CFTC charges Control-Finance for crypto Ponzi scheme, netting 23K BTC

Sooner or later it had to happen. Someone would surely develop an elaborate Ponzi scheme utilizing Bitcoin, token wallets, and the blockchain to bilk an unsuspecting group of victims out of a sizeable fortune. Press reports netted the take at $147 million, but an estimated 22,859 Bitcoins have gone missing, and, if you do the math, the BTC were valued at $6,431 at the time. The fraud took place during 2017’s Bitcoin mania, and these coins back then could easily have been worth over three times this amount.

The Commodity Futures Trading Commission (CFTC) filed its complaint in the southern district of New York against “defendants Control-Finance Limited (Control-Finance), a purported Bitcoin trading and investment company, and its principal, Benjamin Reynolds (together, defendants), both of the United Kingdom.” More than 1,000 customers fell for the alleged investment scheme across North America, Europe, and Asia.  

The Complaint specifically alleges that: “Since at least May 1 through October 31, 2017, the defendants used a website and accounts at popular social media sites to fraudulently solicit customers to purchase and transfer Bitcoin to them. The defendants induced customers into transferring Bitcoin to them by falsely representing that they employed expert virtual currency traders who earned guaranteed daily trading profits on all Bitcoin deposits.”

In this typical “Ponzi” set up, the crooks appealed to the greed in the investing public with promises of outrageous returns. In this particular case, the principals went a few additional steps by setting up an affiliate program that ostensibly paid out hefty commissions for the delivery of additional victims into the scheme’s pipeline. For both customer and affiliate accounts, fake monthly performance reports were generated to disguise what was really taking place. Separate accounts were actually being pooled together for the benefit of the criminal operation and for paying out withdrawals when requested by existing account holders.

Falsely prepared account statements and weekly Trade Reports kept the illusion going that inordinate profits were being generated at will through the firm’s unique trading system. In actuality, Control Finance never engaged in trading Bitcoin in any market, but the crooks were actively collecting deposits through a global network of apparent single-use wallet addresses that customers were given in order to make deposits. The defendants then “routed the deposits to other, pooled wallet addresses that they created at virtual currency payment processors and exchanges throughout North America, Europe, and Asia”. These transfer transactions were never disclosed in any way in order to conceal the misappropriation of funds.

The defendants were clearly leveraging the mania of the time when speculation in Bitcoin was rampant and press coverage was hyping the unbelievable appreciation in value that was taking place with what was then a very obscure, but intriguing investment option. The terms, described in cleverly designed marketing materials, “set the hook”, so to speak. Potential victims were promised that the firm would:

• Earn customers 1.5 % in daily Bitcoin trading profits and up to 45% per month;
• Use risk diversification methods to protect customers’ Bitcoin deposits; and
• Provide a “safe haven” from Bitcoin market risks. 

Exorbitant returns at little or no risk? Such an investment does not exist, but a certain subset of the investing public falls so easily for these claims, without so much as even questioning or discussing the proposition with a respected advisor. Once the “hook” is set, the “fleecing” phase commences in which the actual cash, or in this case the Bitcoins, is turned over to the control of an unknown third party. Would you so easily hand over cash to a stranger that came at you “face-to-face” in the real world? Probably not, but the Internet imbues a mystique of trust that must be questioned up front, before any money ever changes hands.

The defendants are charged with misappropriating the funds of its victims. The Complaint specifies two methods: “(1) by executing uneconomical and confusing blockchain transactions to move customers’ Bitcoin into other wallet addresses under Defendants’ control; and (2) by illegally diverting customers’ Bitcoin deposits to make Ponzi scheme-like payments to customers who requested account withdrawals”.

The CFTC’s press release makes no mention of the recovery of any of the lost funds. It did mention that some withdrawals had been paid and that the crooks had misappropriated funds for their own express purposes, but a specific accounting of confiscated cash and property was not disclosed. Unfortunately, in situations like these, there is very little in the way of a recovery, after netting out fines, penalties, and court costs.

