7 ms·

Ponzi Schemes Using Virtual Currencies (2014) [pdf]

112 points by fludlight 9y ago

whataretensors 9y ago
"No minimum investor qualifications. Most legitimate private investment opportunities require you to be an accredited investor. You should be highly skeptical of investment opportunities that do not ask about your salary or net worth." This is a ridiculous regulation that prohibits class mobility as software eats the world. Apparently being middle class means you are too stupid to realize you are being scammed, but if you are rich you get first pick.
- whataretensors 9y ago
  To further elaborate - a young student putting in $1000 in facebook seed round would now be a millionaire. Not unthinkable for someone like a young Warren Buffet. The government has successfully regulated the future to the top 1%, while claiming it's for the public good.
  - sharemywin 9y ago
    Title IV (Regulation A+) of the JOBS Act
  - mitchellst 9y ago
    OK sure, but it assumes that young student would be able to discriminate a money-making investment from a money-losing one-- something the best VC's in the business, who vet tech deals all day every day, struggle to do. Imagine you repeal all accredited investment regs overnight. Which of these seems likely: - everyone in america invests $1000 in a future facebook, ten years later we're a nation of millionaires. - 10% of the middle class (a huge number of people) wholly or partially cashes out retirement funds to put too much money into speculative early stage startups chasing fantastic returns. They lose it. Kids lose college funds, adults lose retirement funds, and we / society / government has to pick up the tab when such people get too old to work. The point is, it's easy to attack these regulations as a barrier to opportunity and an unfair impediment to your right to do whatever you want with your own money. That's fair as far as it goes, but you also have to grapple with the real consequences of changing the policy. I have a hard time with your analysis that accredited investment rules have no "public good." Phrased differently,the view on the ground in middle America is this: lots of middle-class people buy lottery tickets. Why do you suppose they do that?
    - whataretensors 9y ago
      Young Warren Buffet could. I can go to Vegas and lose all my money on dice. There aren't laws to prevent this. Why are there laws to prevent my ability to invest? The regulation makes more sense as a way to keep the opportunities exclusive to the powerful, while regulators get to claim a moral high ground.
      - wakamoleguy 9y ago
        In many places in the United States, there actually are laws to prevent gambling.
        deleted 9y ago
        [deleted]
        lojack 9y ago
        That’s clearly a straw man argument. A) The federal government doesn’t ban gambling. B) As far as I’m aware there isn’t a single place in this country where gambling is/isn’t allowed for those with specific net worths.
        wakamoleguy 9y ago
        It's not a strawman. The parent is suggesting that we as a people have no problem with allowing low-income or low-net-worth people to gamble (pointing to the acceptance of Las Vegas as evidence). Then an equivalence is drawn between gambling and securities investing. By pointing out that, in fact, 31 states make commercial casinos illegal[1], I am refuting the suggestion that gambling is considered acceptable, which weakens the argument that securities investing should be acceptable as well. [1] https://en.wikipedia.org/wiki/Gambling_in_the_United_States https://en.wikipedia.org/wiki/Gambling_in_the_United_States
        deleted 9y ago
        [deleted]
        9y ago
- cm2187 9y ago
  I have seen enough "super-smart" investors pretending to be dumb, unsophisticated and to have never been told of the risks when an investment goes bad not to have some sympathy for these investor sophistication thresholds.
- sharemywin 9y ago
  On April 5, 2012, President Obama signed a landmark piece of bi-partisan legislation called The JOBS Act into law. The JOBS Act greatly expanded entrepreneurs’ access to capital, allowing them to go to the crowd and publicly advertise their capital raises. Initially, private companies could only crowdfund from accredited investors, the wealthiest 2% of Americans. On June 19, 2015, three years after the JOBS Act was initially signed into law, Title IV (Regulation A+) of the JOBS Act went into effect. For the first time, Title IV allows private growth-stage companies to raise money from all Americans. https://www.seedinvest.com/blog/jobs-act/raising-capital-reg-a-mini-ipo https://www.seedinvest.com/blog/jobs-act/raising-capital-reg...
