Crypto Criminals Part 2: Experts Explain

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[00:00:01] Bob: This week on The Perfect Scam.

[00:00:03] Kathy Stokes: We're seeing a lot of investment related scams, you click on an ad on, on social media, and you're taken to a uh what looks like a legitimate cryptocurrency trading site, and you start buying and selling and when you actually try to sell and get your money out, you realize then that you've just been putting all of your money into a scammer's pocket.

[00:00:26] Lee Reiners: Cryptocurrency's tailor-made to suit the needs and purposes of criminals. And when it comes to actually using crypto it's principally being used for illicit purposes, and it's not, you know, hard to understand why, because you know with cryptocurrency, large sums can be transferred instantaneously worldwide.

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[00:00:53] Bob: Welcome back to The Perfect Scam and our special two-episode series on cryptocurrency scams. I'm your host, Bob Sullivan. Last week we heard from Mei Mei Soe. She lost her life savings and money she borrowed because of a crypto scam. There are so many stories like Mei Mei's that we've heard recently. This is a new crime and things are moving fast. The Federal Trade Commission says crypto recently became the number one way people who are victims of scams send their money to the criminals. Crypto scams don't discriminate, in fact, younger people are more likely to report being victims, but older people report bigger thefts, according to the FTC. Median losses are $11,000 for victims in their 70s. That's why we're doing this special two-part episode. We're going to hear a bit about how crypto really works and the history of crypto in a moment, but first, we wanted to talk to someone on the front lines, so we're bringing back friend of the show, Amy Nofziger. She runs the Fraud Watch Network Helpline, operated by AARP it gets thousands of calls each month, and increasingly the calls are about crypto, and the stories are harrowing.

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[00:02:15] Bob: What kinds of calls are you getting to the helpline about crypto?

[00:02:18] Amy Nofziger: So, we're getting calls in really two different ways. So we're getting victims who were whatever guise of the scam it was, whether it was an imposter scam, a romance scam, a pet scam; they were asked by their perpetrator to pay by cryptocurrency. And so how they get the victim to pay in this way is they'll either email them or text them a QR code which is, we're all familiar with the QR codes, especially during the pandemic, that's how we got our menus at restaurants, et cetera, or they'll direct them online to a like a crypto exchange to put the money in that way. So once the victim has the QR code, they're instructed to go to one of the very popular crypto ATM machines that are available at liquor stores, gas stations, grocery stores, wherever, but the perpetrator doesn't even say to them, oh, this is a crypto machine. They'll just say, "Oh, this is an ATM machine. Scan that QR code, put your money in, hit this button, and you've paid your debt." And so that's one way we're seeing it, but then the other way we're seeing, which is fairly new, is they're meeting people online and just whether it's social media, like and that includes LinkedIn, Facebook, Instagram, Words with Friends, any place where you could have conversations with a stranger, and they start very innocently, like "Hey, this is my name," you know, "Oh, you know, I'm really impressed with your LinkedIn profile, you know, you'd be a great candidate for our investment club. Is that something you're interested in?" Or they're playing Words with Friends, and just as any kind of casual conversation starts, so they go, "What are your hobbies?" "Oh, you know I like to sew. What are yours?" "Oh, you know, I dabble in crypto." And that's usually how the conversation starts. So, a lot of us you know we hear about crypto, we see commercials on TV, I mean I remember recently the Superbowl, right, like every other commercial was a crypto commercial.

[00:04:22] (commercial clip) Is the hype too much? Am I ready? I can’t tell you everything. But if you want to make history, you gotta call your own shots. We going to the league, we going to the league, we going to the league.

[00:04:39] Amy Nofziger: A lot of us it's this, you know, pie in the sky; that's for the elite people, you know, it's not on our level, but at the same time we're really curious about it. So when someone who says they have experience in it extends their arm out to you almost as a mentorship and says, "Well come along with me, I'll help you figure this out." You know, we don't want to miss out. We, we call it FOMO, right, the fear of missing out. Then the perpetrator gets you to invest on a legitimate platform first, then they have your credentials and then that's when it's moved to their criminal enterprise and their platform. And, I mean, I can go over the stories, but we've had people lose millions of dollars in this scam.

[00:05:22] Bob: Oh my God.

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[00:05:29] Bob: That's exactly what happened to Mei Mei Soe who we talked with last week. She met a person through LinkedIn who offered to virtually hold her hand while she invested in crypto. She spent all her life savings on it and borrowed $150,000 too. But in the end, well this was all stolen by her friend. The way her story ends, well, Amy has heard it many times before from helpline victims.

[00:05:56] Amy Nofziger: So oftentimes what people will say is like, "Oh, you know, my, my end game was, you know, 1 million dollars. So once I saw my account hit 1 million dollars, I wanted to withdraw." Well that's when they normally find out that they're a victim because the criminal's like, "Oh, no, sorry, you can't withdraw your money without a, you know, a, a penalty, or, you know, taxes. No, we can't take it out of, you know, your principal in the account. You have to pay an additional, you know, 40%," and that's usually when the victim realizes they've been part of a scam.

