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Cryptocurrency scams can occur when fraudsters use a false identity to steal your currency during what you believe to be a legitimate transaction. This type of scam can also involve the theft of your bank account information and personal details. Here's how a cryptocurrency scam can take place and ways to protect yourself.

You may know Bitcoin as a form of cryptocurrency, but what is cryptocurrency?

Cryptocurrency is any form of currency that only exists digitally and usually has no central issuing or regulating authority. Instead, cryptocurrency uses a decentralized system to record transactions and manage the issuance of new units. While Bitcoin was the first form of cryptocurrency, there are currently hundreds of new ones in circulation.

Many question the validity of this relatively new form of digital currency due to the fact that it is not regulated by a central body and may be subject to extreme price fluctuations. Nonetheless, for those willing to take on the risk, its potential as a profitable means of investment has also made it increasingly popular worldwide. Unfortunately, this has caused some to let down their guard and fall victim to fraudsters.

Cryptocurrency scams can occur when fraudsters use a false identity to steal your currency during what you believe to be a legitimate transaction. This type of scam can also involve the theft of your bank account information and personal details.

Here’s how one type of cryptocurrency scam takes place — and how to protect yourself.

How do cryptocurrency scams work?

Step 1. The fraudster tries to enter an established cryptocurrency group

Cryptocurrency groups exist as ways to network, share information, and trade currency. Members of a group know each other and exchange personal information to validate identity, establish trust, communicate and trade currency. A fraudster will attempt to join a group, often through social media channels under a false identity.

Step 2. The fraudster attempts to buy cryptocurrency

Once a fraudster has joined a cryptocurrency group and earned its trust, they contact a member of the group and offer to buy currency. In order to complete the transaction, the fraudster asks the member for their account details, a copy of their ID, an email address, and any other relevant details. The request for this type of personal information is not unusual for cryptocurrency transactions, and people may assume they are providing these details to a trusted member of their group.

Step 3. The fraudster shares false documentation

Once the fraudster specifies the amount they would like to purchase, he/she sends what looks like proof of a legitimate online banking payment related to the cryptocurrency transaction. Some fraudsters may also send what appears to be a copy of an account statement from his/her foreign bank account.

Step 4. Fraudsters use manipulation tactics to access cryptocurrency

Cryptocurrency trading platforms advise sellers not to release cryptocurrency until they receive funds from the buyer. Typically, the seller will notify the fraudster that they have not yet received the funds. Once met with opposition or suspicion, fraudsters use manipulation tactics (also known as social engineering) to obtain additional banking information from the seller and convince them that the funds were in fact wired. In this way, the fraudster may successfully convince the seller to release their cryptocurrency. Once cryptocurrency is credited to the fraudster’s digital wallet it cannot be recalled.

Step 5. The fraudster steals your personal identity during a cryptocurrency transaction.

Once you have shared banking information and personal details with a fraudster during the transaction, you may remain at risk for future compromises. The fraudster may then find a new cryptocurrency group to join using your stolen identity to engage in additional cryptocurrency scams.

Tips to Avoid Cryptocurrency Scams:

Remember that the safest process is to conduct sales and purchases through a legitimate cryptocurrency exchange. Ensure that you do adequate research before using a particular exchange.

  • Only send cryptocurrency to trusted people — know the person you are engaging and conducting transactions with.
  • Conduct proper due diligence on the cryptocurrency buyers and sellers. Do not be afraid to make telephone calls and send emails to verify the authenticity of the seller. Use telephone numbers from legitimate sources.
  • Do not send cryptocurrency or funds to a third party. All transactions should be completed with the same person you initially engaged with.
  • Do not provide copies or images of your ID.
  • If the person seems too eager or accommodating to complete the transaction quickly, this is a red flag. Exercise caution.
  • Be mindful of websites or services promising high returns or unrealistic investment opportunities. If it sounds too good to be true, it is probably a scam.
  • Watch for grammatical errors in communications with the buyer. It may indicate the buyer is not who they say they are.

As cryptocurrency scams are becoming more common, ensure that you always exercise due diligence and do adequate research along each step of your transaction. Take these extra steps. It may take additional time, but it may be your best defense against falling into the trap of a fraudster.

This article is intended as general information only and is not to be relied upon as constituting legal, financial or other professional advice. A professional advisor should be consulted regarding your specific situation. Information presented is believed to be factual and up-to-date but we do not guarantee its accuracy and it should not be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect the judgment of the authors as of the date of publication and are subject to change. No endorsement of any third parties or their advice, opinions, information, products or services is expressly given or implied by Royal Bank of Canada or any of its affiliates.