Crypto scams are social media’s latest crisis. Here’s how bad the problem is, and how much worse it will get.
Something is eating away at social media.
It’s investment fraud, of which crypto-related fraud is a bigger and bigger part. At the rate it’s growing, it’s set to swallow social media whole.
In a new consumer protection report, the Federal Trade Commission found that social media platforms, mainly Instagram and Facebook, have become the go-to place for scammers to ply their trade. Investment-related fraud is the biggest con perpetuated on social media by the amount of money lost, although online shopping scams make up the biggest portion of overall reports.
Around $770 million of losses from social media rackets were reported to the FTC in 2021. That was a huge jump from just 2017 in terms of monetary losses and total number of fraud reports. From around 5,000 reports of fraud in 2017, scammers targeted almost 100,000 in 2021, a nineteen-fold increase, while the number of losses were around 18 times greater than in 2017.
The report found that 64% of the reported investment scams on social media involved bogus cryptocurrency payments, much higher than the second most popular method, instant payment apps linked to bank accounts, which accounted for only 13% of cases.
The FTC had previously reported, in May, that instances of crypto scams in 2021 were 12 times higher than in 2020, and the total amount of losses was up nearly 1,000%, while this January’s FTC report found that crypto scams now make up the majority of all investment-related fraud online.
It’s the latest crisis for social media, which has fielded accusations from all sides of the political spectrum of abetting fake news and the spread of misinformation, and also wielding outsized power over censorship.
Here’s how bad the problem is, and how much worse it could get.
The rise and risks of crypto theft
Scammers use social media platforms and pose as celebrities, friends, or family encouraging people to make bogus investments. Most of these ‘investments’ are requested through cryptocurrency on the promise of big returns.
On social media platforms such as Facebook, Instagram, and Twitter, scammers hack preexisting profiles and ask contacts for money to be paid in Bitcoin or another cryptocurrency.
In 2020, an 18-year-old hacker from Florida was arrested after infiltrating the Twitter accounts of Joe Biden and Bill Gates. The hacker sent out tweets from these accounts soliciting crypto payments and promising that “all payments sent to the address below will be sent back doubled!” The fraud was responsible for over $100,000 in losses. A similar scheme from last year, this time involving Elon Musk impersonators on Twitter, frauded people out of nearly $2 million.
In addition to masquerading as celebrities, the FTC found that crypto scammers have posed as potential partners on online dating sites, friends and family accounts on social media giving away ‘tips’ on crypto investing, and even as representatives from Coinbase, the well-known cryptocurrency exchange platform.
Crypto scammers worldwide had a field day last year, bringing home nearly $14 billion according to a report earlier this month by blockchain analytics firm Chainalysis.
Chainalysis found that the rise of decentralized finance (DeFi) is the leading factor behind the spread of online crypto scams. DeFi is the idea of eventually removing all traditional middlemen in the financial sector, including banks and lawyers, replacing them with a piece of code that is written on a public blockchain which approves and regulates financial transactions.
DeFi advocates praise how the technology virtually eliminates the transaction fees and long wait times normally associated with funds stored in bank accounts, but while the sector is growing rapidly, its infrastructure and safety is still developing and up for debate.
As a piece of code that is still being refined, DeFi software remains highly vulnerable to hackers and harder for regulators to stop fraud. In fact, 21% of all hacks in 2021 took advantage of loopholes in DeFi code.
“DeFi is one of the most exciting areas of the wider cryptocurrency ecosystem, presenting huge opportunities to entrepreneurs and cryptocurrency users alike,” the Chanalysis report stated. “But DeFi is unlikely to realize its full potential if the same decentralization that makes it so dynamic also allows for widespread scamming and theft.”
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