UK Markets open in 26 mins

Worst crypto scams and 'coverups' of 2022

Hacker stealing password and identity, computer crime.
The value of the cryptocurrency market fell from $3tn in November 2021 to around $900bn now. Photo: Getty

Crypto markets are reeling after the implosion of the FTX exchange, now Yahoo Finance looks back over the past year in a young industry which was marred by corruption and fraudulent activity and asks how much they have dented investor's faith.

The combined market capitalisation of all cryptocurrencies fell from a height of nearly $3tn (£2.7tn) in November 2021 to a current value of around $900bn (£728bn).

Cryptocurrency value dwindled throughout 2022, caused by a sequence of bankruptcies after the dramatic crash of Terra's UST algorithmic stablecoin in May 2022.

Capital haemorrhaged from the combined crypto-market, with dexterous traders selling fast and parking gains in dollar-pegged stablecoins, such as USDC (USDC) and USDT (USDT).

Read more: 2022: Year in review

After a series of high-profile industry bankruptcies, faith in the cryptocurrency industry plunged, retail and institutional investors began cashing out funds, with redemptions of stablecoins for physical greenbacks rapidly increasing.

However, those who withdrew funds were not just cautious investors trying to salvage what they could as the market nose-dived, the bad actors that contributed to the market turmoil were also sequestering large portions of wealth for themselves.

From the low-key cyber-attack of the Wormhole cryptocurrency platform in February to the high-profile collapse of the FTX exchange in November, 2022 was a year of sensational scams, frauds, and crooked dealings.

February: Cryptocurrency platform Wormhole loses $320m after attack

Over $320m in crypto was taken when the Wormhole cryptocurrency platform Wormhole was hacked.

Although the popular 'bridge' linking ethereum (ETH-USD) and solana managed to later retrieve the stolen assets, the hack exposed the vulnerability of decentralised finance platforms to hackers.

In response to the hack CertiK co-founder, Ronghui Gu told CNBC: "The $320m hack on Wormhole Bridge highlights the growing trend of attacks against blockchains protocols.

"This attack is sounding the alarms of growing concern around security on the blockchain.

Since then, 2022 has shown that scammers are getting more and more creative.

March: Axie Infinity hack saw $615m stolen

Axie Infinity in game graphics (screen grab Axie Infinity)
Axie Infinity in game graphics (screen grab Axie Infinity)

In March, hackers were able to exploit the ethereum-based sidechain that runs the popular Axie Infinity NFT based online video game.

The game is developed by Vietnamese studio Sky Mavis The hackers were able to siphon off 173,600 ethereum and $25.5m in USDC from the web3 game that is developed by Vietnamese studio Sky Mavis.

In April US authorities were able to link the attack to the Lazarus and APT38 hacking groups, who operate cyber-attacks for the North Korean government.

May: Terra's UST algorithmic stablecoin collapses

Co-founder of Terraform Labs, Do Kwon (Screen grab Yahoo Finance US)
Co-founder of Terraform Labs, Do Kwon (Screen grab Yahoo Finance US)

The implosion of Terra's UST (LUNA1-USD) algorithmic stablecoin ecosystem wiped out around $40bn in market value of the entire cryptocurrency ecosystem. The UST stablecoin de-pegged from parity with the US dollar and fell from $1 to $0.12 in early May.

Then in September, a South Korean court issued an arrest warrant for Do Kwon, the founder of Terraform Labs, the parent company of crashed stablecoin TerraUSD.

Read more: FTX bankruptcy sees 80,000 UK crypto investors lose funds

In the wake of the collapse of his company, the prosecutors from Seoul accused Do Kwon of investment fraud, which refers to a range of deceptive practices where fraudsters induce individuals into making purchases based on false or misleading information.

According to CNN, South Korean prosecutors who are seeking to take Do Kwon into custody, have traced him to Serbia.

June: The collapse of Three Arrows Capital

Many cryptocurrency-focused hedge funds, and other cryptocurrency companies, held large amounts of the Luna cryptocurrency that was connected "algorithmically" to the stablecoin UST.

One of the most prominent holders of Luna was the crypto-hedge fund Three Arrows Capital (3AC).

Because of smart contract staking agreements, 3AC could not sell large portions of the Luna that they held and were forced to incur up to a 99% loss on their investment.

On 1 July 3AC filed for Chapter 15 bankruptcy. However, Three Arrows Capital had borrowed from other crypto entities in the tightly interdependent cryptocurrency ecosystem. The crypto hedge fund defaulted on a $650m loan to crypto custodial platform Voyager Digital. Now US Regulators are probing the bankrupt crypto hedge fund.

A New York bankruptcy judge has now stated that he would issue subpoenas against the founders of Three Arrows Capital.

According to Coindesk, US Bankruptcy Judge Martin Glenn for the Southern District of New York wrote in a court document published in early December that stated: “The foreign representatives and their agents are authorised to serve subpoenas for the production of documents and testimony upon the founders, the investment managers and anyone else that might have information about Three Arrows’ affairs."

The document names Su Zhu and Kyle Davies who are the founders Three Arrows Capital, which imploded in July of this year and left a $3.5bn debt in its wake.

The hunt is now on to recover the remaining assets from the hedge-fund so that they can be returned to investors.

Watch: Get your money off exchanges' warns Bitboy Crypto after FTX scandal | The Crypto Mile

However, according to the New York-based liquidation firm Teneo, which is tasked with recovering the funds, both Su and Davies have been uncooperative.

