Attorneys face uphill battle in cryptocurrency fraud recovery

Cryptocurrency has become a magnet for both innovation and abuse. What began as an experiment in decentralized finance is now a mainstream target for sophisticated scams and a growing headache for attorneys tasked with navigating client losses in a rapidly evolving legal environment.

In 2023, more than 69,000 complaints to the FBI’s Internet Crime Complaint Center reported losses totaling $5.6 billion tied to cryptocurrency scams, a 45 percent increase in losses from the previous year. Missouri alone accounted for than $55 million of that, stemming from 838 reported incidents, ranking 22 for complaints by state. California had the most complaints at 9,522, followed by Florida at 5,076 and Texas at 4,770. Overall, Missouri ranked 23rd for total money lost; California was again No. 1 at $1.2 billion.

Increasingly, cryptocurrency is the mechanism of choice of fraudsters. But it’s not just scams that are changing. As cryptocurrency shifts from speculative asset to legitimate financial tool, attorneys are facing novel questions of jurisdiction, service, enforcement and compliance, often without clear guidance from regulators or courts.

“The same fraud scams have been around forever. It’s just now they’re using cryptocurrency,” said Kansas City-based attorney Dale A. Werts with Lathrop GPM.

Despite the risks, the adoption of cryptocurrency and blockchain technologies continue to grow, fueled in part by the promise of decentralization and efficiency and in some cases, new federal and state interest in strategic crypto holdings. For attorneys, that means having to stay ahead of legal developments.

Scams, criminals evolving

From “pig butchering” romance scams to fake staking platforms promising massive returns, the schemes vary in form but follow familiar psychological patterns. The FBI’s “Operation Level Up,”  launched in January 2024, identified thousands of unsuspecting victims, many of whom were in the process of liquidating retirement accounts, taking out loans or selling homes to invest in fraudulent crypto opportunities. In total, the FBI estimated that early intervention prevented losses exceeding $285 million.

Per the FBI’s report, “investment” crypto scams had the most complaints, at 32,094. The other top four “crime-type complaints” were tech support at 8,719, personal data breach at 8,716, and extortion and confidence/romance accounting for 8,630 and 3,749 complaints, respectively. Investment-type crimes accounted for nearly $4 billion in loss of the $5.6 billion in reported 2023 crypto scam losses.

The scams are typically orchestrated by transnational organized crime networks operating from counties like China, Russia, Cambodia, El Salvador and others. Victims are often coached over encrypted messaging apps like WhatsApp or Telegram and persuaded to invest using platforms that appear professional and legitimate. Eventually, access to funds is blocked and demands for additional payments, often disguised as “taxes” or “release fees” begin.

“You’ll hear from clients who’s been told they have $500,000 in earnings, but they need to pay $50,000 to withdraw it,” Werts said. “They’ll send the money and then the platform vanishes. The $500,000 never existed.”

By the time victims seek legal help, the digital trail may already be cold or spread across jurisdictions where enforcement is functionally impossible without extensive international cooperation.

“It’s the same scams of all time. Cryptocurrency has enabled them to … once they pull it off, you can’t find them,” Daniel S. Peters of Amundsend Davis said. “The scammers are using the same playbook, it’s just that their getaway car is now digital.”

That anonymity, central to the ethos of crypto, is what makes it so difficult for attorneys and investigators alike. Many platforms involved in these scams are unregulated and hosted overseas, leaving U.S. authorities with limited options.

Recovery faces practical hurdles 

Victims of crypto fraud often face near-impossible odds in recovering lost funds. As attorney Matthew J. Hamilton of Hamilton & Associates put it, “What are you going to do —sue Vladimir Putin?”

While the United States has tools for filing complaints, including the FBI’s IC3 reporting system and specialized investigative units, federal capacity is limited. Operation Level Up, for example, assisted 4,300 victims in 2024, but that is only a fraction of the prior year’s 69,000 complaints.

Agencies warn that most victims in cryptocurrency-related frauds never recover some their money, much less see full restitution for losses. Most complaints are closed without resolution due to untraceable wallets or jurisdiction barriers.

A report from Chainalysis shows that while “stablecoins” have emerged as the preferred vehicle for illicit transactions, accounting for more than 60 percent of all known illicit crypto flows, Bitcoin and other assets remain central to fraud and ransomware operations. Chainalysis also noted a marked rise in professionalization, with vendors offering “crime-as-a-service” platforms and infrastructure.

That infrastructure makes committing crypto crime no longer isolated to a few hackers in basements. The FBI found false job ads have been used to lure victims to compounds where they’re forced to commit fraud, like crpyo scams, under threat of violence or coercion.

The international nature of these crimes compounds the difficulty. Often, the only way to pursue justice is by partnering with foreign counsel to register and enforce U.S. judgments abroad, a process that requires months of legal groundwork and substantial financial resources.

One solution that attorneys point to is to expand service rules. Under Federal Rule of Civil Procedure 4(f)(3), courts can authorize alternative methods of service, including through NFT delivery or website posting, when traditional means are unavailable. Though novel, these tools may allow attorneys to bypass scammers’ disappearing digital identities and initiate proceedings when no physical address is available. Missouri courts do not currently permit such a service, but some attorneys believe adopting a version of that rule at the state level could improve access to civil recourse.