As is usually the case, the CFTC did purport that: “In its continuing litigation, the CFTC seeks civil monetary penalties, restitution, rescission, disgorgement of ill-gotten gains, trading and registration bans, and permanent injunctions against further violations of the federal commodity laws, as charged.”

Director of Enforcement James McDonald also stated: “The CFTC will continue to vigorously police the Bitcoin markets, including fraudulent trading activity as alleged in the Complaint here. Fraud in these markets not only harms customers, but if left unchecked, it could also hinder innovation. We caution potential virtual currency customers, once again, that they should engage in appropriate diligence before purchasing or trading virtual currencies.”

Have there been any other crypto Ponzi schemes of note?

The uniqueness of the “Control Finance” caper is how elaborate the planning and preparation had to be in order to perpetrate its fraud. The technical aspects were daunting enough, but the fact that the crooks were willing to risk such an investment of time and effort by then offering such a ridiculous level of return, i.e., 1.5% per month, was also surprising, considering the level of expertise involved in the rest of the enterprise. The fraudsters were definitely after a quick “smash-and-grab” over a short six-month period. It appears that their “net” brought in an incredible amount of cash.

As for other Ponzi schemes in the crypto arena, much has been written about fraudulent Initial Coin Offerings (ICOs). This twist on crowd funding has been used to dupe “marks” across the globe by promising outrageous returns for those that invest in the crypto development effort to be funded by a proprietary token. Enthusiasm and greed have been used to bilk over $1 billion from investors that were taken in by clever conmen. Some estimates run as high as 80% of these programs turning into fraudulent exercises, where either the entity shuts down due to incompetence or poor planning or when the management team suddenly disappears with the remaining capital in the dark of night.

There have also been several accusations that Bitcoin is the biggest “Ponzi” scheme of all time. Jamie Dimon, the CEO and Chairman of JPMorgan Chase Bank, is known for his derisive comments, but a few Nobel Laureates have also made similar comments, as has Warren Buffett. Buffett has frequently derided Bitcoin at his investor meetings, saying it just sits there and does nothing. The same can be said for Gold, which Buffett has also attacked, as well, for similar reasons. Many advocates, however, claim Bitcoin is “digital Gold” or “Gold 2.0” in our modern age.

As for non-ICO type Ponzi schemes in the Bitcoin arena, there is news today from South Africa of a Bitcoin wallet con that was promising returns of 100% in 15 days. It was said to be raking in as much as $135,000 a day. Unfortunately, Bitcoin prices have been skyrocketing this year, and law enforcement authorities are warning that Ponzi-esque schemes are proliferating everywhere across the planet. The lure of large returns in short periods of time with little or no risk seems to work every time with an uninformed public that is susceptible to the conman’s siren song.

Andreas Antonopoulos, a cryptocurrency evangelist and educator, has been tracking the current wave of scams, which had died down during Crypto Winter, but is now being revived due to Bitcoin’s recent bull run. He asserts that this new “wave of crime” just started a month ago. His latest Tweet says it all: “FOMO is in the air. Newbies are joining the cryptocurrency space and falling prey to scammers. Please educate your friends and family: Promises of profit are 100% Ponzi; Request to “recruit”, “affiliate” etc. are 100% pyramid schemes; ICO/IEO are 99.99% pump-and-dump.”

Concluding Remarks

Bitcoin prices have been on a tear of late, and the criminal element in our society has been waiting patiently for enthusiasm and greed to pervade the crypto arena once again, as it did in 2017. Crooks have polished off their favorite scams, typically ones that resemble the old Ponzi scheme of yore, where exorbitant returns are promised with little to no risk to worry about. Sound familiar? It is definitely time to put your Skeptic’s hat on, question any unsolicited advance related to cryptos, and then walk the other way!

To be forewarned is to be forearmed!

Chris Lee

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