The Fraud Examiner

What You Need to Know About Virtual Currency Fraud

What You Need to Know About Virtual Currency Fraud

By Walt Manning, CFE

October 2015

Juan looks at the transactions floating on one of his 3-D holographic displays. The numbers are showing real-time movements of virtual currency funds around the world. He is pleased with the level of activity, and everything seems normal, so he tells the display to close. He brings back the display of the movie he had been watching, which automatically starts where he had closed it.

Digital currencies like the old Bitcoin had been around for years. Physical “money” had been replaced years ago, when governments realized that it would be so much cheaper and easier to convert to digital. In the old days, there was a certain amount of anonymity as long as someone used cash. Now that everything is digital, every transaction can be tracked.

Governments had long used the volume of currency and interest rates to devalue their currency (and therefore the value of their outstanding debt). With digital currencies, they can now accomplish this even more effectively.

But almost anybody can create an alternative virtual currency. Groups of countries, anarchists and criminals have created and maintained different versions for their own funding purposes. As long as someone else recognizes the value of an alternative currency, then the ability to move funds internationally is still possible.

Juan took a different approach. He and a small group of friends created their own virtual currency that they named “Digitcoin.” They then set up several thousand virtual businesses that accepted this new currency, and even created some exchanges where users could convert other types of virtual currencies into Digitcoin and vice-versa.

But the relative value of a virtual currency is based only on the trust that other people have in the reputation and stability of one currency compared to another. Juan and his group actively promoted Digitcoin, and over time it had gained good reviews.

But their true goal was to make sure that enough Digitcoin was widely distributed and then exchanged for other types of virtual currency. As more people invest in Digitcoin, the group slowly converts these funds through other exchanges into safer (and valid) currencies in many different countries.

Today is the day for the big payoff. After Juan’s movie finishes, the members of his group connect on an encrypted Dark Net chat room. After they coordinate their final arrangements and sign off, each member carries out his or her assignments. Suddenly, all of the Digitcoin exchanges and related businesses disappear from the network. People holding Digitcoins are no longer able to spend or convert them. All of the funds in the missing virtual businesses and Digitcoin exchanges have vanished. The entire Digitcoin scheme had been fraudulent from the beginning.

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