Bitcoin is the new gold. The price of one Bitcoin has reached
over US$1,000, and with prices skyrocketing in this virtual
currency, there are now many online 'exchanges' and
'banks' set up to store Bitcoins for users.
However, fraudsters may be using some of these
'exchanges' as a front. In July 2013 the SEC charged
Trendon Shavers, from Texas, USA, with operating a Bitcoin Ponzi
scheme, and then in October 2013, another Hong Kong-based Bitcoin
Exchange collapsed amid allegations this was also a Ponzi
The SEC says that new and emerging technology is often used as a
lure for setting up a Ponzi scheme, and it appears Bitcoin is a
prime candidate for this. So we thought it would be interesting to
compare the original Ponzi scheme to its modern-day internet
equivalent, nearly 100 years on:
Charles Ponzi - 1920s
Bitcoin Ponzi - Trendon Shavers
Name of scheme
Securities Exchange Company. (Ironically, this name is very
similar to the Securities Exchange Commission('SEC') who
would later charge Shavers with his latter day Ponzi scheme)
Bitcoin Savings and Trust ("BTCST")
Promised source of earnings
Arbitrage; buying discounted postal reply coupons
in other countries and redeeming them at face value in the United
Arbitrage; allegedly selling Bitcoins to those who wanted to
buy large volumes "off the radar", presumably for
"My secret is how to cash the coupons. I do
not tell it to anyone ...Let the United States find it out, if it
"I have yet to come close to taking a loss on any
deal" "Risk is almost 0."
These schemes often attract new investors by
offering high interest rates
Offering returns of 50% within three months,
(This is the equivalent of 506% per annum at a time, when the
annual interest rate for bank accounts was just 5%.)
Offered 7% weekly returns.
(This is the equivalent of over 3700% per annum, when US
interest rates are close to Nil)
Why did it collapse?
Two critical newspaper articles caused a run on the scheme, but
Ponzi was able to pay out US$2 million and US$1 million on each
occasion to prevent collapse. However, a later Federal audit showed
Ponzi was overdrawn on his bank account, and several million in
SEC investigated and traced Bitcoin movements, and
alleged BTCST was a scam.
Value of losses
US$20 million in 1920 dollars
(US$240 million in 2013 dollars)
It is claimed that BTCST held 700,000 Bitcoins, then
worthUS$4.5 million (based on the average price of Bitcoin in
At date of publication, with one Bitcoin close to US$1,000,
700,000 Bitcoins are worth nearly US$700 million
The similar characteristics of both the 1920s Ponzi and the
recent Bitcoin Ponzi show that even in this internet age, people
are still taken in by fraudsters offering enormous returns. Perhaps
the meteoric rise of the Bitcoin has made investors believe such
returns are possible, but the old adage still holds - if it sounds
too good to be true, then it probably is. And a 7% return per week
certainly does sound too good to be true!
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This part will cover the legal position in relation to promotional materials and misleading and deceptive conduct.
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