
Ponzi Schemes Using Virtual Currencies (2014) [pdf] - fludlight
https://www.sec.gov/investor/alerts/ia_virtualcurrencies.pdf
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whataretensors
"No minimum investor qualifications. Most legitimate private investment
opportunities require you to be an accredited investor. You should be highly
skeptical of investment opportunities that do not ask about your salary or net
worth."

This is a ridiculous regulation that prohibits class mobility as software eats
the world. Apparently being middle class means you are too stupid to realize
you are being scammed, but if you are rich you get first pick.

~~~
whataretensors
To further elaborate - a young student putting in $1000 in facebook seed round
would now be a millionaire. Not unthinkable for someone like a young Warren
Buffet. The government has successfully regulated the future to the top 1%,
while claiming it's for the public good.

~~~
mitchellst
OK sure, but it assumes that young student would be able to discriminate a
money-making investment from a money-losing one-- something the best VC's in
the business, who vet tech deals all day every day, struggle to do.

Imagine you repeal all accredited investment regs overnight. Which of these
seems likely:

\- everyone in america invests $1000 in a future facebook, ten years later
we're a nation of millionaires.

\- 10% of the middle class (a huge number of people) wholly or partially
cashes out retirement funds to put too much money into speculative early stage
startups chasing fantastic returns. They lose it. Kids lose college funds,
adults lose retirement funds, and we / society / government has to pick up the
tab when such people get too old to work.

The point is, it's easy to attack these regulations as a barrier to
opportunity and an unfair impediment to your right to do whatever you want
with your own money. That's fair as far as it goes, but you also have to
grapple with the real consequences of changing the policy. I have a hard time
with your analysis that accredited investment rules have no "public good."

Phrased differently,the view on the ground in middle America is this: lots of
middle-class people buy lottery tickets. Why do you suppose they do that?

~~~
whataretensors
Young Warren Buffet could.

I can go to Vegas and lose all my money on dice. There aren't laws to prevent
this. Why are there laws to prevent my ability to invest?

The regulation makes more sense as a way to keep the opportunities exclusive
to the powerful, while regulators get to claim a moral high ground.

~~~
wakamoleguy
In many places in the United States, there actually are laws to prevent
gambling.

~~~
lojack
That’s clearly a straw man argument.

A) The federal government doesn’t ban gambling.

B) As far as I’m aware there isn’t a single place in this country where
gambling is/isn’t allowed for those with specific net worths.

~~~
wakamoleguy
It's not a strawman. The parent is suggesting that we as a people have no
problem with allowing low-income or low-net-worth people to gamble (pointing
to the acceptance of Las Vegas as evidence). Then an equivalence is drawn
between gambling and securities investing. By pointing out that, in fact, 31
states make commercial casinos illegal[1], I am refuting the suggestion that
gambling is considered acceptable, which weakens the argument that securities
investing should be acceptable as well.

[1]
[https://en.wikipedia.org/wiki/Gambling_in_the_United_States](https://en.wikipedia.org/wiki/Gambling_in_the_United_States)

~~~
DennisP
Meanwhile 44 states run lotteries. Apparently gambling is acceptable in
principle, just not competition with the states' games.

[https://en.wikipedia.org/wiki/Lotteries_in_the_United_States](https://en.wikipedia.org/wiki/Lotteries_in_the_United_States)

~~~
wakamoleguy
I'm not sure it's that simple. There's a wide spectrum of types of gambling,
and equal variation in the laws regulating those types. Going to Vegas and
losing your money on dice sounds like commercial casinos, which is why I chose
to highlight it. Most states do have lotteries, as you point out, and gambling
where the proceeds go to charity is also legal in most states (see previous
sources in this thread). Once you start shifting the type of gambling, though,
you also get further from the analogy at hand. One way to look at it is that
providing revenue for education or charities could be seen as a public good
that outweighs the undesirability of gambling.

To take it back to the original argument, the question is then to decide where
investing sits on that spectrum. I am not sure, but I do think there are
enough reasonable differences between investing in securities, commercial
casino gambling, and lotteries to expect that they may have different
regulations.

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TaylorGood
Ponzi aside, let's say it's the greatest cryptocurrency idea. The SEC has
right to use their Howey Test to determine whether it's a security. Based on
1,2,4 below, is this not ICO's?

 _Under the Howey Test, a transaction is a security (or investment contract)
if:

1\. It is an investment of money

2\. There is an expectation of profits from the investment

3\. The investment of money is in a common enterprise

4\. Any profit comes from the efforts of a promoter or third party_

Based on their recent cyber division being announced, there is seemingly a
strong possibility of review/conviction if launching an ICO as a US citizen,
no? Soliciting an unregistered security carries 20yr prison term. Are dev's
factoring this as possible risk?

~~~
xdeqx366
As a crypto-developer working in the blockchain space, my primary company has
opted to do an ICO as part of its operations. The company has existing VC
backing of between 4-10 million, and the project would benefit from blockchain
- for one aspect. By no means is a new token necessary, but that fact seems to
have been side-stepped. The product exists, and perceivably the token could be
usable upon issuance...

I enjoy working on the crypto for the project, but I concern myself with the
eventual legalities of the ICO and how it might change the companies
incentives internally.

I have bills to pay, leaving on principle alone isn't viable for me, but, if
it could impact on my family, I will.

I am not a lawyer, and the answers don't appear to be black and white.

