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Fraud Fuels Growing Cryptocurrency Exchange Losses

The tally of stolen funds from cryptocurrency exchanges this year looks set to skyrocket after reaching $1.2bn in the first quarter, according to a report from blockchain forensics company CipherTrace.

In its Q1 2019 Cryptocurrency Anti-Money Laundering Report, the company attributed thefts, scams and fraud to much of the $1.2bn in losses. This figure looks set to dwarf the $1.7bn lost from exchanges during the whole of 2018 as documented in its Q4 2018 report. 

There was another key difference in 2019, CipherTrace added, pointing out that exchange hacks were a dominant theme last year.

“In the first quarter of this year, insiders, extortionists and scammers attempted a more diverse range of crypto-crimes,” it said.

Exit scams made up nearly $195m of the Q1 2019 losses according to the company. It now officially calls the implosion of Canadian cryptocurrency exchange QuadrigaCX an exit scam. 

QuadrigaCX sought creditor protection after its founder, Gerald Cotten, was reported dead in India. CipherTrace has raised several concerns about the company, which claimed not to have access to cryptocurrency wallets originally under Cotten's control.

CipherTrace had to delay the release of the report as it hastily added new information about troubled cryptocurrency exchange Bitfinex. In late April, the New York Attorney General filed against the exchange and its owner in court for allegedly defrauding clients. 

The exchange had lost $851 million that it had sent to a Panamanian payment processor called Crypto Capital without a written contract, the AG said. Bitfinex’s owners have strongly denied the claims.

Crypto Capital also worked with QuadrigaCX, according to the CipherTrace report. 

“Exchanges and other crypto assets that do business in less regulated countries, as is in the case of Tether and Bitfinex, typically have difficulty gaining traditional banking relationships,” the report added. “This forces digital asset businesses to deal with ‘shady’ operators, and often in countries like Panama where fraud is sometimes de rigueur.”

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