cryptocurrency fraud

The trading of tokens has never been safe: traders, investors, and clients of crypto platforms have always faced risks of fraud, theft of balances, or exchange bankruptcies.

Since the launch of Bitcoin in 2009, high-profile scandals related to illegal trading operations, account hacks, and the disappearance of billions of dollars have been persistent. Yet, people continue to engage in digital assets and trading.

According to blockchain analytics company Chainalysis, the volume of crypto crime grew from moderate levels in 2018 to astronomical levels by 2022, significantly spurred by the collapse of Sam Bankman-Fried’s FTX exchange.

Most crypto crimes are linked to online fraud (scams) and the activities of cybercriminal groups. However, the world of crypto crime is often intertwined not only with ordinary hackers, scammers, and malefactors but also with flamboyant and controversial personalities who challenge the “throne” of the blockchain world.

Mark Karpelès – The First “King” of Bitcoin

Type of scam: Exchange hack due to weak security system.
Amount lost by users and investors: $432 million.

Experienced crypto traders still remember the Tokyo-based Mt.Gox exchange, which was considered the largest between 2010 and 2014. At its peak, it handled 70% of all Bitcoin transactions.

The history of Mt.Gox began in 2007 when American entrepreneur Jed McCaleb registered the domain Mtgox.com, intending it to be a platform for trading Magic: The Gathering cards. This project failed but inspired McCaleb to create a Bitcoin exchange. When he saw transactions worth tens of thousands of dollars, he realised he was in over his head. In 2011, McCaleb sold the site to Mark Karpelès—a passionate programmer, crypto enthusiast, and future “king of Bitcoin,” whose star was just rising.

Mark Karpelès

Rewriting the site’s server software, Karpelès transformed Mt.Gox into the most popular crypto exchange. However, the same year, hackers exploited security weaknesses to steal user credentials and transfer cryptocurrency. Thousands of Bitcoins disappeared from customer accounts.

Karpelès’ chaotic storage of users’ cryptocurrency in various physical and software wallets made the funds vulnerable to hacker attacks.

Unfortunately, this did not teach the Mt.Gox CEO a lesson. Due to numerous bugs and security system weaknesses, customer funds became easy prey for hackers. In February 2014, the platform detected suspicious activity in users’ digital wallets, revealing that 850,000 Bitcoins worth $450 million had disappeared.

Mt.Gox officially could not determine how or where the virtual coins went, with speculation pointing to Russian hackers. This incident severely shook the entire crypto market, and Karpelès’ company teetered on the brink of bankruptcy. In April 2014, it was liquidated.

In 2015, Japanese authorities arrested Karpelès on charges of embezzlement and misuse of customer trust. He was acquitted of most charges but convicted of data falsification. Former Mt.Gox customers met every six months from 2014-2018 in a small Tokyo courtroom to hear updates on the recovery of their funds from trustee Nobuaki Kobayashi.

A total of 24,750 claims were registered for about ¥45 billion ($432 million). As of July 2024, this sum stands at a staggering $45 billion. In July 2024, in a message to creditors, Kobayashi announced that the company had begun making payments to Mt.Gox users. They had waited ten years.

Ruja Ignatova – The Crypto Queen Who Never Was

Type of scam: Ponzi scheme.
Amount lost by investors: $4.5 billion.

In 2016, Ruja Ignatova appeared on the huge stage of Wembley Arena, revolutionising the world of cryptocurrencies. She looked impeccable: diamond earrings, a blood-red evening gown, and matching lipstick.

Ruja Ignatova

Thousands of fervent supporters listened as Ignatova spoke about the inevitable demise of Bitcoin. She claimed that Bitcoin was flawed and too complicated for ordinary people to understand, so she created OneCoin, an alternative coin (altcoin) poised to change the crypto industry forever.

Ignatova founded OneCoin in 2014, claiming it worked like other cryptocurrencies: it could be mined and used for payments. After her meteoric success at Wembley, investors from around the world began pouring money into OneCoin, reaching a total of €4 billion.

OneCoin’s income peaked at €800 million in the third quarter of 2016, but that year, Ignatova’s magic began to wane. Investors increasingly realised that OneCoin had no blockchain, operating as a classic Ponzi scheme where new investors’ funds were paid to earlier investors. Such schemes collapse when the influx of new money dries up.

