The dark side of cryptocurrencies

By Nikolay Ratkov 

bits.media

14 min

June 29, 2015

View Original

The history of Bitcoin and other cryptocurrencies , despite their still young age, is very rich in events and incidents - like anything associated with big money, which can very easily change owner. This new technology, which is gaining more and more popularity every day, attracts not only respectable and law-abiding citizens.

It is possible that the “dark side” of the cryptocurrency economy is actually the underwater part of the iceberg, which is several times larger than the visible activity on exchanges, exchangers and numerous stores that accept Bitcoin for payment.

As you know, one of the main distinguishing features of cryptocurrencies in relation to fiat ones is maximum anonymity. And it attracts not only hackers, but also “ordinary” scammers and swindlers who prefer to remain in the shadows when making dubiously legal transactions .

It was the advent of Bitcoin that made possible the emergence of black markets selling illicit goods online, 24 hours a day, around the world. But, as it turned out, law enforcement agencies were well prepared for the new challenge. After several high-profile arrests of the owners and clients of these resources, most of the most famous black markets were closed.

Another reason for the high criminal activity around cryptocurrencies is the poorly developed security infrastructure and carelessness of the majority of users. It is psychologically difficult for people to get used to the fact that money can be stored not in a bank account (even with online access), but in ordinary files on the disk of their home computer.

In the four years since Bitcoin became known to the general public, the amount of funds lost in the world of cryptocurrencies due to various types of illegal actions has long exceeded a billion dollars. Tens of thousands of people said goodbye to their savings, “rewarding” scammers and hackers who attacked various exchanges , online wallets and other resources that use cryptocurrencies.

Others bought non-existent hardware or cloud mining contracts, or were unable to obtain mined coins from closed pools. Still others invested in exchanges and funds that turned out to be financial pyramids. Many have lost their Bitcoins to online casinos that are banned in their country.

There are probably a lot of unreported cases of fraud, as well as information about scams that are extremely difficult to prove or verify. Therefore, all these figures are most likely just a lower limit. In reality, the size of losses in the cryptocurrency community could be much higher.

The dark side of cryptocurrencies

Cryptocurrencies, mainly Bitcoin, are very popular on various “dark network” services - DarkNet - and are the main method of making payments there. This is due to the fact that users of such sites primarily need anonymity and lack of control. It is quite obvious that one of the first to seriously use bitcoins were sellers of weapons , drugs and other “delights” of the black market.

A distinctive feature of such sites is that they cannot be accessed in the usual way - using a traditional browser. To be able to plunge into the depths of the darknet, you need to install special software - for example Tor . With the development of cryptocurrencies, black markets have received a new lease of life. The method of anonymously sending money, and the very idea of ​​a decentralized currency, have greatly reduced the possibility of control by governments and intelligence agencies.

"Silk Road" of the darknet

The most telling story was the Silk Road online market , which everyone who deals with cryptocurrencies knows about. The main feature of the site was the use of Bitcoin, which for most people was a “dark horse” at that time, and the ability to pay for purchases through the anonymous Tor network.

Silk Road gained real popularity precisely because of the opportunity to buy various “substances”, and in addition to them, pirated software, stolen items and a huge number of other illegal goods were sold.

But the US intelligence services also turned out to be not fools - after almost two years of investigation, in October 2013, the owner and administrator of Silk Road, William Ross Ulbricht, was arrested, and later several of his employees and dealers.

The creator of the Silk Road adhered to a certain code of ethics - in particular, he prohibited the sale of weapons and the services of killers. But this did not help him mitigate his sentence - he received two life sentences and several decades in addition.

Followers Silk Road

Such a tasty morsel as illegal trade could not remain untouched. The baton was first taken up by Silk Road 2.0, and then by several other similar sites. However, the reincarnation of Silk Road turned out to be a trap of the intelligence services. One of the confidants of the site's creator, Blake Bentall, who worked from the very beginning, turned out to be an FBI agent. So they wanted to catch the main dealers , and they succeeded.

Another follower of Ulbricht's idea was the black market Evolution. But he didn’t live long either. In March 2015, the administrator of this resource suddenly disappeared , taking about $12 million with him. He argued that this was due to some “technical problems,” and a few days later the site simply went offline along with the money of sellers and buyers. This event caused panic on the black market, but information that the secret services had a hand in the closure was not confirmed.

An interesting point is that among the many illegal markets on the DarkNet network, it was Evolution that enjoyed the reputation of being the most reliable. Here, a three-party signature was used for each payment - the transaction had to be confirmed by the buyer, the dealer, and the forum administration. Another “trick” of this market is that it essentially had no moral framework when it came to the type of product. At Evolution it was possible to purchase a much wider range of goods and services, including compromising evidence.

The next to close was online marketplace Sheep Marketplace . They say that this happened due to a hack, which is very doubtful, since the withdrawal of funds from the resource was stopped a week before it. The amount stolen is also impressive - more than 150,000 BTC for a total of about $40 million.

In addition to the above resources, we can highlight the Agora online market. It is now the largest market on the DarkNet for drug distribution and is rapidly growing in popularity.

