Crypto and the blockchain are changing the way many businesses operate, or at least thinking about securing assets. However, as with any new technology, there are people who are taking advantage of the buzz around it to scam people and institutions eager to be on the cutting edge. Some of these scams are unfortunately crypto Ponzi schemes.
As one of the few law firms in New Jersey to have successfully represented crypto and blockchain clients in litigation, Dressel/Malikschmitt is making a name for itself in this emerging area of the law. As our reputation grows, so does the number of people reaching out to us with questions about crypto and the blockchain.
Dressel/Malikschmitt does legal due diligence on purported crypto businesses (and other business opportunities) on behalf of our clients. We would be happy to have a conversation with you if this is a service you need and we also thought it might be helpful to post a bit of information about Ponzi schemes and how to avoid them.
Robbing Peter to Pay Paul
Scam artists going after people who want to make easy money or are looking to satisfy a FOMO itch is nothing new.
This is where Charles Ponzi comes in. In the 1920s, a Boston businessman named Charles Ponzi lured in investors with a promise of 50% returns on a 45-day investment in postal coupons. While there was some actual money to be made on these coupons, Ponzi did pay investors his promised returns by attracting more and more additional investors and using their funds to pay earlier investors.
Ponzi wasn’t the first person to run a scam like this, but he did it so successfully, and on such a large scale, that his name became synonymous with this type of scheme. A more recent example is the fraud perpetrated by financier Bernie Madoff, who scammed thousands of investors out of around $65 billion. He was widely regarded for years as a savvy investor, but it ultimately turned out that he was simply falsifying documents and using new money from new investors to pay off anyone who wanted to cash out.
Ponzi schemes are attractive because they promise returns that are too good to be true, while making investors feel like they have been let in on a secret trick for making easy money. They work for a while because everyone likes to watch their accounts grow and feel like they are in on something special. They fail once it becomes hard to recruit new investors, or existing investors want to cash out.
Is Crypto Vulnerable to Ponzi Schemes?
Crypto is an increasingly popular store of value and medium of exchange and is becoming a critical piece of the online financial ecosystem.
However, because it is a new technology that not everyone understands well, there are plenty of unsavory actors ready to take advantage of people who want to believe crypto is a way to get rich quick. As reported by U.S. News, “Cryptocurrency crime soared 79% and hit an all-time high in 2021, with bad actors illicitly pilfering $14 billion in funds last year.”
These stats are alarming, but data on financial scams is always shocking. For example, “newly released Federal Trade Commission data shows that consumers reported losing more than $5.8 billion to fraud in 2021, an increase of more than 70 percent over the previous year.”
Tips for Avoiding Crypto Ponzi Schemes
Scammers are attracted to the opportunity to scam, not the underlying technology. It is therefore wise to remain on your guard against Ponzi schemes when making any investment decisions.
The FBI has a few tips on how to identify and avoid Ponzi schemes in general:
- Be careful of any investment opportunity that makes exaggerated earnings claims.
- Exercise due diligence in selecting investments and the people with whom you invest—in other words, do your homework before investing your money.
- Watch out for investment opportunities that come from unusual sources, such as text or chat messages.
- Consult an unbiased third party—like an unconnected broker or licensed financial advisor—before investing.
The SEC has put out an “Investor Alert” fact sheet on Ponzi schemes that target the users of virtual currency. Building a bit on the tips from the FBI, the agency encourages crypto users to watch out for:
- Overly consistent returns;
- Unregistered investments and unlicensed sellers;
- Secretive and/or complex strategies and fee structures;
- Investment opportunities that come through someone with a shared affinity;
- Opportunities with no minimum investor qualifications;
- Issues obtaining paperwork on the company or the terms of your investment; and
- Difficulty cashing out your investment or receiving payment.
These tips just scratch the surface, but the age old adage of “too good to be true” is always a useful guiding principle. And, depending on the type of investment you plan to make, it may also be wise to consult an attorney.
Dressel/Malikschmitt LLP has helped facilitate many crypto-related transactions, and is one of the few law firms in New Jersey with litigation experience in this area. If you would like to schedule a consultation with our team, please call us at (848) 202-9323, or fill out our Contact Us form.