The Fraud Examiner

A New Spin on an Old Scam: Cryptocurrency Ponzi Schemes

Ron Cresswell, J.D., CFE
Research Specialist, Association of Certified Fraud Examiners                                 

In December 2019, the U.S. Department of Justice (DOJ) filed criminal charges against five defendants in connection with a $722 million cryptocurrency fraud scheme called the BitClub Network. In a press release, U.S. Attorney Craig Carpenito said the BitClub Network was “little more than a modern, high-tech Ponzi scheme.” This scheme was not the first of its kind. In recent years, fraudsters have used a variety of cryptocurrency Ponzi schemes to steal billions of dollars from investors.

How cryptocurrency Ponzi schemes work

At their cores, most cryptocurrency Ponzi schemes are just old-fashioned Ponzi schemes wrapped in the modern, high-tech veneer of cryptocurrency. While the cryptocurrency lingo can be confusing, the schemes themselves are relatively easy to understand. Generally, the fraudsters solicit investments in a cryptocurrency-related business, promise high returns in a short period of time and use the contributions of later investors to pay off earlier investors. At some point, the fraudsters stop making payments and abscond with their investors’ money.

In the BitClub Network case, the defendants offered investors shares in cryptocurrency mining pools. Cryptocurrency mining is the process of verifying previous cryptocurrency transactions in exchange for potential rewards of cryptocurrency. Through cryptocurrency mining, individuals can earn cryptocurrency without having to buy it. However, the cryptocurrency mining process is costly, time-consuming and rarely profitable. It is more likely to be successful when multiple people work together in groups called cryptocurrency mining pools.

From 2014 to 2019, the BitClub Network used online videos and presentations in multiple countries to recruit thousands of investors. The defendants promised high returns in a short period of time, as well as financial incentives for recruiting new investors. According to the defendants, investors would be paid a percentage of the profits from the Bitcoin mining pools operated by the BitClub Network. In reality, internal communications showed that the payment amounts were arbitrary and unrelated to the performance of the mines. To encourage investment in the BitClub Network, the payouts to early investors were very high and they decreased consistently thereafter. However, the defendants knew that the payouts were still too high for the enterprise to be sustainable on a long-term basis. Meanwhile, according to the DOJ, the defendants spent their investors’ money “lavishly.”

The internal communications also revealed that the defendants targeted unsophisticated investors who did not understand the cryptocurrency market. One of the defendants stated, “[W]e are building this whole model on the backs of idiots.” He also referred to potential investors in the BitClub Network as “morons,” “sheep” and “the typical dumb [multilevel marketing] investor.” Before they were arrested, the defendants collected at least $722 million from investors.

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