Can Crypto Scammers Be Stopped Without Government Regulation? It's predictably easy for crypto fraudsters to take advantage of a volatile market that values privacy and anonymity.

Even as crypto matures and institutions enter the game, the industry remains skeptical of government involvement. But will it be able to self-police scams with community-led and technological solutions?

The recent Bitcoin bull run piqued public interest in cryptocurrency, but with it came a new wave of crypto scammers. In fact, crypto consumers have lost over $80 million to scams in just a six-month period between 2020 and 2021, ten times the amount of the previous year, the FTC has reported. Surprisingly, the majority of those falling victim are young, between the ages of 20-30 — an age group that tends to be less gullible and more adept at spotting online scams — further proving that nobody is exempt from being targeted.

These fraudsters are also becoming increasingly creative — from fake investment websites to creating now-defunct cryptocurrencies. One popular scam is posing as celebrities, such as Elon Musk, and promising investments if the target sends cryptocurrency. Scammers also pose as government agencies and big crypto businesses, such as Coinbase, assuring big investment returns. It's predictably easy for crypto fraudsters to take advantage of a volatile market flushed with high-value commodities that values privacy and anonymity.

Some experts believe that the only method of tackling these scams is by asserting more government regulation. However, others fear what effects regulation might have on the independence and anonymity of digital currency, which attracted crypto investors in the first place. So can there be a path toward protecting consumers without encroaching on their privacy?

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Hurdles in regulating crypto

In the past, banks and big corporations have been wary of entering crypto and blockchain, often hindered by the lack of regulation. But in effect, regulating digital currency is challenging. By their nature, cryptocurrencies are independent, operating beyond borders or government agencies. Therefore, applying tax and licensing laws that vary from country to country is problematic for lawmakers, crypto companies and investors. Even within the U.S., there are disparities between state and federal responses to cryptocurrency, and some state regulations are far more stringent than others.

This discrepancy can be especially troublesome when it comes to protecting consumers in the face of scams, with crypto investments subject to far less regulatory protection than traditional financial products. In fact, it appears the U.S. government may be taking new steps toward managing crypto fraud, with hints from the Biden Administration regarding future actions. Officials recently recommended prioritizing consumer privacy and protection and also warned that bad actors in crypto should prepare for enforcement actions. The Treasury Department's tax plan warned digital currencies pose a "significant detection problem by facilitating illegal activity" and proposed crypto assets with a fair market value of more than $10,000 should be reported.

Even defining crypto assets has been tricky, with the crypto industry and some SEC officials calling for clarity over how cryptocurrencies fit into securities laws. On the one hand, the SEC has deemed Bitcoin a commodity, yet it has also filed an action against crypto giant Ripple, alleging it sold its XRP coin as an unregistered security. Still, registering all cryptocurrencies as securities may help track and prevent fraudulent activity, though many would argue it is completely antithetical to the values of cryptocurrency.

Lawmakers can also control crypto scams by utilizing deterrence. In recent months, the SEC announced that it had charged multiple promoters in the big multi-level BitConnect ponzi scheme that shook the industry in 2018, in which the platform drained out $2 billion by duping investors. These charges prove that if players are running big enough scams, the wheels of justice will come after them. Nevertheless, bringing criminals to justice takes time, and it is not a perfect solution when it comes to deterring small crypto crime, which is not on the SEC's radar.

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Crypto self-regulation

While the trajectory of government regulation of cryptocurrencies remains uncertain, many in the industry believe it is up to players in the crypto industry itself to help police scams, either through technological or community-led solutions.

For instance, cryptocurrency wallets should identify addresses that belong to scammers and maintain a database of them in order to warn investors against interacting with them. Another example of a community-led initiative is a project called Token Lists by Uniswap, which enlists members of the Ethereum community to create lists that verify legitimate ERC-20 tokens similar to the manner in which celebrities are blue-check verified on Twitter. Its method of listing filters out high quality, legitimate tokens from scams, fakes and duplicates, while remaining decentralized and community-based.

Other key players in the blockchain industry are also implementing technological solutions to help protect investors, crypto companies and those who would work with them. Ethereum-powered travel distribution channel Winding Tree hosts an open-source registry, ORGiD Bot, allowing blockchain companies to self-verify on the platform. Companies who wish to register go through a KYB process that includes staking the platform's native LIF token to verify they're legit. Solutions such as these require manual registration — including the staking, among other steps — to prevent bots from signing up.

When it comes to crypto fraud, it is mutually beneficial for government officials and the industry to find solutions to protect investors. While crypto enthusiasts assert that limited regulation encourages investment and trading, it also often puts investors at risk.

Related: Cryptocurrency Scams Bilk Victims Out of $80 Million

If crypto's goal is to reach the mainstream market and encourage new pools of investors to join, the recent rise in scams must be stopped. As the government continues to grapple with how to define and regulate crypto assets, it seems that government-led solutions will take too long. It is therefore up to the industry to tackle scammers with more self-regulating initiatives that are decentralized and community-led in order to protect investors while still remaining true to the values of cryptocurrencies.