The Age of Financial Illusion: Are We Underestimating Crypto Fraud?

Crypto has always existed in a strange space, lying somewhere in between innovation and uncertainty. On one hand, it promises decentralised ownership, faster settlement and financial systems without intermediaries – all very attractive attributes. On the other hand, however, it continues to produce a steady stream of scams, collapses and high-profile failures that leave retail investors carrying the losses. But somehow, the industry persists.

The question in 2026 is no longer whether crypto fraud exists – that’s not up for debate, it clearly does – but rather, whether we are still underestimating its scale, sophistication and human impact. Further to this, are these negative attributes and events outliers or intrinsic components of the system?

Opinions on the issue vary dramatically, with some asserting that the biggest vulnerability in crypto is the safety and potenial fallibility of the technology itself, and others arguing that in fact, the biggest issue is the gap between how people think it works and how it actually functions.

 

A Knowledge Gap, Not Just a Technology Problem

 

Chris Brooks, Co-Founder at Crypto Asset Recovery, argues that most victims of crypto scams aren’t being “out-hacked”, but rather misled by misunderstanding.

He says the core issue is a knowledge gap, where users often don’t understand fundamental mechanics such as irreversible transactions, custody or the fact that exchanges are not equivalent to banks. In his view, scammers don’t need to break the system; they can simply exploit the gap between perception and reality, something that is already there.

He also points to major collapses like FTX not as anomalies, but as warnings. According to Brooks, the broader issue is that “trust outruns understanding,” meaning that users often engage with systems they skmply do not fully comprehend.

He adds that regulation such as the FCA’s emerging framework is a step forward, but it can’t replace education entirely. Indeed, rules can’t teach users what a seed phrase is or how custody actually works.

 

Education, Evolution and the “Early Internet” Comparison

 

A similar perspective comes from Ryan Horst, CEO at Altcoin Pro, who argues that crypto fraud is largely a symptom of early-stage technological adoption.

He draws comparisons to the early internet era, where scams and fraud were widespread before standards matured. In his view, crypto is undergoing the same cycle; one where knowledge lags behind innovation, creating opportunities for bad actors.

Horst also stresses an important distinction often raised across the industry: that is, not all major failures represent failures of blockchain itself. Instead, collapses such as FTX, Celsius, BlockFi and Voyager are framed as failures of centralised intermediaries holding user funds.

At the same time howver, he acknowledges that decentralised finance is not risk-free either, pointing to protocol exploits, rug pulls and smart contract vulnerabilities. These issues, he argues, reflect growing pains rather than structural flaws.

He adds that regulatory progress – including the UK’s FCA framework – is part of a broader maturation process, but that long-term resilience will depend just as much on education, security tooling and user behaviour as it will on formal oversight.

 

 

“Crypto Fraud Is Underestimated” – But Not Always Where People Think

 

Alex Witt, General Partner at Verda Ventures, also highlights the role of misunderstanding in driving losses, particularly around custody and self-sovereignty.

He argues that many users treat exchanges like traditional banks, which creates exposure when platforms fail or are mismanaged. At the same time, he emphasises that self-custody introduces its own learning curve, especially around private keys and transaction irreversibility.

On illicit activity, Witt asserts that crypto is often misunderstood in public debate. While fraud and misuse exist, he argues that blockchain transparency can actually make transactions more traceable than cash-based systems.

He also emphasises that regulation is improving market maturity but will not remove user error or sophisticated scams entirely.

 

The Shift Towards AI-Driven, Long-Form Deception

 

From a legal perspective, Louise Abbott, Crypto Fraud Partner at Keystone Law, says the nature of scams is evolving rapidly.

Rather than simple fake investment offers, she highlights a shift towards highly engineered, long-running social manipulation schemes. These increasingly use AI-generated content, deepfake videos, cloned voices and impersonation of financial professionals or celebrities.

According to Abbott, victims are often drawn into scams over weeks or months, building trust before being directed to fraudulent platforms controlled entirely by criminals.

She also notes that many of these cases involve organised criminal networks, and in some instances, they’re even linked to wider serious criminal activity, something that perhaps isn’t understood enough. Importantly, she argues that many of the most significant failures in the sector are driven by governance issues and fraud in centralised entities, rather than flaws in blockchain technology itself.

 

Regulation As A Sign of Progress, But Not a Complete Solution

 

Suhail Mayor, Associate at BCLP, views regulatory developments like the FCA’s recently announced crypto regime as a positive step towards market maturity.

But still, he highlights that the system is built on trade-offs. While platforms are being asked to take greater responsibility for due diligence and monitoring, decentralised activity and offshore platforms may remain harder to capture consistently.

He also raises a structural concern to be aware of. That is, regulatory frameworks often rely heavily on industry-led enforcement, which could create inconsistencies or serious conflicts in practice.

