These are tough days for cryptocurrency investors. Values are cratering. Prominent crypto firms are missing. And it’s coming after a massive surge of criminal fraud that has been pummeling crypto users with unknown billions of dollars in losses with little relief in sight.
Take the actor Seth Green, of “Austin Powers” and “The Italian Job” fame, who got hit unusually hard last month. Green, like other celebrities who joined the crypto craze, had bought several pieces of digital art using the blockchain technology that underpins cryptocurrency. When digital art gets minted as non-fungible tokens, or NFTs, they can be tracked, sold and even stolen, which has now happened to so many NFT owners that Green sounded almost resigned when he announced that he’d gotten ripped off too.
“Well frens it happened to me,” Green tweeted, writing that he’d gotten duped by a fake website that hijacked the items. He called for cryptocurrency exchanges not to allow further sales of his stolen art as he tried to track down the buyer who ended up with one of his most prized possessions of him: Bored Ape #8398a drawing of a sad monkey with a halo in a Phoebe Bridgers-style skeleton shirt.
Some outsiders have outright mocked crypto fans for what they see as tulip mania, spending life savings on digital drawings that anyone can look at online for free. But many crypto supporters have been drawn to the experimental and entrepreneurial community that’s gathered around the technology, which many fraudsters have found ripe for exploitation.
Bored Apes have been among the NFTs most prized by collectors, which supposedly come with intellectual property rights attached, and Green was planning to use his ape as a character in an upcoming animated show.
Green eventually tracked down the buyer who’d bought the ape from the hacker for the equivalent of more than $100,000 and allegedly repurchased the ape for an even larger sum, BuzzFeed News reported. “Had to chase the NFT themselves to the current holders who bought them & make a deal between us for return since we both got scammed,” Green tweeted May 31. “Still actively working with an international art theft and cybercrime team to prosecute the original Thief.” Green’s representatives declined requests for an interview.
“I was scammed for over 400k last month. It’s been a horrific experience,” another user tweeted at Green. “I’m sorry for you,” Green replied. “We the early adopters are figuring out the necessary improvements in real time.”
The growth in crypto fraud has turned exponential in recent years. The reported losses from crypto scams in 2021 were 60 times larger than in 2018, the Federal Trade Commission reported earlier this month, with crypto now accounting for 1 out of every 4 dollars lost to fraud in the reports monitored by the agency. Over 46,000 people lost more than $1 billion in crypto to scams since 2021, but the real sum of losses is likely vastly larger because most frauds are not reported, the agency said.
Adults younger than 50, often the ones hoping to ride the surge in crypto assets, were the biggest marks: “Since 2021, $575 million of all crypto fraud losses reported to the FTC were about bogus investment opportunities, far more than any other fraud type ,” the agency reported.
Financial losses specifically from NFT crimes just through May this year were already more than 600% higher than for all of 2021, with the space seeing twice as many hacks and bigger and bigger heists, according to analysis from digital privacy firm Top10VPN.
For many victims, there’s little hope of getting their lost art back. The marketplaces where NFTs get sold — crypto exchanges — can’t cancel or reverse fraudulent transactions the way a traditional bank or credit card company might; the whole point of crypto was to cut out these sorts of financial middlemen, which many crypto fans greatly distrust.
Crypto technology was built out of a “libertarian ethos” in which “there’s no nanny state that’s going to take care of you,” said Jeremy Goldman, an intellectual property attorney who specializes in legal issues involving crypto assets. “These are the consequences when there’s a mistake … there’s no one to unwind it, you can’t call customer service, you can’t go back to the mothership, you can’t go back to the bank.”
But at the same time, law enforcement agencies in the US have also shown a growing willingness and ability to mount sophisticated investigations into crypto fraud.
In March, federal agents arrested two men in Los Angeles, Ethan Nguyen and Andre Llacuna, on suspicion of executing a $1.1-million “rug pull” in which officials said they sold a series of “Frosties” NFTs to investors as tokens promising future benefits and then vanished. Court records do not show pleas entered and say that the defendants’ attorneys were negotiating with prosecutors over a resolution to the case.
The case demonstrated sophisticated abilities by federal agents “to follow the money and follow blockchain-based transactions,” Goldman said. “They really did a good job in following the breadcrumbs.”
Earlier this month, a federal grand jury indicted a former employee of the crypto exchange OpenSea on insider-trading charges, alleging that he would buy NFTs before he featured them on the site’s homepage, driving up their sale value.
