Effective Strategies for Crypto Fraud Prevention

Regulators are placing increasing emphasis on crypto fraud prevention and investor protection in the digital asset space. As the Securities and Exchange Commission (SEC) works toward drafting the next generation of cryptocurrency regulations, these priorities are expected to remain central to the agency’s approach.  

Institutional investors, trading platforms, and other financial entities that emphasize digital asset security will be best positioned to lead the next wave of adoption. Regulatory clarity is coming, and those who address how to avoid crypto scams now will be ready to operate with confidence when that day comes.  

Key Takeaways

• Attackers are shifting focus from individual investors to platforms, custodians, and funds, where higher-value assets create larger incentives. 

• Institutions often face sophisticated threats like social engineering, SIM swaps, and insider compromise.  

• Retail investors remain vulnerable to pump-and-dumps, rug pulls, and long-con schemes like pig butchering scams (where scammers build trust over time before executing large-scale theft). 

• Layered defense is critical. Effective fraud prevention requires a mix of people, process, and technology that ensures no single point of failure can compromise assets. 

• Compliance is catching up, and the SEC is working to update digital asset custody rules to better protect investors. Institutions that align with qualified custodian standards governing traditional finance will be positioned to avoid crypto scams while complying with forthcoming regulations.  

What Does Crypto Fraud Look Like Today?

TRM Labs, a digital security consulting firm, estimates that investors were defrauded of more than $10 billion worth of cryptocurrency in 2024.  

Financial institutions are typically savvy enough to avoid the pump-and-dumps and rug pulls that can trap retail investors. Still, they remain exposed to more sophisticated forms of fraud that threaten operational infrastructure. Key threats include:

• Social Engineering: Scammers steal sensitive information by tricking people into doing something they otherwise should not. For example, this might involve impersonating IT staff to enter secure facilities or persuading an employee to bypass established approval processes.

• Phishing: Attackers use fake emails, messages, or phone calls to extract sensitive information, such as wallet credentials or access codes. For instance, “Mark in IT” may call an employee, saying he’s updating the system and needs the employee’s password to reset login credentials.

• SIM Swapping: By convincing a mobile carrier to reassign a phone number, attackers can intercept multi-factor authentication (MFA) and access secured accounts. Famously, a SIM-swap gang impersonated an executive and stole $400 million worth of cryptocurrency from FTX. 

• Insider Threats: Trusted individuals steal funds by abusing their access. For example, Solana holders were compromised by a developer who coded a backdoor into a browser extension that allowed him to steal private keys. 

How Institutions Can Avoid Crypto Scams

Avoiding fraud in the digital asset space requires a multi-pronged approach. The following strategies combine people, process, and technology to ensure no single point of failure can put funds at risk. 

People

People are often the weakest link in security, rendering employee training and insider risk management vital. Staff should be taught to recognize phishing attempts, social engineering red flags, and suspicious requests. 

Additionally, the principle of “least privilege,” which grants employees and executives the minimum necessary access to perform their roles, helps limit exposure.  

For critical functions, such as moving funds or changing security settings, dual control (two-party approval) reduces the chance of a single insider compromising security.  

Process

In response to high-profile failures and scams, regulators have proposed an expanded “Safeguarding Rule” that would obligate institutions to use qualified custodians, segregate client assets from firm assets, and submit to surprise examinations of custody arrangements.  

Regardless of whether the SEC finalizes these rules, proactively adopting such standards now strengthens investor protection and reinforces digital asset compliance at an institutional level. 

Finally, every organization should have a crypto disaster recovery plan that includes digital asset insurance. For instance, BitGo offers up to $250 million of insurance against loss, theft, and misuse in situations where BitGo holds all the keys. 

Technology

Technology is foundational to crypto fraud prevention. Institutions should implement infrastructure-grade safeguards that go beyond consumer-grade solutions:

• Multi-Factor Authentication: To log in, parties must confirm their identities with email or text verifications.

• Multi-Signature Wallets: Access requires approval from more than one keyholder before a transaction processes. For example, BitGo wallets require both client and platform keys to proceed. 

• Cold Storage: An internet-connected wallet leaves investors vulnerable to illicit online activity. “Cold” wallets remain a pillar of Bitcoin security, storing private keys in hardware that is permanently offline.

• Hardware Security Modules (HSMs): Hardware, even offline, isn’t immune to tampering. Widely used in traditional finance, HSMs encrypt information and provide audit trails tracking who accessed the device. 

The Role of Compliance in Fraud Prevention

For years, crypto regulation compliance lacked clarity. Institutions that wanted to meet compliance standards often found that the rules were undefined or inconsistently enforced. 

That is changing. A January executive order instructed regulators to develop the next generation of digital asset oversight, and the SEC has held public roundtables to solicit input on how best to handle the topic. 

Work is ongoing, but regulators are likely to implement regulated crypto custody standards that mimic qualified custodian rules from traditional finance. These rules prioritize client asset segregation, independent oversight, and operational transparency—core components of effective crypto fraud prevention.  

Moving forward, institutions that invest in crypto will likely be obligated to use qualified custodians to hold client funds. Working with reputable custodians, like BitGo, will help organizations avoid crypto scams, prevent crypto fraud, and, ultimately, protect client assets.  

FAQ

What are the common signs of crypto fraud?

Phishing scams have several telltale signs: urgency, fear tactics, unfamiliar senders, or slightly misspelled email addresses. Reputable companies will never ask for sensitive information over email or text. 

Retail investors should be wary of unrealistic promises of high or guaranteed returns, unlicensed or anonymous promoters, and pressures to “act fast” before an opportunity disappears.  

How can institutions avoid crypto scams?

Institutions should adopt a layered security approach that combines people, process, and technology.  

Security protocols, such as multi-sig and MFA, offline cold storage, and HSMs, ensure that no single point of failure can compromise assets. Staff should be trained to recognize phishing attempts and social engineering red flags, and organizations managing significant assets should have a disaster recovery plan that includes digital asset insurance.  

What role do regulations play in crypto fraud prevention?

Regulations set baseline standards for fraud prevention.  

The sector is still young, and the law has been slow to catch up with the modern realities of digital asset investing. However, regulators are actively working on the next generation of compliance requirements.  

In the meantime, institutions should look into qualified custodians that adhere to the custodianship rules already governing the traditional finance industry. Those rules aim to protect investors and help prevent crypto fraud. 

What steps should I take if I suspect crypto fraud?

Fast action is critical. First, stop any further transactions related to the suspected fraud. If a password has been compromised, follow the proper internal protocols for reestablishing security measures. The incident should be reported to the organization’s designated compliance or security lead and escalated in accordance with established fraud response or incident management procedures.

Are there tools available for monitoring crypto transactions for fraud?

Yes, there are tools specifically designed to monitor crypto transactions for signs of fraud. Blockchain analytics platforms such as Chainalysis, Elliptic, and TRM Labs help identify suspicious activity by analyzing transaction patterns, wallet behaviors, and connections to known illicit actors. These tools are used by institutions to detect fraud, enforce AML (anti-money laundering) policies, and meet regulatory standards.

At the custody level, BitGo offers internal controls and audit trails that help monitor transaction flows and flag anomalies. Combined with secure wallet infrastructure, these solutions enhance visibility and control over digital asset activity.