Bloomberg: In the era of AI and social media, cryptocurrency scams are rampant

Original Title: 《Scams Keep Haunting Crypto Market, Aided by AI and Social Media》

Written by: Hannah Miller, Bloomberg

Translated by: Luffy, Foresight News

When Jakob - Moritz Eberl clicked on a link to a cryptocurrency company's website, he was stunned by what he saw: his own profile picture.

Under Eberl's profile picture was the name "Mason Jones," with the title "Senior Blockchain Engineer," and the site claimed he was one of six members of the InfinityStakeChain team. Another nearly identical platform, FlexyStakes, used the same photo but a different name, calling Eberl "Noel Brennan." Eberl, a social scientist at the University of Vienna, does not even own any cryptocurrency and has no idea why his photo appeared on these sites.

"I have nothing to do with cryptocurrency," he said in an interview. "I don't follow cryptocurrency. To be precise, I know nothing about cryptocurrency."

Earlier this year, when former FTX CEO Sam Bankman-Fried was sentenced to prison for fraud, many in the cryptocurrency industry thought it could turn a new page after years of scandals. However, scams continue to plague the industry. There are signs that scams are resurging as the market rebounds this year.

It's not just fake profiles and misleading websites; fraudsters are trying to disguise legitimacy through false news about venture capital funding and partnerships with industry giants. Some misinformation has even infiltrated trusted industry data sources.

Photos of team members on the FlexyStakes website, showing Jakob - Moritz Eberl's profile picture under a false name. Source: Bloomberg

Jakob - Moritz Eberl

Both InfinityStakeChain and FlexyStakes issued press releases on news agencies, regional news websites, and Yahoo Finance, claiming to have raised $12 million from investors including Binance, the world's largest cryptocurrency exchange. On their websites, they also claimed to have established partnerships with other major companies in the industry, including Polygon, Avalanche, dYdX, and Fantom. Binance and other companies confirmed to Bloomberg that they have never partnered with either of these startups.

In the cryptocurrency industry, where venture capital activity is closely watched by traders looking for signals on which tokens to buy, investments from large firms like Andreessen Horowitz or Dragonfly can trigger traders to rush to buy new project tokens and drive up their prices. With Bitcoin and other tokens soaring this year and venture capital funds rebounding, the risks for retail and institutional investors looking to capitalize on the market recovery are significant.

PitchBook cryptocurrency analyst Robert Le stated, "This is fraudulent behavior." He pointed out that InfinityStakeChain and FlexyStakes are just a few of the cryptocurrency startups spreading false funding information.

Bloomberg's inquiries about the two projects went unanswered. InfinityStakeChain and FlexyStakes used the same promotional language and listed the same partners on their websites, even though InfinityStakeChain's site has been inactive for the past month. They even claimed to use the same office address: a quiet commercial property in Melbourne, Australia.

The first floor of the six-story office building was empty, filled with abandoned desks, along with some shipping companies, a medical center, and a construction office, but no trace of FlexyStakes or InfinityStakeChain could be found. A receptionist for one of the building's tenants stated that, to her knowledge, no company by those names had rented office space there in the past two years. The building's management, Colliers International, has not yet responded to emails seeking further confirmation.

It remains unclear what the motivations of FlexyStakes and InfinityStakeChain are. Le noted that PitchBook, which tracks venture capital data, has recently found an increase in fraudulent activities in the cryptocurrency space, with some projects being outright scams, and their false funding announcements potentially luring unsuspecting victims to malicious websites.

"Happening Almost Daily"

"What they want to do is get you to visit the site, connect your wallet to use it, and then they will steal all your funds," he said. "We see a lot of fake fundraising projects; they will issue fake press releases. I see this almost every day."

The speed at which scams are emerging is astonishing. Just hours after Tether announced the launch of a new synthetic dollar token, the company's CEO Paolo Ardoino posted on X, stating, "It seems there are multiple websites trying to impersonate our new product Alloy, please do not be fooled."

When it comes to InfinityStakeChain and FlexyStakes, Eberl is not the only one whose profile has been misappropriated. He also recognized the faces of two other individuals, including the so-called founders of these companies. Eberl studies the dissemination of information regarding politics and health, and recently focused on public reactions to Austria's Covid-19 policies. He recognized the couple from the X social media platform, as they both posted about Austria's Covid policies. Both individuals confirmed to Bloomberg that they were also not involved with the crypto startups. Three other individuals whose photos appeared on the websites also confirmed to Bloomberg that they had no connection to either project.

