Here Come the Great Crypto Gold Rush Swindles

Everyone knows it’s not a true gold rush until the swine come out. And while the age of cryptocurrency has been in full swing since Bitcoin launched the fray in 2009, it hasn’t taken con artists long to figure out how to use the so-called digital gold rush to their own advantage.

Most recently, authorities in India, Vietnam, Norway and Belize have been trying to unravel the network of OneCoin, a cryptocurrency selling itself as the next Bitcoin, which authorities are now describing as a Ponzi scheme. Even at the time of the mid-April OneCoin bust in Mumbai – which led to the arrest of 18 people and the seizure of around US $2.9 million – the schemers had already funneled at least US $408 million in allegedly scammed funds through a payment processor in Germany.

German financial regulator, BaFin, has been investigating OneCoin since June 2016 as a result of solicited investments through the German bank Commerzbank AG. Unfortunately, the regulators don’t have the authority to “decide whether or not Onecoin tokens are valid under civil law” but they could shut down unauthorized remittance, reports

“On behalf of Onecoin Ltd, IMS International Marketing Services had investors who had bid to buy ‘Onecoins’ and transfer the sales to various accounts held by IMS International Marketing Services with different banks in Germany and forwarded the money on behalf of Onecoin Ltd to third parties, based in particular outside of Germany. This kind of financial service is classified as money remittance business,” said BaFin in a report.

ICO’s on the rise

Germany’s challenge, and the challenge of virtually any financial regulator attempting to keep cryptocurrency honest, is that the currency is decentralized and therefore beyond restriction and confiscation.

Obviously, there are some benefits to a system as secure as bitcoin. Cryptocurrency, on the whole, relies on blockchain – “an incorruptible digital ledger of economic transactions that can be programmed to record not just financial transactions but virtually everything of value,” according to Dan Tapscott, author of Blockchain Revolution. It’s nearly impossible to fake, constantly reconciled through mass collaboration.

It’s also growing in popularity. According to a recent infographic by, cryptocurrencies account for $100 billion of the overall $84 trillion in the world. Bitcoin accounts for $41 billion of that.

But the way cryptocurrency projects are often funded – initial coin offerings (ICOs) where tokens are sold to early adopters and enthusiasts in exchange for money – sometimes opens the doorway to ponzi schemes, especially given the profit reaped. ICOs, token sales and crowdsales raised more than $51 million in June alone, according to research firm Smith and Crown.

Not quite an IPO

Despite ICOs similarity to another, albeit formally regulated, mode of funding, Initial Public Offerings, ICOs live within the wild west of cryptocurrency where uninformed investors sometimes struggle to understand the concept of blockchain itself – distracted instead by the buzz surrounding cryptocurrencies.

In the case of OneCoin, as a respected blockchain developer pointed out: “It was very clear from our conversation that they did not have a blockchain” rather it was more akin to a database used to store comments and posts on a blogging site.

Yet the company still managed to siphon an alleged $350 million.

These days, ICOs are more apt to be marketed as “software resale tokens” with language like “crowdsale” or “donation” to skirt the legal requirements surrounding security sales. As Smith and Crown points out: “It is unclear whether this is sufficient for global jurisdictions to treat it differently from a securities sale. To date, the matter hasn’t been litigated in a court of law.”

Catching up to the coinsters

The U.S. Securities and Exchange Commission has kept an eye on the rise in bitcoin ponzi schemes, noting that “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.”

The Ontario Securities Commission (OSC) has also issued its own warnings specifically to businesses proposing ICOs: “Products or other assets that are tracked and traded as part of a distributed ledger may be securities, even if they do not represent shares of a company or ownership of an entity,” says the regulator. “Businesses’ specific use of (distributed ledger technology) may trigger Ontario securities law requirements, including the need to be registered or file a prospectus.”

Of course, the move by the OSC sounds sterner than it is. The regulator says it’s focused on connecting with company’s operating within the blockchain sphere.

“Because this is a novel area, businesses may not be aware that some uses of this technology could trigger securities law requirements,” Pat Chaukos, chief of OSC LaunchPad, the agency’s fintech-focused team, told Coindesk with a noticeably softer tone. “We encourage these businesses to speak with us about securities law and investor protection requirements that may apply.”

And can you blame them? While cryptocurrency has been eyed suspiciously, there’s no question blockchain’s incorruptibility will play a role in a future plagued by data leaks and cybersecurity.

As Tapschott put it: “We will not need to trust each other in the traditional sense, because the new platform ensures integrity – think trust achieved through clever code and mass collaboration.”

Sounds like the sort of scheme a lot of us would get behind.


Andrew Seale

Andrew Seale is a Toronto-based business writer who contributes frequently to Yahoo Canada Finance, The Globe and Mail's Report on Business and The Toronto Star.