
SEC charges GAW Miners and ZenMiner as a Ponzi scheme [pdf] - rbobby
http://www.sec.gov/litigation/complaints/2015/comp23415.pdf
======
jimrandomh
The Bitcoin world seems to have an awful lot of incompetent fraudsters. This
particular one is surprising, because I don't see how they thought they could
get away with it; the scheme described in the SEC complaint is one that would
be guaranteed from the start to unravel, and the perpetrators weren't
anonymous.

What they did was, they sold shares in a Bitcoin mining operation
corresponding to hashing power, and kept selling long after their actual
mining equipment had sold out. They then used the revenue from those sales to
buy Bitcoin on the open market, and misrepresent those purchased coins as
newly-mined coins for withdrawals.

Seriously, how could they possibly have thought that would work out?

~~~
Animats
_" The Bitcoin world seems to have an awful lot of incompetent fraudsters."_

Yes, it does.

The upside of this is that none of them have been able to break the basic
blockchain mechanism and profit from doing so. That's an impressive
achievement in computer security. It's the reason that blockchain technology
is now being looked at as a way to record transfers of high-value bonds and
such.

~~~
inoop
> The upside of this is that none of them have been able to break the basic
> blockchain mechanism and profit from doing so. That's an impressive
> achievement in computer security.

Not really. Merkle trees aren't exactly new, and neither is the transaction
signing mechanism used in Bitcoin. Bitcoin didn't achieve anything novel here.

The major new idea Bitcoin brought to the table was proof of work. However,
Satoshi couldn't predict mining pools, which has led to the situation Bitcoin
is essentially controlled by a small cabal of miners and core devs. This is
not the decentralized system Satoshi envisioned.

In fact, there have been cases in the past where a single pool actually had
>50% of mining power for short periods of time. Since ownership of pools is
not exactly transparent, we have no way of knowing if any pool out there is
currently at 50%, or if there are multiple pools colluding. The classic
argument is that there is no incentive for a 50%+ miner to hurt the network,
but then you're trusting a random pool owner with your money, which goes
against everything that Bitcoin set out to do.

Moreover, a large pool has been known to game satoshi dice by including a
double-spend in its next block if it lost, and thus denying the original
transaction to go through. Other games like selfish mining can be played as
well.

Your statement that Bitcoin remains unbroken is not really true. A double
spend has been demonstrated during the first big fork (around version 0.8, if
memory serves me). It was announced with proof on Bitcointalk. I guess hat
since the guy was a white-hat, and returned the money, you're still
technically correct in that he did not profit from it.

Bitcoin is also notoriously vulnerable to DDOS attacks. We had several big
DDOS events this year with Bitcoin transactions being backed up for hours,
even days. In one case a company was 'stress testing' the system by filling up
the blocks with dust transactions, and in another an attacker found a way to
very cheaply fill up blocks with certain types of transactions (sigops).

Finally, Bitcoin simply does not scale very well because it's a massively
replicated system that records and distributes transactions to every node in
the network. This does not scale in number of nodes (network diameter, end-to-
end latency) or in number of transactions (bandwidth, blockchain size).

All in all, calling Bitcoin an impressive achievement in computer security is
a bit of a stretch imho.

------
LukeHoersten
This is a surprisingly clear and articulate explanation of digital currency
mining and how it was used to mask a ponzi scheme by over-issuing securities
against it. Well done SEC.

------
Animats
That's what the SEC does. About once a week, they shut down some investment
scam. This was a straight Ponzi, dressed up, as the SEC says, with techno-
jargon.

These were some of the people behind Paycoin, too.[1]

[1] [https://bitcoinmagazine.com/articles/death-paycoin-
employee-...](https://bitcoinmagazine.com/articles/death-paycoin-employee-
video-reveals-internal-chaos-1429396603)

------
hughes
> After selling approximately 2,290 Remember [9/11 Memorial] Hashlets for a
> total of approximately $48,000, GAW Miners donated only $10,000 to a 9/11
> related charity

That'll go over well with a jury!