In his view, the UK is moving in the right direction, but long-term effectiveness will depend on how regulation adapts to decentralised, cross-border financial systems, and that remains to be seen.

 

The Recovery Problem: When Funds Disappear Across Borders

 

Alex Ferrer, Director of Forensic Investigations at Crypto Legal, sheds light on what happens after fraud occurs.

He notes that victims are often ordinary users interacting with what appear to be legitimate platforms. But, by the time fraud is discovered, assets are frequently moved across multiple wallets and jurisdictions, making recovery extremely difficult. It’s a scam that’s difficult to come back from.

Ferrer argues that regulation alone can’t prevent fraud. Instead, he asserts that there’s a need for faster cross-border cooperation, stronger due diligenc and improved consumer education, alongside rapid reporting systems.

Further to this, he believes that fraud networks are highly adaptive, operating internationally and evolving quickly in response to new technologies and trends. Thus, regulation is simply too slow when it comes to keeping up with criminal activity that is constantly changing, evolving and improving in terms of sophistication.

 

Ben McKenzie On the “Financial Illusion” and Narrative-Driven Markets

 

Alongside industry experts, actor and filmmaker Ben McKenzie has taken a more sceptical public stance on crypto markets. Important to note, however, is that McKenzie isn’t just a celebrity and film star with a strong opinion on crypto
– he also holds a degree  in Economics from the University of Virginia and has long been particularly interested in financial fraud and crypto more specificallly.

In his documentary, “Everyone Is Lying to You for Money”, as covered in interviews including Deadline and Vice reporting on the project, McKenzie argues that crypto often operates within what he describes as a broader “illusion” in modern finance, in which narrative, hype and belief can outweigh underlying value or structure.

His critique focuses heavily on the role of storytelling in financial markets, particularly how marketing, celebrity influence and social momentum can contribute to speculative behaviour.

From this perspective, crypto fraud isn’t just about isolated scams or several individual bad actors, but rather about systems in which belief can sometimes run ahead of verification – a dynamic that, he suggests, has been repeatedly exposed in major collapses and hype cycles.

 

So Are We Underestimating Crypto Fraud?

 

Across all perspectives, there seems to be a broad agreement on one point – crypto fraud is real, evolving and often more socially engineered than technically sophisticated.

But, where opinions diverge is on interpretation of crypto fraud. Industry voices tend to frame it as an education and maturity gap; legal and forensic experts highlight increasing sophistication and global criminal coordination; while more “hybrid” experts and sceptical commentators like McKenzie emphasise structural risks driven by narrative, hype and belief.

What emerges is less a clear conclusion (unfortunately) and more several significant tensions that needs to be grappled with – between innovation and understanding, between decentralisation and accountability, and between financial opportunity and financial illusion.

In that sense, the question may not be whether crypto fraud is underestimated but ratherwhether the industry and its users are still catching up to what the system actually is at its very core.

 

Our Experts:

• Oscar Asly: Group CEO of M4Markets
• Chris Brooks: Co-Founder, Marketing and Boutique Wallet Recovery at Crypto Asset Recovery
• Ryan Horst: CEO at Altcoin Pro
• Alex Witt: General Partner at Verda Ventures
• Louise Abbott: Crypto Fraud Partner at Keystone Law
• Suhail Mayor: Associate, Financial Services Disputes and Investigations, BCLP
• Alex Ferrer: Director of Forensic Investigations at Crypto Legal

 

Oscar Asly, Group CEO of M4Markets

 

 

“I think the harm is still being underestimated, especially at the retail end of the market. Too often the debate focuses on whether crypto itself is good or bad, when the more immediate issue is that many consumers are using financial infrastructure they do not properly understand.

“A customer may know that the price of a coin can rise or fall, but that is very different from understanding custody, private keys, wallet security, liquidity, counterparty risk, or the fact that some transactions cannot be reversed. Education should also extend beyond the assets themselves. People need to understand the difference between holding crypto with a centralized custodian and using a non-custodial wallet. Self-custody can significantly reduce counterparty risk, but it also places full responsibility for safeguarding assets on the individual. Neither model is inherently safer unless users fully understand the trade-offs

“We also need to be honest about the damage done by exchange failures, rug pulls, fake projects and high-profile collapses such as FTX. The technology can be innovative, and in many emerging markets digital assets have grown because people are looking for faster payments and broader access. But adoption without education is dangerous, and adoption without accountable firms is worse.

“Regulation is a positive step, but it will not rebuild trust by itself. Firms need clearer disclosure, stronger custody standards, better fraud monitoring, better consumer education and a higher bar for how these products are marketed.”