[00:06:29] Bob: This friendly advice on crypto, well that's just one kind of call coming into the helpline. In some cases, crypto just adds a new twist to a crime we've already heard about for a long time.

[00:06:42] Amy Nofziger: So this consumer was working on her computer when a pop-up came up. And we've heard about these tech support scams, you get a pop-up, alarms go off. They said that there was a virus, and to not shut it down. And they said that there were criminals accessing her account, and they connected her with someone that she thought was the fraud department at her bank. And they said, "What we need you to do is we need to take, you need to take out $17,000 of your account so the criminals who are getting into your account can't have it, and then you need to put it into a bitcoin machine." And this is, again, she was given a QR code, and it was just scanned, or, you know, sent to her phone, um, she just took her phone, scanned it on the ATM machine. The part--, you know, transferred the $17,000, under the guise that they said, once they caught these people who were in her account, the money would be put back in. Um, so again, it's just these examples just show you how unique, and honestly, how creative they are. Right, no story is exactly the same with these.

[00:07:49] Bob: Something we've seen a lot in the past and will surely see with crypto now. A lot of claims go unchallenged when things are going up, but when the market goes through a rough spot, as it always does, even temporarily, well, that's when a lot of scams are exposed.

[00:08:05] Amy Nofziger: And in interesting thing to note, if anyone has, you know, turned on the TV lately, or read any paper, we've seen that um, crypto has actually gone down, um, it's lost a lot, and they're talking about a big crypto bust. So it's very similar what happens when the stock market goes down, is people get nervous, and they want to pull their funds out. And so we've actually predicted that we're going to get a lot more victims of these crypto investments because people are scared of the, of the crypto, you know, phase being over, that they're trying to withdraw their money, and that's when they find out that they've been a victim, because they've just been riding along for months thinking that they're earning all this money. Now that they want to withdraw it because crypto is declining in value, that's when they're going to find out that they're a victim.

[00:08:55] Bob: Another version of crypto scam Amy has seen recently is what's called an imposter scam. These often involve criminals impersonating famous personalities such as Selena Gomez.

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[00:09:08] Amy Nofziger: Yeah, so, so every imposter scam have really ramped up again. You know, we try to kind of follow the patterns and figure out, you know, what celebrities are they targeting now. Is it country stars, is it, you know, rap stars, you know, whomever it is. Um, and it's always just hard to tell. So what happens a lot of times with these celebrity imposters is, you know, especially during the pandemic, celebrities and, you know, well-known personalities were really accessible to their fans creating, you know, Instagram videos and Facebook reels and even doing live chats, because they, they weren't able to go out on the road. They weren't able to do concerts or create new movies, so they wanted to stay in touch with their fans. Which, for a lot of people, if you're on that fan website, or you follow them on Instagram, or you like their story on Facebook, criminals can see that. They can see your name, your profile engaging with that person. They can make some assumptions. They can make an assumption that you're really into this fan and by reading your comments, they can find out some information about you. So then oftentimes what happens is, the criminal will create an imposter page. Now, um, as you, as you probably know, um, social media does try to verify the legitimate celebrity with the blue checkmark. So the criminal, what they'll do is it'll be like, you know, SGomez123, or something like that, and they'll create a, a page that's very similar, in this case, to Selena Gomez. Then they'll either come in on, you know, DM, on Instagram, or on Messenger on Facebook, and they'll come into a certain person that they pick, and they'll say, "Hey, you know, this is Selena Gomez's manager. She's been, you know, following your comments. She just loves the interaction that you have with the fans and the page, and she wants to do really something special for you." That is when, you know, those endorphins and the ether takes over, because, you know, we all have our celebrity crush, or, you know, whatever you want to say, and all of a sudden, they notice you, right. This is the stuff that like fairy tales are made of. And that's when we start thinking emotionally and not thinking cognitively. So, you know, the manager or their press person, you know, who is fake, will say, "Yes, they really want to invite you to this special meet and greet," or, or, you know, "They're really having trouble right now, um, you know, finding a mainstream love." You know, "They're just so sick of the celebrities out there, and, and they'd love to meet you." You know, "Can you, can you come and meet?" Well of course the fan is going to be super excited about this. And then that's when the pitch comes; either you have to pay to come to this meet and greet, or I need you to send some money to cover for the private jet, or we've even had examples of, you know, all of the staff's cell phones were stolen, you know, out of their uh tour bus, and they need um, cell phones. Can you please help them? I mean they would be in, you know, in debt to you forever. So if you think that that person is reaching out to you has picked you out of the crowd, you know, you really, you really do believe it and your emotions take over.

[00:12:31] Bob: Of course all those crypto ads have ramped up another common phenomenon, FOMO. Fear of missing out.