~~~
TaylorGood
Same. A quick chat with an attorney who is an SEC specialist basically said
"if it breathes" i.e. involves money that ICO is seen as a security. The SEC
putting together the digital division which covers cryptocurrency tokens is
part of what led to him saying this. Basically fish in a barrel.

It is in my opinion that any US-based ICO is now in a lottery as to whether
they get the SEC visit.

Not legal advice at all, just sharing an excerpt from a coffee chat.

~~~
passwordreset
Can you ask him how a virtual currency can also be a security? Tulips could be
a security, OK; but, didn't the Securities Exchange Act of 1934 exempt
currencies from being considered a security?

~~~
TaylorGood
Found this interesting, and relatable:

[https://www.sec.gov/news/press-
release/2014-111](https://www.sec.gov/news/press-release/2014-111)

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fmeyer
It happened in Brazil recently, where one company created a fake
cryptocurrency and used it on its Ponzi scheme.

source:
[https://translate.google.com/translate?hl=en&sl=pt&tl=en&u=h...](https://translate.google.com/translate?hl=en&sl=pt&tl=en&u=https%3A%2F%2Fcanaltech.com.br%2Fmercado%2Fesquema-
de-piramide-movimentou-r-250-milhoes-usando-criptomoeda-falsa-no-
brasil-100928%2F)

~~~
SippinLean
It specifically says that it was a multilevel marketing/pyramid scheme, not a
Ponzi scheme.

~~~
ravishi
Although I don't know the specifics of the scheme, it seemed like a pyramid
scheme while it was running, but turned out to be a ponzi scheme when it went
down. I would bet the people reporting don't know the difference between the
two. I didn't until now.

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qwtel
this is just the latest instalment in a never-ending series of mechanistically
declaring illegal anything the kids like.

renting out your flat to tourists for profit? upsets the neighbours, doesn't
comply with arbitrary laws written centuries ago -- illegal. using cabs that
you order through an app? threatens our cronies with something they are not
prepared to handle -- competition -- so must be illegal. buying and selling
magic internet money for fun and profit? could be interpreted as a security,
hence must comply with arbitrary rules that didn't prevent the biggest
financial crisis in history, but are otherwise supposed to be good for you --
ILLEGAL.

at least one can take pleasure in the knowledge that the same people who
enable and support these kinds of policies cry themselves to sleep with a
(paper) issue of the WSJ every night, wondering why there is no growth, no
inflation, 'millennialls' not buying diamonds, or cars, or houses, not having
kids, and most of all, not sufficiently paying into the ponzi scheme that is
their retirement plan, as well as any number of other issues more or less
related to, or caused by, their own stupidity and boundless self-interest.

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SippinLean
Seems that most of there are examples of _fraud_ instead of a Ponzi
specifically. They list a single example of _using_ Bitcoins as part of a
Ponzi scheme, but no examples of ICOs _being_ Ponzi schemes. Based on OP's
submission immediately prior I believe this is what they were trying to
suggest.

~~~
joe_the_user
Well they say: "We are concerned that the rising use of virtual currencies in
the global marketplace may entice fraudsters to lure investors into Ponzi and
other schemes in which these currencies are used to facilitate fraudulent, or
simply fabricated, investments or transactions."

Which reasonably straight forward.

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arno_v
Would be interesting if they would give examples of ICOs or other crypto
related investments which turned out to be Ponzi schemes or fraud.

~~~
fludlight
Investor Alert: Public Companies Making ICO-Related Claims [1]

SEC Exposes Two Initial Coin Offerings Purportedly Backed by Real Estate and
Diamonds [2] [3]

SEC Issues Investigative Report Concluding DAO Tokens, a Digital Asset, Were
Securities [4] [5]

SEC v. Trendon T. Shavers and Bitcoin Savings and Trust [6]

SEC v. Garza, GAW Miners, and ZenMiner [7]

[1] [https://www.sec.gov/oiea/investor-alerts-and-
bulletins/ia_ic...](https://www.sec.gov/oiea/investor-alerts-and-
bulletins/ia_icorelatedclaims)

[2] [https://www.sec.gov/news/press-
release/2017-185-0](https://www.sec.gov/news/press-release/2017-185-0)

[3] [https://www.sec.gov/litigation/complaints/2017/comp-
pr2017-1...](https://www.sec.gov/litigation/complaints/2017/comp-
pr2017-185.pdf)

[4] [https://www.sec.gov/news/press-
release/2017-131](https://www.sec.gov/news/press-release/2017-131)

[5]
[https://www.sec.gov/litigation/investreport/34-81207.pdf](https://www.sec.gov/litigation/investreport/34-81207.pdf)

[6] [https://www.sec.gov/litigation/complaints/2013/comp-
pr2013-1...](https://www.sec.gov/litigation/complaints/2013/comp-
pr2013-132.pdf)

[7]
[https://www.sec.gov/litigation/complaints/2015/comp23415.pdf](https://www.sec.gov/litigation/complaints/2015/comp23415.pdf)

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izabera
[https://en.wikipedia.org/wiki/OneCoin](https://en.wikipedia.org/wiki/OneCoin)

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nick_
The crypto-currency the world needs is one which detects pyramid/ponzi schemes
and fraud in general.

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baby
Ponzi schemes advertising themselves as ponzi schemes are fine right?

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rebuilder
This was published 2014/03/11 as far as I can tell, if anyone is wondering.

~~~
sctb
Thanks! We've updated the headline.

