In October 2008, a paper titled ‘Bitcoin: A Peer-to-Peer Electronic Cash System’ was published, announcing the creation of one of the world’s first cryptocurrencies. This paper was written by Satoshi Nakamoto, the inventor of Bitcoin.
Nakamoto then created a message board called BitcoinTalk and wrote, “I’ve developed a new open-source P2P e-cash system called Bitcoin. It is completely decentralized, with no central server or trusted parties, because everything is based on cryptographic proof instead of trust. Give it a try.” Obviously, people did.
But who is Satoshi Nakamoto? The short answer is no one knows. There is at least one real person behind this alias because someone wrote the code for Bitcoin, published a paper about crypto, sent emails and made forum posts about the new digital currency. But beyond that, Nakamoto’s identity remains a mystery.
Some think it’s Elon Musk, though he’s denied the rumor. An Australian computer scientist named Craig Wright claimed to be Nakamoto and was awarded copyrights on the original paper published on Bitcoin and its early code. Although, the validity of his claim has since been called into question by many journalists and lawyers who have followed him through multiple court cases. There was even a Japanese American physicist named Dorian Nakamoto, who many thought might be the elusive crypto god, but, alas, he insists it wasn’t him.
Perhaps one of the reasons that Satoshi Nakamoto will never come forward is because they own about $25 billion in Bitcoin, and sometimes, anonymity is the only way to feel safe.
It makes sense that one of the largest contributors to the cryptocurrency would want to remain completely hidden from the public. After all, anonymity is one of the biggest selling points of the entire invention.
Cryptocurrency are digital currencies that verify and record transactions to a decentralized blockchain. A blockchain is essentially an immutable public ledger; once transactions are completed, it is final and irreversible, and every person on Earth can view it for themselves, despite not having an identity tied to it. It offers a way to move money outside of central banks and financial institutions, giving people a perceived sense of freedom and safety in their financial lives.
But the reality is that although anonymity can give a sense of safety to some people, it can also be extremely dangerous. The anonymity promised by cryptocurrency isn’t only appealing to those who are skeptical of traditional financial institutions, it’s also a useful tool for criminals. Dangerous people who want to bypass banking systems and move money anonymously. Dealers and users buying and selling drugs and even darker illegal goods on the internet while avoiding the watchful eye of law enforcement.
This works because although all transactions are tracked and recorded, there’s no personal information tying an individual to their crypto keys. It’s just a random hash of numbers and letters, hardly representing any information at all.
This has led to terrorists, people involved in human trafficking, and drug dealers to seize upon the technology for nefarious gains. The Silk Road, one of the most famous online drug markets on the dark web, used crypto for its transactions. The U.S. Justice Department has also dismantled at least three terror finance campaigns that were soliciting cryptocurrency funds.
The rise of cryptocurrency has fueled growth in global ransomware attacks, which have seen a 485% increase in recent years. In 2021, the FBI seized $2.3 million dollars worth of cryptocurrency from the REvil (R Evil) ransomware group who hacked U.S. security and IT management software provider Kaseya (Kah-say-ah). Not only do these cyber hackers demand crypto as payment, but crypto makes their whole business possible.
And it isn’t just large companies that have to watch their backs. Online crypto scams coercing people to invest in fraudulent crypto funds or fake cryptocurrencies are rampant. Last February, Satish Kumbhani (Sah-TISH Koomb-HA-ni) of India, the founder of Bitconnect, was indicted by the U.S. Justice Department for creating and running a fraudulent cryptocurrency investment platform.
The Monetary Authority of Singapore suspended a crypto coin illegally named after the world-famous South Korean boyband, BTS. And after the success of Netflix’s Korean hit Squid Game, scammers used the series’ popularity to create fake crypto coins. The value of the coins skyrocketed 310,000% in just 11 days, which does sound appealing; the catch though, is that this coin is what was known as a “honeypot.” Essentially, you were able to purchase it, but weren’t able to sell it. Because of this, you traded your dollars for this Squid Game coin, and the scammers escaped with millions in cash from unwitting investors, leaving them with a token that couldn’t be sold and is literally worthless.
Now you might say, well, scams happen at all financial institutions, and you’d be right. But at least with many third-party backed institutions, you get protections that crypto just doesn’t offer. If your regular credit card gets hacked, you will usually get your money back since your bank or financial institution has consumer protections. With crypto, those protections don’t exist.
So when hackers get access to your private keys, or you get scammed into buying a fake coin, or you invest in a fraudulent exchange, once you give them your cryptocurrency, it’s gone forever.
In 2021, there was a reported $3.2 billion in crypto stolen, a 516% increase compared to the year before. And as new technologies involving crypto and blockchain technology become more popular, a new wave of crypto and NFT scams will inevitably rise.
