Wherever there is money to be made, there will always be crafty scam artists with complex plans to bilk naive and unsuspecting investors out of their money. Since bitcoin and dozens of other digital currencies are proving to be very lucrative investments, it comes as no surprise to find criminals surfacing, pretending to be legitimate members of the digital currency industry.
Aside from the illegal 'pump and dump' schemes that were commonplace with many of the early fly-by-night cryptocurrencies, there are scarier scenarios involving pyramid schemes that have the potential to do a lot of damage to the industry's reputation. The Ponzi or Pyramid may involve the criminal using a legitimate cryptocurrency, but the ones that may have the most painful impact on their victims are those 'currencies' created solely to run the scheme. These fraudulent acts have nothing to do with digital currency and everything to do with criminals preying on easy targets that buy into their get-rich-quick pitches. Unfortunately, as we have witnessed time and time again, that is not how the story will be portrayed in the mainstream media - they will find a way to blame bitcoin.
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It defies logic that despite years of warnings and the oh-so-simple advice "if it sounds too good to be true...", people are still falling for these cons. Promises of great wealth, pictures of expensive cars, large boats and homes, and topped off with exotic travel, should raise an immediate red flag. Advertising gimmicks such as "let me share my secret to incredible wealth" are also sucker bait.
What does the SEC have to say about this kind of fraud?
They warn investors to be on the lookout for Pyramid or Ponzi red flags such as promised (and consistent) high returns, "secretive and/or complex strategies and fee structure", and "difficulty receiving payments" among other things. The SEC also issued an Investor Alert in 2013 warning investors of multi-level marketing (MLM) pyramid schemes. It should be noted that there are legitimate MLM programs (think Amway and Tupperware) that actually sell products to consumers, but the sole purpose of an illegal pyramid MLM is to recruit. They may disguise their intentions by selling an overpriced product or service, but it is only to those that they recruit.
These are the hallmark characteristics of a Pyramid Scheme according to the SEC:
- No genuine product or service. MLM programs involve selling a genuine product or service to people who are not in the program. Exercise caution if there is no underlying product or service being sold to others, or if what is being sold is speculative or appears inappropriately priced.
- Promises of high returns in a short time period. Be leery of pitches for exponential returns and "get rich quick" claims. High returns and fast cash in an MLM program may suggest that commissions are being paid out of money from new recruits rather than revenue generated by product sales.
- Easy money or passive income. Be wary if you are offered compensation in exchange for little work such as making payments, recruiting others, and placing advertisements.
- No demonstrated revenue from retail sales. Ask to see documents, such as financial statements audited by a certified public accountant (CPA), showing that the MLM company generates revenue from selling its products or services to people outside the program.
- Buy-in required. The goal of an MLM program is to sell products. Be careful if you are required to pay a buy-in to participate in the program, even if the buy-in is a nominal one-time or recurring fee (e.g., $10 or $10/month).
- Complex commission structure. Be concerned unless commissions are based on products or services that you or your recruits sell to people outside the program. If you do not understand how you will be compensated, be cautious.
- Emphasis on recruiting. If a program primarily focuses on recruiting others to join the program for a fee, it is likely a pyramid scheme. Be skeptical if you will receive more compensation for recruiting others than for product sales.
If you have to pay a large amount of money to 'sign up', regardless of how they word their reasoning, the venture should be suspect. A legitimate multi-level marketing business does not require high up-front costs. They are in business to move as much product as possible, so the bulk of your earnings should come from actual sales and not from recruiting new members.
The very nature of cryptocurrency makes everything open and transparent and with all transactions recorded on a permanent ledger (blockchain), a genuine, legitimate digital currency provides you with a way to check and make sure funds are coming and going as stated. If the blockchain is not public and not 'available' for everyone to verify... run. There should also be no difficulty buying or selling as all legitimate digital currencies are sold on multiple exchanges.
Falling for a Pyramid or Ponzi scheme that is based on recruitment means that you are promoting it to other unsuspecting investors. Tread very carefully because, depending where you live, this may be grounds for legal action against you.
If you come across an investment that you believe to be fraudulent, whether that be a Ponzi or a Pyramid, you can contact the SEC at 800-732-0330 or submit an online tip at https://www.sec.gov/complaint/tipscomplaint.shtml.
If you live in Canada you can report these crimes to the Canadian Anti-fraud Centre (CAFC) by calling 1-888-495-8501.