How to verify crypto projects to keep away from scams?

Recently, there have been an increasing number of scams consisting in extorting money through fake cryptocurrency projects. This is all down to the fact that the ranks of scammers on the market keep growing. More and more people are interested in cryptocurrencies, they invest without understanding how cryptocurrencies or stock exchanges work. They don’t know how to read project documentation or they fall for false information. So to what should we pay particular attention when verifying a crypto project in order to avoid losing funds?

A cryptocurrency project that turned out to be a scam

It’s worth pointing out that a scam in the context of fraud through cryptocurrency projects is a profit-making venture only for creators, not investors. Usually, the creators of such projects know well from the very beginning that the investors will be left with nothing.

Let’s have a look at Kamil’s story to see how an unfortunate investment in a dishonest project could look like. On his YouTube channel – “Encyclopedia Kryptowalut” – he published a video in which he talks about how he was tricked and lost 20 thousand zloty as a result. The project in which Kamil invested was called “Spacey2025”. It is an NFT based game in which players can exchange NFTs for various game upgrades. Once the game was created, a token related to the project was meant to follow. Nevertheless, it hasn’t been listed on any large stock exchange – and its listing was the condition for paying out investors the tokens they had purchased. They still haven’t received most of them. The game has many imperfections, it often lags and practically nothing can be done in it, not to mention the lack of perspective for using the NFTs.

Spacey2025 seemed to be a really promising project, it had decent-looking contracts with sponsoring stock exchanges and over 100,000 Twitter followers. Even after the truth about the creators’ dishonest behavior came to light, the suspiciously high number of followers did not change drastically. This may be a warning not to rely too much on the social media following since it can be bought by the creators.

The Youtuber tells us that, some time after making the investment, the team responsible for the project removed the whitepaper from the website and did not pay for the services provided by the promoters. Many investors have sued the creators for fraud and they, in turn, tried to stage a hacking attack that was supposed to be an excuse for the insolvency.

Many similar projects spring up on the market like mushrooms. They most likely stand no chance of being successfulfrom the very beginning and do not provide any real income for investors who are not involved in creating them.

Kamil’s story and his mistakes can be a lesson on investment security for all the new investors.

How to check crypto projects? Key aspects

If you want to invest your savings in a new cryptocurrency project, you should pay attention to several of its most important aspects:

  • The first one may be the fact that cryptocurrencies are noting but statistics – investing in new startups without a positive or negative opinion is very risky. You can never know if this is a scam, as you can’t usually see it at first glance. These websites are professionally designed and the promotions of new games or projects can be shared on other trusted platforms.
  • The second aspect is the observation of social media, as mentioned in the example of the Spacey2025 project. The number of followers as well as the opinions and positive comments can be purchased – they are usually not in English, but in Turkish for instance. This poses a great difficulty while self-verifying the security, because it is often thanks to the opinions of others that we make our own choices. Therefore, compare the number of Twitter followers with the number of likes or other possible reactions. If the given account has hundreds of thousands of followers and only 10 likes under the posts, it should raise the red flag.
  • Another factor that is worth paying attention to when verifying projects is your own analysis of the documents provided by their authors. Technological documentation such as whitepapers may be incomprehensible to the new investors. Nevertheless, it is worth spending some time on research and getting to know the tokenomics of projects before making any investment. It can be a red flag if, for some reason, a project does not have complete pricing information (project finances – pre-mining, pre-sale and total supply), its main objectives, or the long-term vision described in the documents.
  • If the platform responsible for the project has already been involved in some kind of activities in this field, it is worth finding out what were the experiences that the trusted investors, our friends or YouTubers had while cooperating with the project team. It is definitely a good idea to do a background check on specific people in charge of it on Linkedin. In the case of Spacey2025, the CEO is a poker gambler, which should raise another flag. Publicly available websites such as honeypot.is may also help while assessing the overall risk.
  • Where has a given token been listed or will be listed? Is it a low volume exchange? If the answer is yes, there is a risk that it will be difficult to cash it out reasonably. Spacey2025 has not appeared on any major stock exchange, which may already make us wonder about the reason behind it.

