Dante imagined fraudsters at the bottom of the eighth circle of Hell, just a ring up from traitors. There they wallow in a cesspool befouled in the crap they spewed in life. We securities lawyers are eager students of those lining up to get there. We don't lack subjects. Just as I'm finishing this, news breaks of a major fraud involving college admissions. That'll be for another day.
Rather, let's talk about OneCoin, whose tale has been unraveling for going on three years now. Last Friday, its acting CEO, Konstantin Ignatov, was arrested at LAX after a series of promotional appearances in the US. https://www.justice.gov/usao-sdny/press-release/file/1141986/download. At the same time, an indictment against his fugitive older sister, Ruja Ignatova, (aka "Cryptoqueen") was unsealed. https://www.justice.gov/usao-sdny/press-release/file/1141981/download. With that, it seems that OneCoin's days may finally be over. https://www.justice.gov/usao-sdny/pr/manhattan-us-attorney-announces-charges-against-leaders-onecoin-multibillion-dollar.
The wonder of OneCoin isn't that it's a Ponzi scheme. There are plenty of those. Nor that it took in billions and spanned the globe. There's always a bigger fraud. The wonder of it is that so many fell for it for so long, given how transparently fraudulent it was. Created in 2014, the first red flags were raised against it in Belgium in the summer of 2016. By September 2016, Scotland Yard was investigating it as "a digital currency scheme widely believed to be fraudulent." https://www.coindesk.com/london-police-investigate-onecoin-cryptocurrency-scheme. In 2017 and 2018, regulators, prosecutors and central banks in Italy, Uganda, Finland, Germany, Russia, Austria, India, Hungary, Belize, Luxembourg, Bulgaria, and Samoa all either warned against OneCoin or brought charges against people promoting it. China prosecuted almost 100 OneCoin promoters. See https://www.coindesk.com/tag/onecoin for a complete rundown. It is believed that over 3.3 billion euros were paid into the OneCoin enterprise, much of it despite all those warnings and charges.
The secret to OneCoin's growth was the army of promoters that proliferated around the globe to shill for it. OneCoin called those promoters its "members." All of them could, and many did, join OneCoin's multi-level marketing network. Multi-level marketing is nothing new. Tupperware calls it "relationship-based selling." You hold a Tupperware party and make a few bucks on the side selling plastic food containers to all your friends. You would think that eventually they'd have more containers than they would know what to do with, but no matter, that's how it works. OneCoin did the same thing. It offered "packages" with combinations of coins and tokens to its members, for cash. The members would get more coins and tokens for inducing their friends and relatives to buy a package. And so, sales spread far and wide, with early victims infecting later victims. OneCoin was like the flu, or more aptly the Momo Challenge.
An entire industry appeared to help the promoters along. There were "trader" packages for traders of every appetite, from lowly "starters" on up to "tycoon," "premium," "infinity," and "super combo." To help OneCoin traders advance from starter to super combo traders, they were offered webinars and YouTube video instruction from OneAcademy and OneLife. All this to support a simple concept, which Ruja described as follows:
Your main sales argument is: after 2 splits a member makes out of 5.000 USD 25.000 USD. You should be able to sell this ☺ . . . 2 splits is 5x your money. So of course, everybody who is greedy will go in with 5.000 USD.
Of course. Like the tango, a fraud requires at least two greedy persons.
But this gyre of activity swirled around a black hole -- the assertion that OneCoins and tokens were "real." The criminal complaints allege that they weren't, not even in that ephemeral reality that cryptocurrencies normally inhabit. Transactions in OneCoins were supposedly recorded in a private blockchain, except they allegedly weren't. Tokens were supposed to provide interests in mining operations that yielded more OneCoins, except that allegedly no real mining was done. Also, OneCoins only traded on one coin exchange, and then only briefly. That was Xcoinx.com. Go to it if you are curious, but don't expect much: it is currently, and has been for two years, "under maintenance." If you guessed that Xcoinx.com was also run by OneCoin, then you're catching on.
Of course, OneCoin's founders still distributed coins and tokens as if they were real, and posted prices and volumes as if there was real trading. But all of it -- the "ledger," the "mining," the "trading" -- was under OneCoin's exclusive control, and OneCoin was the only source of information about the entire program. OneCoin members were told their coins and tokens were busy at work reproducing like rabbits. As Ruja's undisclosed co-founder told her, "Get members to think that they are mining their OneCoin via crunching (exchanging) tokens for OneCoin. This storey [sic] is good as ppl will then not go super crazy and just try to sell tokens all the time." But what do you suppose happens when you regularly quintuple the supply of OneCoins?
That was the tipoff that OneCoin was probably bogus. The point of blockchain technology is that by widely distributing the ledger, a new architecture of trust is established. You don't need to trust anyone's honesty, because the blockchain self-authenticates all transactions, and independent mining nodes continually validate the blockchain as well as each other. True mining creates new coins slowly and only after a real expenditure of resources. Here, OneCoin controlled both the ledger and the mining nodes, as well as the sole coin exchange and all information flows, and it automatically created new coins at a calculated rate of over 43 million a month. OneCoin's members knew all of that, and still fell for it.
All of which is to say that OneCoin's members had no clue what they were doing, and that's why the OneFraud lasted as long as it did. The criminal complaint against Konstantin quotes his text messages saying "These ppl are idiots" and "as you told me, the network would not work with intelligent people ;)." The FBI agent swearing out the complaint infers from that "an understanding that OneCoin members had believed the misrepresentations made." Well, yes . . . but only because those members, at least insofar as blockchain was concerned, really were idiots! That there were so many of them proved OneCoin's ultimate undoing. By automatically generating OneCoins to meet the 5-to-1 sales pitch, Ruja and her partner flooded their members with so many OneCoins that any pretense of value eventually had to collapse. As Ruja told her partner in August 2015, "This is the implication from the big sales 4 weeks ago. 1.3 [billion] fake coins. We are fucked. . . ." The investigations started a few months later.
And yet, it all started so simply. As Ruja told her partner early on, "The so called 'mining' of coins is a concept that is very familiar in the industry and a story we can sell to the members." Or, as the Cryptoqueen put it more bluntly, "We are not mining actually -- but telling people shit." This prompted her co-founder to ask "how can this be investigated and found out?" Oh, oh -- I know the answer to that one! By reading your emails? As novelist Jeff Abbott once wrote, "Criminals are dumb as stumps. If they were smart they could go be investment bankers. Or judges." I daresay the eighth circle has room enough for all them too. But OneCoin was one con hiding in plain sight. If Ruja, Konstantin and their silent partner were "stumps," what should we call all those members who plopped down 3.3 billion euros thinking they'd automatically get back five times their money? We know at least that Dante makes no place for them in his Inferno. All their devils are here.