  - whataretensors 9y ago
    I'm aware of the JOBS act. It's still a different system than the rich get to use. Edit: not sure why I'm downvoted. Middle class can't invest in filecoin, for instance, even though the top tier can.
- kevando 9y ago
  I don't see this any different than advertising laws. Given the nature of capitalism, people will always try to bamboozle each other and if the benefit of bamboozling someone is high enough, we get really smart bamboozlers. I think it's natural to plan ahead and prevent this.
- john_moscow 9y ago
  If you're middle class, being hurt by a stupid investment could mean losing your house & retirement savings and yes, the state globally won't benefit from that. Besides, historic numbers [1] show that passive ETFs outperform actively managed funds as a trend, so the original idea behind accredited investors was "if you want to play the high-risk game, at least don't put your last chip on the table". [1] http://www.investopedia.com/articles/investing/030916/buffetts-bet-hedge-funds-year-eight-brka-brkb.asp http://www.investopedia.com/articles/investing/030916/buffet...
  - whataretensors 9y ago
    The rich can be destroyed by investing more than they can afford as well. Index funds beating managed hedge funds has nothing to do with inability to invest disposable income in startups.
    - _pmf_ 9y ago
      > The rich can be destroyed by investing more than they can afford as well. They have shell companies that protect them from this.
      - john_moscow 9y ago
        Shell companies are used to optimize taxes and cap liabilities (note the recent legislation on passive foreign investment companies), they don't have much to do with protecting against investment risks.
- erikb 9y ago
  Yes and no. You are right it limits positive mobility. But there are really two kinds of people here. One kind expects to be handed success to them without them doing any work. It is correct to protect these people as much as possible. They'll probably still end up losing their money, though. The second group of people know that they need to work, learn and plan to succeed. These are the people that may be slowed down by the regulation. But they are able to overcome any given set of static rules anyways, so it's only a slowdown at best. In the end any kind of rules are not just there to protect the stupid, but also to establish the people currently at the top. It's selfish, but when you end up at the top, would you do it otherwise? I probably wouldn't.
  - deleted 9y ago
    [deleted]
  - deleted 9y ago
    [deleted]
rebuilder 9y ago
This was published 2014/03/11 as far as I can tell, if anyone is wondering.
- sctb 9y ago
  Thanks! We've updated the headline.
SippinLean 9y ago
Seems that most of there are examples of fraud instead of a Ponzi specifically. They list a single example of using Bitcoins as part of a Ponzi scheme, but no examples of ICOs being Ponzi schemes. Based on OP's submission immediately prior I believe this is what they were trying to suggest.
- joe_the_user 9y ago
  Well they say: "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." Which reasonably straight forward.
fmeyer 9y ago
It happened in Brazil recently, where one company created a fake cryptocurrency and used it on its Ponzi scheme. source: https://translate.google.com/translate?hl=en&sl=pt&tl=en&u=https%3A%2F%2Fcanaltech.com.br%2Fmercado%2Fesquema-de-piramide-movimentou-r-250-milhoes-usando-criptomoeda-falsa-no-brasil-100928%2F https://translate.google.com/translate?hl=en&sl=pt&tl=en&u=h...
- SippinLean 9y ago
  It specifically says that it was a multilevel marketing/pyramid scheme, not a Ponzi scheme.
  - ravishi 9y ago
    Although I don't know the specifics of the scheme, it seemed like a pyramid scheme while it was running, but turned out to be a ponzi scheme when it went down. I would bet the people reporting don't know the difference between the two. I didn't until now.
just_one_time_ 9y ago
Thanks SEC. They are fighting a Bitcoin EFT while "warning" us about Ponzi schemes that don't exist. I dislike Trump as much as the next guy, but "Drain the swamp" sounds better and better.
arno_v 9y ago
Would be interesting if they would give examples of ICOs or other crypto related investments which turned out to be Ponzi schemes or fraud.
- fludlight 9y ago