NFTs, or non-fungible tokens, are blockchain-based tokens that represent a unique asset like a piece of art, music or other digital content that can be purchased with cryptocurrency. They’re meant to give artists more control and freedom over their work. But we don’t live in an ideal world, do we?
Although NFTs were in a sense “invented” in 2014 with the creation of Ethereum, the real NFT revolution began to boom in 2021. With the help of artist Mike Winkelmann, also known as Beeple, his digital artwork Everydays - The First 5000 Days sold for $69 million and helped put NFTs on the map. Since then, artists and collectors at every scale have benefited from the creation of NFTs, but they’ve also experienced the same rampant scamming in all areas of the crypto world.
A crypto investor who goes by MetaKovan bought Beeple’s $69 million NFT in 2021 and also happens to be the owner of the world’s now largest NFT fund, which studies data to provide analysis on various NFTs. Is $69 million a lot to pay for a digital piece of art? Yes. But what if it brings in far more than $69 million to your business? Some say that Metakovan’s purchase of Beeple’s NFT allowed him to drive up prices in his own NFT business.
NFTs have, in a sense, become a game of who can tell the most believable lie. It was once reported that an NFT called Cryptopunk #9998 of a white haired, green eyed pixelated character sold for $532 million. It was set to be the most expensive NFT of all time until it turned out that the buyer and seller were the same person, creating a fake valuation for their own benefit.
In the crypto world, since buyers and sellers remain fully anonymous on the blockchain, the wallets involved in the transaction are known, but who they’re owned by is not. However, due to the open nature of cryptocurrency, anyone could check the chain and see for themselves that these two wallets had interacted in the past.
If overestimating the value of digital art was the only problem, then maybe NFTs wouldn’t have such a terrible rep. I mean, who even determines the worth of physical art, anyway?
Sadly, with NFTs, overestimation of value is just the beginning. NFTs are embroiled in more scams than you could possibly imagine.
In February of 2022, a small but reputable NFT marketplace Cent had to suspend sales after rampant fraud was discovered on the platform. Its users were minting counterfeit digital assets despite the marketplaces best efforts to ban them. This is just one example of the issues around the authenticity of crypto art and reinforces one of the most popular sayings in crypto.
“Don’t trust, verify.”
With an entirely public blockchain, you are entirely capable of checking every single transaction you make to ensure that what you are purchasing is coming from the original creator. Unfortunately, many seem to forget this crucial part of what makes cryptocurrency important.
In another example, someone sold a fake Banksy NFT for over $300,000.
One of the specifically dark sides of NFTs is that people who get into digital art for creative purposes are easily exploited. Enthusiasts communicate on apps like Discord, Twitter and Instagram. But these same apps allow hackers to lure ignorant NFT aficionados into scams by using fake links that look like an opportunity to mint NFTs for cheap, get free airdrops, and much more. The targets are asked to invest their cryptocurrency into NFTs that won’t ever be created, and then all of that money just disappears from their wallets, never to be seen again.
Even Beeple fans haven’t escaped unscathed. In May 2022, scammers hacked Beeple’s Twitter account and stole $438,000 worth of crypto and NFTs from his followers. They impersonated the artist, claiming to have launched a new line of digital art with Louis Vuitton, and posted a raffle for the fake collection in his Twitter bio. The hackers used a phishing scam, deceiving people into revealing sensitive information or unknowingly installing malware. Once they clicked the link in his bio, all the cryptocurrency and NFTs in their crypto wallets were completely wiped out.
The fragility of the crypto universe was clearly evident in the recent collapse of the cryptocurrency exchange FTX. FTX was the brainchild of Sam Bankman-Fried (Freed). Bankman-Fried was the founder of the quantitative trading firm Alameda Research in 2017 and then FTX two years later. As the majority owner of both firms, there was initial concern over his conflict of interest, but he assured people that they were separate entities. That unfortunately turned out to be a lie.
Contrary to what Bankman-Fried said, FTX used its customers’ money to fund risky bets made at Alameda. They would take customers' deposits, sell them on FTX to regular traders, and then use the cash to invest in other companies. To take it even further, these companies they invested in would often be forced to store their treasuries in accounts on FTX, where the funds could then be used again by Alameda, and the snowball continued to roll.
On November 6, 2022, the world’s largest crypto exchange, Binance, which was also a leading angel investor in FTX, said it would unload hundreds of millions of FTX tokens. This was also around the time a leaked balance sheet came out showing that the majority of FTX’s collateral was in their own FTX token. As you can imagine, if Binance were to sell hundreds of millions of this token, it would drive down the price, and in turn drive down the value of the collateral that FTX held, collateral that was supposed to be customers' assets.
