When Cryptocurrency Exchanges Fail Consumers Beware - Scams Abound


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DENVER - When the high profile cryptocurrency exchange platform FTX collapsed, many investors realized the hard way the true volatile nature of cryptocurrency, as well as the high risk of holding cryptocurrency assets in wallets with third party exchanges and transmitters. Even worse can be the financial scams that follow such disasters.

What should you know as a consumer about cryptocurrency before creating a wallet on a third party public cryptocurrency exchange? .

Facts About Cryptocurrency and Exchanges

  • Cryptocurrencies aren’t backed by a government or central bank.
    Unlike most traditional currencies, such as the U.S. dollar, the value of a cryptocurrency is not tied to promises by a government or a central bank.
  • When you store your cryptocurrency online, you don’t have the same protections as a bank account. Investor’s holdings in online “wallets” are not insured by the government the way bank deposits are. The FDIC has issued cease and desist orders to companies that state or imply they are insured, when in fact they are not. The FDIC’s Bankfind tool will tell you if the financial entity is insured or not.
  • A cryptocurrency’s value is not guaranteed. Just like any high risk investment, what appears to be worth thousands of dollars one day could be worth pennies in a matter of hours.
  • Cryptocurrency payments do not come with purchase protections.  Cryptocurrencies typically do not have purchase protections. For example, if you need to dispute a credit card purchase, your credit card company has a process to help you get your money back. Payments via cryptocurrency transmissions do not.
  • Cryptocurrency payments typically are not reversible. Once you pay with cryptocurrency, you can usually only get your money back if the person you paid sends it back. Before you buy something with cryptocurrency, do some research on the seller or company before you pay.
  • Your transactions are public. People talk about cryptocurrency transactions as anonymous, but it’s not so black and white. Cryptocurrency transactions on exchanges are recorded on the blockchain, a public list/ledger of every cryptocurrency transaction. Sometimes it’s possible to identify the people involved in these transactions.
  • Regulatory agencies are limited in their ability to handle complaints.
    There are few avenues for investors to turn to because of the unregulated nature of cryptocurrency, so while state and federal regulatory agencies may license and regulate some exchange companies as a money transmitter, regulators are extremely limited in their capacity to resolve or intervene on consumer issues that arise related to deposits or transactions with this type of exchange. Consumers should be fully aware of these risks before investing money in cryptocurrency or holding money in cryptocurrency exchanges.

Scams That May Follow Failed Exchanges

Whenever a financial crisis hits, potential scammers seem to follow looking for ways to cash in. If you’ve lost money in crypto, scammers might try to convince you they can get your money back. They’ll impersonate the government, a company, or another organization saying that they can help you recover your money. To spot and avoid recovery scams, remember:

  • Don’t pay anyone who offers to recover money you lost to a scam.
    Nobody legit will call, email, send a letter, or contact you on social media with this kind of offer. They’ll make up lots of stories to convince you they can recover your money. But first, they’ll tell you to pay them a fee. Or give them your financial information so they can put those lost funds back into your account. And if you pay any fee they charge, or give them any account information, your money will be gone.
  • Check out any offers if you’re still tempted. Remember: it’s not how government agencies work, and no legit company or organization will contact you about getting your money back. But if you’re curious, search for their name online with the words “complaint”, “scam” or “review.” See what people say.
  • Know that only scammers will tell you to pay by gift card, cryptocurrency or wire transfer. It’s a sure way to know that whoever you’re dealing with is a scammer.

Billions in cryptocurrency fraud schemes have been reported, and agencies like the Federal Trade Commission (FTC) and the North American Securities Administration Association (NASAA) release helpful advisories and videos to keep up consumer awareness about the risky nature of cryptocurrency and cryptocurrency exchanges.

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