There are also “specialized” black markets entirely dedicated to one type of illegal trade. For example, the Darkleaks website uses its own blockchain to transfer various private and confidential information. It was the Darkleaks black market that became one of the first to put into practice a blockchain similar to the Bitcoin blockchain for other needs not related to financial transactions.

Exchange scams and robberies

Back in 2011, the first victims of hackers were the largest exchanges Bitcoinica and Tradehill at that time, but almost no details were preserved - Bitcoin was little known then and these incidents were hardly covered in the media. In 2012, a successful attack was carried out on BTC-e, which paid the losses out of its own pocket.

The first Bitcoin price collapse was associated with the MtGox hack in June 2011. But compared to the final collapse of this exchange, it seems like a minor episode. The bankruptcy of MtGox in early 2014 can rightfully be called the “crime of the century,” and not only in the narrow world of cryptocurrencies. 650,000 BTC - about $480 million in February 2014, and now 130 million - have disappeared without a trace, and after a year and a half, no progress has been made in solving the case. Who should answer to tens of thousands of clients? Mark Karpeles, darknet sharks hiding behind his name, or an unusually clever group of hackers? For now, this is the same rhetorical question as, for example, “who killed Kennedy?”

But there were also many smaller hacks - earlier this year, as a result of a hacker attack on the largest exchange Bitstamp , almost 20,000 BTC was stolen, which was then more than $5 million, after which the exchange temporarily suspended operations to audit the security system.

Already this year, the major altcoin exchange Bter has been in trouble twice. First, about 50 million NXT was stolen , which was equivalent to approximately $1.65 million. However, soon the exchange administration managed to “agree” with the hacker, and almost the entire amount, with the exception of 8 million NXT, was returned.

The second blow turned out to be fatal - more than 7,000 BTC were stolen from an insufficiently “cold” wallet . As a result, the exchange was forced to close, distributing the remaining assets to clients. Until that time, the Chinese Bter maintained a reputation as one of the most reliable altcoin exchanges, and storing funds in “cold wallets” was considered quite secure and reliable.

There are often reports of thefts from cryptocurrency exchanges, but in fact it is very difficult to verify whether this is really the result of hacker attacks. Perhaps the unscrupulous creators of the exchanges themselves conceived the scam and brought it to life, “comforting” investors with the fact that a hack had been committed. Or maybe some of the news about hacking is just an attempt to smear competitors and a way to attract attention? However, the fact remains that money disappears from cryptocurrency exchanges from time to time, and their clients need to be careful.

Not only exchanges, but also pools can be hacked. Once one of the top five largest pools, 50BTC.com was considered reliable, but on October 18, 2013, it stopped paying rewards to miners. For some time, the administration talked about technical problems, and then announced a hack, as a result of which about 1,500 BTC were stolen. The pool lost almost all miners and closed after some time. No one knows whether the hack actually happened.

In June 2013, at a large Litecoin mining pool – ltcmine.ru – as a result of the owner’s negligence, after an incorrect wallet update, amounts were credited to clients’ balances that were hundreds of times higher than the real ones. The first lucky ones, seeing the money “falling from the sky,” immediately took it out, leaving everyone else with nothing. In total, up to 13,000 LTC were missing. However, there are other versions of this case .

Pyramid builders and air sellers

Around cryptocurrencies, like any other complex and incomprehensible technology, there is a whole host of the most excellent myths . Poorly informed people often call Bitcoin a pyramid scheme.

Although these opinions are not substantiated, cryptocurrencies are actually very convenient for building pyramids. The first to understand this was the American Trendon Shavers , who created the Bitcoin Savings and Trust fund. Of the bitcoins he received from investors, he paid part of it in the form of interest, and with the rest he began to live for his own pleasure, putting forward the argument that they were not money, so he did not commit any crimes. However, the judge did not agree with him, and Shavers went to prison.

Another giant pyramid, the losses from which are comparable in scale to the MtGox disaster, appeared at the end of 2014 in Hong Kong. It was a pseudo-exchange MyCoin , which collected money, promising payback in a few months, and then fabulous profits. All the signs of a pyramid scheme were there – promises of super-income, gifts for those who would give money “right now”, a bonus for referring other clients. However, there were many people who invested hundreds of thousands of dollars in this enterprise. The total amount was almost 390 million HKD.

And in February 2015, when the police became interested in MyCoin, its owners took the money and disappeared, exposing hired employees who knew nothing about the fraud to the hammer of justice. The criminals have not yet been found.

Virtual mining

Miners also became victims of scammers. So, in 2013-2014, many virtual manufacturers of pre-orders for ASIC miners appeared, who created a beautiful website, posted images of non-existent devices drawn in the editor and collected money for pre-orders.

Gullible people, during the rise of Bitcoin and the hype around mining, without thinking twice, placed orders, making non-refundable payments to the wallets of scammers. Of course, they received neither equipment nor money. Smaller scammers sold fictitious hardware through advertisements or took money for delivery of real miners from China, and then disappeared in the same way.

