Hacking gangs and ICO scams abound, but beware of Ponzi

  • By Tom Cleveland

  • February 6, 2019
  • 2:15 am BST

If one were only to review crypto industry headlines regarding fraud, it would be easy to come away thinking that exchange compromises and Initial Coin Offering (ICO) scams are the only ways that crooks perpetrate fraud in this space. Unfortunately, never underestimate the ability of the criminal element in our society to resort to whatever it takes to separate you from your hard-earned cash. Ponzi schemes are still alive and well in this space, and these ruses will continue to prosper as long as people remain greedy.

If you run a Google search on “Crypto Ponzi Scheme”, 657,000 items return in less than one half of a second. The stories are plentiful, but since amounts seem paltry compared to perhaps more than $1 billion lost in exchange compromises in 2018, the articles seem to be buried much deeper in the well. Make no mistake about it, however, you can easily be targeted if you fall for the tempting lead-in, which typically entails making an exorbitant return on a monthly basis with very little risk involved, or so you are told.

According to Philip Gradwell, chief economist at Chainalysis, a firm that keeps government agencies, private entities, and exchanges informed about the goings on in the crypto space: “One of the most significant scams of 2018 was the classic Ponzi scheme. This saw scammers send out emails to [cryptocurrency] owners, asking them to contribute money for which they’d see a guaranteed return. Of course, the return was simply derived from other people contributing to the pot, not from any genuine investment.”

If you dig a little deeper into the headlines of just the last quarter of 2018, these Ponzi stories tell tales of woe for a considerable number of victims:

  • India: Police Bust Bitcoin Ponzi Scheme that Defrauded 8,000: This scam’s ringleader, Amit Bhardwaj, and his ten accomplices bilked 8,000 investors our of $2 million worth of Bitcoin. Bhardwaj’s company, GainBitcoin, had promised 10% returns, as bait to lure in its victims. As is typically the case, the protagonists used the funds to live the rich life and throw large parties to attract more investors. In this case, authorities were able to recover a small portion of the missing funds, but investigations are still ongoing.
  • Japan: 8 arrested for running $68 million cryptocurrency Ponzi scheme: The eight men arrested had raised $68 million from over 6,000 investors. Based on the amount of investment, returns anywhere from 3% to 20% were quoted, but a higher return was possible, if you brought along a friend. None of the entities involved were registered, but no one completed any due diligence before jumping in with both feet. Authorities shut the operation down only after receiving complaints from distraught investors.
  • United States: Fake-cryptocurrency Ponzi scheme lands creator in prison: In this case, Josh Garza started out with the best of intentions, but down the line, greed took over. He bilked 10,000 people out of $9 million for his GAW (“Geniuses at Work”) mining company. When competition increased, his ability to make money crashed. His equipment was obsolete. Instead of closing up shop, he began duping investors, issuing a new altcoin token dubbed PayCoin. Eventually, the SEC and others shut the doors for him. In their sentencing memorandum, Federal prosecutors remarked: “As with all Ponzi schemes, eventually the truth caught up with the defendant and his companies. The market value of PayCoin collapsed, and many customers lost everything they had invested.”

There are many more examples, but the storyline never changes. Victims are initially solicited by a tempting email or by an ad on the Internet. Social media is a favorite “enabler” for this type of crime. In many cases, the initial contact may actually come from a family member, friend, or business associate, who is already onboard and wants to share his good fortune. The “hook” is a return that is considerably more than can be earned by legitimate means, but these are “geniuses” that you are willing to follow to your doom. You may receive early returns, which a judge may ask for later on, but eventually, the money runs out.

Most crypto Ponzi schemes involve Bitcoin, because it is the most recognized token in existence and comprises roughly 53% of the entire market share of all coin systems put together. Other tokens are not immune. According to another report from Chainalysis: “In 2018, tricksters made $36 million by duping Ether owners into handing over their money for no one’s profit but the crooks’. That was double the $17 million for 2017.”

Ponzi schemes and any scam based on greed is the one crime where the crook must gain your confidence. You have to respond. If you are lucky and listen to your instincts, you will know to walk away. Anything that sounds too good to be true usually is.