[00:12:39] Amy Nofziger: I just, think again the thing with crypto is, right now is it's so out there in the mainstream, right. It's everywhere. As I said it's on commercials. Every day you open up a magazine, you hear about some, you know, 26-year-old that, you know, wears shorts and flip flops that become--, became a, you know, crypto millionaire with 10 bucks or whatever it is, right. So a lot of us feel like, well we missed out on Apple, we missed out on, you know, Microsoft. We're not going to miss out on this. No! You know, we're not going to miss out on this opportunity, right, this is our one chance. So we, we almost just get so um, determined to figure out a way, and the criminals know that. They know our mindset. They know that we have this, you know, American dream of, of being successful in one shot. And so when that hand comes out, when the mentorship comes out and says, well let me pull you along. Let me help you with that, you feel like this is your one in a million opportunity and that you are the lucky one that they chose.

[00:13:45] Bob: Then there's the other side of the coin, or bitcoin, kind of the opposite of FOMO.

[00:13:53] Amy Nofziger: The theme we see with the payment by crypto, which is interesting, and it's coming up in the, in the newest AARP Bulletin, is how many ways the criminal can get you to, to pay with crypto without even saying the word crypto, without even saying the word bitcoin. Right, because oftentimes when we talk about red flags, we say, okay, listen for the word crypto. Listen for the word bitcoin. If you hear that, stop. But the criminals aren't even saying those words now. They're saying, um, QR code. They're saying ATM machine. They're saying, you know, go to the Coin Star machine. You know the machine where you put your pennies in at the grocery store, yeah, you know what, that's an ATM machine. Just take that QR code and scan it, right. So they're, they're circumventing the red flags that we tell people. I, I will say one story that was really interesting that came in, this, it was from an employee. So the employee was working at a convenience store. And she received a phone call at the store on her duty, and they pretended to be FedEx. When they said, you know, "Hey this is FedEx. We have a package coming to you today, um, but there's still payment due on it." And here's this, you know, hardworking individual at the store who's probably got five customers in front of her, you know people complaining about gas prices, whatever it is; she picks up the phone and then she's just like, "Well, I'm pretty sure I remember we were going to get a shipment today. Oh my gosh, like, I, I can't, I can't not let this shipment come." And they said, "Well, you need to pay it or the shipment's not coming." So she took money out of the drawer per their instructions, walked around the, like the stand, the customer service stand to the crypto machine in their gas station, in their convenience store, entered the money into it, scanned the QR code they sent, the money's gone. She realizes that it was not FedEx, and then she realizes that, well after her managers found out, that she violated company policy by taking money out of the drawer and she was let go.

[00:15:57] Bob: That's crazy, but you know what, it makes a ton of sense.

[00:16:01] Amy Nofziger: It does make a ton of sense, because again, they're, they're finding these people who are busy, multiple, you know, doing multiple things at once, they're under the ether, she thinks she's going to lose her job, she has 10 people standing in front of her, she doesn't want to fail. She, you know, and then we have the convenience of the crypto machine right there, and I often say, why do we need crypto machines at gas stations? How many of us wake up, you know, on a Friday morning and say, you know what, I'm going to go buy some crypto when I get gas today. Or I'm going to get a Slurpee and some crypto today. Why do we even have these machines there? It doesn't make sense to me. That's for a different conversation, but again, the criminals know where these crypto machines are, and they know how to get people to pay them.

[00:16:47] Bob: Well, that's the astonishing part of the story is you can pull out a handful of dollar bills and load it into a machine and send it to a criminal that way in, in instants.

[00:16:56] Amy Nofziger: Instant -- gone.

[00:16:57] Bob: Yeah.

[00:16:49] Amy Nofziger: Yeah, not even a thought. Yeah, so and it was just really heartbreaking because she was, you know, trying to just do her job.

[00:17:05] Bob: Gone in an instant. That's what makes crypto scams so attractive to criminals. To understand better where all this comes from, we enlisted the help of Lee Reiners. You heard from him last week too. He's a Professor of Fintech at Duke University now, but before that, he worked at the Federal Reserve in New York where he was one of the earliest people to study cryptocurrency. Last week he told us crypto is the perfect payment mechanism for people who want to do bad things. And that that's not Monday morning quarterbacking. He had a sense something big was coming way back when crypto first began, but as so often happens, he couldn't get many folks to heed his warnings.

[00:17:50] Lee Reiners: You know, I think like a lot of people, I was just initially fascinated by this non-state-backed uh, digital currency. In fact, you know, given the role I was in at the time, it was really kind of Chief of Staff function type of function, and so I recognized that this was something that, you know, regulators, including the Fed, was going to have to deal with at some point. And so I kind of formed a group of, of folks who were sort of looking at cryptocurrency, you know, from a variety of different angles within the New York Fed, in a sort of a, an ad hoc working group that didn't really get much of attention at the time. You know, I think we were kind of dismissed by senior management, but I left shortly after I created that group, but my understanding it's since gone onto to do good things. So a bit of an uphill slog at first though.

[00:18:36] Bob: Getting to the question I should have asked Lee first, what is cryptocurrency?

