A particular kind of scam is hogging the attention of state securities regulators.
So-called pig-butchering schemes are becoming increasingly prominent in the cryptocurrency space, and 46% of state regulators in the U.S. and Canada say these type of scams are a top concern, according to the North American Securities Administrators Association's annual list of top investor threats.
Pig-butchering schemes were the second-most-cited threat by U.S. and Canadian state securities regulators responding to NASAA’s survey, marking the first time the threat has made the list. Digital asset frauds took the top spot, cited by 62% of respondents, while social media and internet schemes followed behind, at 41%.
The term “pig-butchering” came to greater prominence as crypto hit the mainstream, and these schemes often take the guise of crypto opportunities, according to Amanda Senn, NASAA’s Enforcement Committee co-chair and chief deputy director for the Alabama Securities Commission.
Often, the fraudster will contact the victim through social media apps or texting, touting their success with an (often fraudulent) crypto exchange. The fraudster commits them to a small sum of money at first and provides small returns, lending a degree of credibility at a time.
This is where the term’s significance comes in, Senn explained; in lieu of trying for a lump sum, the fraudster will bleed the victim’s finances in small increments, akin to fattening up a pig before they’re slaughtered.
“And then the fraudster goes for the kill,” she said. “They take more and more money from the victim before a total loss is experienced by the victim.”
Alabama securities regulators have gone after numerous pig-butchering scams, citing two cases this year with alleged fraudsters purporting to be online cryptocurrency exchanges with no known business addresses. Senn said investors had lost millions in her state alone, and she worried that victims might be vulnerable to crypto-related schemes because they wouldn’t know how to find legitimate investments in the space.
Such schemes could also rebound on broker/dealers and advisors working with victims, particularly if money comes out of the victim’s brokerage account, according to Sander Ressler, a managing director of Essential Edge Compliance Outsourcing Services.
When a victim learns of the scam, they may ask their broker about why they didn’t question its validity. Brokerage firms will often have different supervisory requirements when sending money to a third party.