Old frauds with a new sauce: digital assets and space transition
| DOI | https://doi.org/10.1108/JFC-11-2021-0242 |
| Published date | 14 December 2021 |
| Date | 14 December 2021 |
| Pages | 205-220 |
| Subject Matter | Accounting & finance,Financial risk/company failure,Financial crime |
| Author | Daniel Dupuis,Deborah Smith,Kimberly Gleason |
Old frauds with a new sauce:
digital assets and space transition
Daniel Dupuis
Department of Finance, School of Business Administration,
American University of Sharjah, Sharjah, United Arab Emirates
Deborah Smith
Department of Accounting, Monte Ahuja College of Business,
Cleveland State University, Cleveland, Ohio, USA, and
Kimberly Gleason
Department of Finance, School of Business Administration,
American University of Sharjah, Sharjah, United Arab Emirates
Abstract
Purpose –The purpose of this study is to describe the evolution of fraud schemes with historically conducted
with fiat money in physical space to the crypto-assets in digital space as follows: ransomware, price
manipulation, pump and dump schemes, misrepresentation, spoofing and Ponzi Schemes. To explain how fraud
schemes have evolved alongside digital asset markets, this study applies the space transition theory.
Design/methodology/approach –The methodologyused is a review of the media regarding six digital
asset fraud schemes thathave evolved from physical space to virtual space that are currentlyoperational, as
well as a review of the literatureregarding the space transition theory.
Findings –This paper finds that thedigital space and digital assets may facilitate pseudonymouscriminal
behaviorin the present regulatory environment.
Research limitations/implications –The field is rapidly evolving, however this studyfinds that the
conversion from physical to virtual space obfuscates the criminal activity, facilitating anonymity of the
perpetrators,and creating new challenges for thelegal and regulatory environment.
Practical implications –This paper finds that the digital space and digital assets may facilitate
pseudonymouscriminal behavior in the present regulatory environment.An understanding of the six crypto-
asset fraud schemes described in the paper is useful for anti-financial crime professionals and regulators
focusingon deterrence.
Social implications –The space transition theory offers an explanation for why digital space leads
criminals to be better positioned to conductfinancial crime in virtual space relative to physical space.This
offers insights intobehavior of digital asset fraudster behavior that could help limit the social damage caused
by crypto-assetfraud.
Originality/value –To the authors’knowledge, this paper is the first to detail the evolution of fraud schemes
with fiat money in physical space to their corresponding schemes with digital assets in physical space. This
study is also the first to integrate the space transition theory into an analysis of digital asset fraud schemes.
Keywords Financial crime, Fraud, Cryptocurrency, Digital assets, Space transition theory
Paper type Research paper
1. Introduction
Like crows captivated by shiny objects, it is difficult for many individuals to look away
when a new, innovative fraudscheme presents itself. With individuals quarantined at home
and bored, surfing the web for stimulation and uncertain economic conditions setting
Digital assets
and space
transition
205
Journalof Financial Crime
Vol.30 No. 1, 2023
pp. 205-220
© Emerald Publishing Limited
1359-0790
DOI 10.1108/JFC-11-2021-0242
The current issue and full text archive of this journal is available on Emerald Insight at:
https://www.emerald.com/insight/1359-0790.htm
financial criminals on the prowl, fraud schemes have proliferated during the COVID-19
pandemic. Partly due to an increase in online time and the meteoric rise in social media
attention, crypto-scams have taken flight. Brooks (2021) notes that between October 2020
and June 2021, Americans havelost $80m in cryptocurrency fraud schemes and the Federal
Trade Commission (FTC) reports that they received over 7,000 complaints from consumers
regarding crypto-investmentscams.
A largely uninformedpublic and new technology, driven by social media influencers and
high media visibility, creates an amenable environment for the evolution of new fraud
schemes. In this paper, we integrate the fraud triangle theory with the space transition
theory to describe the evolutionof traditional fraud schemes committed in physicalspace to
digital asset schemes that operatein digital space. We also address six currently operational
crypto-based or crypto-enabled fraud schemes that are based on historic fraud schemes:
ransomware, price manipulation, fraudulent disclosures, pump and dump schemes, Ponzi
schemes and spoof sites and fake apps. We conclude with implications for regulators and
anti-financialcrime professionals.
2. Space transition theory the nature of digital assets
2.1 The nature of cryptocurrency and the space transition theory
By some estimates, cryptocurrency could replace up to one-fourth of national currency
within a decade (Samejo et al.,2018),and at the same time, Kethineni and Cao (2020) state the
cryptomining attacks increased over one thousand percent in early 2018. Rob Wright, of
Europol, estimates that billions of dollars of criminal money is laundered annually with
cryptocurrency(Kethineni and Cao, 2020).
The problem is that the same features that make cryptocurrency appealing to the
public at large make it useful for crime (Potgieter and Howell, 2021). Cryptocurrency
provides a new opportunity to facilitate extant financialcrime schemes, including Ponzi
schemes, randsomeware (Kethineni and Cao, 2020), price manipulation and “pump and
dump”projects (Cengiz, 2021). Low barriers to entry make it easy for criminals to
elevate existing fraud schemes with digital assets (Kethineni and Cao, 2020). Further,
digital coin transactions are instantaneous and irrevocable, and as the currency is
portable, criminals can take advantage of international transferability (Kethineni and
Cao, 2020).
While the borderless nature and nonrelianceon central authorities facilitates commercial
freedom, international anonymity creates opportunity for fraudsters.The blockchain ledger
associated with cryptocurrencyprovides an audit trail, but digital coins are typically stored
under encryption with privatekeys (Houben and Snyers, 2018). Because the ownership is in
the form of a cryptographic key rather than personal identification, the participants are
anonymous. Anotherreason that cryptocurrency is more anonymous than cash is the lackof
an intermediary, such as a bank or financialinstitution, making it difficult, if not impossible,
to require disclosures (Potgieter and Howell, 2021). Kethineni and Cao (2020) point out that
cryptocurrencies enhancethe opportunity for crime and extend crime in the virtual world to
the real world, a concept thataligns with space-transition theory of crime (Jaishankar,2008).
Criminals are lured by the anonymity, security and the difficulty of tracing activity
(Kethineni and Cao, 2020).
Cressey’s (1953) fraud triangle theory can be integrated with a relatively new paradigm
from the criminology discipline,the space transition theory (Jaishankar, 2008), to explain the
transferability offraud schemes from the physical space to the virtual spacein which digital
coins and their markets reside. The fraud triangle theory (Cressey, 1953) posits that three
factors are required forfraud to occur:
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