[00:18:42] Lee Reiners: So cryptocurrency is simply a digital currency, a digital asset, that users can send from one to another without the need for any intermediary.

[00:18:54] Bob: It might feel like crypto came out of nowhere just recently, but crypto actually has an important history dating back to the last financial crisis.

[00:19:06] Lee Reiners: There was growing momentum out there amongst the general populace for something like this. And it was, it really came along, you know, at this unique moment in time that attracted a lot of people. So, you know, the Satoshi Nakamoto White Paper, which, you know, spelled out bitcoin, was released in Halloween of 2008, and then the first bitcoin block was mined in 2009. So, you know, this is in the midst of the global financial crisis and a lot of people were justifiably upset at Wall Street, at large financial institutions, and, and also at, you know, financial regulators and, and policymakers in general for failing to, to prevent, you know, what had happened. So a lot of people viewed, you know, cryptocurrency as sort of a way to stick it to the banks, you know, or stick it to, you know, the Federal Reserve, or a way to kind of channel their general frustrations at capitalism, at, you know, financial markets. Also keep in mind that the Federal Reserve, you know, pushed interest rates to zero, uh essentially in the wake of the financial crisis. And they remained at zero for, you know, the better part of a decade. I mean it was only until, you know, recently, as I'm sure many people are aware that the Fed had started to increase uh interest rates in the face of rising inflation, and so that meant that, you know, investors were engaged in what's known as a search for yield. I mean you just couldn't make a lot of, you know, money in, you know, traditional safe assets like, you know, bonds or you know just think about how much you get on your savings account, right. So things like, you know, cryptocurrency attracted a lot of speculators. And so it wasn't just crypto. I mean you saw a general surge in the price of um, you know, riskier assets, you know, collectibles of all sorts, tech stocks, things of, things of that nature. Um, so I could, I could sense that, and I could see, you know, that there was real momentum and sentiment growing behind cryptocurrency, and that it wasn't going to just fizzle out and go away, um, you know, on its own.

[00:21:13] Bob: Not only didn't it go away, bitcoin has soared to unimaginable heights, and yes, created immense wealth for a few people. Along the way it spawned thousands of imitators and an industry so complex that even experts like Lee can't really keep up.

[00:21:34] Lee Reiners: I do think that, you know, financial regulators have a responsibility to be, you know, proactive and not reactive, and unfortunately, with cryptocurrency, you know, they've been reactive from the beginning, and they continue to be reactive. And you know that's in, in some sense the, the nature of what it means to be a regulator. I mean these are risk averse people, there's certainly self-selection going on here. But it has just been very, very difficult in the cryptocurrency context because it's an industry that evolves so, so quickly. And just think of all the derivations that we've now seen from, you know, the original bitcoin. You know we have things like stable coins now, and, you know, decentralized finance, and, you know, nonfungible tokens. So every year in the fall when I teach my, you know, Fintech or crypto class, you know, I'm having to incorporate things that just a year ago I wasn't talking about because that's how quickly the market evolves. And so you can see then how this really challenges regulators to, to keep up, um, with, with what's going on.

[00:22:42] Bob: But you know who has kept up, criminals.

[00:22:46] Bob: And, and I can, yeah, and I can sense the recipe for fraud, um, if regulators are playing catchup, and especially if six or seven years ago they were kind of dismissive of the whole idea that, that gave um, the industry this amazing head start, it also gave criminals a big head start, right?

[00:23:04] Lee Reiners: Yeah, of course, and, you know, this is something that frustrates me, you know, when you talk about the criminal element especially with cryptocurrency, and you know, supporters of crypto, you know, like to say, well, you know every new technology was first adopted by criminals. You know, look at the pager, look at the, the cell phone. And, you know, I acknowledge their point, but you know cryptocurrency's unique in a lot of ways, uh mainly is that it was, you know, tailor-made to suit the needs and purposes of criminals. And when it comes to actually using crypto, not just, you know, speculating or investing crypto, but using crypto, it's principally being used for illicit purposes, and it's not, you know, hard to understand why, because you know with cryptocurrency, large sums can be transferred instantaneously worldwide. It's decentralized, right, so there's no central, you know, intermediary or point of control, you know, running all of this. There's no way for, you know, for law enforcement to, you know, to shut the entire, you know, bitcoin down. As we just discussed, it's, you know, largely, you know, unregulated or lightly regulated. You know, again, the technology is constantly evolving, so now we have, you know, thousands of cryptocurrencies, not just bitcoin.

[00:24:27] Bob: I asked Lee the question probably everyone has on their mind: Can you really get rich with crypto?

[00:24:33] Bob: And um, you know, people have sort of heard, well two things; one, um, that for a long time a lot of people were getting very rich on cryptocurrency. Uh, and two, that it's maybe sort of anonymous, you know, it's, it's a quiet way to make money. So can you address both those things?

