Recently, the arrest of an Indian victim of the global crypto Ponzi scheme BitConnect has attracted attention. The victim, Shailesh Babulal Bhatt, had lost money in BitConnect and subsequently Bhatt kidnapped two employees of BitConnect founder Satish Kumbhani and successfully extorted $148 million worth of Bitcoins. Especially in the aftermath of the second Bitcoin Halving in 2016, crypto Ponzi schemes defrauded millions of naïve investors out of billions. Here is our report.
Introduction
Cryptocurrencies, with their decentralized nature and promise of high returns, have become an attractive tool for operators of Ponzi schemes, particularly those structured as multi-level marketing (MLM) schemes. These schemes often lure investors with the promise of quick riches, leveraging the complexity and perceived legitimacy of cryptocurrencies to obscure their fraudulent nature. The rise of supposedly revolutionary algorithm-based trading bots has further facilitated these schemes, making it easier for operators to display fake profits on investors’ dashboards, thus sustaining the illusion of profitability.
Working Hypothesis
Cryptocurrencies are appealing to Ponzi and MLM scheme operators due to several key factors:
- Anonymity and Decentralization: Cryptocurrencies offer a level of anonymity and decentralization that traditional financial systems do not, making it difficult for authorities to trace and recover funds.
- Complexity and Lack of Regulation: The complexity of blockchain technology and the lack of robust regulation in many jurisdictions make it easier for fraudsters to operate without immediate detection.
- Ease of Creating Fake Profits: The use of algorithm-based trading bots and the manipulation of cryptocurrency prices allow operators to easily create fake profits on investors’ dashboards, thus perpetuating the fraud.
Major Crypto Ponzi Schemes: Comparative Analysis
1. OneCoin
- Estimated Losses: $4.4 billion
- Estimated Number of Victims: 3 million
- Overview: OneCoin, co-founded by Ruja Ignatova, also known as the Crypto Queen, in 2014, was marketed as a revolutionary cryptocurrency, but it lacked a functional blockchain. The scheme promised high returns to investors through the sale of educational packages that supposedly included tokens for mining OneCoin. However, the value of OneCoin was entirely fabricated, and the scheme was revealed to be a massive Ponzi operation.
- Legal Actions: Ignatova disappeared in 2017, and several high-ranking members were arrested. The U.S. Department of Justice indicted Ignatova, but she remains at large. Co-founder Karl Sebastian Greenwood was sentenced to 20 years in prison. The U.S. lawyer Mark S. Scott was sentenced to 10 years in prison over money laundering for OneCoin.
2. BitConnect
- Estimated Losses: $2.4 billion
- Estimated Number of Victims: 1.5 million
- Overview: Launched in 2016, BitConnect offered a lending platform where investors could earn high returns by lending their Bitcoin, supposedly profiting from a trading bot. However, BitConnect’s returns were unsustainable, and the platform collapsed in January 2018, with its token’s value plummeting from $463 to below $1 within hours.
- Legal Actions: BitConnect was shut down by regulators in multiple countries. The U.S. SEC and the DOJ filed charges against the founder Satish Kumbhani and several promoters, and India’s Enforcement Directorate arrested key figures involved in the scheme. However, Kumbhani remains at large. Recently, the Indian BitConnect victim Shailesh Babulal Bhatt was arrested over the kidnapping of two employees of Kumbhani and the successful extortion of approximately $148 million.
3. PlusToken
- Estimated Losses: $2 billion
- Estimated Number of Victims: 3 million
- Overview: PlusToken, which started in 2018, was presented as a high-yield investment program that promised daily returns. The scheme attracted millions of investors, particularly in Asia, before it collapsed in mid-2019. Operators of the scheme stole around $2 billion in cryptocurrencies before disappearing.
- Legal Actions: Chinese authorities arrested and prosecuted several individuals involved in the operation, and significant amounts of stolen cryptocurrencies were recovered.
Comparative Analysis
| Scheme | Estimated Losses | Estimated Victims | Key Operators | Legal Actions |
|---|---|---|---|---|
| OneCoin | $4.4 billion | 3 million | Ruja Ignatova Karl Sebastian Greenwood Mark S. Scott | Several arrests; Ignatova remains at large |
| BitConnect | $2.4 billion | 1.5 million | Satish Kumbhani | U.S. SEC charges; arrests in India, Satish Kumbhani remains at large |
| PlusToken | $2 billion | 3 million | Multiple Operators | Arrests and prosecutions in China; partial recovery of funds |
Summary Assessment
The use of cryptocurrencies in Ponzi schemes has proven to be highly effective for fraudsters due to the combination of anonymity, lack of regulation, and the technical complexity of blockchain technology. These factors allow operators to sustain the illusion of profitability and evade detection longer than traditional Ponzi schemes. As seen in the cases of OneCoin, BitConnect, and PlusToken, millions of victims have lost billions of dollars, highlighting the significant risks associated with investing in unregulated cryptocurrency schemes.
Legal actions have been taken against the operators of these schemes, but the global and decentralized nature of cryptocurrencies complicates enforcement and recovery efforts. The substantial losses and widespread impact of these scams underscore the need for greater regulatory oversight and public awareness to protect investors from similar schemes in the future.
Cryptocurrencies have the potential to revolutionize finance, but without adequate safeguards, they also offer a potent tool for fraudsters. As the crypto space continues to evolve, so too must the efforts to detect, prevent, and prosecute those who exploit this technology for criminal gain.
