Cryptocurrency’s rapid rise has unfortunately been accompanied by a wave of fraud and criminal schemes. From high-yield investment scams to anonymous hackers stealing millions, crypto fraud cases dominate headlines and have cost victims billions of dollars. In 2022 alone, cryptocurrency investment fraud reported to the FBI totaled an astounding $2.57 billion, and hackers stole another $3.8 billion worth of crypto in that year – and these figures are likely underestimates. This article examines five common types of crypto fraud schemes and explains how forensic investigators are working to unravel these cases using blockchain analysis and old-fashioned detective work.
- Ponzi Schemes and Fake Crypto Investments
The Scam: Ponzi schemes have a new playground in the crypto world. Fraudsters create fake investment opportunities – often a crypto trading platform, lending program, or “high-yield” fund – that promise investors spectacular returns. Early investors might actually receive some returns, which are really just funds from later investors. This lures more people into the scheme. Eventually, the scheme operator disappears with the money or the platform collapses when new deposits dry up. Notorious examples include BitConnect (a crypto lending Ponzi that collapsed in 2018) and OneCoin (a fraudulent “cryptocurrency” from 2014-2016). These schemes drew in hundreds of millions or even billions of dollars before imploding.
Investigator’s Tactics: Uncovering a crypto Ponzi scheme requires following the money. Forensic accountants and law enforcement start by analyzing the flow of funds on the blockchain and through bank accounts. Every deposit into the scheme’s wallets is traced to see where it came from, and every outgoing transfer is traced to see where the funds went. In many cases, investigators find that money from new investors was simply being rotated to pay “profits” to earlier investors – classic Ponzi behavior. Blockchain analytics can often cluster addresses and identify which addresses belong to the scammers. For example, if the fraudsters cashed out via a major exchange, subpoenas to the exchange can reveal their identities. In the BitConnect case, investigators worked through thousands of transactions to identify promoters and fund flows, leading to guilty pleas and indictments. The FBI’s Internet Crime Report noted that crypto investment fraud skyrocketed 183% from 2021 to 2022, underscoring how prevalent these schemes have become. However, by meticulously tracing transactions and collaborating internationally (since such scams often have global reach), authorities have been able to dismantle several crypto Ponzi operations and even recover some funds for victims.
- Exchange Hacks and Stolen Crypto Assets
The Scam: Cryptocurrency exchanges and projects are prime targets for hackers. In these schemes, cybercriminals breach security to steal large amounts of crypto. This category includes exchange hacks (like the famous Mt. Gox hack in 2014 or the Coincheck hack in 2018) and attacks on DeFi protocols and token bridges. 2022 was dubbed the worst year yet for crypto hacking, with $3.8 billion stolen, primarily from DeFi projects and cross-chain bridges. These thefts can range from a few million dollars to hundreds of millions in a single attack. Often, state-sponsored hacker groups (notoriously, North Korea’s Lazarus Group) are involved in large-scale thefts to fund illicit activities.
Investigator’s Tactics: When an exchange or protocol is hacked, investigators act quickly to trace the stolen funds across the blockchain. Cryptocurrency is transparent in that every movement of funds is recorded on the ledger. Investigators use blockchain explorer tools and specialized software to follow the trail. A common pattern is that thieves will split the loot among thousands of new addresses (to obfuscate) and often attempt to launder it through mixing services or by swapping coins (for example, converting stolen ETH into BTC or other coins). Despite these tricks, blockchain forensic analysts can often “follow the money” through these hops. They identify wallet addresses linked to the hackers and monitor them. Many times, the hackers eventually try to cash out somewhere – an exchange or OTC broker – which provides an opportunity. Law enforcement can then work with that service to freeze assets or get KYC information on the holder of the wallet. A notable technique used is setting traps: for instance, investigators have in some cases inserted tracking data or made “tainted” payments to hacker wallets to mark them for tracing. Additionally, international law enforcement cooperation (through agencies like Interpol) is key, because hackers may be overseas. Successes have been seen – for example, U.S. authorities traced and seized about $3.6 billion of Bitcoin from the 2016 Bitfinex hack, and in other cases, arrests have been made when culprits traveled to jurisdictions where warrants could be executed. The cat-and-mouse game is ongoing, but each high-profile hack investigation further sharpens forensic techniques.
- Phishing, Impersonation, and Fraudulent Giveaways
The Scam: Not all crypto scams rely on sophisticated code – many prey on human psychology. Phishing scams trick individuals into giving up their private keys or login credentials. This might be through fake emails that look like they come from a crypto exchange (leading victims to a counterfeit login page), or malware that captures keystrokes. Impersonation scams involve fraudsters posing as trusted figures – for example, “Elon Musk giveaway” scams on Twitter that promise to double any crypto sent to a certain address, or imposters pretending to be support staff from a wallet provider and asking for your seed phrase. Another common scheme is the “pig butchering” or romance scam: victims are groomed over weeks or months via social media or dating apps, then convinced to invest in a fake crypto platform (which shows big fake profits) before the scammer disappears with their funds.
Investigator’s Tactics: These scams often result in many victims sending crypto directly to the scammer’s wallet addresses. Investigators start by gathering all victim reports and identifying the common wallet addresses or domains involved. With that, they trace where the money went. If dozens of victims all sent Bitcoin to a handful of addresses, those addresses can be watched on the blockchain. Often, scammers will launder funds through mixers or jump them through multiple cryptocurrencies to hide the trail. Blockchain analytics companies have databases of known scam addresses (for example, addresses associated with known phishing campaigns or darknet markets) which can provide leads. Investigators might find that the funds ultimately land on an exchange – at that point, a subpoena or legal request can be sent to get the account holder’s information. In some cases, law enforcement may conduct “sinkholing” operations – essentially, taking control of scam infrastructure (like a phishing website or server) to gather information on the perpetrators. For romance or social media scams, traditional techniques like undercover work or metadata analysis (IP addresses, etc.) help locate the group behind it. These investigations can be challenging – if the scammers are in regions with less law enforcement cooperation, they may evade arrest – but now several task forces (including the FBI’s crypto units) specifically tackle these crimes. Public education is also a tool: by publicizing known scam addresses and methods, investigators reduce the pool of potential victims and make the scams less effective over time.