For Eberl, the incident is unsettling, even though he is accustomed to receiving malicious comments and online harassment due to his research. His wife recently watched the Netflix documentary "Bitconned," and he worries he might become a target of a crypto scam. He even fears that a Bloomberg investigation could be part of some conspiracy. Therefore, he asked if he could send a meeting invitation from his own account to ensure he wouldn't click on any malicious links.

Most importantly, he is concerned that he might be implicated in fraud, which could damage his reputation and harm unsuspecting users.

Eberl said, "I don't know why this is happening to me."

Recently, another case of misinformation regarding cryptocurrency venture capital occurred with a company called Candle Labs. Multiple data and news platforms, including Crunchbase, PitchBook, and Silicon Valley Journals, incorrectly reported that the company raised $48 million in Series B and later-stage venture capital. Twenty-one-year-old Sam Safahi founded this cryptocurrency startup in 2022 with some friends and his father, Alan Safahi. Alan Safahi previously served on the board of Ripple Labs and is currently serving a 40-month sentence in federal prison for fraud and money laundering related to a $2.7 million prepaid debit card scam.

Sam Safahi stated in an interview that the company did not raise $48 million and is unsure how the news spread. "We raised $1.2 million, mostly from family or friends," he said.

Candle Labs on Crunchbase. Source: Bloomberg

Whether the false data about Candle Labs' $48 million funding was provided intentionally or mistakenly to these data platforms does not change the fact that misinformation has always existed. Safahi stated that the company ultimately shut down last year because it received a letter from the U.S. Securities and Exchange Commission suggesting that its CNDL token was an unregistered security.

Confusing Fundraising News

Sam Safahi said, "When my father gets out, we plan to negotiate with the SEC to restart the project and get it back on track."

Silicon Valley Journals stated in an email to Bloomberg that it obtained the information from Crunchbase and subsequently updated its article about Candle Labs' fundraising. Crunchbase has an article mentioning a $48 million fundraising round, as well as a $1,000 fundraising listed on the company's data page. There is also a line on the Candle Labs data page stating, "This is a fraudulent startup; if you receive a job offer from it, please ignore it."

A representative from Crunchbase declined to comment for this article. After Bloomberg's inquiry, it removed the sentence accusing Candle Labs of being fraudulent from its data page.

A spokesperson for PitchBook stated that the information came from "published sources." After review, the data tracker chose to remove the entry from its website.

Le stated that due to the prevalence of misinformation, PitchBook had to change the way it tracks the cryptocurrency industry. When announcing a funding round, Le typically speaks directly with investors, the company's limited partners, and the founders themselves to confirm their involvement. If there are government documents, he often verifies the funding situation through those documents.

He said, "Compared to traditional venture capital, we take a more cautious approach to funding announcements in the crypto space."

He has also encountered another new issue in his efforts to combat misinformation: artificial intelligence makes it harder to distinguish what is real from what is fake. Le noted that more scammers may use chatbots like ChatGPT to write websites and project white papers, resulting in scam projects appearing more sophisticated than ever.

He said, "In the past, they always had various grammatical errors that made it obvious they were fake."

Bots and Humans

Le pointed out that social media is another complex factor in the spread of online misinformation. He stated that some bots execute cryptocurrency trades based on news and social media posts, meaning misinformation can artificially inflate token prices. And it's not just bots that are being deceived. Svitlana Volkova, chief AI scientist at engineering services company Aptima Inc., focuses on cryptocurrency misinformation and stated that humans are particularly vulnerable to financial information, with almost no safeguards against the spread of misinformation on social media sites.

She said, "People share information without verifying it first, and that information gets reshared and spreads rapidly."

Misinformation poses risks not only to cryptocurrency traders but also to venture capitalists themselves. Cryptocurrency venture capital firms have been criticized for not conducting sufficient due diligence and for backing fraudulent startups like FTX. Roger Royse, a partner at Haynes Boone law firm, stated that it is common for cryptocurrency founders to exaggerate.

An Unresolved Reality

"In Silicon Valley, where I am, startup founders have a kind of almost delusional arrogance, which is the nature of startups," Royse said.

The question of how far self-aggrandizing founders can go has been raised in the case of Elizabeth Holmes and her blood-testing startup Theranos. While founders may believe they have the potential for high-level success, Royse said that does not mean they can claim to have accomplished things they have not. Publicly misrepresenting funding rounds, including the amounts raised, and allowing other venture capital firms to invest based on that information could carry legal risks.

"If important facts are misrepresented and investors are induced to invest, that is fraud," he said.

As for Eberl, the social scientist in Vienna, it remains unclear whether he can have his photo removed from the FlexyStakes website.

"To some extent, I feel that the cryptocurrency scam has violated my rights," he said, while his academic curiosity was also piqued. "On the other hand, I find it very strange, and I find this connection very interesting."