Crypto OTC scam: how to avoid becoming a victim

Andrew Burkin 

Andrew Burkin

Managing partner at 555Crypto

Kirill Zolotukhin

06 March 2019,
Crypto OTC scam: how to avoid becoming a victim

Let's imagine that you already have some experience in the crypto industry and a certain reputation within your local crypto community. It means that at some point you will probably get an unexpected offer from a stranger or a person you barely know to execute over-the-counter (OTC) crypto deal. In other words to exchange a considerable amount of crypto to fiat currency at what will seem to be a very good rate.

Against your better judgment, you could even consider this as your golden ticket. Human beings naturally believe in miracles. We will give you several tips on how to steer clear of fraud attempts executing a non-cash cryptocurrency OTC deal.

How does a typical OTC offer from a stranger look like? A person introduces himself as an authorized intermediary of a ‘whale’ cryptocurrency holder, a mining pool or an investor with intentions either to buy or to sell a large volume (often more than 1000 BTC) of crypto in exchange for a fiat money wire transfer.

Sounds strange, right? Here are the two questions you need to ask yourself:

  • Why cold contact?
    Why would an official representative of a 'whale' look for a new client using cold contacting like an average salesman? There are international financial institutions with century-old names that could help him to move crypto and also keep a low profile.

  • Why you?
    Think for a moment, why does the offering party contact you? Even if you're engaged in the community, have experience and reputation relevant to crypto,  it doesn't mean that you are an expert in every aspect of a crypto world. In case you’ve never been engaged in any OTC deals, the probability that you've been contacted by a scammer is very high.


Crypto OTC negotiations red flags

  1. Excessive secrecy – your counterparty doesn't want to share the details of the OTC transaction process without a signed NDA (Non-Disclosure Agreement). This NDA is expected to be signed by the intermediary only, not the actual person or company buying or selling crypto.
    In such cases, any questions about the potential harm of the offer's details going public are left unanswered.

  2. Lack of relationship proof – your counterparty introduces himself as an authorized proxy of the decision-making party but refuses to present any documents confirming a relationship with a person or entity that will be executing the deal. No broker license, letter of attorney, etc.

  3. Fear of professional services involvement – your counterparty refuses any involvement of a legal counsel or financial advisor referring to the untrusting or unethical nature of such request.  

  4. Inquiries about your wallet/bank account details. Your counterparty demands Proof-of-Coin (also known as Proof-of-Product) procedure. If you are selling BTC it could be a transfer of 1-15 satoshis to the potential buyer’s wallet to prove that you have access to the wallet with the funds or a video of your screen when you are accessing that wallet. If you are buying, it could be a statement from your bank account.
    It's important to highlight that such requests should not be made by anyone but authorized bank officer or licensed financial advisor, in other cases it's a sign of potential fraud.

  5. Fixation on fees. The dialogue begins with the intermediary fees discussion or counterparty implies that there are several intermediaries in the chain and you need to account for their cuts. You lack any clue here, who are all those people and why you need to pay them. Another red flag in such cases is an ‘irrevocable fee protection agreement’ (IFPA) signed prior to the deal in order to protect everybody’s high earnings. A mere fact of intermediary fees discussion implies that you are not dealing with an authorized representative of the crypto or fiat funds holder, but with a sales agent at best or even with a scammer.


OTC deal procedure red flags

So you checked all the papers, consulted your legal and financial advisors and your counterparty is ready to discuss the procedure of your crypto OCT transaction. Here are the several characteristics of scammy narrative you need to keep in mind:

  1. Excessive namedropping. A representative person claims out of context that his/her client has accounts in one or several of the top international banks (sometimes even with spelling mistakes like ‘HSBS’, ‘Standart Chartered’, ‘Barclais’, ‘UBC’, etc.).
    It’s often proposed to open an account in the same bank ‘to boost the process’, due to ‘strong personal ties’ with the bank’s management. Of course, they never explain the nature and details of such ties and how exactly they are going to help.

  2. A lot of buzzwords. A blunt usage of specific financial terms, e.g.: SWIFT MT760/MT799, Block(ed) Funds Investment, Brokerage Account etc. The infamous practice of fraudulent use of financial instruments is well known since the beginning of time, but the cryptocurrency boom gave it a new life. You can further read the details of common examples of such cases on FBI, SEC or U.S. Department of the Treasury websites.

  3. Strange demands without a clear purpose. Your counterparty offers to execute the deal in a specific jurisdiction but fails to explain regulatory, tax or any other benefits of such jurisdiction. Usually, they name a country with strong crypto or financial reputation like  UAE, Hong Kong, Singapore, Estonia, Latvia, the UK, Switzerland, Czech Republic, rarer the USA or Canada.
    A choice is often explained with a cover story that ‘a wallet/account owner travels a lot, currently stays at the chosen location and the further discussion is possible only at his territory (bank, office or a designated secure location).

  4. Shady agreements. If you choose a jurisdiction where crypto is banned, you might get a proposal to execute a deal in exchange for ‘delivery of goods, granting software license or rendering services’ (of course on paper only). The proposed agreement will likely be drafted with gross violations of Incoterms and International Sale Contract Model created by the International Chamber of Commerce (ICC).

  5. Demand to use a specific escrow agent. It is a common practice to use an escrow account in a well-known bank for international settlements, but in case of crypto deals, it is often proposed to use services of some unknown attorney or no-name third parties which supposedly specialize in cryptocurrency transactions. The details of a proposed third party are not disclosed and a website (if there is one) looks like a simple landing page lacking general information.

  6. Excessive attempts to relieve safety concerns. Your counterparty demands you meet in person ‘to clarify all the details’ and constantly telling you that the deal is safe and there is nothing to worry about.

Of course, this is not a comprehensive list of every possible scenario of a crypto OTC scam attempt, but these are the most common ones that repeat very often. If you encounter one or several abovementioned red flags, try being more skeptic about the deal and getting professional advice from a legal or financial consultant.

We would like to believe in all the best, but it’s barely real, that the road to well-being was paved by so glossy stones, even in volatile and just to be consistently regulated cryptocurrency realm.

Advanced reading: in 2013 UNCITRAL Secretariat prepared a brochure “Recognizing and Preventing Commercial Fraud”. We recommend taking a look at this still unexpired guidance.

The authors are managing partners at 555Crypto – a company specialized in OTC crypto deals, exchange listings and liquidity support for crypto projects.


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