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Scams are the bane of crypto's existence. Whenever an initial coin offering (ICO) exit scam or Bitcoin giveaway scam makes the headlines, it generally serves to underline the risky nature of the cryptocurrency industry, at least for members of the mainstream media.

However, while scams undoubtedly rob innocent people of money and often weaken faith in crypto, they arguably have a number of positive side-effects for the industry.

From creating more pressure for effective regulation to forcing exchanges and traders to take greater security measures, they're a vital rite of passage for crypto, one without which it wouldn't be developing quite as quickly.

Scams = regulation

According to a CipherTrace report published in January, cryptocurrency scams and thefts deprived the global crypto community of USD 1.7 billion in total in 2018.

Despite this qualifying as decidedly bad news, this loss should also be recognized as providing valuable opportunity for the industry to grow. And perhaps the biggest reason is that, as the brief history of crypto has already shown, scams and thefts have been a significant driver of the push for robust cryptocurrency regulation.

"Fraudulent activity can never really be viewed as positive but it does help in pushing regulation of these assets higher up the agenda,” eToro UK managing director Iqbal Gandham tells Cryptonews.com. “Detecting illicit activities in crypto will be technology driven and the industry will also need to work with law enforcers to ensure a globally coordinated solution.”

This suspicion that scams create more momentum for regulation is borne out in the experience of most nations where cryptocurrency is popular. For example, Japan.

In January 2018, the Japanese exchange Coincheck was hacked, with the parties responsible siphoning away 526 million XEM (then worth around USD 400 million). Around the same period, there were reports that the Yakuza were money laundering using crypto, while the Japanese Financial Services Agency (FSA) was warning of the misleading and fraudulent nature of many ICOs.

As a result of such events, the Japanese crypto industry agreed to form the Virtual Currency Exchange Association on April 23, 2018. Then comprising 16 Japanese exchanges, the JVCEA aimed to establish self-regulatory rules for customer protection and internal conduct, and in October it received official recognition from the FSA.

Something similar has been observed in other nations where cryptocurrency is big, whether it’s South Korea, Russia, America, the UK, Switzerland or the whole EU. Regardless of the country, crypto regulation and standards have been proposed largely to protect consumers against the threat of scams and illicit activity.

Blockbid CEO David Sapper tells Cryptonews.com:

"The side effect of fraud in the crypto industry has resulted in many projects placing much more importance and priority on their security protocols, in order to understand how they can better protect the company and user assets.”

But while fraud has undoubtedly played a part in highlighting the need for regulation, it needs to be pointed out that other factors have obviously played a role.

“It is not only fraudulent behaviour and subdued price activity that is encouraging and enabling regulatory developments,” says Iqbal Gandham. “Now that we are seeing more institutional players coming into the market and developing their own use-cases for blockchain technology, this has sparked more attention from regulators on the crypto industry.”

Scams and adoption

Given that the sheer extent of illicit activity pressures the crypto industry to regulate and develop itself, scams might also lead to greater adoption in the long run.

What’s more, scams have also had the counterintuitive effect of increasing the early adoption of cryptocurrencies. This might seem like an odd thing to say, but one factor helping crypto to maintain its growth rate in users in 2018 possibly was the scope it offered for making a dishonest profit at other people’s expense.

Of course, this view is controversial, and not everyone within the crypto industry would agree with it.

"I think that it's more likely that users are attracted to the crypto industry because of its innovation and status as an emerging industry," David Sapper affirms. "However, I believe that there may have been some users who were attracted to crypto in the early days because of the opportunity to make a quick but unethical buck."

And with an influx of fraudsters, the wider cryptocurrency market expands, with added members of the public being drawn in by the seductive promises made by deceptive ICOs.

That said, none of this means that scams are good in themselves. Indeed, Bitcoin emerged largely as a means of providing financial transparency and security, so it's clear that fraud is something that crypto will have to work hard at eliminating, if it will ever reach its full potential.