 

Chris Brooks, Co-Founder, Marketing and Boutique Wallet Recovery at Crypto Asset Recovery

 

 

“Yes, crypto fraud is underestimated, and the real problem isn’t the technology. It’s the knowledge gap. Most people who come to us weren’t outsmarted by some brilliant hacker. They simply didn’t understand what they owned. They didn’t know a transaction can’t be reversed, that an exchange isn’t a bank, or that holding “custody” means controlling keys they never actually held. Scammers don’t need to break the system. They just exploit the space between what people think crypto is and how it really works.

“On the bigger collapses, FTX wasn’t an outlier. It was a warning that too many people treated. Rug pulls and exchange failures keep working for the same reason: trust outruns understanding. And the debate over how much crypto fuels illicit activity often distracts from the quieter, more common harm, which is ordinary people losing their savings through honest confusion.

“Regulation like the FCA’s authorization rules is genuine progress, but rules alone won’t close the gap. A framework can’t teach a beginner what a seed phrase is or why writing it down matters. Until education keeps pace with adoption, the safeguards will always be one step behind the losses.”

 

Ryan Horst, CEO at Altcoin Pro

 

 

“One of the most misunderstood aspects of cryptocurrency is that many of its biggest failures have not been failures of the technology itself. They have been failures of education.

“Every major technological revolution creates a period where knowledge lags behind innovation. The internet experienced widespread fraud and scams in its early years, and artificial intelligence is now facing similar challenges with deepfakes and impersonation. Cryptocurrency is no different. A knowledge gap naturally creates opportunities for bad actors, making education one of the most effective forms of consumer protection.

“It is also important to distinguish between failures of centralized companies and failures of cryptocurrency itself. High-profile collapses such as FTX, Celsius, BlockFi, and Voyager are often cited as examples of crypto’s risks, yet these were centralized financial intermediaries that took custody of customer assets and assumed risks on behalf of their customers. One of cryptocurrency’s greatest innovations is the ability for individuals to hold and control their own digital assets without relying on a third party. By learning how to securely self-custody their assets, users can eliminate many of the counterparty risks that contributed to these failures. Understanding wallets, private keys, custody, transaction mechanics, and basic security practices is therefore fundamental to participating safely in the digital asset ecosystem.

“That is not to say decentralized finance (DeFi) has been without challenges. The ecosystem has experienced protocol exploits, rug pulls, and fraudulent projects, reinforcing the importance of due diligence and sensible risk management. While scams can often be avoided through proper research, protocol exploits are different. Some have resulted from users interacting with outdated smart contracts or older versions of decentralized applications (DApps), while others stemmed from vulnerabilities in code that were only discovered after deployment.

“This pattern is not unique to blockchain technology. Most transformative technologies experience higher failure rates in their early years before engineering practices, security standards, and regulations mature. Commercial aviation is a good example. In its early decades, accidents were far more common than they are today. Through continuous engineering improvements, stronger safety standards, and decades of learning, air travel has become one of the safest forms of transportation in the world. Blockchain technology is following a similar path of rapid iteration and improving security. The difference is that, while DeFi exploits can result in financial losses, they do not pose risks to human life. As the ecosystem matures, security audits, formal verification, bug bounty programs, insurance solutions, and user education continue to strengthen the industry’s resilience.

“Concerns around illicit activity are also frequently raised. While cryptocurrencies have been used in criminal activity, blockchain transactions are permanently recorded on public ledgers, making many transactions easier to trace than cash. Current research suggests illicit activity represents only a small percentage of overall blockchain transaction volume, although continued improvements in compliance and enforcement remain important.

“Regulatory developments, including the UK’s proposed FCA authorization framework, represent another positive step toward improving transparency, accountability, and consumer protection. While regulation can help establish higher industry standards, it cannot eliminate investment risk. Like any emerging asset class, responsible participation ultimately depends on informed decision-making.

“For this reason, we believe the future of digital assets depends as much on education as it does on technological innovation. As the industry continues to mature, the organizations that will create the greatest long-term value are those that prioritize education, transparency, and responsible participation, giving individuals the knowledge and confidence to navigate the digital asset ecosystem safely.”

 

Alex Witt, General Partner at Verda Ventures at Verda Ventures

 

 

“Yes, crypto fraud is still underestimated by the public, but the core issue is education, not the technology itself.

“Decentralised systems like Bitcoin empower users with true ownership via self-custody, but irreversibility and complex custody mechanics create steep learning curves. Many treat exchanges like banks and fall for phishing, rug pulls, or support scams. FTX exposed custodial risks dramatically.

“Illicit use exists but is overstated relative to cash; on-chain transparency often aids enforcement (permanent on-chain record visible to everyone!) more than traditional finance. Regulatory progress like UK FCA rules signals growing maturity, reducing some risks through clearer standards, but won’t eliminate user error or sophisticated attacks.