The Three Arrows Capital founders claim to be in Dubai and Bali which Teneo claim are convenient “jurisdictions known for difficulties in enforcing foreign court orders.”

One of the Three Arrows Capital founders is now planning to film a "life and mental health podcast", presumably from his new location in Dubai.

But one Twitter follower was quick to remind him of the creditors owed billions of dollars after the collapse of Three Arrows Capital and replied saying, "all proceeds going to creditors?"

Yahoo Finance spoke to Alex Svanevik, CEO of blockchain analytics platform Nansen.ai, about the management methods employed at Three Arrows Capital, he said: "Certainly there was hubris. Just a few weeks ago, Kyle still called 3AC 'the most successful fund in crypto'. Poor risk management is another element. They also doubled down on certain strategies that were failing: GBTC, stETH.

"My understanding from speaking first-hand with people who provided capital to 3AC is that they also misled investors in some cases. They positioned themselves as a fund that could help generate high yields with low-risk strategies. And under the hood they were making huge directional bets with leverage," Svanevik said.

June: The collapse of Celsius

When the Terra's UST stablecoin Terra collapsed in May, it created a domino effect that brought down the whole crypto market.

One crypto lending firm after another took critical hits in the subsequent crypto crash.

In July, Celsius, formerly one of the largest crypto lenders, ended up filing for bankruptcy.

However, Celsius clients began reporting they couldn't withdraw their funds in June.

Former Celsius CEO Alex Mashinsky tried to calm fears by saying the company was not halting withdrawals.

Read more: 'Get your money off exchanges', warns Bitboy Crypto after FTX scandal

But then just days later, Celsius froze everyone's accounts. It has now been reported by both the Financial Times and Coindesk that Mashinsky withdrew $10m weeks before the company froze customer accounts and then filed for bankruptcy.

According to the Financial Times, a spokesperson for Alex Mashinsky said that the Celsius founder had withdrew a percentage of cryptocurrency in his account, much of which was used to pay state and federal taxes."

November: FTX collapse

Sam Bankman-Fried
Sam Bankman-Fried, who founded and led FTX, is escorted out of court after his arrest in Nassau, Bahamas on 3 December. Photo: Dante Carrer/Reuters

The FTX exchange was set up on the offshore finance haven of the Bahamas in May 2019.

In early November, public reports began to circulate citing leaked, internal financial statements and questioning the health and liquidity of both FTX and its trading arm Alameda Research.

Coindesk journalist Ian Allison blew the lid on the irregularities in Alameda Research's balance sheet. Allison said a large proportion of the $14.6bn in assets held by Alameda Research was in FTX's own FTT (FTT-USD) token.

The coin that could be freely created by FTX dominated the reserves that Alameda Research used as collateral for loans.

Read more: FTX founder charged with defrauding investors

With outstanding liabilities of an estimated $5.1bn at Alameda Research, holders of FTT experienced rising panic that margin calls on those loans might decimate the value of FTX's native token.

The collapse of FTX began in earnest when Binance CEO Changpeng 'ZC' Zhao stoked a bank run on the FTX exchange with a tweet stating that his exchange would liquidate its holdings in FTX's native FTT token.

The unraveling of this once prominent cryptocurrency exchange, that hosted events with former world leaders Bill Clinton and Tony Blair, was swift, and on 17 November, FTX filed for bankruptcy at a court in Delaware.

On 12 December the attorney general of the Bahamas announced Bankman-Fried's arrest for "financial offences" against laws in the US and The Bahamas.

He was then charged by the Securities and Exchange Commission (SEC) with defrauding investors out of $1.8bn.

Read more: FTX crash wipes billions from market as Binance steps in to buy crypto rival

Thousands of users of the FTX cryptocurrency exchange are now unable to withdraw their funds and according to a court filing last month, the once prominent exchange owes its 50 largest creditors almost $3.1bn.

FTX's current CEO, John Ray, told congressional lawmakers on Tuesday that FTX lost $8bn of customers' money.

Ray said the company was comprised of an "absolute concentration of control in the hands of a small group of grossly inexperienced, non-sophisticated individuals."

On 13 December, US federal prosecutors charged Bankman-Fried with wire fraud and conspiracy to commit wire fraud against lenders and customers.

According to CNN, US congressional statutory maximum sentencing guidelines suggest that Bankman-Fried could face a maximum sentence of 115 years in prison if convicted on all eight counts that have been levelled against him.

US attorney Damian Williams spoke about the charges against Bankman-Fried at a press conference.

He said the FTX founder had “knowingly” defrauded customers and investors and accused Bankman-Fried of secretly and illegally siphoning off customer funds from FTX to finance operations at Alameda.

However, he concluded his statement with a warning to other bad actors operating within the cryptocurrency industry: “This is one of the biggest financial frauds in American history, we are not done.”

Digital asset fraud on the rise

New figures show that in the UK alone digital asset fraud has soared by in the past year. In November a freedom of information request to the UK's Action Fraud organisation, showed that financial losses relating to digital assets had jumped to £226m ($273m) in 2022, up 32% on the previous year.

According to Cardano founder Charles Hoskinson the problems that occurred throughout 2022 were not due to the failure of crypto itself but rather caused by flawed and centralised infrastructures helmed by people who were either incompetent or exploitative.

Hoskinson said: “Crypto didn’t fail. People failed. People in positions of trust. At the end of the day, as much as we like to believe in the principles of cryptocurrency, this had everything to do with people putting their money in centralised exchanges and organisations entrusting centralised businesses to do something on their behalf."

Watch: What would Karl Marx think about crypto? – The Crypto Mile Episode 7