CTFC Levels Charges In $147M Bitcoin Pyramid Scheme

As bitcoin hovers around $9,100, as Libra may (or may not) give the marquee cryptocurrency a run for its virtual money, it’s worth noting what lies behind the wild price swings — especially the ones that have ramped prices from sub $4,000 levels in short order.

Call it exuberance, excitement, the fear of missing out, at least for some speculators. And where there is such a whole hearted embrace of promise there lies peril. And to add another P to that list: Pyramid schemes.

News comes Tuesday that the Commodity Futures Trading Commission (CFTC) has filed a civil enforcement action in New York against Control-Finance Limited, which CoinDesk reported is a “purported” bitcoin trading and investment company. The action also named its founder, Benjamin Reynolds, who is based in the United Kingdom.

The allegations detail a pyramid scheme that raked in staggering sums from May to October 2017.

The charges state the individual and the company took in more than 22,850 bitcoin — as much as $147 million worth at the time of the fraud — and the victim count numbered 1,000. The pyramid scheme, according to the CTFC, operated through what was billed as the Control-Finance “Affiliate Program.”

The defendants promised that — through the trading activities of Control-Finance’s program — investors could ear up to 45 percent returns on investments. Monthly. All the unwitting victims had to do was purchase and send bitcoin to Control-Finance.

“In reality, the defendants made no trades on customers’ behalf, earned no trading profits for them, and misappropriated their Bitcoin deposits,” alleged the CFTC in a statement. The promises of get-rich-quick lures are centuries old, but the methods here were decidedly modern. The scheme, reports say, used single use wallets to receive the deposits, route them elsewhere and then pass them through a series of processes. When customers wanted redemptions, money was siphoned from other customer accounts. Thus the pyramid, or Ponzi, scheme. Reynolds also provided fake account details and trade reports.

The Control-Finance case comes amid news that show bitcoin being used for shady doings on a far larger stage. As reported, Kim Jong Un’s regime in North Korea is banking — no pun intended — on cybercrime to gain access to foreign currency.

The Financial Times reports that, amid continued sanctions, the dictator has deployed thousands of hackers to steal money from abroad.  The latest forays seem to include attacks on cryptocurrency exchanges, where hackers stole hundreds of millions of dollars.

The read across here is two-fold: Enthusiasm can open the door to fraudsters eager to make some (virtual) money. Economic desperation can open the door to fraudsters, even state sanctioned fraudsters eager to grab some money, too. Cryptos — where the use cases are always on the come, always over the horizon and something less than ready for prime time when it comes to commerce — opens the door to fraudsters looking for a way to fleece.