Thu | May 24, 2018

Collin Greenland | Blockchain technology – caution!

Published:Sunday | February 11, 2018 | 12:00 AM

Jamaica seemed destined to join the rest of the world in the advent of blockchain technologies, which have created quite a stir and generated ongoing debate among researchers, academicians, professional journals, industry practitioners, media landscape, and increasingly the curious public worldwide.

Though still fairly nascent, the promised proficiencies offered by this technology to transform how data is securely stored and exchanged, have attracted industries and professions that encompass various degrees of public participation.

Although the financial sector in particular, through its emerging popularisation of bitcoin, currently the best-known cryptocurrency, has led the way, the technology is expected to also seriously affect auditing, cybersecurity, and financial planning and analysis. However, like so many other aspects of human endeavour, recent events have shown that the spectre of fraud can taint this emerging technology in ways that can result in unprepared and unsuspecting investors incurring losses.

While the methods used by cryptocurrency fraudsters may be still be evolving, certain patterns can already be discerned by unscrupulous persons seeking to rip off persons intrigued with this kind on investments. Initial coin offering (ICO) frauds can occur when scammers create a fictitious ICO, then steal the funds they receive from investors, which allegedly happened in December 2017 when the US authorities shut down the PlexCoin ICO, reputed to be a US$15-million fraud.

Hackers can also spoof, or impersonate, a legitimate ICO and, therefore, lure unsuspecting investors into paying them instead of the real company. For example, the well-established Canadian Messenger company, commonly called Kik, suffered such a scam. Typically, cybercriminals will create a fake website or social media account and use phishing emails to promote a phony 'pre-sale' offer or other trick. In fact, the world leading provider of anti-money laundering software for Bitcoin, Chainalysis, recently estimated that ICO spoofing has victimised 30,000 investors this year alone, to the tune of $225 million.

 

'Phone-porting'

 

Scoundrels have also use 'Phone-porting' to fleece victims, by securing a person's phone number by duping a mobile provider into giving them control of the account. Once they have the phone number, they can reset the password to a digital wallet and drain the account.

According to US Federal Trade Commission statistics, phone-porting attacks in general rose by 256 per cent between 2013 and 2016. Rascals also know that investors use virtual wallets to store cryptocurrency so they can establish fake wallets online or in mobile app stores, then use these to steal investors' savings. For example, in December last year, this reportedly happened with the bitcoin gold wallet scam, which reportedly stole $3 million from customers of the popular service MyEtherWallet.

In recent times also, a new category of malware has emerged that specialises in stealing Bitcoins, either by stealing log-in credentials, the wallet itself, or by getting in the middle of a transaction. Information security expert Dell SecureWorks, for example, estimates this malware increased elevenfold between 2012 and 2014.

As with the nature of white-collar crimes, the types of ways being developed to defraud investors continue to emerge. These have also included the use of shady cryptocurrency exchanges, cryptocurrency Ponzi schemes, pump and dump schemes, and impersonators trying to lure investors through Twitter and Facebook, directly contact individuals, asking for investment in their project, or to buy discounted Bitcoin. The well-documented experiences of case studies such as NiceHash, PlexCorps, Tezos, OneCoin, and Mt Gox would be well worth the while for Jamaican prospective investors and regulators to familiarise themselves with.

Not only the Jamaican public, but the financial sector and our regulators, must sensitise our citizens that cryptocurrency investors face a lot of these risks. Since this market is largely unregulated and unprotected, it is up to individual investors to acquaint themselves with these risks for their own security. It may be wise for our regulators such as the Stock Exchange and FSC to be forewarned by the actions of their counterparts in other jurisdictions.

In December 2017, the US Securities and Exchange Commission warned that some trading or fundraising schemes that use them may be breaking the law, and issued a warning to investors buying Bitcoin and other cryptocurrencies, cautioning that there are higher risks of "fraud and manipulation" in the market.

Authorities in China, United States, Singapore, Japan, South Korea and elsewhere are also looking into ways to regulate cryptocurrencies and the issuing of digital tokens.

Whereas some may argue that having heavy-handed regulation could stifle innovation in blockchain, our experiences with pyramid and Ponzi schemes here on island would heed us to be cautious.

Speaking personally, in regard to cryptocurrency, this writer concurs with the philosophy of the legendary Anglo-Irish author, orator, statesman, political theorist and philosopher Edmund Burke, who opined:

"Better to be despised for too anxious apprehensions, than ruined by too confident a security."

- Collin Greenland is a forensic consultant. Email feedback to columns@gleanerjm.com and cgreeny.collin@gmail.com.