Everyone active in the crypto space has seen the headlines about fraud. Many have unfortunately experienced losses from scammers. 2022 was a heyday for the bad guys, with cryptocurrency fraud reaching an all-time high as hackers made off with $4.3 billion.
Governments are ramping up efforts for stricter regulations in the digital currency market, but final resolutions and stability in the crypto markets are coming slowly. Cryptocurrency’s volatile and risky nature continues to pose challenges for investors and financial institutions alike.
Despite these risks, global cryptocurrency adoption continues to grow. The technical details behind crypto fraud and security are incredibly complex to most crypto investors. In this landscape, software developers and security teams are in the hot seat, charged with intensifying efforts to fight fraud and safeguard investors.
The increase in crypto adoption has led to a corresponding uptick in crypto cyber threats. Let’s look at the crypto cybersecurity landscape, some emerging threats, and what investors can do to protect themselves.
Good News for Cryptocurrency Cybersecurity in 2023
Despite FTX’s flameout and ongoing scam activity, there is good news. With this being crypto, some scammers operate openly, and organizations like Chainalysis can track their data.
In July 2023, Chainalysis reported that crypto scam revenue was down by 65% mid-year, primarily due to two colossal scam activities – VidiLook.io and Chia Tai Tianqing Pharmaceutical Financial Management, closing up shop.
Through June, crypto scammers have taken in nearly $3.3 billion less in 2023 than in 2022.
Emerging Cryptocurrency Security Threats
Even as overall scam revenue is down, cryptocurrency’s growing popularity continues to inspire cybercriminals. Some of the emerging threats in the crypto space include:
- Rug Pulls: In DeFi (Decentralized Finance) scenarios, scammers entice investors with the promise of high returns, only to “pull the rug” by draining the smart contracts once they invest substantial assets.
- Dusting Attacks: Attackers send small amounts of cryptocurrency to individual wallets and track those transactions to identify vulnerabilities for a larger-scale attack later.
- Flash Loan Attacks: In Q1 of 2022, DeFi protocols were the source of 97% of all stolen cryptocurrency. Flash Loan Attacks are one-way criminals exploit a weakness in decentralized exchange loan systems. They borrow large sums of money without collateral, destabilize liquidity pools, and repay the loan almost instantly, causing substantial losses. You can read about flash loan attacks in detail in this post from Wall Street Mojo.
- MEV (Miner Extractable Value) Front-running: In this scenario, miners reorder transactions in a block to prioritize those offering them the most financial gain, thus affecting the normal transaction processes.
Buyer Beware – Social Engineering, Impersonation, and Phishing Scams
Con artist scams have probably been around since humans traded shells and feathers. Unfortunately, social-type scams are the crypto scam hot spot at the moment. They target people with schemes to build confidence or trick them into disclosing their private keys.
Con-artist scams are a hot spot at the moment, being the only category in which Chainalysis found increased activity. This year, the money flowing into impersonation scams—where tricksters pose as authority figures like law enforcement officers to defraud victims—has dropped only by 23%, compared to a 77% decline in scam inflows.
And even though the scam revenue is down, the bad news is that the number of transactions directed toward addresses associated with impersonation scams has surged by 49% yearly.
This statistic indicates that while the total sum lost to these scams may have decreased, the number of people falling prey to them has actually risen. Investors should be wary of anyone posing as a regulator who reaches out for information.
Protective Measures for Crypto Cybersecurity
While the threats are real and evolving, so are the protective mechanisms. Wallets, in particular, are a vulnerable flexion point for crypto theft. Here are some security protocols and best practices to safeguard your crypto investments:
Multi-Signature Wallets: Use multi-signature wallets to require more than one key to authorize a crypto transaction. Doing so adds additional layers of security.
Hardware Wallets: Store your cryptocurrencies in a hardware wallet—a physical device that holds the user’s private keys, isolated from the internet. Of course, this means you must have a robust plan for safeguarding the physical wallet.
Regular Software Updates: Ensure all wallet software and associated applications are up to date to protect against known vulnerabilities.
Smart Contract Audits: Before investing in any DeFi projects, check if reputable firms have audited their smart contracts.
Two-Factor Authentication (2FA): Enable 2FA for all your crypto-related accounts for an extra layer of security.
Monitoring Services: Use services that alert you to unusual activities, like abrupt withdrawals or fund transfers.
Crypto Advantages in Cybersecurity and Fraud Investigations
While cryptocurrency hacks have taken on a legendary status, there is another side to the (bit) coin. Crypto technology can also benefit fraud investigations in several ways.
Traceability and Semi-Anonymity
While cryptocurrencies offer a layer of privacy not commonly found in traditional financial systems, this shield of anonymity is not absolute. Tracked transactions eventually lead to cryptocurrency exchanges or key junctions requiring the user’s true identity.
With the proper legal channels, such as search warrants, law enforcement agencies can compel these exchanges to disclose the identities of the involved parties, making it increasingly complicated for illicit actors to operate under the radar.
Immutable Data Storage
Blockchain technology, the backbone for most cryptocurrencies, offers a unique solution to a longstanding issue in cybercrime investigations: the inconsistency of data retention. Conventional service providers in the global financial markets may have sporadic and unreliable data storage systems.
Blockchain’s immutable ledger stores transaction data methodically and transparently. The nature of blockchain means it is challenging, if not impossible, to tamper with the data. The ledger stores your transaction data permanently, recording any transaction changes. This data permanence means that blockchain can be a formidable tool for investigators, offering a reliable trail of evidence.
Cross-Border Evidence Access
One of the standout features of cryptocurrency is its ability to transcend geographical barriers. For law enforcement, this characteristic drastically simplifies collecting evidence across national lines, which is notorious for red tape and jurisdiction juggling.
Emerging Solutions for Cryptocurrency Cybersecurity
Innovators are working on next-level solutions to combat cybersecurity threats as the crypto universe expands. Some of these include:
- Layer 2 Security Protocols: Designed to handle transactions off-chain, these increase speed and reduce the attack surface.
- AI and Machine Learning: These technologies can monitor transaction behavior in real time, flagging any unusual patterns instantly.
- Decentralized Identity Verification: Solutions like blockchain-based IDs could significantly reduce the risk of identity theft and fraud.
- Quantum-Safe Algorithms: As quantum computing evolves, crypto algorithms that can withstand quantum attacks are becoming crucial.
- Insurance Policies: More insurance products specialized for crypto investments are coming to the market, offering yet another layer of protection for investors.
For active crypto investors, staying vigilant is essential, as is the willingness to adapt to emerging threats and embrace innovative solutions. In any financial endeavor, the risk will never be zero, but a well-informed approach to cybersecurity can significantly mitigate the dangers and allow you to navigate the crypto landscape more securely.
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This material has been prepared for informational purposes only and is not intended to provide tax, legal, or financial advice. You should consult your tax, legal, and accounting advisors before engaging in any transaction.