------
JoshTriplett
The title seems misleading; from the sounds of things, these weren't "mining
companies" in the first place, they were scams from the start. To be a mining
company, they'd have to actually do mining. Instead, it sounds like their
primary product was the money coming in from people buying their product,
which is the definition of a pyramid scheme.

Quoting the relevant bits of the ruling:

35\. Second, contrary to its stated reason for existence, no mining actually
occurred through ZenMiner’s ZenCloud interface. Though customers paid for
equipment that they believed they were directing to mine in various pools
available through the ZenCloud interface, and also paid for hosting services,
very few pieces of the mining equipment purchased by customers actually
existed in a ZenMiner datacenter. Most customers paid for a phantom piece of
equipment that neither GAW Miners nor ZenMiner owned. Ne ither GAW Miners nor
ZenMiner was directing customers’ computing power to any pools at all, much
less the ones customers believed they were choosing.

37\. Cloud Hosted Mining customers were entitled to request that the computer
equipment they had purportedly purchased be sent to them, but neither GAW
Miners nor ZenMiner owned that equipment to ship.

49\. By October 2014, GAW Miners had oversold Hashlets to an even more extreme
degree. It had oversold altcoin-mining Hashlets by at least about 100 times
its computing capacity, and bitcoin-mining Hashlets by at least about 5 times
its computing capacity.

50\. Though GAW Miners built a data center that, by November 2014, contained
significant computing capacity for mining bitcoin, it made no increases to its
computing capacity for mining altcoin.

~~~
alvern
It seems they started as a mining operation, then pivoted to sell shares or
futures called "Hashlets". The scam started when they oversold these Hashlets
and advertised to customers to use a cloud service instead of their physical
mining rigs.

~~~
cba9
Right. At one point in the complaint, they say the company had oversubscribed
its mining capabilities but _kept_ selling to 4x IIRC, which rather implies
that there was mining capability there in the first place (just much much less
than they were selling).

------
Kinnard
I'd be careful about the use of the term ponzi scheme.

I think it's a rather dangerous example of doublespeak:
[https://en.wikipedia.org/wiki/Doublespeak](https://en.wikipedia.org/wiki/Doublespeak)

Social Security exactly fits the definition of a Ponzi Scheme[1], has serious
sustainability issues[2], and could do far more damage to hundreds of millions
of people if it were to collapse.

No one is going after the people running Social Security though it is far more
dangerous.

[1] "operation where the operator, an individual or organization, pays returns
to its investors from new capital paid to the operators by new investors,
rather than from profit earned by the operator."

[2] Social Security is a Ponzie Scheme:
[https://en.wikipedia.org/wiki/Social_Security_(United_States...](https://en.wikipedia.org/wiki/Social_Security_\(United_States\)#Claim_that_it_is_a_Ponzi_scheme)

~~~
cjensen
The claim that Social Security is a Ponzi scheme is nonsense -- though it
seems to fit the definition at first glance, if you think through it far
enough you will see it does not fit.

Since a Ponzi scheme is defined as an "investment", it is therefore voluntary.
A Ponzi scheme can only obtain such volunteers if it promises each volunteer
investor more than it pays in. It therefore requires an ever-growing pool of
investors. Since there is a finite number of people on the planet, a Ponzi
scheme must fail at some point.

By contrast, Social Security is a mandatory scheme, and the pay-in and pay-out
can be dynamically adjusted to ensure that it remains solvent. In particular,
no guarantee is made that pay-out will exceed pay-in. Do not mistake the
impending Social Security deficit for an inherent outcome of the scheme. The
deficit could easily be fixed if politicians on both sides would stop
pandering to their bases.

~~~
Kinnard
The fact that it is compulsory while it would allow those who run it to
extract more to prevent a collapse, would do nothing to assuage the damage
were it to collapse.

~~~
mikeash
Likewise, the fact that it would do damage if it collapsed has nothing to do
with whether or not it's a Ponzi scheme.

