Bitcoin Goldrush leads to virtual Ponzi scheme

Thursday, 5 December 2013

by Sally Davitt I December 5, 2013

However, fraudsters may be using some of these ‘exchanges’ as a front. In July 2013 the SEC charged Trendon Shavers, from Texas, USA, with operating a Bitcoin Ponzi scheme, and then in October 2013, another Hong Kong-based Bitcoin Exchange collapsed amid allegations this was also a Ponzi scheme.
 
The SEC says that new and emerging technology is often used as a lure for setting up a Ponzi scheme, and it appears Bitcoin is a prime candidate for this. So we thought it would be interesting to compare the original Ponzi scheme to its modern-day internet equivalent, nearly 100 years on:
 

Characteristic	Charles Ponzi - 1920s	Bitcoin Ponzi - Trendon Shavers
Name of scheme	Securities Exchange Company. (Ironically, this name is very similar to the Securities Exchange Commission(‘SEC’) who would later charge Shavers with his latter day Ponzi scheme)	Bitcoin Savings and Trust (“BTCST”)
Promised source of earnings	Arbitrage; buying discounted postal reply coupons in other countries and redeeming them at face value in the United States.	Arbitrage; allegedly selling Bitcoins to those who wanted to buy large volumes “off the radar”, presumably for questionable purposes.
Claims made	“My secret is how to cash the coupons. I do not tell it to anyone …Let the United States find it out, if it can."	“I have yet to come close to taking a loss on any deal”  “Risk is almost 0.”
These schemes often attract new investors by offering high interest rates	Offering returns of 50% within three months,  (This is the equivalent of 506% per annum at a time, when the annual interest rate for bank accounts was just 5%.)	Offered 7% weekly returns. (This is the equivalent of over 3700% per annum, when US interest rates are close to Nil)
Why did it collapse?	Two critical newspaper articles caused a run on the scheme, but Ponzi was able to pay out US$2 million and US$1 million on each occasion to prevent collapse. However, a later Federal audit showed Ponzi was overdrawn on his bank account, and several million in debt.	SEC investigated and traced Bitcoin movements, and alleged BTCST was a scam.
Value of losses	US$20 million in 1920 dollars (US$240 million in 2013 dollars)	It is claimed that BTCST held 700,000 Bitcoins, then worthUS$4.5 million (based on the average price of Bitcoin in 2011/2012) At date of publication, with one Bitcoin close to US$1,000, 700,000 Bitcoins are worth nearly US$700 million

The similar characteristics of both the 1920s Ponzi and the recent Bitcoin Ponzi show that even in this internet age, people are still taken in by fraudsters offering enormous returns. Perhaps the meteoric rise of the Bitcoin has made investors believe such returns are possible, but the old adage still holds - if it sounds too good to be true, then it probably is. And a 7% return per week certainly does sound too good to be true!

Sources:

http://www.sec.gov/answers/ponzi.htm 
http://www.acfe.com/ponzi-schemes.aspx
http://www.smithsonianmag.com/people-places/In-Ponzi-We-Trust.html#ixzz2lcFMMIfT
http://www.sec.gov/News/PressRelease/Detail/PressRelease/1370539730583#.UpPRoaG4avF
http://bitcoinmagazine.com/5889/sec-files-charges-against-bitcoin-ponzi-mastermind-trendon-shavers/
http://rt.com/usa/bitcoin-sec-shavers-texas-231/