Many still perceive cryptocurrency as a novel and unconventional form of currency. It operates within an environment that lacks the safety and regulation found in traditional financial systems. Just like the lawless days of the American Wild West, the crypto world is a frontier where anything goes and fortunes are made and lost.

By Simon Campbell-Young, vice-president: global sales and co-founder of Digimune

Back in the 1800s, the American Wild West was a vast, untamed wilderness waiting to be explored. Fast forward to today, and the crypto world is just as uncharted and full of potential riches. It’s like a modern-day gold rush, where profit-hungry pioneers seek their fortunes. Risks and uncertainties are prevalent in the sparsely governed and regulated environment.

With the cryptocurrency market now valued at over US$1 trillion, it naturally attracts the attention of both opportunistic thieves and cunning conmen. However, unlike the stereotypical villains from old Western tales who would brazenly attack stagecoaches in broad daylight, crypto thieves are slick, sophisticated and generally invisible.

Billions of dollars have been lost in well-known crypto heists, including the 2022 theft of $620-million from Ronin Network and the $570-million hack of Binance’s BNB chain, and the $600-million heist targeting Poly Network the year before.

Surprisingly, the majority of crypto losses are caused by targeted attacks on individual crypto investors. Nearly 70% of losses are because of phishing and traditional fraud, and most involve victims – knowingly or unknowingly – paying their digital coins to scammers. According to Chainalysis, an international blockchain analysis specialist that tracks illicit crypto flows, crypto scams resulted in $5,9-billion in losses last year, a significant decrease from US$10,9 billion in 2021.

But how do these scammers carry out their schemes? Phishing scams might involve cloning the website or app of a trusted cryptocurrency exchange to steal login credentials or private keys. On the other hand, fraud methods include impersonation, investment scams, fake exchanges, counterfeit cryptocurrencies, romance scams, and blackmail scams.

Fraud in the crypto world is strikingly similar to that seen in traditional banking. However, the common assumption amongst investors is that crypto is “better than banking” and, therefore, somehow safer. The level of the scams targeting crypto investors is sophisticated and there is no doubt that scammers operating in this space are clever.

As with traditional hard cash or digital currency, it’s almost impossible to recover the money lost because of a scam. But crypto investors tend to hope that because of the advanced nature of blockchain technology, it might somehow be traced and recovered. Exchanges are inundated with calls from despairing investors who have lost cryptocurrency through their own poor judgement.

There is a slim chance that fraud victims could work with digital sleuths, or crypto hunters, to trace the money trail through the blockchain. However, even if the crypto is found, it is unlikely that the perpetrator will be identified and the money recovered. A recent example is the so-called “Blockchain Bandit”. Earlier this year, this unidentified fraudster started moving crypto assets from their wallet for the first time in six years. The Bandit amassed approximately US$90 million worth of funds stolen from 10,000 cryptocurrency users between 2015 and 2016. The Bandit carried out the theft using “ether-bombing” – finding and draining Ethereum addresses with weak private keys.

There is an unexplored risk associated with the ability to track stolen cryptocurrency. In theory, if it becomes possible to identify stolen funds in circulation, it may also become possible for other criminals to intercept and seize them. This poses a potential threat to crypto investors, as they could become targets of thieves and fraudsters, with little chance of recovering their stolen funds.

To tackle this concern head-on, we’ve designed a crypto insurance product that specifically focuses on covering losses caused by fraud and phishing. This new form of cover, available through traditional insurers and as a value-added service through crypto exchanges, will essentially protect people from themselves. Risks will be mitigated and compensation will be paid out in the event of a loss due to a scam.

Our comprehensive approach includes device-layer protection, dark web monitoring, and direct API integration with policyholders’ social media accounts. By proactively safeguarding crypto investors from theft and scams, we hope to reduce the risk of losses by up to 40%.

In the analogy of the Wild West, we’ve become the stagecoach guard “riding shotgun” in hostile territory, protecting the valuable bullion on board.