5 Ways Fraud Is Possible on Blockchain

A blockchain is a form of distributed ledger technology wherein a shared digital ledger makes transactions visible and transparent. For years, blockchain was touted by futurists as a way to stop fraud from happening. However, blockchain also has several qualities that make it prime for various scams by bad actors—irreversibility, lack of laws, and anonymity.

So while blockchain makes it possible to see an asset's history of ownership and make it relatively easier to identify fraud, it doesn't make it impossible.

Is Blockchain Safe？

Whether blockchain is safe depends on several factors, which may or may not put you at risk of fraud. While blockchain technology is built for security, its safety limitations are rooted in two things—the security features of its supporting technology and the human aspect of its use.

Unfortunately, international laws have not yet adapted to the rise of blockchain use. Unlike credit cards and debit cards, blockchain-enabled cryptocurrency transactions in most countries do not have legal protections. In fact, crypto transactions typically do not include a dispute process, cannot be canceled, and are not reversible.

Knowing this, here are the five ways that fraud is possible on blockchain that you should be aware of.

1. Crypto-Malware

As crypto becomes more common, it also becomes a bigger target for hackers looking to exploit unsuspecting device owners for mining purposes. Using a special type of malware, hackers can carry out cryptojacking activities wherein they can use other people's devices and processing power to gain mining rewards.

In some cases, crypto-malware can originate from clicking questionable links which install fake programs that masquerade as legitimate mining software. Alternatively, they can also be purposely installed by employees who want to mine cryptocurrency in the office.

2. Crypto Rug Pulls

A crypto rug pull is when a developer creates a cryptocurrency token with the intent of tricking people into helping increase its value before cashing out their dominant shares. Commonly occurring on decentralized finance exchanges (DEXs) and liquidity pools, token creators manipulate the price of a token with personal reserves or marketing before suddenly withdrawing.

In numerous instances, rug pulls are executed using a meme coin or a coin created from pop-culture references, with no history or plan for further development or accountability. When the developers cash out, the token instantly loses value, and other investors lose money. Afterward, the developers tend to abandon a project and run away.

3. Cryptocurrency Scams

According to the Federal Trade Commission (FTC) Consumer Sentinel, reports of crypto-related scams have risen dramatically. From October 2020 through March 31, 2021, with almost 7,000 people reporting losses of more than $80 million.

These scams come in many forms, one of the most common of which is pretending to be celebrities linked to crypto. For example, several people have reported sending millions of dollars to fake Elon Musk profiles in the last six months. Aside from this, crypto scam victims also report being tricked into sending crypto to websites claiming to be legitimate exchanges through fake links in phishing emails.

On the other hand, there has also been a rise in romance scams, wherein 20% of the money victims of romance scams used cryptocurrency to trick people into sending money through an anonymous wallet or to invest in fraudulent coins.

4. Lack of Authentication

While the blockchain network is designed to be secure, the apps and services that enable them aren't always safe. Fraud becomes possible on blockchain-enabled platforms when they lack supporting security features that complement its use of blockchain technology.

With the rise of blockchain-enabled games and pay-to-play models, so have the various scams that work around its payouts. For example, many up-and-coming blockchain-enabled games like Axie Infinity don't have two-factor authentication for its users. Once hackers get a hold of your log-in details, it's possible for hackers to incrementally send small amounts of your rewards to their anonymous wallet or sell off your in-game character and items.

5. NFT Art Theft

In 2021, NFTs (non-fungible tokens) took center stage in the blockchain world. Touted as a method to create digital scarcity in the online world of unlimited copies, an NFT makes it possible to own a unique, blockchain-registered digital certificate registered in a blockchain of an asset.

While some artists succeed (such as Beeple, whose collage was sold for $69 million), it is not true for everyone. As NFTs become more common, so does the art theft surrounding them. Many scammers have been reported to steal digital artworks from artists and sell them as their NFT.

Often, these scammers target deceased artists or those that are not as internet-savvy. While scammers earn large amounts of money, original artists are frequently left with little to no legal protection or support.

How to Report Blockchain Fraud

If you suspect that you are being scammed or a particular person or group is committing fraud, there are several ways to report it. Here are a few of them:

• Federal Trade Commission (FTC)

• Commodity Futures Trading Commission (CFTC)

• U.S. Securities and Exchange Commission (SEC)

• The cryptocurrency exchange company you used to send the money

While most blockchain transactions are irreversible, you may be able to get a refund if you use a credit or debit card. Regardless, it's best to report whenever possible to alert governing bodies and legitimate exchanges of up-and-coming attempts at fraud.

With enough reports, these groups are more likely to launch an investigation that can yield meaningful results. At the very least, you help other investors or blockchain enthusiasts avoid the same fate.

Creating a Safer Blockchain Experience

When it comes to blockchain, there are endless opportunities to improve our lives. Its decentralized ledger technology can revolutionize dozens of industries such as finance, real estate, and so on.

However, despite its best efforts, blockchain is not without faults or loopholes that make fraud possible. For this reason, it's best to maintain basic internet safety practices, avoid sending money to questionable people, buy NFTs without doing research, or invest in coins without a history of development or accountability.