In one of our recent posts, we addressed the topic of cryptocurrency fraud, outlining the methods used by crypto-fraudsters. One of the most common methods of theft was identified as a scam, which involves arousing the victim's interest in investing by promising quick and easy profits. Today's post will focus on a somewhat similar mechanism, which also involves instilling in potential victims the feeling of the possibility of quick and easy profit by investing their funds in highly advertised projects, such as pyramid schemes.
How does a financial pyramid work?
Financial fraud based on pyramid schemes has been known to global markets for many years; it was only a matter of time before they appeared in the cryptocurrency market. These schemes most often operate using the so-called Ponzi scheme, which involves paying out profits to previous investors from funds contributed by subsequent investors. This mechanism always leads to bankruptcy of the entire structure when the inflow of new investors is significantly reduced or blocked. It is not a mechanism based on economic principles, according to which profit is generated through the flow of money from the sale of products or services. The goal of pyramid scheme organizers is not to produce any goods or provide services; even if they do offer anything, it is only a sham. Their primary goal is to attract new investors willing to invest their funds in a project promising high returns. The only entities that actually profit from such a venture are its organizers and the initial investors who managed to withdraw their funds while they could still be covered by the capital of new investors.
How to recognize a financial pyramid scheme in the cryptocurrency market?
Pyramid schemes often operate under the guise of legitimate, promising businesses. This makes the venture seem not only highly profitable but also safe to potential investors, which is why they are eager to invest their funds. A classic example of this type of venture is the "OneCoin" financial pyramid scheme, which operated between 2014 and 2017. Approximately 3 million people were harmed, with investor losses totaling approximately $5 billion. Investors received financial incentives for each participant invited to the scheme, while the pyramid's creators, by promoting the scheme on YouTube and their websites, created the illusion of legitimacy and reliability. Forecasts were presented, assuring that the new cryptocurrency would "dethrone" Bitcoin. In reality, it didn't even have its own blockchain, and transactions using it were only possible on websites associated with the project.
Therefore, if you want to avoid investing your funds in a financial pyramid, you should keep in mind a few helpful tips.
First and foremost, the mere promise of a large profit in a very short time should raise our suspicions. It's important to remember that investing in cryptocurrencies carries the same risk as investing in the stock market, so guaranteeing a profit should raise suspicion.
As mentioned earlier, it's highly probable that a pyramid scheme is a venture in which someone offers higher profits for persuading more people to join the project. This is the mechanism upon which pyramid schemes are based, so such a practice should seem suspicious to investors.
We should also be wary of pseudo-cryptocurrencies, which are not available on the open market but are controlled by private companies, and payment options are limited to selected websites. Investing in cryptocurrencies that don't allow for storage in a cryptocurrency wallet, but can only be stored on a given company's website, is also discouraged.
Before investing your virtual funds, it's also worth conducting thorough research to gather information about the venture you intend to invest your cryptocurrency in. I encourage you to stay up-to-date with current reports issued by the Financial Ombudsman, the Office of Competition and Consumer Protection, and the Polish Financial Supervision Authority. These reports, in addition to informing about ventures that officially have the status of a pyramid scheme, also identify projects whose operations suggest a high probability of being pyramid schemes.
Criminal liability of organizers of pyramid schemes
The Penal Code (hereinafter referred to as the Penal Code) does not strictly regulate the crime of organizing a pyramid scheme. Criminal liability for the creator of a pyramid scheme is based on Article 286 § 1 of the Penal Code, which concerns the crime of fraud. Creating a pyramid scheme is inextricably linked to the need to attract new investors, and therefore leads others to disadvantageously dispose of their property through misleading information, which fulfills the provisions of the aforementioned article. It is worth noting that, in addition to the creators of pyramid schemes, individuals who encourage others to invest in such a project are also subject to criminal liability under Article 286 § 1 of the Penal Code. Under this provision, the perpetrator may be sentenced to imprisonment for a term ranging from six months to eight years.
It should also be added that the idea of introducing a separate provision into the Penal Code concerning the offense of creating pyramid schemes is still current. Such changes, as indicated in the Supreme Audit Office's report (KBF.430.014.2019, Registration No. 181/2019/P/18/112/KBF), are motivated, among other things, by the fact that currently, "injured parties are required to report to the Penal Code to hold anyone criminally liable, which usually occurs at the end of a pyramid scheme's operation or after its collapse, when recovering the deposited funds is impossible." Therefore, introducing such a provision would increase the chances of investors recovering their funds. Let's hope that legislators will implement the appropriate changes as soon as possible.
This alert is for informational purposes only and does not constitute legal advice.
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