Crypto scam offers modern twist on classic pyramid fraud


2019-12-19 /

 Bulgarian entrepreneur accused of helping to trick millions of investors.

It was billed as an exciting new cryptocurrency that would one day become more popular than bitcoin and turn myriad small investors into multimillionaires. But OneCoin, launched by a Bulgarian entrepreneur in 2014, was exposed this year as a traditional pyramid scheme operated by an international gang of scammers.

Ruja Ignatova, its founder, boasted of having studied at Oxford university and worked for McKinsey in eastern Europe.
The bizarre case of OneCoin illustrates how easily a classic scam dating back to the 19th century could be reinvented for the digital age. It also shines a light on how gaps in financial literacy across fast-growing emerging economies, as well as the developed world, can encourage even sophisticated investors to pursue unrealistic gains.

Ms Ignatova disappeared in October 2017, after failing to show up at a critical meeting in Lisbon of OneCoin promoters. They were supposed to take a long-awaited decision on whether to open a private online exchange where investors could convert their holdings of virtual currency into euros. The 39-year-old faces charges in the US of securities fraud, wire fraud and conspiracy to commit money-laundering. Her whereabouts are unknown. The scam is believed to have attracted more than €4bn from several million investors between 2014 and 2018.

Petya Dimitrova, a self-employed Sofia businesswoman, says she was duped by the "euphoria" that accompanied OneCoin's arrival in Bulgaria in 2015 from Asia, following a rapid ­expansion in China, India, Malaysia and Indonesia. The group's Bulgarian operation occupied swanky offices in Sofia, while Ms Ignatova spent millions of euros buying historic properties in the Bulgarian capital and also kept a luxurious motoryacht moored at a marina on the Black Sea coast.
"I fell for Ignatova's hype about developing OneCoin as an innovative cyber product for a mass market, so I bought some packages of tokens that could be turned into 'coins'," Ms Dimitrova says.

"It went well at first, I made some money . . . Then they changed the rules and I couldn't pull out any cash. I realised then that it was a scam," she adds.
Bratan Neyalkov, who works in e­commerce and has a university degree, says that he invested in 2015 without considering the warning signs: OneCoin was not listed on any cryptocurrency exchange, coins could only be sold back to the company, and purses for cryptocoins that allow investors to transfer coins were not available.
"People need to be educated to recognize the real deals from the scams," Mr Neyalkov says. "OneCoin got going at a time when we'd heard almost nothing about cryptocurrencies and blockchain technology. And regulation is weak even now, so other scammers like OneCoin could still be successful."

A BBC investigative podcast series revealed that contrary to Ms Ignatova's claims, OneCoin was not using a blockchain digital ledger to sell electronic tokens. Instead, the company operated with SQL Server, a database management system that is not capable of supporting a legitimate cryptocurrency.
OneCoin operated a traditional pyramid fraud in which existing investors receive payouts from funds provided by new entrants. The US justice department called it "an old-school pyramid scheme on a new-school platform".
With liabilities exceeding assets by an ever-increasing margin, the scheme falls apart when the supply of new investors runs out.
For one former governor of a Balkan central bank, OneCoin brought back memories of pyramid schemes that rocked countries across the region in the 1990s, when vulnerable small savers, tempted by monthly dividend payments of 10-15 per cent, sold cars, jewellery and family apartments to join a fraudulent scheme.
In the most extreme case, the collapse in 1997 of a series of pyramid schemes in Albania in which investors lost an estimated $2bn - equivalent to almost 50 per cent of national output - triggered the fall of the government followed by a violent uprising across the country.

More than 2,000 people died and scores of public buildings were looted and burnt. Once order was restored, the Albanian government hired administrators from the Big Four accounting firms to liquidate the schemes. "The Albanian experience is a powerful reminder of the social costs of unchecked criminality," the IMF said in a 1999 report on the collapse of the schemes.
Tihomir Beslov, a Sofia-based expert on international crime, believes that OneCoin originated in China, where investors in 2016 alone poured more than €450m into the scheme. Pyramid fraud is widespread in China, and often includes a cult element aimed at persuading investors to stay loyal, he says, adding: "Ignatova was the right person to front an international operation of this kind but others must have provided the technology back-up and arranged the laundering of the proceeds."
Bulgaria's financial supervision commission warned in 2015 of potential risks for investors in new cryptocurrencies, mentioning OneCoin as an example, but the authorities showed no interest in investigating. In January 2018, police raided OneCoin's Sofia offices at the request of a German prosecutor and seized its servers. It was not until this month that the OneCoin website finally went offline.