The total amount lost to cryptocurrency fraud in the UK has surged by 32 per cent in the past year.
Scammers stole £226mn from investors in the year to September 30, according to data from Action Fraud, the UK government's national reporting system for fraud and cyber-crime.
The number of fraud reports also rose, from 8,676 in the year to September 30 2021 to 10,030 last year.
Senior associate at Pinsent Masons, Hinesh Shah, said despite the recent fall in cryptocurrency prices, the association of cryptocurrencies with huge windfalls in profit has continued to attract investors who lack the necessary skills and experience to tell a legitimate cryptocurrency investment from a fraudulent one.
There is also a concern that scammers may be proactively targeting these inexperienced investors.
Shah added: "Given the huge sums which some crypto investors made during the boom, scams involving cryptocurrencies can be especially potent for smaller investors who may be desperate to make a ‘quick buck’.”
Crypto fraud can be done under a number of guises, including ‘rug pulls’ where developers of tokens steal funds raised from investors, or ‘pump and dump’ scams where fraudsters create excitement around an asset and sell their own holdings when the price rises, leaving investors exposed to any falls in value.
There are also fraudulent initial coin offerings, where a new token being launched does not exist.
Regulators and government have not yet worked out whether they should regulate crypto, and if so, how.
Some have said the sector should not be regulated, as that would further legitimise an industry that poses no threat to financial stability and is an inherently risk investment.
However, last week, a deputy governor at the Bank of England warned that crypto needs to be regulated in order to protect financial stability.
Jon Cunliffe, deputy governor for financial stability at the Bank of England, said the experience of the past year has demonstrated that crypto is not a stable ecosystem.
Part of this is because its foundation is “completely unbacked instruments of extreme volatility” that can swing wildly in value, he said.
Cunliffe’s comments come after the collapse last month of crypto exchange FTX.
The company, worth $32bn at its height, was built by 30-year-old entrepreneur Sam Bankman-Fried, who stood down after FTX found itself unable to meet a slew of customer withdrawals, driven by concerns over its links to a proprietary trading group.
Bankman-Fried was long seen as the “acceptable face” of crypto, and his company had received investment from SoftBank and BlackRock amid others.
However, the team brought in to restructure the company in light of its bankruptcy have highlighted the lack of financial controls FTX had, with one saying Bankman-Friend led the company like “his personal fiefdom”.
sally.hickey@ft.com
