponzi scams

Cryptocurrency ponzi schemes promise investors very high returns in exchange for an initial investment. Returns are paid out of new investment funds to attract additional investors until the scammers close up their scam and abscond with the proceeds.

ICO exit scams

In these types of scams, criminals set up fake companies, often with elaborate websites and collateral, then raise capital via unregulated initial coin offerings or ICOs. Once the ICO is completed, they intentionally cash in the proceeds and disappear, leaving funders with nothing to show for their investment.

The rise and fall of scamming activity

From late 2016 through the end of 2018, Chainalysis has identified over 2,000 scam addresses on Ethereum that have received funds from nearly 40,000 unique users. Scam activity increased dramatically in 2018. Of the total 40,000 users hit by Ethereum scams ever, nearly 75% were scammed in 2018. The number of people scammed increased four times from 2017 to 2018.

Understanding types of scams

Though phishing, ponzi schemes and ICO exits are the most common scam types, there are additional types of Ethereum scams, such as infection scams. The frequency and success rates of these types of scams has changed over time.

In 2018, scamming activity shifted in two ways. First, after the success of phishing scams in 2017, many more criminals jumped on the bandwagon. They saturated the market with phishing attacks, but fewer users took the hook.

As a result, phishing scams were much less effective than in previous years. In 2018, the median amount sent to a scam was around $94, far less than 2017’s median of $144. Furthermore, the median total revenue made by a scammer in 2017 was over $6,500, as opposed to $2,440 in 2018. In 2017, only 49 scams made less than $100, whereas in 2018, that number jumped to 181, of which 65 made less than $10. However, while most Ethereum scams were less lucrative, a few outliers brought in millions.

A smaller group of innovative criminals executed more complex ponzi and ICO exit scams that generated millions of dollars in income. These more sophisticated schemes dominated the second half of the year.

Protecting against changing threats

The good news is that although Ethereum has a reputation for scams, the amount reported stolen represents a very small portion. Moreover, scams decreased after the first quarter as prices dropped. The simplest scams like phishing emails were far less effective in 2018 than previous years.

However, on the negative side, criminals responded by getting creative, developing big, innovative, complex scams that paid huge dividends. Twice as many users lost four times as much in assets in 2018 relative to 2017, because of these outsized scams.

What to do? Users need to protect themselves against different types of scams as market conditions change, looking out for ponzi schemes when prices are low and becoming vigilant against phishing scams when prices are rising. In-depth data analysis can decode these changing threats and arm users with the knowledge to defend themselves.