Top 10 Biggest Scandals In Cryptocurrency

10 min readMay 25, 2023
Top 10 Biggest Scandals In Cryptocurrency

10 cryptocurrency scandals that shook the industry

Cryptocurrency has emerged as a revolutionary technology that promises to disrupt traditional financial systems. While the industry has seen tremendous growth over the years, it has also been marred by several controversies and scandals. From exchange hacks and market manipulations to Ponzi schemes, and the latest FTX collapse — the cryptocurrency market has witnessed its fair share of scandals that have left investors reeling.

In this blog, we take a closer look at 10 of the biggest cryptocurrency scandals that shook the market, exploring their impact on the industry.

1. Bitcoin Savings and Trust (BTCST) Ponzi Scheme

  • BTCST was a Ponzi Scheme that promised investors up to 7 per cent weekly interest, and raised at least 700,000 bitcoins from February 2011 to August 2012.
  • The CEO of the company, Trendon T. Shavers solicited all investments, and paid all purported returns in bitcoins, using new bitcoins received from investors to pay returns on outstanding investments, and diverting investors’ bitcoins for his personal use.
  • Despite publicly denying the Ponzi scheme, Shavers knowingly and intentionally operated BTCST as a sham and made false and misleading representations to investors concerning the use of their bitcoins, the promised returns, and the safety of their investments.
  • The court ordered Shavers and BTCST to pay over $40 million in disgorgement and prejudgment interest. When Shavers still did not comply, the U.S. District Court for the Eastern District of Texas ordered him to be imprisoned in October 2022.

2. Mt. Gox Scandal

  • The Mt. Gox scandal in 2014 is considered to be one of the biggest thefts from a Bitcoin exchange platform in history. Established in July 2010, Mt. Gox quickly rose to become a leading Bitcoin exchange, handling over 70% of all Bitcoin transactions. However, in June 2013, the exchange suspended withdrawals in US dollars, which was the start of its troubles.
  • After several relaunches and additional trading halts, the exchange suspended all trading on 24th February 2014, and its website went offline hours later. A few days later, Mt. Gox filed for bankruptcy protection in Tokyo, with liabilities of about 6.5 billion yen ($64 million at the time) and assets of 3.84 billion yen.
  • The company had lost close to 750,000 of its customers’ Bitcoins and around 100,000 of its own, which was equivalent to 7% of all Bitcoins and worth about $473 million at the time. The reasons for the loss were unclear at first, and the incident is still subject to speculation, but it is believed that the exchange was subject to several hacks between 2010 and 2014.
  • The exchange’s founder, Jed McCaleb, sold the platform to Mark Karpelès in March 2011, and it is reported that the exchange had already lost 80,000 Bitcoins (worth over $62,000) at the time.
  • Karpelès was arrested in August 2015 in Japan, released on $100,000 bail, and is reportedly still waiting to stand trial.

3. Bitfinex Exchange Hack

  • Bitfinex, a Hong Kong-based cryptocurrency trading platform, was one of the largest Bitcoin exchange platforms, accounting for over 10% of all exchanges. However, on August 2nd, 2016, the company announced that almost 120,000 BTC (worth $72 million at the time) had been stolen from its platform.
  • The incident led to a blame game between the company, its security provider BitGo, and the US Commodity Futures Trading Commission (CFTC), which was accused of forcing Bitfinex to use BitGo and keep the majority of its funds in hot storage instead of its existing cold storage setup. This decision was believed to have contributed to the magnitude of the hack.
  • The CFTC had fined the exchange $75,000 for offering illegal off-exchanged financed commodity transactions shortly before the hack, and the discussion then focused on whether Bitfinex could impose the losses on its customers. Eventually, Bitfinex users received BFX tokens as compensation for their losses from the hack.

4. OneCoin Scam

  • OneCoin was a cryptocurrency Ponzi scheme that operated from 2014 to 2017, led by Bulgarian national Ruja Ignatova. It claimed to be a revolutionary digital currency that would become the “Bitcoin killer” and attract millions of users. However, in reality, it was a fraudulent scheme that never even had a real blockchain or cryptocurrency.
  • The scheme worked by convincing investors to purchase packages that included tokens that could be exchanged for Onecoins once they were released on public exchanges. Ignatova and her associates made grandiose claims about the value of OneCoin, the number of users, and partnerships with major companies to inflate the perceived value of the tokens.
  • The company had a complex and secretive organizational structure that made it difficult for authorities to investigate. Ignatova and other key leaders of the scheme were able to evade arrest and abscond with the funds of the investors.
  • In 2017, Ignatova disappeared and has not been seen since. The US Department of Justice filed charges against her and other leaders of the scheme, alleging that OneCoin had raised more than $4 billion worldwide through fraudulent means. The scheme is believed to have victimized over 3 million people across the world.
  • The Onecoin scam ultimately collapsed in 2018, and the company was declared bankrupt. Investors lost billions of dollars, and many are still trying to recover their losses.

5. MyCoin Pyramid Scheme

  • MyCoin was a pyramid scheme based in Hong Kong that was shut down by authorities in February 2015. The Hong Kong Commercial Crime Bureau (CCB) conducted a preliminary investigation, which revealed that investors may have lost up to $400 million.
  • The scheme was straightforward as investors were asked to invest at least 400,000 Hong Kong Dollars for 90 bitcoins to be put in a MyCoin account for the period of a few months, while MyCoin promised them a return of 150%. Inadvertently, several victims fell prey to the scam and invested, in hopes of promising returns.
  • Five arrests were made in connection with the scheme, but it remains unclear how much of the defrauded funds have or will be returned to the victims.