Federal agents have also been flexing another legal power to crack down on crypto crime: civil asset forfeiture, the sometimes-controversial method by which officials seize money or houses suspected to be involved in crime.
Also in March, federal agents sought a court order to seize roughly $165,000 worth of Ethereum in a digital Binance.US wallet. Officials said the cryptocurrency had been stolen from an Orange County investor, nicknamed “PM,” who got tricked into giving up his coins by a fraudster pretending to be a Coinbase technical support representative. The title of the case: United States of America vs. Approximately 40.997711 Ethereum Digital Currency. (Like all asset forfeiture cases, the case is lodged by the government against the property itself, not the suspects holding it, who are sometimes never prosecuted.)
Firms such as Chainalysis have argued that, although the overall losses from crime have undoubtedly arisen, illicit activity has made up a smaller and smaller proportion of crypto activity as crypto has grown more popular and firms have perhaps become more sophisticated about fraud prevention.
Simon Migliano, the head of research at Top10VPN, however, is cautious about embracing the perspective that the fraud picture is improving. “In principle, it’s completely fair to say that it’s typically positive and a sign of a maturing technology when illicit usage of that technology as a share of total usage starts to decline,” Migliano said.
However, he added: “Up until now crypto was an ever-growing bubble that somehow kept defying all reasonable expectations that it would pop. It’s a little dangerous in my view to downplay increasing raw fraud numbers in this way, when a new technology has been growing at such an unsustainable rate.”
Some users, lacking an easy way to get their property back or to hold fraudsters directly accountable, have turned to civil litigation to take aim at the institutional players that help the marketplace function and who, they argue, have a responsibility to help keep that marketplace safe.
One user who, like Green, experienced the digital equivalent of a very expensive pickpocketing by a fraudster, losing NFTs including apes he bought for more than $200,000, sued multiple defendants including Yuga Labs, the company that originally created the apes, in federal court in Snowfall.
The complaint argued that Yuga Labs — which designed its NFTs to allow the firm to continue collecting 2.5% of revenues, even from the sales of illegally stolen apes — is complicit in the fraud market because it continues giving special benefits to ape owners whether the apes they hold were stolen or not.
“They refuse to police their own community, they’re the gatekeepers, they can lock out the thieves if they wanted to, and they won’t do it,” said Emily Nuvan, a lawyer representing the plaintiff in the case, Robert Armijo , from the firm Armstrong Teasdale in Salt Lake City.
Yuga Labs was not sympathetic to the plaintiff’s claims.
“The theft was unfortunate, not just because valued NFTs were stolen,” the firm’s lawyers wrote in a June 3 court filing. “In this case, the misfortune is all the worse because it was plaintiff — no one else — who opened the door, unlocked the safe, and, regretfully, let the thief right in. Rather than direct his ire at those who actually wronged him, and acknowledge his own missteps from him, however, plaintiff now seeks to lay the blame for these events everywhere else. The firm declined to comment to The Times about NFT thefts.
Nuvan, in an interview, pointed out that Yuga Labs itself had suffered hacks, which was indicative of the greater fraud problem facing the space that needs to be combatted if regular consumers are going to be involved.
“These scams are so prevalent, you’re almost guaranteed to get hacked or scammed or something stolen from you because all the onus of security has been put on these users,” Nuvan said. “And they’re not capable of doing it because the scams are too sophisticated.”
For similar reasons, crypto skeptics and law enforcement experts have been concerned by celebrities’ involvement in the crypto space.
“For the common person who is extremely gullible, they’re going to consider these securities, commodities, safe investments, because they’re endorsed by people they idolize,” said Claire Nolasco Braaten, associate professor of criminology and criminal justice at Texas A&M -San Antonio, who has studied crypto prosecutions in the US “There should be some warning, like ‘do your due diligence, don’t invest in any cryptocurrency you see on the internet.’”
But for Clarence Guillory III, 27, a blockchain editor who goes by @sensei_shui online and who estimates he’s lost $30,000 worth of crypto through various scams over the years, fraud is part of the cost of investing in an experimental environment that even many crypto fraud victims remain excited about exploring.
“It’s the same mentality as being a pioneer. The people who settled California, they accepted the risk they were taking,” Guillory said. For each time he was tricked, he said, “it’s helping me become a better human being and see the implication of my choices. I’m taking accountability for myself and the choices I made. If you’re boxing, you’re gonna get punched.”