Last month we wrote about the prevalence of Ponzi schemes being floated around the world and the danger that high yielding promises entail. Among the heart of nearly every online Ponzi scheme is funding methods that use alternative currencies to provide anonymity to the fraud. Until it was shut down, Liberty Reserve was the leading payment option for fraudsters. Filling its gap has been other similar providers such as Perfect Money, EgoPay, and Solid Trust Pay. Also picking up steam has been the emergence of Ponzi schemes offering bitcoin funding. The currency provides fraudsters anonymity as well as appealing to bitcoin adopters.
Among known frauds, the largest one fell apart last year and was conducted by the notorious Pirateat40. Doing business as Bitcoin Savings and Trust (BST), the fund lured investors in bitcoin fourms, promising single digit interest rate returns per week, which annualized would be in the 1000%+ column. The fund was launched in November 2011 by a user known as Pirateat40. After collecting bitcoins from investors and paying out interest payments, the fund gained traction and ultimately collected 700,000 bitcoins in deposits from investors. Pirateat40 claimed to be able to achieve the gains by taking advantage of the fragmented infrastructure to be able to buy bitcoins cheaply and sell them at a markup. BST and Pirateat40 never actually did do any of this, with investor funds going towards paying his own expenses and for daytrading bitcoins in his personal account.
The fund ultimately closed down in August 2012 as investors filled up the Bitcointalk BST forum thread with complaints. Pirateat40 himself disappeared from the forum at that point as well. Even before the scheme failed, forum users doubted BST and many believed it to be a Ponzi scheme. While security and piracy is part of the bitcoin world, BST sits atop as the largest bitcoin related fraud that was committed since its creation in 2009.
The size of the fraud, which in today’s figures is above $50 million, did catch the eye of regulators, with the SEC getting involved. As an anonymous fraud, there wasn’t much hope that investors would ever see their bitcoins again, let alone Pirateat40 ever being caught. In a turn of events, the SEC announced yesterday that it was charging Texas resident, Trendon T. Shavers (aka: Pirateat40) as being the man behind BST. According to the SEC’s charges, Shavers collected 700,000 bitcoins in deposits, with 507,148 being used to fund withdrawals and interest payments. Of the remaining funds, 150,649 were transferred to his bitcoin trading account, where he suffered losses trading, but did transfer out $147,102 to his own personal checking account.
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In announcing the chargers, the SEC’s Andrew M. Calamari, Director of the SEC’s New York Regional Office declared that “Fraudsters are not beyond the reach of the SEC just because they use Bitcoin or another virtual currency to mislead investors and violate the federal securities laws. Shavers preyed on investors in an online forum by claiming his investments carried no risk and huge profits for them while his true intentions were rooted in nothing more than personal greed.”
In addition, to the charges against Shavers, the SEC also issued an ‘Investor Alert’ titled Ponzi Schemes Using Virtual Currencies. The alert explains what are Ponzi schemes, how they can be conducted using virtual currencies, and describes red flags. Among them are claims of “high investment returns with little or no risk”, a description that was used by Pirateat40 when he made such claims as “It’s growing, it’s growing!” and “I have yet to come close to taking a loss on any deal,” and “risk is almost 0.”
The SEC documents didn’t offer explanation of how Shavers got caught by the enforcement agency, but it does show that bitcoins aren’t as anonymous as everyone thinks. Specifically, gateways for exchanging bitcoins to cash, remain tightly linked to traditional banking firms. As a result, any large transfers in and out of bitcoin exchanges can and do draw inspections from bank compliance officials which has led to more and more bitcoin related ventures requiring customers to become authenticated. While such programs raise legitimacy of bitcoins within the established financial world, it also decreases its overall use as an anonymous currency.
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(Image courtesy of Wikimedia Commons)