The latter would be particularly typical in regions where buys find it impossible to function or to get transactions up of US$50,000, so "blocktrades." Back in Hong Kong, the OTC marketplace is very common. For a authority without funding controllers, simple bookkeeping rules along with a broad access to forex balances, Bit-coin end users from all over around the planet arrive at Hong Kong to run transactions.
The obstacle to develop into the OTC dealer is somewhat very low, since the only real condition will be funding. Based upon how big of their performance, OTC merchants utilize platforms such as Coincola or even Localbitcoins, their particular site, a physical shop, or just a Telegram take care of and current email to manage their organization. Some acknowledge each wire and cash transfers, even while other concentrate in other, or even accept other kinds of cost for example Western Union.
Legal risk
OTC traders take on a wide variety of risks. At first, there is the legal risk of unwittingly being lured into a money laundering operation. Even though the exchange of bitcoin is unregulated in many places, including Hong Kong, existing regulation mandates traders to perform due diligence on their counterparties.
“You should guard against the ML/TF risks [...] by increased vigilance in assessing the ML/TF risks of customers as well as monitoring and detecting unusual or suspicious transactions,” a circular from the Hong Kong Customs and Excise Department reads.
Scams and Schemes
But even diligently following know your client (KYC) and anti-money laundering procedures doesn’t necessarily protect traders from the wide variety of scams and schemes that target them daily.
Most commonly, phishing emails attempt to obtain traders’ email and cloud storage credentials. Using the information found in somebody’s inbox can allow a fraudster to contact previous business partners and redirect funds into the fraudster’s wallet, for example by posing as a trusted buyer and asking for a Bitcoin transfer upfront.
If the attacker is able to passively read incoming email for a long time, they may also be able to inject themselves into a conversation at the right moment and redirect funds to their own pockets by changing the account information.
MOSCOW, RUSSIA MARCH 1, 2018: Ledger Wallet, a cryptocurrency hardware wallet, at the DeeCrypto retail store selling cryptocurrency mining equipment by such brands as Bitmain, GPU, KeepKey, Embedded Downloads LTD, Ledger, etc. Artyom Geodakyan/TASS (Photo by Artyom GeodakyanTASS via Getty Images)
In one of the most perfidious schemes to hit Hong Kong traders in the past years, OTC traders were used to exchange income from other scams into bitcoin, which can more easily be transferred overseas without being seized.
Those moving illicit money with Bitcoin may attempt to pay a premium to convince the traders to let go of KYC procedures. “If they do not want to disclose any personal data and don’t want to do KYC, we can’t do OTC trading with them,” explains Winnie Law, General Manager of the Hong Kong trading space the Genesis Block.
The Great Switcheroo: How OTC traders Become Unknowing Accomplices
In the case of the great switcheroo, the scammer poses as the seller of some intangible good, such as a ticket to a cruise or resort. The scammer then asks an unsuspecting buyer for their personal information, including passport copies. After all, this seems like normal procedure for booking international travel.
The scammer then contacts the OTC trader in the name of the victim and asks to buy bitcoin in exactly the same amount as the aforementioned ticket. The scammer submits the victim’s documents and receives the trader’s personal information, including bank account numbers and passport scans (the latter to fulfill common due-diligence procedures). The scammer can use these documents to gain the trust of the victim, who will be encouraged to make payment upfront. The victim is under the impression that since they have the personal information of the seller, and since it matches the information on the bank account, they can later receive help from the police (if needed).
Once the victim makes the deposit to the trader, the trader releases the bitcoin to the scammer who disappears with it. Since the victim and the trader never directly communicated with each other, it may take them a while until they realize the scheme themselves.
Police will often take statements from both the victim and the trader and see no point in investigating further, as there are no usable leads. Whether the victim can get their money back depends on how they deposited it. For the trader, there is no way to get the bitcoin back in any case.
The 100,000 Bitcoin Trade
One particularly peculiar scheme has been making the rounds in the cryptocurrency community recently, involving people otherwise uninvolved and unfamiliar with cryptocurrency conventions and procedures. They are encouraged by contacts on LinkedIn or Facebook to seek out "insiders" who can help sell or buy for miners or institutional investors.
Leo Weese
A request from a seemingly real buyer aims to find buyer for an unrealistically large amount of Bitcoin.
The figures involved, for example 100,000 bitcoin, might seem meaningless to those unfamiliar with industry dealings, and similar to the Nigerian Scam email, may be specifically designed to weed out savvy responses. Sending out hundre## ds of thousand of spam emails often comes cheap, but charming and luring those that respond into the scheme can cost a lot of manpower. By weeding out the savvy users right away, scammers can more effectively run their operation.
In the hopes of a small commission, the recipient then uses their reputation and energy to seek out their friends involved in cryptocurrencies (or as John Oliver would call them, "Dans"). The scammer’s hope: In light of a recommendation from an old friend and in hopes for a good deal, the OTC traders let their guard down. “Typically you will go and jump through all the hoops... they then suggest starting small with a 100k USD transfer. That's where the scam ends.” Dave Chapman, Chairman of OTC firm Octagon Strategy stated his firm has never been "foolish enough to entertain this" but says "we're inundated with up to 10 requests like this per day."
How to Protect Yourself: Don’t Just Trust—Verify
Verifying the authenticity of funds is trivial when using Bitcoin. The system’s transparent and open Blockchain allows anybody to inspect it. Whether an address contains more than 100,000 bitcoin or not can easily be looked up (only three such addresses exist, representing the vaults of the large exchanges).
If you are contacted by somebody who has Bitcoin to sell, ask to see the address that the Bitcoin are sitting in. The most solid proof is a signed piece of data (such as a random number or a message) that you provided to the sellers as a challenge. For addresses starting with 1, this process is relatively straightforward, though no good procedure exists for multi-signature and segwit addresses.
The other option is to ask for a small withdrawal from that address, for example 1 USD to an address of your choosing (how about the Edward Snowden defense fund?). Screenshots, letters from banks or lawyers, and anything of the like are worthless and should be considered indications of some kind of scam.
A solid escrow procedure is technologically cheap with Bitcoin’s multi-signature system, but it can be hard to find a trusted third party that both the buyer and the seller trust.
Amateur OTC Traders Aren’t Around For Long
Trading Bitcoin, providing escrow services or acting as a facilitator of blocktrades requires close attention to your legal environment, a good understanding of human behavior, and advanced information security skills with a strong focus on Bitcoin. Scammers of all sorts will always try to outsmart you and trick you out of your hard-earned money.
The trading volumes in Bitcoin can appear insanely large and profitable, but they also require significant skill and attention.