OneCoin didn’t offer an altcoin; it sold referral marketing courses. Interested parties had to buy a course and recruit others, earning rewards for their efforts. Payouts were made from the continuous flow of new money.

Eventually, the scheme was exposed. In 2017, the FBI issued an arrest warrant for Ignatova, but she mysteriously disappeared with the investors’ money. Despite a $5 million reward for information leading to her arrest, law enforcement has yet to catch the former crypto queen.

Ignatova’s fate remains unknown. In 2024, journalists speculated that she might be protected by Bulgarian mafia boss and drug trafficker Christoforos Nikos Amanatidis, known as Taki, who served as her personal bodyguard.

“Taki is a ghost. You’ll never see him, only hear about him. He talks to you through others. If you don’t listen, you’re gone,” says an article about the mafioso.

Former U.S. Internal Revenue Service investigator Richard Reinhardt suggests that Taki or his associates may have killed Ignatova.

Sam Bankman-Fried – The Last Visionary of the Crypto World

Type of scam: Misappropriation of customer digital assets and illegal trading operations.
Amount lost by users and investors: Users – $8 billion, investors – $1.7 billion.

FTX, short for Futures Exchange, was founded in 2019 by 27-year-old American entrepreneur and investor Sam Bankman-Fried. He quickly rose in the uncertain crypto world and just as rapidly fell from grace.

According to CoinGecko, the market capitalisation of cryptocurrencies grew by 44.1% in 2019, reaching $350 billion in July, with Bitcoin exceeding $13,000. FTX’s popularity soared as clients opened accounts to trade cryptocurrency.

Sam positioned FTX as a cryptocurrency futures exchange that could meet professional traders’ needs with the slogan “built by traders for traders.”

FTX’s market maker was Alameda Research, founded by Bankman in 2017, with his then-girlfriend Caroline Ellison serving as CEO.

Sam launched the FTT token, whose market value rose over 850% from early 2019. The FTT price peaked at $84.18 in 2021. By comparison, on 16 July 2024, it was $1.4. FTX dominated the market through aggressive acquisitions of competitors like Liquid Global, LedgerX, and Blockfolio, operating in the U.S., Bahamas, Japan, Europe, Switzerland, and Hong Kong.

In 2022, FTX had over 5 million users, around 200 employees, and a company valuation of $32 billion.

In early 2022, the crypto market wobbled as Bitcoin and other cryptocurrencies began to fall. According to Watcher.Guru, 25 crypto exchanges closed that year, and major platforms like Coinbase, Robinhood, and Crypto.com sharply cut staff. Only FTX remained resilient.

However, a dramatic crash awaited the platform in November. CoinDesk published an article revealing that Sam used the FTT token as an asset for his subsidiary Alameda Research. Journalists discovered that the company used customer funds to finance third parties and traded user assets without consent. Additionally, Alameda used FTT tokens for leveraged trading, violating U.S. law.

After the fraud exposure, FTT’s price plummeted, and Alameda Research couldn’t repay its debts. The balance sheet showed that FTX and Alameda were too closely linked. Alameda borrowed from FTX as needed, funded by customer deposits.

FTX’s downfall spanned from 2 to 12 November. On 8 November, the platform halted withdrawals. On 9 November, Binance’s ex-CEO, Changpeng Zhao, declined to acquire FTX, unwilling to risk his company due to Sam’s illegal activities.

On 10 November, Alameda Research ceased all trading operations, and on 11 November, FTX filed for bankruptcy protection. The final blow came from an alleged hack, with hackers stealing up to $477 million.

In total, Sam’s fraud caused users to lose about $8 billion and investors $1.7 billion. Bankman-Fried’s trial dragged on until spring 2024. On 28 March, he was sentenced to 25 years in prison and ordered to return $11 billion.

Before FTX’s collapse, it announced that investors would recover their lost funds, as the exchange and Alameda Research managed to sell several assets profitably. According to The Conversation, although Bitcoin’s price rose over 250% after the November 2022 crash, investors will be compensated at the 2022 rate.

FTX also claims that 98% of its creditors, including individual investors with accounts up to $50,000, will receive their lost funds. Payments are expected within 60 days after the reorganisation plan is approved by the U.S. bankruptcy court.