Remember Bernie Madoff? The financier from Wall Street who perpetrated the biggest Ponzi Scheme ever… He managed to defraud investors of USD17.5 billion and if you throw in the fictional interest, the total rises to USD65 billion. But conning the public and institutions is not just the purview of fiat currencies. Indeed, cryptocurrencies are beginning to have their fair share of Ponzi Schemes.
A huge selling point for cryptocurrencies is that they are (not all) decentralised, which means there is no oversight or third-party involvement. It is a peer-to-peer transaction. This leaves clients/investors open to Ponzi schemes unless proper due diligence takes place.
A native of Bulgaria Ruja Ignatova launched One Coin Ltd in late 2014. By 2017 they had over 3 million investors and had raised USD15 billion. Basically, One Coin was multi-level marketing or pyramid selling. They created a company called One Life, which all investors joined. The company was sold as “one big family”, and even had their own hand signals.
The concept encouraged investors to buy educational packages that taught financial freedom. This was highly popular as Ignatova promoted her company on the back of the 2008 financial meltdown, blaming banks and governments for the global debacle. Investors were encouraged to introduce other investors to purchase educational packages and of course be paid accordingly.
The cost of these packages was anything from USD100 to USD150,000. The money spent on these packages would be exchanged for One Coins which were guaranteed to increase in value. To exchange one coin for currency, there was an in-house One Coin Exchange, which never actually worked. There was also no blockchain, which is a fundamental part of any cryptocurrency. The in-house market had daily selling limits based on the packages that had been invested in or bought.
Many countries’ financial authorities issued warnings on One Coin. These warnings came much too late despite the many complaints and newspaper articles decrying One Coin. Ruga Ignatova disappeared in 2017 and has not been seen since. One Coin has been exposed as a Ponzi scheme and many investors have lost their money.
Once again, a crypto Ponzi scheme has been revealed to the world, defrauding investors to the tune of USD2 billion. Glen Arcaro, BitConnect’s director and main board director, admitted to earning USD 24 million from the scheme, and faces up to 20 years in jail.
BitConnect arrived on the market in 2016. The underlying concept was to allow users/traders to lend the BitConnect Coin for a specific period of time in return for an interest payment. BitConnect’s offer was linked to their trading platform which utilised a controversial trading bot to lock in profits. The returns averaged 1% daily, (360% p.a.), which screamed high yield and Ponzi scheme. Following its collapse in January 2018 the SEC on Wednesday 1st September 2021 charged the owners/directors with defrauding their clients of USD2 billion.
It is understandable that cryptocurrency users enjoy the benefits of peer-to-peer trading and the joys of a decentralised currency. However, as seen from the above this market is open to abuse such as Ponzi schemes and money laundering. The cryptocurrency market will have to improve on their self-regulation or face the distinct possibility of government regulation on a global scale. Indeed, the chair of the Financial Conduct Authority (FCA), recently said, “cryptocurrencies issuing digital tokens need to be brought firmly within our reach”.
In decade after decade, it has been proven that Ponzi schemes attract many investors through their own greed and ignorance of the market. When a return is offered at 1% per day, that’s 360% per annum, investors should be exceptionally wary. If a cryptocurrency is operating without a blockchain, that screams fraud.
It is up to the individual to do their fact-check and due diligence. Do not be blinded by profits. Keep a sharp look-out for anything you feel is not quite right. If you see anything that makes you uncomfortable do not invest or take you money out. History is littered with financial corpses that have not done their due diligence or ignored simple warnings.