“If the WhatsApp … or the Telegram is still open, we can do what’s called a service by NFT,’ said Hamilton. “We create a service NFT and a service website page and serve them through the channels they used to scam.”

However, enforcement is a different story.

“If you get a judgment in Boone County, Missouri, okay, sure, take that to Singapore,” said Hamilton.

The logistics and costs involved often mean only high-value cases move forward. Hamilton estimates judgments need to exceed $1 million to justify the expense of international enforcement.

“You need some type of legal authority to back you … enforcement agencies are already taxed … It’s just very difficult, whether it’s a police department of FBI … to assist in that,” said Peters.

Policy and legislative fixes

Beyond the courtroom, attorneys say more can be done at the state level to improve consumer protection and close enforcement gaps. Missouri lawmakers could consider adopting a crypto-specific fraud statute or creating a working group to explore regulatory models.

Other states, like New York and California, have introduced digital asset licensing regimes or mandatory registration for crypto firms operating within their states. These rules not only increase transparency but also give regulators greater leverage when bad actors emerge.

Attorneys also stress the importance of public education. Knowing how frauds typically begin — unsolicited messages, rapid pressure to invest and platforms that make withdrawals difficult — can help consumers avoid becoming a victim in the first place.

“If you have to pay money to get money, that’s a scam,” Hamilton said. “That never occurs in the natural world … If your bank owes you money, it doesn’t ask you to deposit money to pay it.”

Even basic consumer warnings can help. The FBI’s report notes that scam victims are often middle-aged professionals, not just retirees, many of whom are tech-savvy but unfamiliar with crypto’s darker corners. While 16,086 of 2023’s cryptocurrency-related complaints were from individuals over 60 years old, the next largest age groups with complaints were the 30-39 age-range (10,849 complaints) and 40 to 49 (10,318). Those two age groups accounted for over $1.5 billion in total losses.

Future of federal regulation  

As scams continue to dominate headlines, attorneys also are looking for clearer regulatory guidance. Federal crypto legislation has been proposed in Congress each year but has so far stalled. In the meantime, agencies like the SEC have pivoted to more collaborative rulemaking efforts.

“I think that additional regulation is inevitable,” Peters said. “Not just because of scammers, but for the efficiency of markets … I don’t think it’s going to reach its full potential unless you get governmental regulation giving people confidence.”

Peters added that the “techonology itself is tremendously reliably, but … the difficulty in addressing those mistakes or scams, that’s where the pressure for additional regulation is coming.”

Meanwhile, artificial intelligence and blockchain/crypto forensics are becoming more important tools in identifying bad actors. However, those tools come with caveats: forensics firms can be costly, and the quality of their analysis varies widely.

“Most crypto forensic investigators get paid to write you a report to make you feel good,” Hamilton said. “But you need someone who can actually find where the money went. That kind of work is expensive.”

Federal policy may continue to shift dramatically. Following his reelection, President Donald Trump moved quickly to implement a pro-crypto agenda, pledging to make the U.S. the “crypto capital of the world,” signing an executive order in January that lays the groundwork for a “Strategic Bitcoin Reserve” – a federally-controlled storehouse of digital assets sourced from previously forfeited crypto, according to the administration.

The executive order prohibits further sales of forfeited Bitcoin, which has historically been liquidated at auction, and directs the Treasury to develop budget-neutral strategies for future accumulation.

“It’s really, as far as I can see, for several reasons. It’s, No. 1, little bit of political payback for people who support him and No. 2, it’s going to add legitimacy to the field and three, you’re going to have price stability,” Hamilton said of the reserve. “Price stability and legitimacy are really good … It’s a good idea for the crypto industry.”

In Congress, there is renewed discussion of the Financial Innovation and Technology for the 21st Century Act, or FIT21, which would classify most cryptocurrencies as commodities regulated by the Commodity Futures Trading Commission.

“I think most of us would like to see some federal legislation, because federal legislation is a great way to be more efficient, because now I don’t have to look at 50 different states … it’s a big question about what law applies,” Werts said. “It’s just very inefficient, so if you get a federal statute that trumps all the state statutes, then you brought some efficiency.”

Recently elected House Speaker Mike Johnson, R-Louisiana, has indicated support for legislation like FIT21. However, for some, the idea of regulating cryptocurrency goes against its initial nature in the first place.

“In my view, those that have this view of cryptocurrency becoming a worldwide respected monetary system don’t want to hear about governmental regulation. They want the monetary system to evolve through technology,” Peters said. “I have a hard time seeing it reach its potential monetarily without additional governmental regulation, just like any other monetary system has, in my opinion.”

Attorneys do seem to agree on one key point: prevention will always be more effective than recovery. That means keeping clients aware of common fraud tactics, building-in security protocols and resisting the urge to trust new platforms or financial products at face value.

“This is a game, because the world moves so fast now you have to stay up on it all the time,” Werts said. “You can think your safety measures are up to snuff, until tomorrow, and guess what? They’re not the latest anymore … One of the best pieces of advice I give people is: Don’t trust anybody. Not until you’re absolutely certain.”