  Investor Alert: Public Companies Making ICO-Related Claims [1] SEC Exposes Two Initial Coin Offerings Purportedly Backed by Real Estate and Diamonds [2] [3] SEC Issues Investigative Report Concluding DAO Tokens, a Digital Asset, Were Securities [4] [5] SEC v. Trendon T. Shavers and Bitcoin Savings and Trust [6] SEC v. Garza, GAW Miners, and ZenMiner [7] [1] https://www.sec.gov/oiea/investor-alerts-and-bulletins/ia_icorelatedclaims https://www.sec.gov/oiea/investor-alerts-and-bulletins/ia_ic... [2] https://www.sec.gov/news/press-release/2017-185-0 https://www.sec.gov/news/press-release/2017-185-0 [3] https://www.sec.gov/litigation/complaints/2017/comp-pr2017-185.pdf https://www.sec.gov/litigation/complaints/2017/comp-pr2017-1... [4] https://www.sec.gov/news/press-release/2017-131 https://www.sec.gov/news/press-release/2017-131 [5] https://www.sec.gov/litigation/investreport/34-81207.pdf https://www.sec.gov/litigation/investreport/34-81207.pdf [6] https://www.sec.gov/litigation/complaints/2013/comp-pr2013-132.pdf https://www.sec.gov/litigation/complaints/2013/comp-pr2013-1... [7] https://www.sec.gov/litigation/complaints/2015/comp23415.pdf https://www.sec.gov/litigation/complaints/2015/comp23415.pdf
nick_ 9y ago
The crypto-currency the world needs is one which detects pyramid/ponzi schemes and fraud in general.
- sudouser 9y ago
  Most surprising is peolpe placed so much faith in the figure of enigmatic Satoshi Nakamoto
TaylorGood 9y ago
Ponzi aside, let's say it's the greatest cryptocurrency idea. The SEC has right to use their Howey Test to determine whether it's a security. Based on 1,2,4 below, is this not ICO's? Under the Howey Test, a transaction is a security (or investment contract) if: 1. It is an investment of money 2. There is an expectation of profits from the investment 3. The investment of money is in a common enterprise 4. Any profit comes from the efforts of a promoter or third party Based on their recent cyber division being announced, there is seemingly a strong possibility of review/conviction if launching an ICO as a US citizen, no? Soliciting an unregistered security carries 20yr prison term. Are dev's factoring this as possible risk?
- unkown-unknowns 9y ago
  How many of the Howey test questions must be "yes"? All? Any? More than x number of them?
  - lostmsu 9y ago
    They all seem to BE "yes "IMHO. So does it matter that much?
  - zerocrates 9y ago
    All.
- xdeqx366 9y ago
  As a crypto-developer working in the blockchain space, my primary company has opted to do an ICO as part of its operations. The company has existing VC backing of between 4-10 million, and the project would benefit from blockchain - for one aspect. By no means is a new token necessary, but that fact seems to have been side-stepped. The product exists, and perceivably the token could be usable upon issuance... I enjoy working on the crypto for the project, but I concern myself with the eventual legalities of the ICO and how it might change the companies incentives internally. I have bills to pay, leaving on principle alone isn't viable for me, but, if it could impact on my family, I will. I am not a lawyer, and the answers don't appear to be black and white.
baby 9y ago
Ponzi schemes advertising themselves as ponzi schemes are fine right?
izabera 9y ago
https://en.wikipedia.org/wiki/OneCoin https://en.wikipedia.org/wiki/OneCoin
qwtel 9y ago
this is just the latest instalment in a never-ending series of mechanistically declaring illegal anything the kids like. renting out your flat to tourists for profit? upsets the neighbours, doesn't comply with arbitrary laws written centuries ago -- illegal. using cabs that you order through an app? threatens our cronies with something they are not prepared to handle -- competition -- so must be illegal. buying and selling magic internet money for fun and profit? could be interpreted as a security, hence must comply with arbitrary rules that didn't prevent the biggest financial crisis in history, but are otherwise supposed to be good for you -- ILLEGAL. at least one can take pleasure in the knowledge that the same people who enable and support these kinds of policies cry themselves to sleep with a (paper) issue of the WSJ every night, wondering why there is no growth, no inflation, 'millennialls' not buying diamonds, or cars, or houses, not having kids, and most of all, not sufficiently paying into the ponzi scheme that is their retirement plan, as well as any number of other issues more or less related to, or caused by, their own stupidity and boundless self-interest.

