Scams continue to haunt the crypto market, aided by AI, social media: Report | Cryptocurrency

“I am not associated with crypto,” he said in an interview. “I don’t follow crypto. I have to be honest, I still don’t fully understand crypto.”

When former FTX CEO Sam Bankman-Fried was jailed following his conviction on fraud charges earlier this year, many in the crypto industry breathed a sigh of relief that the industry could turn the page after years of scandal. Still, scams continue to haunt the asset class, and there are signs they have picked up again amid this year’s recovery in the market.

Both InfinityStakeChain and FlexyStakes issued press releases that appeared on wire services, local news sites and Yahoo! Finance claims to have raised $12 million from investors led by Binance, the world’s largest crypto exchange. On their websites, they also claim partnerships with other big names in the industry, including Polygon, Avalanche, dydx and Fantom. Binance and the others each confirmed to Bloomberg that they have never worked with one of these startups.

In a sector where VC activity is closely watched by traders looking for signals about which tokens to buy, an investment from big names like Andreessen Horowitz or Dragonfly could inspire traders to snap up a new project’s token and increase its price. With Bitcoin and other tokens soaring this year and VC funding recovering, the stakes are high for both retail and institutional investors looking to take advantage of the market’s resurgence.

“It’s fraud, especially if you’re setting up these sites,” said PitchBook crypto analyst Robert Le, who identified InfinityStakeChain and FlexyStakes among a group of crypto startups peddling false fundraising information.

Inquiries about the two projects from Bloomberg went unanswered. InfinityStakeChain and FlexyStakes both used the same promotional language and listed the same partners on their websites, although InfinityStakeChain’s website became inactive in the past month. They even claimed the same office address at a quiet commercial property in Melbourne, Australia.

The six-level office building is home to an empty first floor full of abandoned desks, some shipping companies, a medical center and a construction office, but there is no sign of FlexyStakes or InfinityStakeChain. A receptionist for one of the building’s tenants said that, to her knowledge, no company with either of those names had rented space there in the past two years. The building’s manager, Colliers International Group, did not respond to an email seeking further confirmation.

It is unknown what the motives are for FlexyStakes and InfinityStakeChain. Le said PitchBook, which tracks venture capital data, has recently seen an increase in fraudulent activity in the digital-asset space, and some projects are simply blatant scams whose fake fundraising announcements can lure unsuspecting victims to a malicious website.

‘Almost on a daily basis’

“All they want to do is get you to come to the site, connect your wallet to use the thing, and they steal all your funds,” he said. “We see so many fake projects raising money and they will put out fake press releases. I see it almost daily.”

Scams can occur alarmingly quickly. Only a few hours after Tether Holdings Ltd. announced a new synthetic dollar token on Monday, the company’s CEO Paolo Ardoino posted on X that it “appears that there are already several websites trying to imitate our new product Alloy by Tether. Don’t fall for it.”

As for InfinityStakeChain and FlexyStakes, Eberl wasn’t the only one whose header was misused. He also recognized two other faces, including the alleged founder of both companies. Eberl studies communication and misinformation about politics and health, and has recently focused on public reactions to Covid-19 policies in Austria. He recognized the pair from the X social media platform as they both posted about Covid policies in Austria. Both individuals confirmed to Bloomberg that they were also not involved in the crypto startups. The other three individuals whose photos appeared on the websites also confirmed to Bloomberg that they are in no way connected to any project.

For Eberl, the incident was disturbing, even though he is used to hateful comments and online harassment about his research. His wife recently watched the Netflix documentary Bitconned and he was worried about being targeted by a crypto scam. He even feared that an inquiry from Bloomberg, which included a Zoom link for a video conference interview, was part of some kind of ploy. So he asked if he could send the meeting invitation from his own account to make sure he hadn’t clicked on a malicious link.

Above all, he was also worried about being associated with something potentially fraudulent that could damage his reputation and hurt unsuspecting victims.

“I have no idea how I earned it,” Eberl said.

Another case of crypto-VC misinformation was recently seen at a company called Candle Labs. Several data and news platforms, including Crunchbase, PitchBook and Silicon Valley Journals, incorrectly reported that the company had raised $48 million in a Series B, or later stage, venture funding round. Sam Safahi (21) founded the crypto startup in 2022 with some friends and his father, Alan Safahi. The elder Safahi, who previously served on the board of Ripple Labs, is now serving a 40-month sentence in federal prison for fraud and money laundering convictions related to a $2.7 million prepaid debit card scam.

Silicon Valley Journals said in an email to Bloomberg that it got the information from Crunchbase and subsequently updated the article about Candle Labs’ fundraising to include an attribution to Crunchbase. Crunchbase has an article referencing a $48 million fundraising, as well as a $1,000 fundraising listed on the company’s data page. The Candle Labs data page also had a line that read: “This is a fraudulent startup – if you receive a recruitment offer from these guys, ignore it.”

Representatives from Crunchbase declined to be interviewed for this story. Following Bloomberg’s investigation, it removed the conviction of fraud at Candle Labs from the company’s data page.

A spokesperson for PitchBook said the information came from “published sources”. After a review, the data tracker chose to pull the entry from its website.

With so much misinformation going around, PitchBook has had to change how it tracks the crypto industry, Le said. When a funding round is announced, Le will often speak directly to the listed investors, the companies’ limited partners and the founders themselves to confirm that they are all involved. He also often confirms the increase using government requests, if available.

“We take more of a grain of salt in the crypto space for a fundraising announcement than in the traditional VC space,” he said.

Another new wrinkle in his efforts to combat misinformation: Artificial intelligence is making it harder to detect what’s real and what’s not. More scammers are likely using chatbots like ChatGPT to write their website language and the white papers explaining their project, Le said, and the result is that scam projects look more polished than they did in the past.

“They used to have all these grammar mistakes, and you can just tell it’s fake,” he said.

Crashes and people

Social media is another complicating factor when it comes to spreading misinformation online, Le noted. He said that there are bots that perform crypto transactions based on news and social media posts, which means that false information can artificially increase token prices.

And it’s not just bots that fall for it. Real people are especially vulnerable when it comes to financial information and there are few safeguards on social media sites to prevent falsehoods from spreading, said Svitlana Volkova, chief AI scientist at engineering services firm Aptima Inc., whose research on crypto disinformation focused.

“People share information without prior verification and it gets reshared and it goes viral,” she said.

The misinformation poses a risk not only to crypto traders, but to venture capitalists themselves. VC firms in the crypto space have been criticized for not doing enough due diligence and ending up backing fraudulent startups like FTX. It’s common for crypto founders to tell the truth, said Roger Royse, partner at law firm Haynes Boone.

‘Suspension of reality’

“Here in Silicon Valley, where I practice, it’s kind of the nature of being a startup founder, that people have a lot of hubris that borders on a suspension of reality,” Royse said.

The question of how far founders can go when it comes to self-aggrandizement has been raised in cases like the one against Elizabeth Holmes and her blood-testing company Theranos. While founders may believe they have the potential to succeed at a high level, Royse said that doesn’t mean they can claim to have accomplished things they haven’t. And lying publicly about a funding round, including the amount raised, and getting other VCs to invest based on that information could cause a legal problem.

“If there is a misrepresentation of a material fact, and it causes the investor to invest, that is the basis of a fraud claim,” he said.

As for Eberl, the Vienna-based social scientist, it’s unclear whether he can get his image removed from the FlexyStakes website.

“On some level, I guess I feel violated by the crypto scam,” he said, adding that his academic curiosity was also piqued: “On the other hand, I just find it extremely strange and I find this connection extremely intriguing.”