Crypto-assets, or digital currencies stored on the blockchain (distributed ledger, abbreviated as DLT), have been at the forefront of interest since 2008, initially by a narrow group of experts, later by the general public. Among other things, crypto-assets have given rise to a whole new sector of the international economy (so-called DeFi, or decentralized finance).
From a collector’s item for computer enthusiasts and a means of payment on the black market, crypto-assets have gradually become a sought-after investment, both in terms of speculative and as a store of value, including by institutional investors. Crypto-assets have also been integrated by many large companies in marketing or product manufacturing.
Regulators around the world have not been able to react in time to the rapid adoption of crypto-assets, which is more or less sophisticatedly being exploited by fraudsters to defraud not only institutional and retail investors into crypto-assets, but also providers of related services.
Providers of services related to crypto-assets include a wide range of entities, especially crypto-assets exchanges, exchange offices, investment intermediaries, protocol developers, game developers, etc. Within the EU, the MiCA Regulation on crypto-asset markets was adopted on May 31, 2023. In connection with the adoption of new European regulation, a research question arises as to whether the adopted solution will significantly limit the scope for crypto-asset fraud and reduce the risk of failure of related service providers.
Investors are sometimes harmed due to the non-prudent actions of related service providers, which in several cases border on fraudulent conduct by responsible persons. For example, in May 2022, the popular crypto-asset Luna imploded at the time, and in the fall, the major crypto exchange FTX went bankrupt, with serious suspicions in both cases that the management of the respective companies did not act in the best interests of investors and investors’ funds were used for other than agreed purposes. Other significant examples of DeFi service failures in 2022 and 2023 are the Celsius lending platform, the fall of the Terra cryptocurrency, or recent reports of violation of legal regulation by Binance.
Historically, the largest crypto-asset frauds undoubtedly include the crypto-assets OneCoin and Bitconnect, both operating on the principle of Ponzi schemes, with a total damage of approximately 30 billion USD. Another example of DeFi service failure is the hack and subsequent bankruptcy of the Japanese crypto exchange MtGox in 2014, when 850,000 bitcoins were stolen (today’s value approx. 32 billion USD), and the (partial) compensation for the victims of the fraud only occurred this year.
From the domestic scene of the Czech Republic, for example, the controversial project XIXOIO can be mentioned, offering so-called tokenization of commercial companies, but under significantly disadvantageous terms (recently, persons in the management of the project were even detained in this context). Another area of crypto-asset fraud is also business transactions between two participants, where the seller uses crypto-asset as a means of payment (especially in real estate transactions).
Unlike other transactions, where the crypto-asset as a right is acquired for money either from its issuer or holders, in this case, the counter-value is not money, but a specific thing in the legal sense. Thanks to the properties of the blockchain, it is not easy to prove that a particular transaction between participants actually took place, and there is an increased risk of fraud, which cannot be eliminated even by regular custody service providers for money transactions.