[00:24:54] Lee Reiners: Sure, I mean so the, your first point is absolutely, you know, correct. The main reason that people buy cryptocurrency is because they think they can sell it at a higher price to someone else in the future. So they don't care about, you know, the fundamentals or anything like that. You know they're enticed by the ability to get rich quick, which is uh has been appealing universally throughout time. You know, unfortunately though at some point, you know, that music has to stop, you know, the so-called supply of great fools runs out. You know I mean that you're hoping that some great fool comes, shows up after you where you can sell your crypto to him. And that, you know, very well might be happening, you know, right now, um, 'cause we've seen crypto prices plummet over the last couple of months. So, so yeah, to the extent that people have heard about cryptocurrency or purchased cryptocurrency it's because, you know, they view it as, you know, a speculative investment. You're second point around anonymity, um so, you know, let's just talk about bitcoin, because that's the most popular crypto currency in the first. It's not fully anonymous. So to send a, you know, bitcoin from one person to another, let's say I want to send it to you, I need to know your public address. So this is simply an alphanumeric string of characters that, you know, is represents you on the bitcoin block chain. And I can, you know, I need that to send the bitcoin to you. So it's not fully anonymous in that sense. Now you can create unlimited public addresses, so you're not bound to use just one. And again, you can imagine how this is a challenge to law enforcement who, you know, is seeking to attract uh criminal activity on the, the block chain, so you can't just rely on one public address. And this is something that, you know, crypto advocates also like to point to is the fact that, you know, every single transaction on the bitcoin block chain is completely transparent. Um, and that is true. I mean you can see every single transaction that's ever occurred. And so in some sense that makes law enforcement's job easier, but you know the problem with that is that you need to identify, right, a real world identity behind that address, that public address, and that is very, very challenging.

[00:27:13] Bob: Perhaps the second question on your mind is: Is crypto a Ponzi scheme? So I asked that too.

[00:27:20] Bob: Okay, so this whole greater fool thing sounds a lot like a Ponzi scheme to me. Is crypto a Ponzi scheme?

[00:27:27] Lee Reiners: Yeah, I mean that's uh, a debate that people like to have. It's not technically a Ponzi scheme in the sense that there's no, you know, single person or single entity that's kind of running it. You know, historically when we think of Ponzi schemes, we think of obviously Charles Ponzi, right, who was a real person. You know when you think of Bernie Madoff, he was obviously a real, a real person. So it's not a Ponzi scheme in that technical sense, however, the economics of it are very similar to a Ponzi scheme in the sense that you're relying on um, new money buying out old money. Right, the greater fool theory. So I buy bitcoin or some other cryptocurrency, I hold onto it, and I expect that I can sell it to someone else at a higher price in the future. And so those economics are identical to, you know, traditional Ponzi schemes. And, of course, you know, the supply as I said, the supply of greater fools runs out. It can't, you know, it can't go on um, forever. And again, I think that's probably what you're seeing right now.

[00:28:33] Bob: Another claim you might have heard is the crypto is kind of like gold, an asset you can hold that's outside the control of governments, all the more important. Now when there's talk of runaway inflation, so I asked Lee, is crypto digital gold or is crypto more like stocks or like bonds or...

[00:28:54] Lee Reiners: So you know, this is uh was, and remains um, you know, a fundamental challenge when it comes to all cryptocurrencies which is, what is the valuation methodology, you know, by which means are you making an assessment that bitcoin is worth $20,000 and not $100,00 or not, you know, $5. Because when you look at traditional assets, they're very clear and established uh, methodologies and models, by which we determine whether or not any given asset um, is overvalued or undervalued. So stocks, for instance, you know, stocks have a future stream of cash flows associated with them, right, in the form of dividends, um, you know, maybe share buy backs things like that, and what we do is then we discount that future stream of cash flows to the present time, right, discounted cash flow analysis. And we do things like that with bonds too. So anything that you know, has cash flow, cash to it, you know, we can discount those cash flows. Uh, you know, you look at things of traditional currencies. Well, of course, those are valued relative to one another, you know there is the dollar/yen exchange rate. And you know, those exchange rates are determined based upon things like GDP growth in the two countries, inflation rates in the two countries, interest rates in the two countries. Well again, those are things that don't apply in the cryptocurrency context. So this is an asset that trades entirely on sentiment. There's no way to value it. There's no fundamentals. And so this is why, I think, if you're looking at the current market, it's so hard to assess whether or not it's oversold, right, when would you buy the dip. By what basis would you say that it is oversold? So, you know, I think that means that there's really, you know, the bottom hasn't been reached yet. And, you know, because of that, you know, so, so, you know, the crypto supporters then, you know, they like to say, well, you know, you can't value this asset like you do traditional um, financial assets. And so one of the theories that they, you know, have been, you know, holding up for quite a while was this notion that bitcoin in particular is digital gold. Because, you know, bitcoin's source code, you know, provides that there will only be 21 million bitcoin ever be, ever put into circulation. So there's a fixed supply, just like there's a fixed supply of gold. And, in fact, you know, people have argued, including the, the Winklevoss twins, um, if you're familiar with the, you know, the Facebook story, who, you know, are now um, you know into cryptocurrency and own the Gemini Cryptocurrency Exchange, you know, they've argued that in fact, bitcoin is better than gold because gold can technically be mined on asteroids. And so there really isn't a fixed supply, and that someday we'll be able to mine gold on asteroids. Um, so you know, and so they argue, okay, well because, you know, bitcoin's digital gold, you know, it's a hedge against inflation and against, you know the, the stock market. Well that thesis has been completely blown out of the water in recent months because we have inflation at the highest level it's been in forty years and at the exact time that inflation has reared its ugly head, crypto prices have plummeted. So it's obviously not digital gold.

