That they won’t pull the rug for you, pump you up, fish you out, or pump your pool

It is a well-known fact that the digital currency market is fertile ground for fraud. As in any situation where there is great profit potential on the one hand, and a lack of regulation and regular legislation on the other, the digital currency sector has for years been a source of fraud and manipulation that is becoming more sophisticated by the day. This is actually due to a number of fundamental reasons, the first is that this is a clear case where legislation is having difficulty adapting itself and catching up with technology, and the second is that digital currencies, by their very nature and definition, are intended to bypass the institutional banking system and exist outside the boundaries of legislation, and therefore inherently make it difficult for the legislator to regulate them.

Digital currency scams are endless: from creating fictitious currencies and trading sites, to creating smart contracts that steal money from users’ digital wallets (fake websites and phishing scams), creating fictitious value for the currency through false promises or false transactions (pump and dump, wash trading), promising services or add-ons that are never provided (giveaway scams), stealing the entire liquidity pool and canceling the currency after investments and purchases have been made, and more. While authorities around the world are beginning to take action against fraudsters in an attempt to combat the phenomenon, this is a drop in the ocean, with estimates that in 2023 alone, digital currency scams reached a total of $5.6 billion.

However, despite the proliferation of scams and their increasing sophistication, there are still several ways in which an investor or trader in digital currencies can avoid falling into the trap of fraud, and several things that coin creators and companies hengaged in services in the field of digital currencies are required to avoid in order not to risk themselves breaking the law:

Safeguarding and securing digital wallets, recording transactions – Individuals seeking to trade digital currencies should always remember that there is no reason to provide their digital wallet details to any third party and that such a request usually indicates some type of fraud. Wallet owners should monitor what is happening in their wallet regularly and owners of companies that deal in digital currency services or individuals who trade in such currencies in a “professional and commercial” manner (including for others) are advised to keep accurate records of transactions carried out in the wallet to avoid allegations of money laundering in the future.

White Paper – Every legitimate issuance of a digital currency should be accompanied by a “white paper” which is essentially an information sheet that includes an explanation of the currency, how it was built, and what the mechanism behind it is. The document should provide links to a website or other online sources related to the currency, as well as basic details of the founders of the currency. If the white paper is illogical or incomplete, of course, the currency should be treated with utmost suspicion. Coin creators and companies involved in the field should be careful to produce such a white paper for each currency (in the European Union, at least, this is a regulatory requirement), as providing such information may help protect them from future allegations of fraud, as providing accurate and complete details assumes an informed investment.

Beware of false promises – It should be remembered that the digital currency market is an unstable and inherently risky market. Any promise of a certain profit is likely a false promise that should raise red flags for a prudent investor or trader. In general, overhype of a particular currency, and massive advertising that includes promises of add-ons, bonuses, and “free money” are often an indication of some kind of fraud. Thus, it is better for currency creators and companies in the field to make as few advertisements and “promises” (promotions) as possible regarding a particular currency, its value, or the profits that can be received from trading in it. It should be remembered that in the future, any such advertisement, promise, or promotion will be examined and scrutinized, and any word that is out of place may be perceived as false advertising or fraud, and so – as the saying goes – silence is a qualification for wisdom.

As a general rule, remember that if something seems too good to be true, it usually isn’t, especially when it comes to a market and field that is so young and subject to manipulation. Anyone operating in the field, both as a private investor and as a business entity, should conduct all possible checks and consult with experts in the field, including legal experts, in order to try to hedge the risks and avoid falling into the trap.