An OTC or “over the counter” deal was offered by Alameda to purchase them at $22 a token, but this wasn’t taken. The market called their bluff, and within 48 hours, FTX’s token was down 93%.
Days later, the U.S. Securities and Exchange Commission and the Justice Department began investigating FTX. On November 11th, Bankman-Fried resigned from both companies and FTX filed for bankruptcy.
In many ways, the FTX collapse seems like a traditional financial catastrophe the kind we saw during the 2008 financial crisis. But crypto, with its promise of anonymity and its assurance of no go-betweens, makes the FTX disaster very different. Millions of dollars in FTX funds were stolen during the bankruptcy process. No one knows by whom.
The collapse of FTX has led other cryptocurrency companies to tout their cash reserves and call for greater transparency. Because, even if you’re not out there buying and trading cryptocurrency, you know it's had its fair share of pretty bad PR moments.
And just a couple of weeks ago, one of the largest banks backing cryptocurrency clients, Silvergate Capital, collapsed during the disastrous Silicon Valley Bank run. Silvergate got into the game early and was willing to work with many tech and crypto companies which led to a $6 billion valuation in 2021, but as they say, oh, how the mighty have fallen.
And the loss in value isn’t the only narrative that needs damage control.
As crypto has grown in popularity, especially amongst young people, environmental concerns around what it takes to sustain the industry have become widely discussed. In 2021, Cambridge University researchers calculated that Bitcoin mining was using more electricity than the whole country of Argentina. This huge carbon footprint of blockchain technology has alerted people, especially those who care about sustainability, to crypto’s sizable contribution to climate change.
However, the Cambridge Center for Alternative Finance estimates that Bitcoin uses just over 100 Terawatt-hours of energy per year to facilitate transactions and keep the network running. In reality, this is actually less energy than what is used for gold mining in a year. In fact, the iron and steel industry uses over 10 times this amount of energy on an annualized basis. If Bitcoin was a country, in terms of energy usage it would rank 32nd out of 59 tracked by the Cambridge Center. So yes, while Bitcoin mining does use quite a bit of energy, it is far from the biggest problem on this front.
What effect this will have on the future of cryptocurrency depends on people’s continued desire for the anonymity that crypto provides. The anonymity that allows you to transact back and forth anonymously with anyone is the same anonymity that allows criminals to run rampant and scammers to run off with millions. It’s a double-edged sword.
However, it’s getting easier for investigators to track crypto exchanges by deciphering patterns in the blockchain. There’s a small group of detectives who have begun tracing cryptocurrency crimes for law enforcement agencies, and a cryptocurrency tracing firm, Chainalysis, has emerged to find these patterns.
They find groups of blockchain addresses that come from a single person or service, follow the money from those clusters, watch it move, and eventually figure out which crypto exchange the money came from. In the U.S, crypto exchanges are legally required to retain identifying information about users under KYC rules, standing for Know Your Customer. So the promise of anonymity, the one that the entire argument of crypto hinges on in the first place, is not always so certain.
There are currencies on the market that appear to be more untraceable than their competitors. Monero, which has been adopted by dark web markets, claims to be untraceable. Zcash is another that gives even the best tracers trouble, leading many to fear it will provide safe harbor to criminals and people evading taxes. The question is, will law enforcement and other agencies be able to catch up as new blockchain technologies are created?
So far, they’re not doing too badly. In 2021, criminal investigations by the IRS seized over $3.5 billion in cryptocurrency, there was a $56 million seizure by the Justice Department and $2.3 million was seized from the ransomware group behind the Colonial Pipeline cyberattack, which alerted the American public to the real potential danger of these cyber criminals.
Then in 2022, a New York-based couple was arrested for laundering money they’d stolen by allegedly hacking a large crypto exchange, Bitfinex. They had turned some of the money into the apparently untraceable Monero, but law enforcement could trace it and found exchange accounts in their name. They found the private keys of a wallet holding over 100,000 Bitcoin and seized it, being worth about $3.6 billion at the time. To this day, it’s still not known if or how these addresses were tracked. However, one thing is certain, and it’s that this was the largest cryptocurrency seizure in history.
So while crypto has its positive aspects for those seeking complete control over their finances, it’s trustless and anonymous nature requires extreme caution, because the negatives can cut quite deep if you aren’t careful. If you are going to get involved, be wary of scams, hold your own keys, and remember, “Don’t trust, verify.”
Governments across the globe continue to look at how to regulate cryptocurrency before it gets too out of control by their measures. Unfortunately for them, bureaucracy tends to move very slowly while technology, especially crypto, moves at breakneck speed.
Technology can be amazing! But when the creators don’t put measures in place to curb the potential negatives of their creations, we can be left in a pretty bad situation.