“What needs to change: Better onboarding education, default secure tools (e.g., multisig defaults), user-friendly verification, and a healthy skepticism around the latest hyped crypto trends (NFTs, GameFi, DAOs, etc.).”

 

Louise Abbott, Crypto Fraud Partner at Keystone Law 

 

 

“I have seen first-hand that one of the sector’s greatest challenges is not necessarily the underlying technology but the significant gap in consumer understanding. Many individuals do not fully appreciate the distinction between regulated and unregulated products, the implications of self-custody, or the fact that blockchain transactions are generally irreversible. These misunderstandings can increase exposure to scams, fraud, and unsuitable high-risk investments.

“The biggest crypto-fraud trend in the UK right now is the shift from simple fake investment scams to highly engineered, long-running social manipulation schemes powered by AI, deepfakes, and professional-looking crypto platforms. Fraudsters are now heavily using AI-generated celebrity endorsements, fake news interviews, cloned voices, live deepfake video calls or fake financial advisers.

“The frequency and magnitude of cryptocurrency fraud continues to increase. It is hugely underestimated and the risk is very real. The sophistication of the fraudster has increased as people have become more sceptical or scam aware. The industry’s track record has undoubtedly been affected by major exchange failures, frauds, and collapses such as FTX, which caused devastating losses for consumers. However, it is important to distinguish between misconduct by centralised businesses and the underlying blockchain technology. Many of the most significant failures have resulted from poor governance, inadequate controls and, in some cases, outright criminal behaviour rather than inherent flaws in distributed ledger technology.

“Many scams involve the fraudsters convincing the victim that they have entered onto a legitimate trading platform where they purchase and trade cryptocurrency. Victims are approached through social media with scammers spending weeks and months building trust. Eventually, they introduce a crypto investment opportunity. The victim is encouraged to invest via an app that the scammer controls. In most of my cases, I trace the funds back to wallets or ledgers being controlled by serious organised criminal gangs linked with people trafficking, terrorism or child sexual exploitation.

“Governments and regulators have been moving towards a more regulated regime, which this sector is in desperate need of. The legitimate exchanges do not shy away from this. However, the UK remain behind the other key jurisdictions. We have seen the slow introduction of some legislation concerning AML and promotion of crypto products, but in the large part, consumers in the UK remain hugely exposed to fraud, with limited recovery options. The UK’s move towards a comprehensive regulatory framework is a welcome and necessary development. Bringing crypto firms within the FCA’s regulatory perimeter should improve standards of governance, consumer protection, and financial crime controls. Consumer education, robust due diligence, and effective enforcement remain essential if confidence in the sector is to grow.”

 

Suhail Mayor, Associate, Financial Services Disputes and Investigations, BCLP

 

 

“The FCA’s new crypto regime represents a welcome step towards a more credible and resilient market. By requiring platforms to conduct structured due diligence before admitting assets and to take the lead in detecting and preventing market abuse, the UK is signalling that participation is reserved for serious, well-governed firms, which should strengthen institutional trust over time. The FCA is clear, however, that the regime will not remove all risk, and consumers should understand that scam tokens and fraudulent activity may still arise.

“The framework also reflects deliberate trade-offs. Its industry-led model places real enforcement responsibility on platforms, raising legitimate questions about consistency and conflicts of interest. And while the prohibitions on market manipulation apply globally, the platform-centric monitoring model means that activity occurring wholly outside UK venues – including decentralised finance – is less directly captured in practice.

“In my view, these structural features will need ongoing attention as the regime evolves, particularly in a cross-border market where regulatory divergence can be exploited. The UK has made a credible start, but long-term success will depend on how effectively the rules are implemented and how quickly they adapt to an increasingly decentralised market.”

 

Alex Ferrer, Director of Forensic Investigations at Crypto Legal

 

 

“Crypto fraud is still significantly underestimated because the technology continues to evolve faster than public understanding. Most victims we encounter are not inexperienced or reckless investors. They are ordinary people who have been convinced they are using legitimate investment platforms, exchanges or wallet services. By the time they realise they have been deceived, the assets have often been transferred through multiple wallets and jurisdictions, making recovery considerably more complex.

“Regulatory progress is encouraging and should improve standards across the industry, but regulation alone cannot eliminate fraud. Criminal groups are highly organised, operate internationally and rapidly adapt their methods to exploit new technologies and market trends. Effective consumer protection requires more than compliance rules. It depends on better public education, stronger due diligence by exchanges, faster cross-border cooperation and prompt reporting by victims. As digital assets become more mainstream, trust in the sector will ultimately be determined not only by innovation, but by its ability to prevent, detect and respond to fraud effectively.”