[00:32:10] Bob: But what about El Salvador? Maybe you've heard that entire country's, well country anyway, El Salvador, have adopted crypto as their national currency. Isn't the proof of crypto's inherent value?

[00:32:25] Lee Reiners: If you actually, you know, read about what's going on on the ground, it's a complete disaster. You know bitcoin has plummeted in price since El Salvador has made this announcement, and no one is using it in El Salvador. And the reason is quite simple, it's just far too volatile to be used a means of exchange. Think about it, if you're a merchant anywhere, and not just in El Salvador, but anywhere, why would you accept payment in something that can go down by 15 or 20%, you know, the very next day. Right, so it just doesn't make sense as a media of exchange, and, in fact, it's turned into a humanitarian disaster in El Salvador. Um, the credit rating agencies has down, have downgraded El Salvador's um, sovereign debt rating. IMF is threatening to cut off El Salvador from any future lending programs, so it's really a, a sad story in terms of what's going on there, and it's a cautionary tale for, you know, any other country that is thinking about, you know, embracing cryptocurrency as um, as legal tender.

[00:33:27] Bob: By now, I hope it's clear that crypto is a very complex, financial instrument. Even the experts don't really understand it very well. And certainly, can't predict its future very well. So that means you, listener, should be very, very cautious when buying or using crypto for anything.

[00:33:45] Bob: Crypto exchanges can look, you know, like they were made yesterday because they may very well have been, right, and it's a, it's a special case of how hard it is to determine what's real and what's fake, I think.

[00:33:57] Lee Reiners: Yeah, I think that's, you know, that's absolutely right. You know and there's really no way for, you know, consumers to, to differentiate without doing, you know, some significant legwork.

[00:34:09] Bob: Lee teaches crypto to his students who, as you might imagine, are very curious about it. And he tries hard to stay neutral, but he does give them this piece of advice.

[00:34:21] Lee Reiners: I don't give investment advice to my students, it's not the business that I'm in, you know but I do tell them that if you're going to invest in cryptocurrency, treat it like the casino in the sense that don't spend more or bring more than you're willing to lose, 'cause this is a highly, highly volatile asset class. If you can afford to take the risk and it doesn't, you know, make you lose sleep at night, then fine. You know, maybe it makes sense to place small, small portion of your portfolio into cryptocurrency, because it very well could go up. You know I, like I said, I don't have a crystal ball. But again, you have to do your due diligence on not only what you're investing in, but where you're doing the investing. So, you know, platforms like, you know, Coinbase and, and Gemini are kind of name brands, but even those platforms, because of our complex and fragmented regulatory system in the US, they're not regulated the same way that traditional stock exchanges, like the New York Stock Exchange or the NASDAQ are regulated. So even on your, you know, name brand crypto platforms, you're really missing a lot of the traditional consumer protections that we're accustomed to when it comes to stock exchanges.

[00:35:33] Bob: And right now, we have a lot of work to do to enhance those consumer protections.

[00:35:38] Lee Reiners: You know, there's a lot of misaligned incentives right now when it comes to cryptocurrency, just as there are misaligned incentives when it came to, you know, mortgages and the subprime mortgage market leading up to, to 2008. It's always at the end of the day, you know, it's always the people who can least afford to take the losses who are, who are left holding the bag. And you're seeing that play out right now with, with crypto, and you've seen it play out time and time again with speculative assets.

[00:36:06] Bob: Kathy Stokes is Director of Fraud Prevention Programs for AARP. And she'd like to see a lot more work done to protect consumers when it comes to cryptocurrencies.

[00:36:16] Kathy Stokes: Well, you know, it's been around a little while, but it's really only this last year, maybe, yeah, about this last year that it just seems to be everywhere. And I have to think that part of it is because we're sort of, I don't know, normalizing or credentializing it through all of those ads we saw at the Superbowl, and that have, you know, been on the airwaves since, but also like I don't think you can walk a mile in most areas without seeing a few bitcoin ATMS, and so it's just sort of all around us, and it seems, I don't know, like normal currency.

[00:36:57] Bob: Hmm, but this machinery has now been put in place. Um, there's, there's the top of mind advertising, and then there's devices which are now everywhere, and it makes it, uh, makes for an infrastructure that criminals can abuse, right?