Melting clouds

Recently, the creators of the pyramids have found another fraud scheme - the sale of fictitious contracts for cloud mining. Really, what could be simpler? A website is created where an allegedly existing data center is advertised and favorable (but not too favorable) conditions for mining are promised, and contracts begin to be sold.

Since the average payback time for real mining is 4-6 months, scammers have nowhere to rush. They simply pay victims some of their own money, continuing the advertising campaign and luring new customers, or old ones, to “reinvest the profits.”

Such pyramids can exist for many months and acquire a reputation as reliable services. And only when the flow of payments begins to dry up, they curtail their activities and disappear with the money. Moreover, the first clients who invested at the very beginning can even make a profit, since it is more profitable for scammers to pay a “small share” than to earn suspicion ahead of time. Examples of such services include HashProfit and cointellect.com .

One of the largest cloud pyramids was BitcoinCloudServices , which existed for about a year and stopped payments in May 2015. The number of victims and the amounts lost are still unknown.

High Risk Investments

Among other pyramids, one cannot fail to mention such a type as HYIPs (High Yield Investment Project), which are currently gaining more and more popularity. There are a whole host of HYIPs that accept cryptocurrencies, ranging from Bitcoin to little-known altcoins.

The HYIP scheme is quite simple - the user invests real funds into his account and gradually receives interest from his own deposit. Moreover, the creators of HYIPs often announce in advance that the scheme is a pyramid, but the first investors can receive a large (in percentage) profit.

HYIPs have very attractive “promises”, up to several hundred percent daily (so-called “doublers”). In fact, the conditions in different HYIPs can differ radically, but the main feature is that the creators lure users to invest as much money as possible in their brainchild, motivating them with a huge percentage of payments from the deposited amount.

The creators, thanks to loud advertising slogans and branded promises, attract the required number of investors, make several payments to them and, with a clear conscience, “wind up” their project, leaving the clients’ money in their wallet.

You need to understand that the money for payments is taken not from the pockets of the creators, but from the pockets of the investors, i.e., in essence, the hype exists and pays out exactly as long as there is an influx of new users, and as soon as it slows down or stops, the hype simply disappears with all accumulated deposits.

Investors can also get a good profit, provided that they have time to give away the money immediately after the opening of the HYIP. But if you give free rein to greed even a little and “play for time,” then there is a very high chance of losing all your investments and savings.

Anyone who has a wallet with popular cryptocurrencies can try to invest in such services at any time, literally in one click. A special attraction is that the payment is anonymous and is often credited to your balance in a matter of minutes. But you need to understand that the chance to predict behavior and the probability of “winning” in a particular hype is approximately equal to the reliability of fortune telling on coffee grounds and does not depend at all on the type of coffee.

Ransomware viruses and miners

Virus writers also discovered Bitcoin. The anonymity of cryptocurrencies is especially beneficial for the so-called “ransomware” - that is, ransomware viruses. These viruses, penetrating the victim’s computer, quietly encrypt files and documents, and then display a warning on the screen, demanding a ransom in Bitcoin for providing the decryption key - otherwise, all the user’s files become useless garbage. Based on the name of the first of these Trojans, a new class of threats is called CryptoLocker, but now there are already many such viruses. Even police officers became victims of cryptolockers. Various means are proposed against them , but the main fight is still ahead.

There is also a “less harmful” miner virus, which is a Trojan that runs a mining program on the victim’s computer, thereby exploiting its computing power for its own purposes. Some companies that produce games and various software have become famous for such “sins”, having built such Trojans into their clients. Quite well-known companies also came across this.

Gambling

Two or three years ago, online casinos and various sites began to appear on the Internet, offering to gamble not with fiat money, but with increasingly popular cryptocurrencies. One of the first online casinos to gain popularity was SatoshiDice. There are a whole lot of stories associated with it about attempts to deceive the system, as well as large bets - both winning and losing.

We should immediately divide casinos that work with popular cryptocurrencies into two groups: the first are ordinary online casinos that simply accept cryptocurrencies as one of the ways to replenish an account and withdraw funds; the second group is casinos that were originally created for gambling with cryptocurrencies.

If everything is more or less clear with the first group, then the second group is much more interesting. Such sites usually support Provably Fair technology to check the fairness of bets and the game itself. Players are given the opportunity to use unique hash signatures, thanks to which they can check their bets at any time and make sure that the site is honest and does not contain some of the tricks that traditional online casinos often suffer from.

In conclusion

We can confidently say about the world of cryptocurrencies that this is a completely new and very dynamically developing market with its own characteristics that are unique to it. There is wide scope for various scams. Many of them end successfully, since the criminals retain the advantage of anonymity. There is no way to get your money back if you make a mistake. It's almost useless to complain if you've been scammed. You are in complete control of your money, but the responsibility for its safety also lies solely with you.

It should be borne in mind that even basic neglect of general security rules can lead to very unpredictable consequences, because if an attacker was able to gain access to your funds, then with a high degree of probability you will say goodbye to them forever. Remember the most important thing - you must take all actions deliberately. Take care of your wallets!

Просмотры: