In the previous article "Web3 Investment Guide | Security (04): Millions of Crypto Assets Stolen, How to Protect Crypto Wallets?", Portal Labs provided ways to prevent crypto scams from the perspective of wallet management.

But in fact, in addition to the endless security incidents, high net worth investors also need to face other investment scams. These scams are not simple "head-pulling funds", but disguised as high-end financial services such as hedge funds, family offices, private banks, project investment opportunities, etc., which are hard to guard against.

Perhaps you have heard such a "recommendation": Web3 project, team members come from many well-known projects, investors include a series of well-known VCs and institutions, and now the investment promises a return on investment of 50%. Many wealthy businessmen from Singapore and Hong Kong have invested...

At first glance, these descriptions sound very tempting, with both background and high returns. However, the reality is often that at best the other party will rug pull (run away with the money), or at worst you will be involved in criminal issues such as transnational banking, money laundering, etc.

Therefore, in this article, Portal Labs will combine real cases to review these seemingly high-end but actually carefully designed scams, and provide feasible prevention strategies to ensure asset safety.

Fake Crypto Fund Scam

In the traditional financial market, the most common investment method is funds. Both hedge funds and quantitative funds are very popular among high-net-worth investors. Naturally, these types of funds have also appeared in the Web3 market to help investors achieve rapid growth in wealth.

However, unlike the traditional financial market, crypto funds currently have no special system of regulation and supervision. Therefore, many scammers have set their sights on this gray area and packaged scams with the concept of "crypto funds" in an attempt to attract high-net-worth investors.

For example, Arbix Finance in 2022 claimed to be a decentralized quantitative fund audited by CertiK, focusing on DeFi arbitrage strategies and promising investors a 5% return every day. Early investors were able to withdraw funds, but after just a few months, the funds in the fund account were quickly transferred to an anonymous address, the official website was closed, and the team lost contact, ultimately causing investors to lose $10 million.

How to prevent it?

First of all, the easiest way to identify this type of scam is that all funds need to be registered and filed. Currently, both onshore and offshore funds are registered in some mainstream countries and regions, such as the United States, Singapore, Hong Kong, and BVI. You can directly check whether the fund and fund manager are licensed.

Secondly, if it is a fund that advertises that it has had many successful cases, investors can check its historical performance in databases such as Preqin and Crunchbase;

In addition, the fund needs to disclose relevant information to investors on a regular basis. At the same time, because crypto funds usually use cryptocurrencies as assets, investors can also query the fund address through tools such as Etherscan and Nansen to check the flow of funds and the dynamic situation of the fund's holdings.

Crypto Bank Deposit Scam

In recent years, some criminals have begun to imitate traditional private banks and wealth management companies to launch so-called "high-end crypto deposit products". These scams usually promise to enjoy interest returns far higher than the market level by depositing digital assets such as Bitcoin (BTC) or Tether (USDT), and even claim to be able to avoid taxes in compliance, attracting many high-net-worth investors. However, these so-called "crypto banks" do not actually have formal financial licenses and regulatory guarantees, and funds are often abused, ultimately leading to asset losses for investors.

In 2022, the U.S. Securities and Exchange Commission (SEC) accused the crypto lending platform NEXO of illegally providing deposit services, with the funds involved reaching $120 million. NEXO once claimed that its platform provided a deposit return of "12% annual interest rate" and claimed to hold financial licenses in many countries. However, the SEC investigation found that NEXO was not effectively regulated, the deposit products it provided were not compliant, and investor funds were not properly managed. In the end, a large number of accounts were frozen, and investors were unable to withdraw funds, resulting in heavy losses for investors.

How to prevent it?

Before investing in a crypto banking platform, be sure to check whether it holds a legal financial license, such as the UK FCA, Singapore MAS, Switzerland FINMA, etc., to ensure that the platform operates legally under the supervision of relevant regulatory authorities.

Compliant platforms usually hold customer funds in independent custody to prevent abuse and misappropriation. Therefore, if the platform does not have a clear third-party custodian, or the deposit funds are not managed through a regulated trust institution, investors should be highly vigilant.

Even if the platform does hold financial licenses in multiple countries, it needs to regularly confirm its compliance status. Changes in the regulatory environment may affect the legality of the platform, and it is very important to keep abreast of relevant regulatory changes.

Crypto Project Ponzi Scheme

In Web3, Ponzi schemes are everywhere. Whether it is ordinary investors or high net worth investors, this type of scam is often the most likely to fall into the trap. The biggest feature of Ponzi schemes is that they attract funds by promising high returns, but there are no real investment projects. All returns are just paid to old investors through the funds of new investors until the capital chain breaks, eventually causing investors to suffer heavy losses.

At the same time, in existing cases in China, investors who participated in Ponzi schemes (also known as pyramid schemes) were also unable to get back their defrauded funds as accomplices. Therefore, high-net-worth users in particular need to be extra careful to avoid participating in such projects.

For example, OneCoin is a fake project disguised as a cryptocurrency. The project claims to be a breakthrough cryptocurrency, but in fact it has no actual blockchain technology to support it. Its founder, Ruja Ignatova, attracted a large number of investors through false propaganda and promises of huge returns. However, in the end, OneCoin was revealed to be a Ponzi scheme, the founder Ruja disappeared, and investors suffered heavy losses, totaling more than $4.5 billion.

How to prevent it?

Any project claiming to be a cryptocurrency should have full transparency and be subject to independent third-party audits to ensure that its actual projects and technologies are legal and compliant. Therefore, investors need to be wary of projects that are not publicly audited, especially tokens that do not have a clear technical architecture and practical applications.

If the annual rate of return promised by a crypto project is much higher than the normal range of the market, investors need to be highly vigilant. The typical feature of a Ponzi scheme is to attract funds by exaggerating returns, but the actual project does not have the ability to make sustained profits.

Investors should conduct in-depth investigations on the background of the project owner to understand the experience of its founding team and historical project achievements. At the same time, use tools such as Etherscan and Nansen to check the flow of funds to ensure that the funds are not flowing into unrelated accounts or being directly transferred to unknown locations.

Avoid investing all your money in a single project, especially in risky crypto projects. Diversify your investments and combine traditional financial instruments with crypto assets to reduce the risk of your overall portfolio.

Protect your crypto investments

In the crypto market, the risks faced by high net worth investors go far beyond the financial losses caused by market fluctuations. More importantly, due to the lagging supervision and lack of transparency in this field, scams and non-compliant projects continue to breed.

Therefore, in the Web3 era, the real investment wisdom is not only to find the next project that will grow tenfold, a hundredfold, or a thousandfold, but also to ensure that your assets are protected from fraud and risk. Investors must establish strict investment screening criteria and multiple protection measures. The following three points are recommended for your consideration:

  • All investments must undergo independent due diligence. Do not rely solely on the project party’s publicity. There must be an independent third-party investigation.
  • Compliance is an important principle to avoid falling into the trap of "Web3 without regulation" and ensure that all financial institutions have legal licenses.
  • The details in the contract may determine the survival of the assets and must be reviewed by a professional legal team.