Forensic Accounting and Fraud Examination, 2nd Edition

13Cybercrime: Fraud in a Digital World

Cryptocurrencies are an electronic money movement and payment system. While available since at least 2009, cryptocurrencies, led by huge increases in value, really broke into the eye of the public in 2017. The 2017 cryptocurrency movement was grounded in ICOs (Initial Coin Offerings). ICOs are a means of funding a business venture by issuing a cryptocurrency rather than traditional angel, venture, or some other form of investment capital.

In general, the investment process is as follows: the cryptocurrency is issued to the investor and the issuer collects cash for operations and investment. Such an approach to raising money allows the issuer to avoid regulations and the processes required to register investments. In 2017, ICOs went from being a relatively unknown fundraising method used in the blockchain community, to raising over $4 billion. Because investors hold currency rather than ownership shares, the issuer has little (legal) obligations to those receiving the cryptocurrency.¹

Jordan Underhill, ACFE Research Specialist, J.D., CFE, likens some of the smaller cryptocurrency offerings to being similar to “penny stocks.” As such, they are subject to abuse via schemes similar to pump and dump. While the funded organization gets its cash flow, the holders of the cryptocurrency are left with little to no legal protection. According to Underhill, forensic accountants and fraud examiners need to have some sense of how cryptocurrencies and ...