Identity Fraud in the Crypto Industry

Source:ONDATO Identity Fraud Report for Crypto Industry 2023

Effective fraud prevention starts with companies being aware of the ways in which fraud occurs. That’s why this year ONDATO decided to analyze and compile the crypto fraud trends that were seen in the first half of 2023. We hope the research will provide important information and help others minimize their fraud risk.

Cryptocurrency Overview

Arguably the most well-known cryptocurrency, Bitcoin, was launched in January 2009. At the time, cryptocurrencies promised complete anonymity, privacy, and decentralization. Ideals that persist to this day. In practice, however, the application of these principles is complicated.

Cryptocurrencies work differently from official currencies issued by banks, which brings its own drawbacks. The anonymous payment method offers scope for making it easier to commit financial crime and finance terrorism. In order to protect transactions, some form of anonymity must be sacrificed for effective anti-money laundering processes. This puts companies with crypto assets in the difficult position of seeking a balance between privacy and compliance. This is where government frameworks seeking to create comprehensive and fair regulations come into play.

Cryptocurrencies are not controlled by any central authority. Instead, they rely on a distributed accounting system called a blockchain, which makes them more resistant to hacking and modification. Cryptocurrencies use cryptographic techniques to secure transactions. Public and private keys are used to facilitate transactions and prove ownership of the cryptocurrency, ensuring the security and privacy of transactions.

Cryptocurrencies can be used for a variety of purposes, including online purchases, investing, transferring money across borders, and storing value.

Crypto AML Regulation

In 2014, the FATF issued a report providing guidance on anti-money laundering (AML) measures for cryptocurrencies. This led to the translation of these recommendations into legal frameworks in FATF member countries.

In 2019, there was a significant development in the United States, with three key financial regulators issuing official statements. This statement categorised cryptocurrency exchanges as financial institutions under US jurisdiction, subject to the AML regulations outlined in the Bank Secrecy Act.

In 2021, the FATF updated its guidance on AML measures for cryptocurrencies, bringing greater clarity to the definitions of virtual assets and providing specific guidance on the application of these rules to stablecoins. The FATF also introduced a definition of virtual asset service providers (VASPs) as part of its updated guidance.

In 2022, the European Council approved the Markets in Crypto-Assets (MiCA) regulation. This regulation ensured that all EU countries have unified regulatory frameworks for dealing with crypto-assets and do not have to rely solely on national legislation.

In 2023, Europe introduced new regulations affecting VASPs. These rules mandate the collection and reporting of specific data regarding the sender and recipient of cryptocurrency transfers, regardless of the amount of crypto assets transferred. These measures were implemented to increase the traceability of cryptocurrency transfers, particularly in the context of suspicious transactions.

Fraud overview

In a detailed examination of our data from thousands of cryptocurrency identification attempts, we found that 7% were fraudulent. This suggests that the crypto industry is vulnerable to attacks by fraudsters. This may be due to two factors: the relatively new nature of cryptocurrencies, where fraudsters may assume that the system is easier to circumvent than established financial institutions, and the anonymity of cryptocurrencies, which may cause users to prefer anonymity despite new regulations in an attempt to defraud the system.

Fraud methods

In its analysis, ONDATO identified 6 of the most prevalent forms of fraud. The data shows that the most common type of fraud is the use of printed documents (42%). According to the analysis, most cryptocurrency fraudsters use passports.

Usually the seam of the waistband is not visible when it is printed. Instead, you can see the line where the paper was folded. In addition, watermarks are not visible on printed copies. Other methods are documents provided from other screens/displays with a percentage (31%) and fake documents 14%. As with printed documents, there are a few signs to watch out for with fake documents. Some of these can be easy to spot: from the use of different fonts, simple imperfections or irregularities to photographs that do not meet the normal criteria for identifying documents. Others are difficult to spot without the use of AI, such as repeating ID numbers on multiple attempts with different documents or data displayed as plain text.

2% are IDs that have been rejected because they were made by known fraudsters

Portrait of a typical fraudster

According to ONDATO’s findings, drawing a portrait of a “typical” cryptocurrency fraudster is easy: a French man, 20+ years old, who tries to fool the system by printing out a fake passport and trying to pass it off as a real one.

However, it’s important to note that this “typical” scammer is not the only person we should be looking out for. Scams can happen anytime and anywhere, whether it’s during the day or night. For example, even when we show men, 23% of scams are committed by women.

Nationality of the most common fraudsters

According to the data obtained by ONDATO during the analysis, the most common nationality of fraudsters is French. 14% of all fraud attempts were committed by documents with French nationality. Argentine documents are second with 8%, American and German both have 7%.

This data shows that fraud can and will take place all over the world and companies should be vigilant regardless of the nationality provided.

What devices are fraudsters using?

According to information from ONDATO, it is clear that most fraudsters prefer phones. However, according to our findings, there is almost no difference between Android and iOS.

The use of phones shows a simple but worrying fact: fraud can be committed from anywhere in the world. In a shop queue, in a park, in a café. If a fraudster owns a phone, and most of the world does, they can try to trick the system.

When does one cheat?

Our research shows some interesting trends regarding the timing of fraud attempts.

ONDATO found that most fraud happens on Tuesdays between 2pm and 4pm, and in 2023, most cases were detected in May. This means that fraud is not dependent on weekends, free time or the availability of the fraudster. As mentioned, fraud can happen anywhere and at any time.

This information about fraudulent practices in the crypto industry reinforces the importance of having reliable tools to identify clients and comply with KYC and AML rules

ONDATO is a key partner in the field of secure client identity verification. Ondato OS is a pioneering KYC compliance platform that includes all the necessary KYC and AML tools and provides digital identity services. 

With ONDATO, you can rest assured that your client identification processes are secure and fully compliant with the law. Please do not hesitate to contact us for more information. We are here to provide you with secure and efficient support, not only in the fast-paced world of the crypto-industry.

Contact us

Do you have any questions, do you want to cooperate with us or would you like to be a part of interesting projects?

Leave us your message !