- Rug Pulls and DeFi Exit Scams
The Scam: A “rug pull” refers to developers abruptly abandoning a cryptocurrency project and running off with investors’ funds. In the crypto context, this often happens with new tokens or DeFi projects. Scammers hype up a new coin or NFT collection, get people to buy in, and then suddenly withdraw all liquidity or reserves, causing the token’s value to plummet to zero – effectively stealing the investors’ money. These scams have hit decentralized exchanges and yield-farming projects especially hard. For example, there have been tokens where developers programmed a backdoor so they could drain funds, or NFT projects where the creators vanished after the initial sales. Rug pulls are often quick – the scam might unfold in days or weeks, once enough money has been collected.
Investigator’s Tactics: Investigating a rug pull involves piecing together both on-chain and off-chain evidence. On-chain, analysts trace the flow of funds from the project’s smart contract or treasury. Usually, there is a telltale moment when a large amount of cryptocurrency (the proceeds from token sales or liquidity pools) is transferred to the developers’ wallet. From there, investigators follow the money. If it moves to an exchange or a mixer, that’s important information. Off-chain, investigators dig into the identities of the project team – were they anonymous developers on Telegram, or did they have known personas? Sometimes, mistakes are made: a scammer might reuse an address that is linked to their real identity (for instance, an address they previously used on a KYC exchange), giving investigators a lead. Blockchain forensics can cluster addresses associated with the scam across multiple transactions, potentially revealing a pattern of rug pulls by the same entity. In some cases, white-hat hackers and independent analysts play a big role – the crypto community often crowdsources investigations, sharing findings that law enforcement can then build on. While many rug pull perpetrators have gone unchecked (especially if they carefully covered their tracks through anonymity networks), there have been cases of enforcement. For example, U.S. authorities have charged the founders of certain fraudulent ICOs and NFT projects by tracing funds and tying email or IP evidence to those individuals. The key for investigators is often the fiat off-ramp: as long as scammers eventually try to convert crypto to cash, there’s an opportunity to catch them.
- Money Laundering via Mixers and Darknets
The Scam: Cryptocurrency is also used as a tool for laundering money from various crimes. This isn’t a scam on investors per se, but rather a way criminals try to hide ill-gotten gains. Examples include ransomware rings demanding Bitcoin, drug cartels using crypto to move money, or corrupt officials converting bribes to crypto. To launder these funds, criminals use mixers/tumblers (services that pool and shuffle cryptocurrency from many users to obscure the origins), “chain-hopping” (converting one coin into another across multiple blockchains), or privacy coins like Monero. They might also route funds through darknet marketplaces or gambling sites known for weak KYC. The goal is to sever the traceable link between the crime and the final destination of the funds.
Investigator’s Tactics: Money laundering cases are where blockchain analytics truly shine. Investigators use advanced software (like Chainalysis, Elliptic, etc.) to cluster addresses and detect patterns that indicate common control. For instance, Chainalysis Reactor uses heuristics to link addresses likely controlled by the same entity. If a criminal splits a stash of Bitcoin into many pieces and sends them through various paths, clustering algorithms can often still deduce that those pieces are related. A classic example is the co-spending heuristic: if two different addresses later join together in one transaction, they are probably controlled by the same person or group. This helps to reveal which addresses are part of the fraudster’s “wallet network.” Investigators also look at flow through mixers: while mixers are designed to obscure, large injections of funds into a mixer and subsequent withdrawals can sometimes be correlated, especially if the timing and amounts have patterns. Additionally, law enforcement may perform undercover operations, such as running a fake cryptocurrency service or infiltrating a darknet market, to gather intel on laundering networks.
Crucially, investigators leverage the fact that at some point, laundered crypto often has to interact with the traditional financial system. Through “follow-the-money” techniques, they watch for when tainted crypto hits an exchange that complies with law enforcement. Subpoenas or warrants then yield the identities behind those accounts. This is how, for example, authorities arrested individuals involved in laundering funds from large hacks – the suspects were caught when they tried to convert crypto to fiat or spend it. In many cases, blockchain evidence is backed by traditional evidence (emails, chat logs, informants) to build a complete picture. Courts have increasingly accepted blockchain tracing as reliable evidence, given its success rate in real cases. Investigators today are collaborating across borders – since crypto laundering is global – sharing blockchain intel to take down networks. The recent dismantling of some darknet marketplaces and mixing services (like the enforcement action against the mixer “Tornado Cash”) shows that even sophisticated laundering tactics are being cracked by determined forensic investigation.
From Ponzi schemes to hacker heists, cryptocurrency fraud investigations blend cutting-edge technology with classic detective work. Every blockchain transaction leaves a trace, and while criminals devise clever schemes to obscure their tracks, investigators are continually honing their tools and techniques to illuminate them. The five schemes discussed above are among the most prevalent, but with each bust and each technological advance, the message is clear: crypto is not the untraceable Wild West many fraudsters hoped it would be. Forensic experts, armed with blockchain analytics and global cooperation, are steadily tightening the net on crypto criminals – and bringing accountability to this new frontier of finance.