[00:37:10] Kathy Stokes: Yes.

[00:37:11] Bob: So that makes this a really important inflection point and that means it's a really important time for authorities, law enforcement, consumer advocates, people to be talking about this crime, right?

[00:37:21] Kathy Stokes: Absolutely.

[00:37:23] Bob: Uh, so what do they need to hear about it?

[00:37:26] Kathy Stokes: Well, a few things. What we're seeing is it's sort of two tracks. One, we're seeing a lot of investment related scams, so you click on an ad on, on social media, and you're taken to a uh what looks like a legitimate cryptocurrency trading site, and, in fact, it's, it's fake. And you start buying and selling and when you actually try to sell and get your money out, you realize then that you've just been putting all of your money into a scammer's pocket, because it's not a legitimate trading platform. The other thing we're seeing is the uh use of cryptocurrency in online romance scams. And that can either be the, the criminal telling his target or her target that he's made a lot of money investing in crypto and hey, why don't you try it with me? And we see them sending that, that target to a legitimate cryptocurrency platform, and, you know, start sending money into it, you know, using that platform, and at, and at some point, that criminal moves the target to another platform, and the platform is entirely fake, but the person keeps investing thinking, you know, they're still in this legitimate space until they try to take their money out and realize that it was fraudulent. And they've lost everything they've put in.

[00:38:53] Bob: The criminals have made an entirely fake uh crypto exchange?

[00:38:58] Kathy Stokes: Yeah, and, and that's nothing new. These criminals are really good at setting up websites that either look exactly like the website of a legitimate company, retail, or what have you. So it's, it's nothing new, but they're just getting so much better at it.

[00:39:13] Bob: I mean it, it seems like it's one thing to make a website, it's another thing to make something that, that looks and acts like a cryptocurrency exchange, so that's kind of remarkable to me.

[00:39:22] Kathy Stokes: Well I, yeah, it just goes to the level of sophistication of these criminals.

[00:39:27] Bob: The criminals are obviously to blame for committing the crimes, but it seems like there are a lot of other companies, um, industries in the platforms that um, at least have a hand in enabling this. So who else should be um, have, have their feet held to the fire when it comes to these kinds of scams?

[00:39:46] Kathy Stokes: Well I, I believe that the companies that are out there making lots of money on the buying and selling of crypto, putting out bitcoin, ATMs, I, I just don't believe that we, as a society, need that. I, you know, crypto's completely unregulated still. Not enough people know enough about it. And people have a hard enough time understanding when investments are legitimate, how the broker or the investment ad--, advisor makes money off of that for example. So to expect a retail investor, who's hearing nothing but good things about get rich quick on crypto, to understand what's real and what's not, especially when the surround sound is, oh my gosh, you know, this is the greatest thing since sliced bread, we're all going to make a lot of money, it's just too much to ask the consumer, I think.

[00:40:41] Bob: This sounds like it makes you a little bit mad.

[00:40:42] Kathy Stokes: It makes me angry. You know, I, I'm just, I, I'm a happy person, I'm a content person, but I am increasingly frustrated at the volume of fraud targeting consumers, and the volume of, of entities who could respond to this just saying, well, you know, they weren't smart enough, or they didn't know enough, or they were idiots, or they were stupid. That's got to change. This is a crime conducted by criminals, and not just like some guy in his mom's basement. This is largely transnational criminal enterprises that are using their sophisticated tech--, techniques and all the money in the world to intentionally target specific individuals in the United States. And we, as a country, shouldn't just sit by and let it happen because we think the person was not smart enough, or maybe they were, you know, older and had cognitive decline or weren't tech savvy, and just give it a pass. It is time to change this.

[00:41:52] Bob: That last point that many people think victims are to blame when their money is stolen, it's very important to Kathy. It's unfair, she says, but more than that, it helps perpetuate the system we have now which doesn't focus nearly enough on the criminals or the crime.

[00:42:10] Kathy Stokes: Well, you know, our reaction to friends, family, neighbors when they experience property crime or unfortunately a violent crime, our, our response is entirely appropriate. It's like, oh my gosh, I can't believe that happened to you. I am so sorry, you know, and bake them a lasagna or send them a pie. And we really care, and we're worried about them. Financial crime, and by this I'm talking about scams, is a crime. But we don't look at it that way. We tend to just look at it and go, oh my God, I can't believe they fell for it. Or, I don't know what they were thinking, but that would never work with me. You know, you must have been, he must have been an idiot, or it's all these, all these words, all this language that we use that serves to put the responsibility on the victim for having, having fallen victim. And we don't do that in other crimes, and we actually are producing a, a paper in July, AARP with FINRA, Investor Education Foundation with the help of Heart & Mind Strategies, a consulting firm, to go deep on this sort of cultural bias that we have, to sort of prove that it's there, explain how it works and what its impact is, and it's a call to action. We need to change the narrative on how we talk about victims so that we think differently about it, we look at it as the crime it is, and we act accordingly as a country and go after this multibillion dollar fraud industry.