112 points by fludlight 9y ago

"No minimum investor qualifications. Most legitimate private investment opportunities require you to be an accredited investor. You should be highly skeptical of investment opportunities that do not ask about your salary or net worth." This is a ridiculous regulation that prohibits class mobility as software eats the world. Apparently being middle class means you are too stupid to realize you are being scammed, but if you are rich you get first pick.

whataretensors 9y ago
To further elaborate - a young student putting in $1000 in facebook seed round would now be a millionaire. Not unthinkable for someone like a young Warren Buffet. The government has successfully regulated the future to the top 1%, while claiming it's for the public good.
- sharemywin 9y ago
  Title IV (Regulation A+) of the JOBS Act
- mitchellst 9y ago
  OK sure, but it assumes that young student would be able to discriminate a money-making investment from a money-losing one-- something the best VC's in the business, who vet tech deals all day every day, struggle to do. Imagine you repeal all accredited investment regs overnight. Which of these seems likely: - everyone in america invests $1000 in a future facebook, ten years later we're a nation of millionaires. - 10% of the middle class (a huge number of people) wholly or partially cashes out retirement funds to put too much money into speculative early stage startups chasing fantastic returns. They lose it. Kids lose college funds, adults lose retirement funds, and we / society / government has to pick up the tab when such people get too old to work. The point is, it's easy to attack these regulations as a barrier to opportunity and an unfair impediment to your right to do whatever you want with your own money. That's fair as far as it goes, but you also have to grapple with the real consequences of changing the policy. I have a hard time with your analysis that accredited investment rules have no "public good." Phrased differently,the view on the ground in middle America is this: lots of middle-class people buy lottery tickets. Why do you suppose they do that?
  - whataretensors 9y ago
    Young Warren Buffet could. I can go to Vegas and lose all my money on dice. There aren't laws to prevent this. Why are there laws to prevent my ability to invest? The regulation makes more sense as a way to keep the opportunities exclusive to the powerful, while regulators get to claim a moral high ground.
    - wakamoleguy 9y ago
      In many places in the United States, there actually are laws to prevent gambling.
      - deleted 9y ago
        [deleted]
      - lojack 9y ago
        That’s clearly a straw man argument. A) The federal government doesn’t ban gambling. B) As far as I’m aware there isn’t a single place in this country where gambling is/isn’t allowed for those with specific net worths.
        wakamoleguy 9y ago
        It's not a strawman. The parent is suggesting that we as a people have no problem with allowing low-income or low-net-worth people to gamble (pointing to the acceptance of Las Vegas as evidence). Then an equivalence is drawn between gambling and securities investing. By pointing out that, in fact, 31 states make commercial casinos illegal[1], I am refuting the suggestion that gambling is considered acceptable, which weakens the argument that securities investing should be acceptable as well. [1] https://en.wikipedia.org/wiki/Gambling_in_the_United_States https://en.wikipedia.org/wiki/Gambling_in_the_United_States
        deleted 9y ago
        [deleted]
        9y ago
cm2187 9y ago
I have seen enough "super-smart" investors pretending to be dumb, unsophisticated and to have never been told of the risks when an investment goes bad not to have some sympathy for these investor sophistication thresholds.
sharemywin 9y ago
On April 5, 2012, President Obama signed a landmark piece of bi-partisan legislation called The JOBS Act into law. The JOBS Act greatly expanded entrepreneurs’ access to capital, allowing them to go to the crowd and publicly advertise their capital raises. Initially, private companies could only crowdfund from accredited investors, the wealthiest 2% of Americans. On June 19, 2015, three years after the JOBS Act was initially signed into law, Title IV (Regulation A+) of the JOBS Act went into effect. For the first time, Title IV allows private growth-stage companies to raise money from all Americans. https://www.seedinvest.com/blog/jobs-act/raising-capital-reg-a-mini-ipo https://www.seedinvest.com/blog/jobs-act/raising-capital-reg...
- whataretensors 9y ago
  I'm aware of the JOBS act. It's still a different system than the rich get to use. Edit: not sure why I'm downvoted. Middle class can't invest in filecoin, for instance, even though the top tier can.
kevando 9y ago
I don't see this any different than advertising laws. Given the nature of capitalism, people will always try to bamboozle each other and if the benefit of bamboozling someone is high enough, we get really smart bamboozlers. I think it's natural to plan ahead and prevent this.
john_moscow 9y ago
If you're middle class, being hurt by a stupid investment could mean losing your house & retirement savings and yes, the state globally won't benefit from that. Besides, historic numbers [1] show that passive ETFs outperform actively managed funds as a trend, so the original idea behind accredited investors was "if you want to play the high-risk game, at least don't put your last chip on the table". [1] http://www.investopedia.com/articles/investing/030916/buffetts-bet-hedge-funds-year-eight-brka-brkb.asp http://www.investopedia.com/articles/investing/030916/buffet...
- whataretensors 9y ago
  The rich can be destroyed by investing more than they can afford as well. Index funds beating managed hedge funds has nothing to do with inability to invest disposable income in startups.
  - _pmf_ 9y ago
    > The rich can be destroyed by investing more than they can afford as well. They have shell companies that protect them from this.
    - john_moscow 9y ago
      Shell companies are used to optimize taxes and cap liabilities (note the recent legislation on passive foreign investment companies), they don't have much to do with protecting against investment risks.
erikb 9y ago
Yes and no. You are right it limits positive mobility. But there are really two kinds of people here. One kind expects to be handed success to them without them doing any work. It is correct to protect these people as much as possible. They'll probably still end up losing their money, though. The second group of people know that they need to work, learn and plan to succeed. These are the people that may be slowed down by the regulation. But they are able to overcome any given set of static rules anyways, so it's only a slowdown at best. In the end any kind of rules are not just there to protect the stupid, but also to establish the people currently at the top. It's selfish, but when you end up at the top, would you do it otherwise? I probably wouldn't.
- deleted 9y ago
  [deleted]
- deleted 9y ago
  [deleted]

