How cryptocurrency Ponzi schemes work
At their cores, most cryptocurrency Ponzi schemes are just old-fashioned Ponzi schemes wrapped in the modern, high-tech veneer of cryptocurrency. While the cryptocurrency lingo can be confusing, the schemes themselves are relatively easy to understand. Generally, the fraudsters solicit investments in a cryptocurrency-related business, promise high returns in a short period of time and use the contributions of later investors to pay off earlier investors. At some point, the fraudsters stop making payments and abscond with their investors’ money.
In the BitClub Network case, the defendants offered investors shares in cryptocurrency mining pools. Cryptocurrency mining is the process of verifying previous cryptocurrency transactions in exchange for potential rewards of cryptocurrency. Through cryptocurrency mining, individuals can earn cryptocurrency without having to buy it. However, the cryptocurrency mining process is costly, time-consuming and rarely profitable. It is more likely to be successful when multiple people work together in groups called cryptocurrency mining pools.
From 2014 to 2019, the BitClub Network used online videos and presentations in multiple countries to recruit thousands of investors. The defendants promised high returns in a short period of time, as well as financial incentives for recruiting new investors. According to the defendants, investors would be paid a percentage of the profits from the Bitcoin mining pools operated by the BitClub Network. In reality, internal communications showed that the payment amounts were arbitrary and unrelated to the performance of the mines. To encourage investment in the BitClub Network, the payouts to early investors were very high and they decreased consistently thereafter. However, the defendants knew that the payouts were still too high for the enterprise to be sustainable on a long-term basis. Meanwhile, according to the DOJ, the defendants spent their investors’ money “lavishly.”
