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Cryptocurrency the main target for scammers in 2018

Cryptocurrency the main target for scammers in 2018

A new year brings new opportunities and, for investment scammers, 2018 seems set to deliver new ways to defraud investors of their hard-earned cash..

Last year saw several big tax avoidance schemes hit the headlines, while an investment product called binary options also made the news.

Across the investment industry this year, the big trend investors will be watching is cryptocurrency. This has sparked the term ‘cryptomania’ as investors race to get on board, with bitcoin surging nearly 2,000% in the last 12 months, according to CNBC.

But the soaring interest has also seen a sharp rise in scammers trying to get in on the act.

Detective sergeant Alexander Eristavi, who heads the investment fraud team at the City of London Police, names cryptocurrency as the biggest area of investment scamming to watch in 2018.

‘Cryptocurrency is growing really fast,’ said Eristavi. ‘There’s a lot of startups no one has ever heard of. You have a lot of people hoping to fund the right startups, but the problem is nobody can tell which startup is real as they’re not regulated.’

He added that initial coin offerings (ICOs) and contracts for difference (CFDs) are the two main ways scammers can target investors.

According to the Financial Conduct Authority (FCA), ICOs are digital ways of raising funds from the public using a cryptocurrency like bitcoin, with issuers accepting a cryptocurrency in exchange for a digital token representing for example a share in a firm or a prepayment voucher for future services.

Eristavi added that these are a ‘problem’ for the City of London Police as it can be difficult to detect fraud in the cases of cryptocurrency start ups which fail to launch.

Binary options lose investors £27m

Eristavi also highlighted binary options as the other big scam in 2018; an ‘investment’ which is essentially a bet placed on whether the price of an asset will be above or below a set price in future.

Every bet has only two possible outcomes: get it right and you will win your stake back, plus profits of 50% to 90%. If you are wrong, however, you lose the lot.

Figures from Action Fraud, part of the City of London Police, show that investors have lost 400% more money through binary options in the last six years, up from £6,200 to £27 million.

In December, the European Securities and Markets Authority (Esma) said it was looking at measures to ban the sale of binary options to retail investors in response to ‘significant’ investor protection concerns.

At the start of this year, binary options became regulated by the FCA and according to Mifid II they are financial products.

It is estimated that around 90% or more of binary options firms are fraudulent; while there are genuine brokers in the market, Eristavi says they are best avoided altogether.

‘Even we struggle at times to tell which [broker] is genuine. My personal view is binary options are very risky and should be avoided.

‘There are people who have been left in life-changing situations losing money from binary options; suicides have been linked to [the results of] binary options. I’d recommend not entering an investment unless you know what you are doing.’

Aside from the online world, investment scammers also look to capitalise on continuing trends. A notable one is ethical investing and investments that are supposed to be good for the environment.

‘Forestry is a perennial one,’ said Jonathan Watts-Lay, director at financial education firm Wealth at Work. ‘It plays into people’s emotions and it’s marketed as ethical and good for the environment. And they quote returns of 7, 8, 9% and people think it’s fantastic.’

He recalled a well-known story in which investors visited one of the forests they invested in. All looked good on arrival, he said, but locals suggested they fly over the site to look at their ‘investment’. They found the forest was shaped like a donut with no trees in the middle.

With all these warnings about investing in unusual products, some argue it could stifle financial innovation as some firms could be concerned about coming across scammers when in fact they are perfectly legitimate.

It is a notion rejected by Watts-Lay, and in the case of pension providers he said: ‘There’s a lack of innovation in the retirement space which is because the industry is poor at innovating, because it doesn’t fit their business models. They have a financial incentive not to innovate.’

And while losing hard-earned money is obviously the biggest problem with investment fraud, does scamming have a wider impact on the wealth and investment management industry?

Watts-Lay said while there is direct evidence of money lost through scams, such evidence does not exist for the impact it has had on people’s trust in investment services.

But he added: ‘It’s a reasonable assumption that there is this problem where people move away from legitimate investments.

‘At retirement people should take financial advice yet we know from research that when they retire, only 30% say they would want to take advice.’  

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