Spotting fraud in cryptocurrency investments

The rise of cryptocurrencies has ushered in a new era of financial innovation, offering both individuals and institutions alternative avenues for investment and wealth management; however, alongside these opportunities are significant risks fraught with legal complexities and potential pitfalls.

In the face of an escalating prevalence of crypto-crime, investors and legal professionals must exercise greater vigilance and proactive strategies.

"Invest $1,000 today, become a crypto millionaire tomorrow!"

Enticed by the allure of instant wealth, countless individuals dive headfirst into the cryptocurrency market — only to realize, often too late, that an underworld of sophisticated scams hides behind many of these offers. The crypto revolution, celebrated for its innovation and potential, also harbours some of the most insidious forms of financial fraud.

Cryptocurrencies, once fringe, have now reached mainstream acceptance with a global market capitalization exceeding $2 trillion as of early 2025. Yet, this explosive growth has come at a cost. Reports from the Canadian Anti-Fraud Centre reveal that Canadians lost over $638 million to fraud in 2024 alone, much of it linked to crypto schemes. This staggering figure underscores why investors, lawyers, and regulators must care deeply about this emerging threat.

Blockchain technology offers undeniable benefits: increased transparency, reduced transaction costs, and new avenues for capital allocation and wealth creation. Legal professionals are increasingly advising clients on legitimate crypto investments, tax implications, and regulatory compliance; but, with these promising developments comes significant risk. The decentralized and largely unregulated nature of cryptocurrency markets provide fertile ground for fraudsters who exploit gaps in oversight to target the inexperienced or overly optimistic.

Understanding these risks requires recognizing patterns commonly associated with crypto fraud. One hallmark of fraudulent crypto schemes is the promise of guaranteed high returns with little or no risk. A basic economic truth applies: legitimate investments carry inherent risks. When offers deviate significantly from market norms, they should trigger immediate skepticism. For example, schemes promising returns of "100% per month" have proven repeatedly to be fraudulent, yet these scams persist because human psychology is susceptible to unrealistic optimism and the fear of missing out (“FOMO”).

Yet, these false promises don't operate in isolation—they're often bolstered by highly sophisticated scams that appear credible at first glance. Fraudulent exchanges and investment platforms designed to mimic legitimate services are increasingly common. Victims may initially believe they are interacting with a credible business, only to see their investments vanish overnight.

For example, one prominent case involved a fraudulent platform that scammed investors out of $35 million through fake celebrity endorsements and convincingly designed websites. Such scams underscore the necessity for thorough due diligence, verification through multiple credible sources, and consultation with professionals.

Another example involved the Ontario Teachers’ Pension Plan (“OTPP”) investment of $95 million in the now defunct FTX crypto exchange. This resulted in lawsuit being filed by a member of the OTPP against the OTPP board, where it is alleged that the board did not conduct proper due diligence of the FTX investment and as a result was in breach of its fiduciary duty.

Compounding the problem is a fragmented regulatory landscape. While conventional financial systems are backed by robust regulatory frameworks—clearly outlining procedures for investor protection, oversight, and dispute resolution—the crypto landscape remains fragmented and inconsistent. Canadian regulators, like those worldwide, struggle to apply existing laws to crypto transactions that cross multiple jurisdictions and evade traditional definitions. This uncertainty means the victims often face daunting hurdles when seeking restitution or pursuing legal actions against bad actors. Without standardized regulatory safeguards or clearly established case law, crypto-crime becomes increasingly prevalent and remains challenging to prosecute, which underscores the urgency for enhanced vigilance and proactive due diligence.

Further complicating enforcement and recovery is the inherent anonymity of blockchain technology. The pseudo-anonymous nature of blockchains, originally a feature designed to protect privacy, has become a double-edged sword. Criminals exploit this feature, easily obscuring the path of stolen funds through a labyrinth of wallets and exchanges. Investigating and tracing fraudulent crypto transactions can become prohibitively difficult and costly, particularly without immediate action. For legal professionals, understanding blockchain-tracing techniques and collaborating with forensic investigators is increasingly critical.

Given these challenges, it’s clear that recognizing potential fraud requires deliberate, informed actions. Investors and legal professionals must adopt concrete, practical strategies to identify and mitigate these risks to avoid falling victim.

Practical Steps for Identifying Fraudulent Crypto Investments

Both investors and lawyers can adopt concrete steps to mitigate these risks:

• Perform rigorous due diligence. Evaluate the legitimacy of platforms, scrutinize the transparency of investment details, and verify team credentials.
• Question extraordinary promises. Encourage skepticism toward high-return, low-risk claims. Genuine investment opportunities come with realistic expectations and transparent risk disclosures.
• Confirm regulatory compliance. Ensure the investment and platforms are registered with relevant regulatory bodies. Unregistered entities represent a significant red flag.
• Educate and stay updated. Continuous education about emerging crypto threats and scams is crucial. Resources provided by agencies like the Canadian Securities Administrators, their provincial counterparts, and the RCMP should be regularly consulted.

Proactive Legal Strategies for Prevention and Recovery

For legal professionals, there are also practical strategies:

• Advise clients proactively. Ensure clients are aware of common scams, and advise them to approach crypto investments cautiously.
• Encourage transparent documentation. Accurate and thorough documentation of all crypto transactions can greatly assist if recovery actions become necessary.
• Rapid response to suspected fraud. Speed is essential in crypto fraud cases. Legal teams must move quickly to freeze assets, initiate investigations, and collaborate with authorities.

Cryptocurrency, demands responsible engagement from both investors and their legal advisors. As fraud grows increasingly complex, vigilance cannot be optional — it must be a cornerstone of any crypto strategy. While the promise of crypto continues to attract enthusiastic participants, understanding and mitigating the inherent risks ensure that opportunities are harnessed safely and responsibly.

This article was prepared with the assistance of ChatGPT 4.5.