Is This the Age of the Ponzi Scheme?

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( — July 26, 2019) — A quick look at today’s economic landscape reveals that these are unique times. Multi-level marketing (MLMs) companies are everywhere, people are redistributing their investments to integrate cryptocurrency, and the gig economy has more and more people hanging out their own professional shingle. What happens, then, when these potential opportunities turn out to be scams? Though there may be opportunities for restitution, it all starts with recognizing when fraudulent activity is occurring.

Understanding Ponzi Schemes

Ponzi schemes are a type of financial fraud similar to pyramid schemes premised on investors receiving huge profits based on a minimal investment. New investors’ funds are then used to pay back earlier investors, but the pool of potential participants quickly dries up. These scams have been around for years, but they’ve been in the news more recently because the internet has made them easier to execute than ever before. In 2016, for example, the couple behind The Secret to Life Coaching (TSTLC) was investigated for running a $20 million Ponzi scheme, while in the last few months countless new criminal cases have been in the news – and it’s a global problem.

Blowing The Whistle

The primary way in which Ponzi schemes come to light is through the action of whistleblowers, individuals who have original information that can lead to the enforcement of action against the company. As explained by Meissner Associates, Ponzi schemes are one of many types of Securities law violations, and whistleblowers, as voluntary sources of new information, play a key role in revealing these scams. 

One of the highest profile whistleblower cases in the last year took place in relation to the pyramid scheme and cult NXIVM. Though that case hasn’t been settled yet, the group’s machinations never would have come to light without the contributions of Barbara Bouchey and another whistleblower who had previously been part of the group. Meanwhile, on a global scale, cryptocurrency companies have been at the heart of a number of Ponzi schemes, and that trend isn’t likely to slow down.

The Cryptocurrency Problem

Cryptocurrency presents a novel set of problems as it pertains to Ponzi schemes because the funds are poorly understood, yet some are perfectly legal and viable. What’s the distinction, then, between a valid cryptocurrency like Bitcoin that has seen real success, and Tron, a cryptocurrency company based in China that managed to con investors out of at least $30 million?

The problem with Tron wasn’t its cryptocurrency model so much as the fact that outsiders were able to manipulate the company’s notoriety to defraud users. Scammers set up a platform known as the Wave Field Super Community and encouraged users to invest in it, then closed up shop and disappeared with the funds. Tron was never actually affiliated with the scam, but was left to bear the brunt of the community response, and that may topple their currency.

Meanwhile, some label Bitcoin a Ponzi scheme, but this is a mistaken conception that reflects a lack of understanding of modern asset markets – and its growth and stability bear this out. Other short-lived cryptocurrency operations could easily behave like Ponzi schemes, though, setting up shop, taking on investors, and then withdrawing the money and disappearing into the void. This is one of the risks of digital currency and a key reason why investors need to carefully consider new investments, but Bitcoin isn’t a source of concern.

People may be more aware of Ponzi and pyramid schemes today, but they’re also newly vulnerable to digital scams. Investors and entrepreneurs of all stripes should be alert to possible manipulations and ill-behavior that could negatively impact their own financial prospects.