rebuilder 9y ago

This was published 2014/03/11 as far as I can tell, if anyone is wondering.

sctb 9y ago
Thanks! We've updated the headline.

SippinLean 9y ago

Seems that most of there are examples of fraud instead of a Ponzi specifically. They list a single example of using Bitcoins as part of a Ponzi scheme, but no examples of ICOs being Ponzi schemes. Based on OP's submission immediately prior I believe this is what they were trying to suggest.

joe_the_user 9y ago
Well they say: "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." Which reasonably straight forward.

fmeyer 9y ago

It happened in Brazil recently, where one company created a fake cryptocurrency and used it on its Ponzi scheme. source: https://translate.google.com/translate?hl=en&sl=pt&tl=en&u=https%3A%2F%2Fcanaltech.com.br%2Fmercado%2Fesquema-de-piramide-movimentou-r-250-milhoes-usando-criptomoeda-falsa-no-brasil-100928%2F https://translate.google.com/translate?hl=en&sl=pt&tl=en&u=h...

SippinLean 9y ago
It specifically says that it was a multilevel marketing/pyramid scheme, not a Ponzi scheme.
- ravishi 9y ago
  Although I don't know the specifics of the scheme, it seemed like a pyramid scheme while it was running, but turned out to be a ponzi scheme when it went down. I would bet the people reporting don't know the difference between the two. I didn't until now.

just_one_time_ 9y ago

Thanks SEC. They are fighting a Bitcoin EFT while "warning" us about Ponzi schemes that don't exist. I dislike Trump as much as the next guy, but "Drain the swamp" sounds better and better.

arno_v 9y ago

Would be interesting if they would give examples of ICOs or other crypto related investments which turned out to be Ponzi schemes or fraud.