6. The DAO

  • The DAO was a Decentralized Autonomous Organization run through rules encoded as smart contracts on the Ethereum blockchain platform. DAO token holders had the right to vote on investment proposals and receive rewards generated by the output of work from contractors’ proposals.
  • The DAO was intended as a form of venture capital vehicle that would invest in projects in the sharing economy and raised the largest amount ever in a crowdfunding campaign of around $150 million in ETH in June 2016.
  • However, hackers exploited a programming mistake in the code of the DAO and managed to transfer a third of its funds into a subsidiary account.
  • Eventually, the Ethereum community decided to hard-fork the blockchain to restore virtually all funds to their value and ownership before the attack. This led to a split in Ethereum, where the original unforked blockchain was maintained as Ethereum Classic, breaking Ethereum into two separate active cryptocurrencies.

7. BitConnect Scam

  • The Bitconnect scam was a fraudulent cryptocurrency scheme that operated from 2016 to 2018. The scheme was marketed as a lending platform that promised investors high returns on their investments, with interest rates of up to 40% per month. Investors could lend their Bitconnect tokens to the platform and receive interest payments in return. In addition, Bitconnect also offered its own cryptocurrency called Bitconnect Coin (BCC), which could be traded on its own exchange.
  • To attract investors, the scheme’s promoters hosted flashy events and recruited social media influencers to promote Bitconnect. However, in classic Ponzi scheme fashion, their returns were paid out to earlier investors using the investments of new investors. There was no legitimate business model or investment strategy behind Bitconnect, and its high returns were simply unsustainable.
  • In January 2018, Bitconnect announced that it was shutting down its lending platform and exchange citing “bad press” and “regulatory issues”. This announcement caused the value of Bitconnect’s own cryptocurrency, BCC, to plummet from over $400 to less than $10 in a matter of days, wiping out billions of dollars in investor value.
  • In the aftermath of the scheme’s collapse, lawsuits were filed against Bitconnect and its promoters, and several individuals were arrested and charged with fraud. The scheme is widely regarded as one of the largest and most notorious cryptocurrency scams in history.

8. Axie Infinity

  • In 2021, the gaming-focused Ronin Network, which hosted the popular game Axie Infinity, was hacked in what was considered the largest decentralized finance exploit to date. The hackers were able to steal validator keys, which gave them control of the Ronin network, and as a result, they were able to steal around 173,000 ether and $25 million worth of stablecoin USDC, totalling over $615 million.
  • This was a major blow to the game’s play-to-earn model, which had allowed gamers in Southeast Asia to earn a living simply by playing the game. After an investigation, the FBI attributed the hack to North Korea’s Lazarus hacking group.
  • Despite the devastating impact of the attack, the team behind Axie Infinity, Sky Mavis, took swift action to recover the stolen funds and return them to the affected users. In April 2021, Sky Mavis raised $150 million led by Binance to help with the recovery efforts.

9. Wormhole Crypto Bridge

  • In February of 2022, Wormhole, a protocol that enabled the transfer of digital assets between different blockchain networks, fell victim to a massive hacking attack that resulted in the theft of over $320 million worth of cryptocurrency. The hacker was able to exploit a vulnerability in Wormhole’s smart contract, which allowed them to create and mint a large number of fraudulent crypto tokens.
  • The attack on Wormhole, which occurred on the Ethereum blockchain, was particularly damaging due to the fact that it involved the creation of fake tokens that could be used to manipulate markets and defraud investors. The hacker was able to create and sell these fraudulent tokens, causing the value of legitimate tokens to drop and leading to significant losses for investors.
  • In response to the attack, Jump Crypto, a trading and venture capital firm, stepped in to replace the stolen funds. The firm provided support to Wormhole, which helped to mitigate the damage caused by the attack and restore investor confidence in the protocol.

10. FTX Collapse

  • FTX, a popular cryptocurrency trading platform, experienced a catastrophic collapse in early November 2022. The collapse was triggered by a report by CoinDesk, which raised concerns about leverage and solvency issues involving FTX-affiliated trading firm Alameda Research.
  • The collapse had a significant impact on the volatile crypto market, which lost billions and fell below a $1 trillion valuation. FTX faced a liquidity crisis and began searching for bailout funds, with rival exchange Binance briefly considering buying portions of the company before backing out.
  • By November 11, 2022, FTX’s founder and CEO Sam Bankman-Fried stepped down, and the company filed for bankruptcy. However, the situation became worse when FTX experienced a possible hack in which hundreds of millions worth of tokens were stolen.
  • Bankman-Fried, was arrested in The Bahamas and extradited to the United States in late December. He pleaded innocent to all criminal charges on January 3, 2023.
  • While the precise details of the collapse are still being investigated, it is clear that the collapse was a result of a confluence of factors, including poor management, lack of transparency, and security vulnerabilities.

Wrapping Up

The crypto market has been shaken by numerous scams over the years, with many investors losing their hard-earned money. The aforementioned scandals are just a few examples of the dangers that lurk in the crypto space. As the market continues to grow and evolve, it is essential to remain vigilant and informed to avoid falling victim to fraudulent activities.

It is also critical for regulatory bodies to establish more robust frameworks to prevent and punish those who engage in fraudulent activities in the crypto space. As the market continues to mature, one can only hope that lessons learned from these scams will help to create a safer and more transparent cryptocurrency environment for all investors.

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