[00:43:50] Bob: Some of this change begins simply with the language we use around scams. When we hear of someone else who is victim, often our first response is...

[00:43:59] Kathy Stokes: "Oh my God! I can't believe you fell for that! How much money did you give them?" Right. So Mom or Dad either don't believe the child, and that begins a family rift, or they cower in shame. They can't believe this happened. They don't want anybody else to know because the people will start thinking that they can't be independent anymore. And if they call the police, which quite often they don't because they don't even know to report it and say, you know, I'm a victim of a scam, quite often the uh responding police officer on the phone will say, "Well what are you calling us for? You gave them your money willingly." Or they'll say, "You know what, that's not criminal, it's civil. We can't help you." So these things happen, and you start to see what, what we see sort of writ large is that people who suffer fraud tend not to report it. We know that the range of losses in this country is anywhere from 5 billion a year to maybe 56 billion a year, maybe a whole lot more. We just don't know because people don't report and a large, a, a big reason for that is because we blame them and they feel ashamed, and they don't want to tell anybody. And so you've got the individual feeling ashamed, you've got the family shaming them, you've got the police and, and this isn't a, a broad brush, but many police officers don't understand that it's a crime, and we have prosecutors unwilling to take uh cases, we have policymakers that I don't believe will act until they understand how significant these losses are and how significant the impact is on older adults when they lose money to this fraud at a time in their lives when they're least capable of financial recovery. I mean, for example, when an 83-year-old woman loses $50,000 to a fraud, that she truly, truly believed was legitimate, how is she going to get that money back? It's not like she can go back into the workforce. So there's a societal impact too. Maybe she has to start using federal or state programs to even exist.

[00:46:06] Bob: Hmm. It's also painful. You know, I do think there's this natural human, well, I don't know if it's a human impulse, it's the impulse that we've been given, right, to, to react with how could you do that? Um, but then I also think almost everyone's been on the other side of such a moment and it's the most painful thing to hear, like the, the worst thing you could possibly say to me right now, I'm already suffering and now you're like basically stepping on me by saying something like, "How could you fall for that." Help people who want to, who want to be better, what kinds of things can they say instead?

[00:46:36] Kathy Stokes: I think if we can keep in mind the context that this is a criminal enterprise, it's organized crime by and large, we can understand that they have, they hold all the cards. The victim is up against you know these huge, organized crime rings. It's one person who, who has no idea somebody's trying to harm them against a, a cadre of people who do nothing but harm people that way every day. If we can look at it that way, and we can understand that Mom... Mom didn't do something wrong, she was the victim of a crime. You know, say, "Mom, I'm so sorry, I've heard about this. This is what's happening. I'm so sorry. Let's, you know, we've got to cut off contact right away, let's call the bank." Have them try to take action. Call the police. Insist that they take a report even if they say it's a civil matter. Insist on that report.

[00:47:37] Bob: Want to make a difference? You don't have to wait until someone you love is a victim. You can help right now.

[00:47:44] Kathy Stokes: Well I think one of the things that we know is education works. So if you're first hearing about crypto fraud, or an online romance scam today, bank that and then go talk to everybody in your community about it, you know, talk to Mom and Dad, talk to your uncle--, talk to your sister, your brother, your colleague. If we know about a particular scam, we're 80% less likely to engage with it, and if we do engage with it, we're 40% less likely to lose money or sensitive information. But we have to be aware, and we have to share what we know, because that's the way that we essentially inoculate the people in our lives from these criminals.

[00:48:33] Bob: Talking about it helps a lot. Just talking...

[00:48:37] Kathy Stokes: We've got to talk about it, you know, if you're a small business owner, and you have people coming in, let's say you're, you’re baking cookies or you're cutting hair, you know, have conversations with people. Hey, did you hear about this latest scam? You know be safe out there.

[00:48:53] Bob: Be safe out there. You know, like Lee, I'm not in the business of giving you investment advice, so I won't, but I think it's so important to always keep in mind that it's never easy to make easy money. Once in a while people do, but they aren't smart, they're just lucky. As the FTC says, if someone is guaranteeing you big returns on crypto, they're a scammer. If someone demands payment in crypto or in gift cards, they're surely committing a crime. And if someone is romancing you and selling you an investment, they're almost certainly just trying to take your money. And if you want to invest in crypto, don't invest any more than you'd be willing to lose at a poker table. Don't forget, the Fraud Watch Network Helpline is free and available Monday through Friday 8 a.m. to 8 p.m. Eastern at 877-908-3360.

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[00:49:57] Bob: Thank you to our team of scambusters; Executive Producer, Julie Getz; Researcher, Haley Nelson; Associate Producer, Annalea Embree; and of course, our Audio Engineer, Julio Gonzalez. Be sure to find us on Apple Podcasts, Spotify, or wherever you listen to podcasts. For AARP's The Perfect Scam, I'm Bob Sullivan.

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