Only the cryptocurrency projects? Diversifying the portfolio

Many crypto businessmen have earned their fortunes by investing their assets in the new projects. However, we should keep in mind that cryptocurrency investments can bring not just the great profits, but also sudden losses – even if we follow all the previously mentioned aspects of project verification. Therefore, we should definitely remember about capital diversification and prior risk analysis. The risks associated with investments can never be completely eliminated or predicted, but we can at least minimise the possible losses.

Diversification, i.e. allocating your capital into different assets, is designed to protect investors from losing their entire savings. When investing in digital assets that carry risk, the exchange rate can’t be predicted, only speculated on. By dividing the capital between different assets, you can be sure that you won’t lose all your money in the event of a bad investment call. Apart from the cryptocurrencies, you can invest some of the savings in, for instance, real estate, stocks, raw materials or works of art.

Bibliography: YouTube

List of the KNF’s public warnings and money laundering

Despite the fact that more and more people start acknowledging the presence of cryptocurrencies in the modern world, many still doubt whether the activities carried out on cryptocurrency exchanges are legitimate. It is worth pointing out that, in spite of the decentralization of these institutions, they must meet the applicable legal requirements in a given country. In Poland, for instance, all suspicions regarding the lawfulness of the actions undertaken by financial institutions are reported to the Polish Financial Supervision Authority (KNF), which is obliged to create a list of public warnings.

What exactly is the list of the KNF’s public warnings?

The Polish Financial Supervision Authority is a body that ensures the orderly functioning of  financial institutions including  electronic money institutions operating in Poland.

With users’ safety in mind, the Authority has introduced a list of public warnings commonly referred to as the “KNF’s blacklist”. The main idea behind  the creation of this list was to build trust to both the financial sector and the Supervision Authority itself.

Each consumer can find a list of public warnings on the KNF’s website. It comprises financial market entities for which the suspicion of committing a criminal offense was reported. The list mainly includes cases related to performing activities unauthorized by the Polish Financial Supervision Authority.

Until the high-profile scandal related to putting Amber Gold, a non-bank financial intermediary, on the list of public warnings, the list was managed by the officials of the Polish Financial Supervision Authority. They were responsible for detecting dangerous activities and subsequently registering them on said list. However, after the fraud scandal involving Amber Gold, the law was tightened up. Consequently, also the method of selecting suspicious enterprises had to change – from then on the Supervision Authority has been obliged to list all entities suspected of committing a crime.Such entry on the list may be made by means of the notification by the Supervision Authority or by a person who reports a case to the prosecutor’s office.

The standard procedure after putting an entity on the list of warnings is to notify the relevant authorities, i.e. the prosecutor’s office, of a suspected crime. This entails the initiation of criminal proceedings and the associated risk of financial penalties (even multi-million) or even imprisonment of individuals responsible for running the business.

Consequences of entering an activity on the list of public warnings

The entry is purely informative – the Supervisory Authority simply reports a notification on suspicion of committing a criminal offense, therefore the warning itself does not directly imply problems related to the functioning of the company. It is the decision of the prosecutor’s office issued after analyzing the case that states whether a crime has been committed.

The main problem for the listed institutions may be undermining their image. Clients using the services of a company that drew the KNF’s attention may suspend the current use of their services out of fear for the safety of their funds. There is nothing wrong with that, as long as we remember to carefully analyze all available information, preferably from multiple independent sources, before passing our own judgment. Being listed on the public warnings list does not spell the end of the company’s activity, it solely means that it will be determined whether its activity complies with the applicable law. Despite that, the “blacklisted” entrepreneurs are being stigmatized, they are exposed to public condemnation and rejection by society.

Examples of institutions included on the list of KNF’s public warnings:

  • Amber Gold is a financial institution established in 2009. The company operated without required permits or supervision while offering to increase cash savings by a high percentage – people were supposed to make fixed-term deposits backed byprecious metals. It is worth noting that the Polish Financial Supervision Authority also did not grant Amber Gold a permit to conduct banking activities. Consequently, it was listed on the KNF’s blacklist already in the same year it was established. Amber Gold was closed only 3 years after it had been  put on the list of warnings. This means that, throughout this whole period, large amounts of dirty money may have flowed through the business.
  • BitBay – was the first largest cryptocurrency exchange established in Poland. In 2018, the Supervision Authority registered its activity on the list of public warnings, alleging it was providing payment services without a permit.
    This resulted in BitBay’s headquarters being moved to Malta. In 2021, the company rebranded, which also involved changing the company’s name to “Zonda”. One of Zonda’s goals, apart from the popularization of cryptocurrencies, has become to regulate the market in Poland. The stock exchange obtained an Estonian license allowing it to provide financial services.
    In the interview with the founder of BitBay, Sylwester Suszekon, published on the BUSINESS INSIDER portal, we can read that, before announcing publicly that BitBay was placed on the list of warnings, none of the company’s management board members had been informed about this decision. It came as a shock, without any warning.
  • Kanga Exchange is a Polish cryptocurrency exchange established in 2018. In addition to stock exchange activities, Kanga has expanded its services to include cooperation with exchange offices.
    At the beginning of 2022, companies (Good Investments LTD, BSSIP LTD, Good Solution Investments Limited) involved in the operation of the cryptocurrency exchange were put on the list of KNF’s public warnings in an alleged connection with conducting activities in the field of financial instruments trading without the required permit or authorization. The persons managing the companies were not briefed by the Polish Financial Supervision Authority on why they had listed  and had not been previously informed that such an event would take place.

List of the KNF’s public warnings – does it have anything to do with counteracting money laundering?

Money laundering is a process used by criminals who want to “clean” their money by separating it from their illegal sources of income so that it appears to have been obtained from the legitimate financial gains.

Among other things, the AML (Anti Money Laundering) Act is meant to ensure that people do not avoid paying taxes which, in turn, leads to the reduction of money laundering. It has a threshold for converting fiat currencies into digital currencies of 1,000 euros, beyond which user verification is required. Illegal sources generate higher revenue, so laundering money through cryptocurrencies can be even more difficult for potential criminals than through the banks.

It is worth to keep in mind that the AML Act does not interfere with the KNF’s list of warnings. Institutions that have been (or are still involved) in money laundering or are under the suspicion of committing this crime are not entered on the KNF’s list. It is due to the fact that the entry on the list of warnings does not qualify as a notification on suspicion of committing a crime of money laundering – this is dealt with by the General Inspector of Financial Information (GIFI).

When analyzing the cases of activities put on the list of the Supervisory Commission, it can be noticed that the entry itself constitutes merely the information for the general public, not a tool for combatting money laundering itself. There have already been cases of companies  being recorded in the list without any official justification from the Commission whatsoever. The actual level of crime and social harm in these vary from case to case and yet they are all treated in the same way. Without any clear information regarding  the allegations, it is difficult to respond to the situation or take any substantive action. As for the cryptocurrency institutions, the notification from the Polish Financial Supervision Authority  leads to changes in their respective business activities, so that they comply with the applicable legal provisions. In order to avoidany doubts regarding the activities of cryptocurrency exchanges in Poland, the concrete, pertinent regulations must be enacted in the first place.

Zuzanna Kwiecień
for Kanga Exchange

How is money really being laundered?

Cryptocurrencies lure buyers of all ages. Investors appreciate them for their anonymity or cheap and fast money transfers. Unfortunately, more and more often we hear that cryptocurrencies are being exploited by criminals who utilise them for unethical purposes. Online banking seems to be a conducive space for fraudsters who take advantage of technological gaps or ignorance of financial institutions’ users. These criminals extort and steal confidential data linked with bank accounts or digital wallets. Such data is enough to carry out a money-laundering process on accounts of unaware and unsuspecting owners.

Money laundering is not only a financial criminal offence – it is also a tool that fosters other felonies such as political crimes or financing terrorism.

What exactly is money laundering?

Money laundering is an activity aimed at covering up the source of the money. It’s most often used to hide illegal income obtained for instance from corruption or drug trafficking.

Concealing the source of income by means of cryptocurrencies is quite complex and risky compared to the conventional methods. Digital currency transactions are, contrary to the popular belief, much more transparent than fiat currency exchanges. Cryptocurrency transactions are recorded in a public ledger ensuring the transparency of the trades. This idea is clearly the opposite of money laundering, which intends to obscure the transaction’s trail.

What does the money laundering process look like?

