cryptocurrencies ponzi scheme

Multi Level Marketing Businesses and Ponzi Schemes Using Virtual Currencies

MLM and Cryptocurrencies are NOT Illegal

MLM and cryptocurrency companies are legal in the U.S. when executed properly, under the right regulations. There are massive regulations at the state level but enforcement is almost always at the federal level since these companies cross state boarders.

Cryptocurrency MLMs are also legal – when adhering to both MLM and cryptocurrency laws simultaneously. So when you are presented a cryptocurrency MLM opportunity, should you jump right in or look for red flags? Alert: Ponzi Schemes Using Virtual Currencies

On July 23, 2013, the Security Exchange Commission (SEC) Office of Investor Education and Advocacy issued this investor alert to warn individual investors about fraudulent investment schemes that may involve Bitcoin and other virtual currencies.

Ponzi Schemes Defined

“A Ponzi scheme is an investment scam that involves the payment of purported returns to existing investors from funds contributed by new investors.

Ponzi scheme organizers often solicit new investors by promising to invest funds in opportunities claimed to generate high returns with little or no risk. In many Ponzi schemes, rather than engaging in any legitimate investment activity, the fraudulent actors focus on attracting new money to make promised payments to earlier investors as well as to divert some of these “invested” funds for personal use. The SEC investigates and prosecutes many Ponzi scheme cases each year to prevent new victims from being harmed and to maximize recovery of assets to investors.

As with many frauds, Ponzi scheme organizers often use the latest innovation, technology, product or growth industry to entice investors and give their scheme the promise of high returns. Potential investors are often less skeptical of an investment opportunity when assessing something novel, new or “cutting-edge.”

Look Out for Potential Scams Using Virtual Currency

“Virtual currencies, such as Bitcoin, have recently become popular and are intended to serve as a type of money. They may be traded on online exchanges for conventional currencies, including the U.S. dollar, or used to purchase goods or services, usually online.

We are concerned that the rising use of virtual currencies in the global marketplace may entice fraudsters to lure investors into Ponzi and other schemes in which these currencies are used to facilitate fraudulent, or simply fabricated, investments or transactions. The fraud may also involve an unregistered offering or trading platform. These schemes often promise high returns for getting in on the ground floor of a growing Internet phenomenon.

Fraudsters may also be attracted to using virtual currencies to perpetrate their frauds because transactions in virtual currencies supposedly have greater privacy benefits and less regulatory oversight than transactions in conventional currencies. Any investment in securities in the United States remains subject to the jurisdiction of the SEC regardless of whether the investment is made in U.S. dollars or a virtual currency.  In particular, individuals selling investments are typically subject to federal or state licensing requirements.

Cryptoqueen’s OneCoin tops the MLM Hall of Shame

Dr. Ruja Ignatova, Founder of OneCoin at Wembley SSE Arena, 2016

Dr. Ruja Ignatova called herself the Cryptoqueen. She told people she had invented a cryptocurrency that was the “Bitcoin killer”, and persuaded them to invest billions. Since OneCoin’s founding in 2014 to 2016, sources estimate OneCoin took in about $4 Billion from investors globally. Then in 2017, she disappeared. OneCoin headquarters in Sofia, Bulgaria was raided and its servers were shutdown in January 2018. OneCoin leaders were arrested in 2019. Other loss estimates from about 3 million investors start at $4B to $15B or even up to $37B.

Ruja’s genius was recognizing that established MLM leaders with huge downlines were the perfect vehicle to market her fake OneCoin. This was a plan that the FBI says Ruja privately referred to as “the bitch of Wall Street, meets MLM”. This was the secret of OneCoin’s success. It wasn’t just a fake cryptocurrency because there was no blockchain model. OneCoin was still interviewing blockchain experts for the position of Chief Technical Officer to create their blockchain in October 2016. It was just an old-fashioned pyramid scheme, with suspect plagiarized course packages as its “product” and a fake coin as its “currency” for earnings or rewards.

As part of its main business, OneCoin sold educational materials, such as courses on cryptocurrencies, trading and investing. The courses were part of a multi-level marketing (MLM) scheme, where course buyers were offered rewards for bringing in more participants. Buyers of the course materials in “packages” were to be rewarded with tokens that could be used to mine OneCoins.  

With heavy hitters (leaders) harnessing the power of MLM and the promise of fast and easy money, there is no surprise that OneCoin spread like wildfire.