fludlight 9y ago
Investor Alert: Public Companies Making ICO-Related Claims [1] SEC Exposes Two Initial Coin Offerings Purportedly Backed by Real Estate and Diamonds [2] [3] SEC Issues Investigative Report Concluding DAO Tokens, a Digital Asset, Were Securities [4] [5] SEC v. Trendon T. Shavers and Bitcoin Savings and Trust [6] SEC v. Garza, GAW Miners, and ZenMiner [7] [1] https://www.sec.gov/oiea/investor-alerts-and-bulletins/ia_icorelatedclaims https://www.sec.gov/oiea/investor-alerts-and-bulletins/ia_ic... [2] https://www.sec.gov/news/press-release/2017-185-0 https://www.sec.gov/news/press-release/2017-185-0 [3] https://www.sec.gov/litigation/complaints/2017/comp-pr2017-185.pdf https://www.sec.gov/litigation/complaints/2017/comp-pr2017-1... [4] https://www.sec.gov/news/press-release/2017-131 https://www.sec.gov/news/press-release/2017-131 [5] https://www.sec.gov/litigation/investreport/34-81207.pdf https://www.sec.gov/litigation/investreport/34-81207.pdf [6] https://www.sec.gov/litigation/complaints/2013/comp-pr2013-132.pdf https://www.sec.gov/litigation/complaints/2013/comp-pr2013-1... [7] https://www.sec.gov/litigation/complaints/2015/comp23415.pdf https://www.sec.gov/litigation/complaints/2015/comp23415.pdf

nick_ 9y ago

The crypto-currency the world needs is one which detects pyramid/ponzi schemes and fraud in general.

sudouser 9y ago
Most surprising is peolpe placed so much faith in the figure of enigmatic Satoshi Nakamoto

TaylorGood 9y ago

Ponzi aside, let's say it's the greatest cryptocurrency idea. The SEC has right to use their Howey Test to determine whether it's a security. Based on 1,2,4 below, is this not ICO's? Under the Howey Test, a transaction is a security (or investment contract) if: 1. It is an investment of money 2. There is an expectation of profits from the investment 3. The investment of money is in a common enterprise 4. Any profit comes from the efforts of a promoter or third party Based on their recent cyber division being announced, there is seemingly a strong possibility of review/conviction if launching an ICO as a US citizen, no? Soliciting an unregistered security carries 20yr prison term. Are dev's factoring this as possible risk?

unkown-unknowns 9y ago
How many of the Howey test questions must be "yes"? All? Any? More than x number of them?
- lostmsu 9y ago
  They all seem to BE "yes "IMHO. So does it matter that much?
- zerocrates 9y ago
  All.
xdeqx366 9y ago
As a crypto-developer working in the blockchain space, my primary company has opted to do an ICO as part of its operations. The company has existing VC backing of between 4-10 million, and the project would benefit from blockchain - for one aspect. By no means is a new token necessary, but that fact seems to have been side-stepped. The product exists, and perceivably the token could be usable upon issuance... I enjoy working on the crypto for the project, but I concern myself with the eventual legalities of the ICO and how it might change the companies incentives internally. I have bills to pay, leaving on principle alone isn't viable for me, but, if it could impact on my family, I will. I am not a lawyer, and the answers don't appear to be black and white.

baby 9y ago

Ponzi schemes advertising themselves as ponzi schemes are fine right?

izabera 9y ago

https://en.wikipedia.org/wiki/OneCoin https://en.wikipedia.org/wiki/OneCoin

qwtel 9y ago

this is just the latest instalment in a never-ending series of mechanistically declaring illegal anything the kids like. renting out your flat to tourists for profit? upsets the neighbours, doesn't comply with arbitrary laws written centuries ago -- illegal. using cabs that you order through an app? threatens our cronies with something they are not prepared to handle -- competition -- so must be illegal. buying and selling magic internet money for fun and profit? could be interpreted as a security, hence must comply with arbitrary rules that didn't prevent the biggest financial crisis in history, but are otherwise supposed to be good for you -- ILLEGAL. at least one can take pleasure in the knowledge that the same people who enable and support these kinds of policies cry themselves to sleep with a (paper) issue of the WSJ every night, wondering why there is no growth, no inflation, 'millennialls' not buying diamonds, or cars, or houses, not having kids, and most of all, not sufficiently paying into the ponzi scheme that is their retirement plan, as well as any number of other issues more or less related to, or caused by, their own stupidity and boundless self-interest.