Revenue derived from illegal sources is introduced to the general financial circulation. The entire procedure breaks down into three main stages:

Placement

The first stage is the placement of the “dirty” money. It is physically introduced into the banking system in order to exchange cash for other tangible assets. The following methods can be used at this stage: smurfing – making a series of smaller deposits to a specific bank account for amounts that are below the reporting threshold; structuring—several fictitious people make payments for relatively low amounts that are below the regulatory reporting limits; exchanging money by people hired to exchange currency without registration; blending both the “clean” and “dirty” money in places where numerous unregistered cash transactions are made every day, such as restaurants.

Layering

The second stage of money laundering is layering, i.e., concealing the source of the money. Its purpose is to further move the money away from its illegal source. It is precisely in this phase that cryptocurrencies may temporarily come into play. They might be used for multiple fiat-crypto and crypto-fiat exchanges. The essence of the second phase is to conceal the source of the money, which is why numerous financial operations are carried out. As a result, the relationship between the turnover and its source is no longer visible or traceable.

Integration

The final step is to integrate the “laundered” money disguised as legal income back into the financial system. The funds have the appearance of having been derived from legal sources, as they already have documents issued by relevant financial institutions, for instance, banks. Fictitious purchase and sale transactions between people involved in the whole illicit procedure are just one example illustrating how money’s certificates of origin can be obtained.

Do banks launder money?

In 2018 the AML (Anti-Money Laundering) Act entered into force. It defines a set of rules aiming to prevent the introduction of illegally obtained money into circulation. The Act covers various financial activities as well as businesses in order to counteract money laundering. Any failure to comply with the Act results in high fines.

It is difficult to establish how exactly banks launder money. Nevertheless, thanks to affairs concerning institutions like BOŚ Bank or ING Bank, the fact that it happens is undeniable.

As ‘Dziennik Gazeta Prawna’ reports, proceedings are pending against Bank Ochrony Środowiska, which is a bank controlled by the State Treasury. A year after an inspection by the GIIF (General Inspector of Financial Information) in March 2019, the proceedings were initiated against the institution. They revolve around suspected laundering of money from the United States and huge amounts of money are involved. This of course concerns customers of state financial institutions since the body that has access to their cash is suspected of illegal activities.

In 2018, ING Bank was fined 775 million euros for negligence leading to money laundering taking place at this very institution. This might be unsettling for users of traditional institutions, which by definition should guarantee security and regular controls to prevent illegal procedures. After these events, banks have been forced to introduce verification of transfers, which in turn causes users to complain about problems with freezing their assets in bank accounts. Besides, the practice of banks asking about the source of the money is gradually becoming commonplace.

What are the consequences of money laundering?

Money laundering is an illegal procedure that leads to many negative consequences. In addition to the most important repercussions, i.e., befitting penalties for complicity (including reckless complicity), this practice also has its consequences on a global scale. Money laundering is punishable by imprisonment of up to 8 years, but so is the practice of banks and other institutions aiding and abetting money laundering. Complicity can be defined as the act of procuring, facilitating, or advising the commission of acts considered to be the laundering of money obtained from illicit sources. State financial systems are hit by massive instability, with tax systems being particularly affected, and the mechanisms of the market economy are shaken. Countries with a high record of money laundering undermine their credibility in a global context (this applies not only to the entire state as such, but also to its institutions, banking systems, or the entrepreneurs themselves). Combatting money laundering also means preventing corruption among politicians or officials.

Every modern business entity, including traditional financial institutions, cares not only about generating income, but also about establishing its positive image in the context of conducted activities. Therefore, their decision-makers are prepared to potentially cover up abuses such as money laundering in order to build or maintain their reputation.

It is important to bear in mind that virtual currencies in the context of money laundering only appear in the layering stage, fiat money in the form of cash is mainly used for this purpose specifically. Companies associated with cryptocurrencies such as Kanga Exchange warn against money laundering through virtual currencies, introduce campaigns to discourage the idea, but also have special procedures in place to verify if the transactions performed by the user resemble money laundering (e.g., repeated low deposits, not exceeding the verification threshold characteristic for layering and allowing the users to remain anonymous). After a thorough analysis of the topic, we can ask ourselves whether the aggression aimed at cryptocurrencies in the context of money laundering is fair? Or maybe it all just stems from the need to divert attention from the existing problem, propelled by the ignorance and fear of new technology, i.e., blockchain?

Zuzanna Kwiecień
for Kanga Exchange