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Posted 11th April 2018

Will the rise of cryptocurrencies make corporate fraud easier?

It’s no exaggeration to say that 2017 was an historic year for cryptocurrencies.

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Will the rise of cryptocurrencies make corporate fraud easier?

Will the rise of cryptocurrencies make corporate fraud easier?

It’s no exaggeration to say that 2017 was an historic year for cryptocurrencies.

In the closing months of another politically tumultuous year, investors were offered a glimmer of hope when they saw the value of Bitcoin skyrocket from around $900 per coin (£635) to almost $20,000 (£14,100).

But in January, things took a turn for the worse: the Bitcoin bubble burst. In anticipation of a backlash to cryptocurrency trading in Asia in the form of regulations and bans — announced a day before the crash — new investors were suddenly reluctant to buy, while existing traders frantically tried to sell off their coins. Amid the chaos, the value of Bitcoin plummeted to just 50 percent of its pre-Christmas peak.

This isn’t the first time the bubble burst. Bitcoin saw similar crashes in 2011, 2013, 2014, and even as recently as summer 2017, when a vast number of Bitcoin investors frantically sold off coins in anticipation of the currency’s undoing by rival currencies like Litecoin and Ethereum.

Despite being short-lived, the Bitcoin spike in 2017 did put cryptocurrencies into the public lexicon. What’s more, recent efforts by governments to regulate transactions using cryptocurrencies could make it more appealing for companies to turn to the cryptocurrencies for their business transactions.

But as with any technological development, the breaking of new ground can open up opportunities for those looking to commit fraud to move between the cracks. This begs the question: could the impending rise of cryptocurrencies actually make instances of corporate fraud more commonplace?


The benefits of the blockchain

The blockchain is essentially an online ledger, powered by millions of computers, that is updated in real-time whenever a transaction is made. These transactions are made public, with identities remaining anonymous to protect privacy, which means that any exchange can be viewed by anyone else on the blockchain.

On the one hand, advocates celebrate the blockchain for its revolutionary approach to tackling online fraud. However, the conflicting dialogues around cryptocurrencies can make it difficult to understand whether or not digital trading is actually safe.

The promises of this technology are certainly attractive to those with pockets deep enough to buy in; as it turns out, the kind of deep pockets that Google has. It was recently announced that Google is adopting its own blockchain technology to be used in its cloud technologies. Eric Schmidt, the Executive Chairman of Google, hinted at this fascination with blockchain technology back in 2014:

“Bitcoin is a remarkable cryptographic achievement. The ability to create something which is not duplicable in the digital world has enormous value. The Bitcoin architecture, literally the ability to having these ledgers that can’t be replicated, is an amazing advancement.”

This scale of backing is hugely promising for blockchain investors. It puts blockchain technology on the map for other companies, especially large financial institutions, to make the investment themselves.


“Cryptofraud” is already prevalent

Yet contrary to this praise of the blockchain, the market already seems rife with fraudulent activity. The once-popular Bitcoin-investment platform Bitconnect has been exposed as a major Ponzi scheme, abruptly announcing that it would be shutting down its lending and exchanging services in January. Similarly, an investment into US exchange platform Bittrex in 2017 showed that many investors were artificially inflating the values of cryptocurrencies by purchasing coins en masse, and PlexCorps, an initial coin offering (ICO) company, has been charged with defrauding its investors by promising unrealistic returns on its own cryptocurrency, PlexCoin.

In the UK, perhaps the most notable example of using cryptocurrencies illicitly came in the form of the WannaCry ransomware attack on the NHS, the largest cyber-attack of its kind in history. Doctors and nurses around the country were threatened with having important patient files and urgent referral notices deleted if they didn’t pay off the hackers with Bitcoin.

This highlights one of the key problems with the blockchain: hackers can exploit the anonymity it offers to their advantage.


Regulations are becoming more widespread

Most of the fraudulent activity surrounding Bitcoin and other cryptocurrencies has been the historic lack of regulation in the market. Now, governments around the world are responding by imposing regulations on exchanges conducted within the blockchain.

The strictest acts of regulation are coming into play in Asia. Rumours that South Korea will ban ICO’s after their government uncovered $600 million in illegal trades are still looming, but China has taken an even more drastic step in banning the trading of cryptocurrencies altogether.

Over in the US, regulation has been provided by the Securities and Exchange Commission (SEC), which was responsible for the charges against PlexCorp’s questionable ICO. The SEC chairman Jay Clayton announced that the Commission would monitor the market more closely for any potential violations of securities laws.

Regulations are a likely part of the cause of Bitcoin’s sudden drop at the beginning of the year: early investors in the currency are likely to have sold off coins before the full impact of regulation ever came into play. Even so, imposing regulations can make the market more attractive to bigger companies, whose buy-in could have a significant positive effect on currency value, as opposed to the artificial inflation that has plagued cryptocurrencies in the past.


What can be done now?

Though the future of cryptocurrencies is difficult to foresee, there are a few measures that users can use now to help prevent fraudulent activity when using cryptocurrencies.

The first is the use of multi-signature wallets. These digital exchange wallets require two authorisations from two separate parties before any Bitcoins are released. For businesses, this means that any transactions you make will be screened for fraud, either by someone else within your organisation or by a trusted third party, before the payment is made.

The second is to remain vigilant for old fraud routines in new clothes. Though cryptocurrencies are a relatively new technology, most of those who carry out fraud are stuck in their old ways, so common Bitcoin scams may well look familiar. They include:


●          Malware downloads and phishing

●          Bitcoin pyramid schemes

●          Bitcoin investment schemes

●          Fake exchange scams

You should train your staff to spot these early on, pairing such training with regularly-updated security systems on your own servers.

Despite the concerns, cryptocurrencies look like they’re here to stay. Remaining vigilant, especially if you decide to invest, is key if these digital currencies are to have the bright future so many of us are hoping for.

Aziz Rahman is the co-founder of serious business crime solicitors Rahman Ravelli. The firm has become one of the fastest-growing and most highly regarded legal practices in the UK; specialising in the defence of serious fraud, regulatory matters, complex crime and commercial litigation.

Categories: Finance, Legal

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