SEC Virtual Currency Ponzi Schemes

The Securities and Exchange Commission’s Office of Investor Education and Advocacy has issued an investor alert regarding the dangers of Ponzi schemes that use bitcoins and other cryptocurrencies.

The SEC claims they’ve identified recent instances of fraudulent investment schemes “that may involve bitcoin and other virtual currencies”. Ponzi schemes are investment scams that involve funneling money from new investors to existing investors. Those who invest in Ponzi schemes are given promises of high returns with little to no risk.

Today, there’s been a surge in the popularity – and value – of Bitcoin and other cryptocurrencies. This surge in popularity has attracted many new investors. Many of these investors are unaware of the reality of cryptocurrencies, and have little knowledge of the industry. This makes them ideal targets for Ponzi scheme organizers.

As the SEC’s statement explains, “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.”

There’s a specific reason why organizers do this: investors are less likely to verify investment information when a cutting-edge technology is used. The SEC’s warning goes on to explain that, “Potential investors are often less skeptical of an investment opportunity when assessing something novel, new or “cutting-edge”.

Virtual Currencies And Ponzi Schemes

The SEC claims that the novelty factor of cryptocurrencies makes them a big opportunity for scams and Ponzi schemes.

What does a cryptocurrency scam look like? The SEC claims it may involve an unregistered offering or trading platform. That platform may claim to offer high returns for getting in on the ground floor of an exciting new internet phenomenon.

Another major advantage of cryptocurrencies is their anonymity. Transactions in virtual currencies have greater privacy and less regulatory oversight than transactions in fiat currencies, generally speaking.

Nevertheless, US law still applies to cryptocurrency investments:

“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.”

In other words, investments still need to have regulatory paperwork even if they’re dealing with cryptocurrencies or Bitcoins. If a particular investment opportunity lacks this information, then you could be dealing with a fraudulent opportunity.

Major Bitcoin Investment Scams Have Taken Place In The Past

The SEC cites a case called SEC v. Shavers, where the organizer of an alleged Ponzi scheme advertised an ‘investment opportunity” related to Bitcoin in an online Bitcoin forum. Investors were promised returns of “up to 7% interest per week”.

Investments would be used for bitcoin arbitrage activities to generate the returns. In other words, the organizer would buy bitcoins for a low price and sell them for a higher price.

Instead of generating 7% returns for investors, the organizer exchanged the funds into US dollars and then used those funds to pay personal expenses.

How To Spot A Cryptocurrency Scam, Fraud, Or Ponzi Scheme?

As with any new industry, there’s the potential for big opportunities when you get in on the ground floor of bitcoin and cryptocurrency companies. However, there are certain red flags that distinguish legitimate opportunities from potential scams. Here are some of the red flags outlined in the SEC’s press release:

High Returns, No Risk:

All investments come with some amount of risk. Investments with higher returns typically involve more risk. If someone is “guaranteeing” high returns with little to no risk, then that’s a huge red flag.

Overly Consistent Returns:

Few investments are guaranteed. Returns on investments tend to go up and down over time – especially investments seeking high returns. If someone advertises consistent returns over time, regardless of market conditions, then that’s a warning sign.

Unregistered Investments:

Ponzi schemes typically involve investments that have not been registered with the SEC or with state securities regulators. If a company can’t produce regulatory paperwork, then that’s a red flag.

Unlicensed Sellers:

People who sell investments are required by federal and state law to be licensed or registered. In the past, many Ponzi schemes have involved unlicensed individuals or unregistered companies.

Problems Producing Paperwork:

Ponzi scheme organizers are well aware of lists like this. When investors read a list, then ask for the company’s paperwork, they’ll often delay or mention some minor problem. In other cases, the organizer might produce fraudulent paperwork entirely. Read the paperwork carefully to spot any errors.

Problems With Payments:

Ponzi schemes collapse when investors withdraw money. If you cannot withdraw your money, or have difficulty cashing out your investment, then that could be a sign of a problematic investment.

One common Ponzi scheme strategy is to encourage investors to “roll over” their promised payments to enjoy huge returns in the future. In reality, this is just a way for the Ponzi scheme to hold on to as much money as possible for as long as possible.

No Minimum Investor Qualifications:

Ponzi schemes are often designed to attract individual investors, including those with minimal experience. Legitimate private investment opportunities, on the other hand, require you to be an accredited investor – it’s a layer of protection for the company and for the investor. If there are no minimum investor qualifications, then that’s a red flag.

Secretive Or Complex Fee Structures And Strategies:

One common Ponzi scheme strategy is to overwhelm investors with technical information they might not understand. This is particularly common in the world of cryptocurrencies, where even people with technical expertise might not fully understand the industry.

If an investment opportunity comes with secretive or complicated fee structures and strategies, then it could be an obfuscation strategy.

It Comes From A Trusted Source:

Ponzi schemes use real-world connections to lure investors. In many cases, this comes from a shared affinity – like a national, ethic, or religious affiliation. As the SEC’s statement on cryptocurrency scams explains, “Sometimes, respected leaders or prominent members may be enlisted, knowingly or unknowingly, to spread the word about the “investment.”

Just because the investment comes from a trusted source doesn’t mean it’s immediately legitimate.

Final Thoughts On SEC Virtual Currency Ponzi Schemes

Ultimately, the Securities and Exchange Commission issued this warning because they believe there’s an increased risk of Ponzi schemes in the world of bitcoin and cryptocurrencies.

Several major cases have already been reported. In an industry that’s growing as fast as this one, scams can become increasingly common. Watch for the red flags listed above to protect your investment.