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Crypto currency and fraud – Part 1: the shady exchange market

Part 1: the shady exchange market

2017 was the year of blockchain, Bitcoin and other crypto currencies. But in addition to the many possibilities of this technology, there are also risks involved. A five-part series about how fraud is committed with crypto currencies, with the first subject 'The shady exchange market'.

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2017 was the year of the Bitcoin, Blockchain and the year that everyone could make a fortune by investing in crypto currencies. 'Experts' had high expectations and price increases of thousands of euros per day were no exception. Crypto currencies also have a downside, though: they lend themselves perfectly to all kinds of fraud. This five-part series highlights the various forms of crypto currency related fraud, including shady exchange offices, market manipulation, money laundering, crypto currency as a means of payment for criminal activities and Initial Coin Offering (ICO). Today we will discuss our first topic: the shady exchange market.

The trade in crypto currencies takes place almost exclusively via 'online exchanges’. These exchanges are like online banks, where you deposit money and then use it to buy or sell crypto currencies for the current rate. Online exchanges are often poorly secured and can hold crypto currencies up to (tens of) millions of euros, which makes them an attractive target for criminal hackers Strange Twists And Turns Of Nano And BitGrail Since The $150 Mln Hack. Most of the times, there are no guarantees that consumers get 'their' cryptos back in the event of such a hack. Let's compare this to a real bank, where good security is the standard, which is under strict supervision and for which the Dutch Central Bank offers guarantees up to EUR 100,000.

In addition, the lack of guidelines and supervision has led to a proliferation of exchanges, including rogue practices that simply try to have your money transferred without giving you crypto currencies in return. This is often done by creating a website or app that resembles a well-known exchange website or app. People land on these websites through ads displayed by Google. They think they are buying crypto currencies on a reliable website, but all they do is spend their money and end up with nothing.

MtGox exchange case

One of the best known examples is the MtGox fraud. The MtGox exchange was at its peak in 2014, when it processed 70% of all Bitcoin transactions. But then it went bankrupt and many people saw their Bitcoins disappear. When the bankruptcy was settled, it became clear that under Japanese law the creditors would only recover their value in Japanese Yen for the exchange rate at the time of the bankruptcy. As a result, many users of MtGox have lost a lot of money, while the founder of the exchange was able to sell the Bitcoins at much better rates and consequently earned a fortune.

Exchanges may also suddenly disappear, including all outstanding amounts and crypto currencies. This means you are directly robbed by the owner of the exchange South Korean Government Concerned With Scams in Bitcoin Market, Fake Exchanges. Sometimes the owner claims to have been robbed and later it turns out that he or she took off with the money themselves. Or an exchange goes offline unannounced and you simply can't withdraw or sell your currencies anymore.

Other methods

Finally, there are fraudulent websites that copy the more well-known exchanges and try to get hold of your login details. They then rob you of your coins on the actual exchange. These websites may even end up at the top of search results as advertisements, as is sometimes the case with real banks: a new form of 'phishing', as it were. But while many banks still use e-readers, for most of the exchanges only one password suffices to gain access to large amounts of money. How to lose $8k worth of bitcoin in 15 minutes with Verizon and Coinbase.com

Due to the unregulated market of crypto currencies and the proliferation of exchanges, trading in crypto currencies is not without its risks. In the banking system, these risks are mitigated by regulation and supervision. The market for crypto currencies could benefit from more regulation and supervision as well. It would become much safer while still maintaining its decentralised character.

Unsafe exchanges are not the only risks associated with crypto currencies. Read our next blog for more information on market manipulation and insider trading with crypto currencies.

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