In the first three months of 2022, hackers stole $1.3 billion in crypto from exchanges, platforms, and private entities. The victims are disproportionately in DeFi.
Taking into account that there are millions of dollars at stake, and a rapid pace of innovation based on an open-source architecture, DeFi protocols are a good target for hackers. The DeFi space walked into the world with many interesting features and the promise to become the future of finance, but new cyber scams tagged along as well.
In April 2023, Michael Bentley, the co-founder and CEO of Euler Labs, the company behind the protocol Euler Finance, tweeted that the days after the hack were the hardest of his life. In the case of Euler Finance, a flash loan attack occurred.
April 2023 wasn’t a good month for another DeFi protocol as well. DEUS Finance lost more than $6 million over a weekend hack that exploited a vulnerability. The blockchain security company PeckShield stated that the hack targeted DEUS Finance’s stablecoin on the networks BNB Smart Chain and Arbitrum.
Those interested in crypto have heard of other terrifying stories as well. It seems that everybody who follows crypto is aware of these numbers. While some hacks are associated with vulnerabilities of the network, smart contracts, or market manipulation that is out of the control of ordinary users, individuals usually fall prey to a number of scams, such as phishing scams, crypto mining scams, and rug pulls.
To find out more about common crypto scams, we suggest reading this article: 'The most common crypto scams & how to avoid them'.
Unlike other traditional methods of payment, stolen cryptocurrency is not easy to recover. For example, you can notice a strange charge on your credit card or bank account that seems like a potential fraud. It became easy to use credit cards as you can dispute a fraud-like charge in order to get your money back. You just have to contact your credit card issuer or bank immediately and let them know it is an unauthorised transaction.
On the other hand, cryptocurrencies don’t encompass built-in consumer protection. Crypto is not covered or insured by any government-sponsored programs and regulations with the purpose to safeguard consumers and investors.
Centralised financial systems typically include insurance for a particular amount. For example, the US Federal Deposit Insurance Corporation (FDIC) covers all deposit accounts for a standard amount of $250,000 in case the financial institution becomes insolvent, but this doesn’t include crypto assets.
Even though decentralised finance made many wrongs associated with traditional finance right, the issue of insurance and consumer protection remains. Many users trust a number of crypto wallets and relevant exchanges when it comes to financial transactions. However, it is not an easy task to recover funds in the crypto environment.
Additionally, keep in mind that cryptocurrency is a bearer asset. To own a bearer asset means that the user is the one holding it. In simple words, whoever holds the private key is deemed the owner. This is in contrast with credit assets which imply that a third party is holding your assets for you.
Think of this situation as the difference between buying groceries with cash and buying groceries on credit. Unlike buying on credit where the bank moves the money, when you buy groceries with cash, you hold that cash physically. Someone could take that cash from your hands, run away and become the new owner.
With bearer assets, it is hard to demonstrate proof of ownership. That’s why stolen or lost private keys make it hard to successfully go through a recovery process.
Apart from situations where hackers exploit vulnerabilities of a particular technology to steal funds or manipulate the market when it comes to individuals, hackers usually employ social engineering techniques such as phishing scams or fake emails to gain access. If a transaction goes wrong and your wallet has been compromised, it is vital to act fast.
Here are the few activities typical end-users can try out to recover stolen funds:
If you held your lost funds within a well-known exchange, the platform is probably aware of the hack and has likely started working on a recovery process. Since decentralised exchanges and crypto, in general, are not insured by a government, there is a possibility that not all of your assets may be brought back.
However, cyber scams are deemed crimes in nearly all contemporary criminal codes so you can report it to the police as well. This works for all kinds of crimes related to the virtual world, from DeFi hacks to NFT scams.
If you are not sure where to start, you could hire a recovery expert. Recovery experts are also colloquially known as crypto hunters. As the name suggests, a crypto hunter is an individual or company that seeks lost or stolen crypto assets on behalf of their clients.
Crypto hunters work with crypto holders and law enforcement to recover misplaced or stolen crypto assets. Experts may help with the recovery process of lost private keys and passwords as well.
However, be cautious when hiring experts. Some crypto hunters may be scammers themselves pretending to help you recover your funds while taking your money at the same time. These are secondary scammers that pose as legitimate companies in the crypto recovery niche.
Even though it doesn’t mean that you will recover your funds, you can decide to go down the litigation road. When you report a cyber crime to the police, law enforcement further investigates the matter.
Hiring a lawyer with a deep understanding of crypto scams can file a complaint with the relevant authorities and pursue legal action. For example, back in 2021 BitConnect, a US-based cryptocurrency platform, was shut down by the US SEC for conducting a Ponzi scheme. The company was held accountable for its fraudulent activities.
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