INTRODUCTION

The blockchain technology has been hailed as a revolutionary innovation that promises to transform various sectors of the economy, such as finance, trade, health, and education. However, along with the opportunities and benefits, there are also risks and challenges that come with this new technology. One of the most prevalent and dangerous threats is the emergence of Ponzi schemes that exploit the hype and ignorance of the public to lure unsuspecting investors into fraudulent schemes. According to a recent report by Chainalysis, a blockchain analysis company, Ponzi schemes accounted for nearly 95% of all cryptocurrency-related crimes in 2020, amounting to over $2.9 billion in losses for victims. In this article, we will explain what Ponzi schemes are, how they operate in the blockchain world, what are the red flags and warning signs to look out for, how to protect yourself from falling victim to these scams, and what to do if you have been scammed or suspect a scam.

UNDERSTANDING PONZI SCHEMES

A Ponzi scheme is a type of fraud that pays returns to investors from their own money or the money of new investors, rather than from actual profits. The scheme relies on a constant inflow of new investors to sustain itself, and collapses when the recruitment of new investors slows down or stops. The name comes from Charles Ponzi, who ran a notorious scam in the 1920s in the United States, involving the sale of postal coupons. Ponzi schemes are also known as pyramid schemes, because they have a hierarchical structure, where the initial promoter or leader recruits other people to join the scheme, who in turn recruit more people, and so on. The people at the top of the pyramid receive the highest returns, while the people at the bottom receive little or nothing.

PONZI SCHEMES IN THE BLOCKCHAIN WORLD

The blockchain technology, which underlies cryptocurrencies such as Bitcoin and Ethereum, is a system of distributed ledger that records transactions in a secure, transparent, and decentralized way. The blockchain technology has many advantages, such as eliminating intermediaries, reducing costs, enhancing efficiency, and enabling innovation. However, it also has some drawbacks, such as complexity, volatility, scalability, and regulatory uncertainty. These factors create a fertile ground for Ponzi schemes to thrive in the blockchain landscape, as they exploit the lack of knowledge, regulation, and oversight of the technology and its applications. Some examples of Ponzi schemes that have operated in the blockchain world are:

• Bitconnect: Bitconnect was a cryptocurrency lending platform that promised investors up to 40% monthly returns, plus additional returns from a referral program. Bitconnect claimed to use a trading bot that generated profits from the volatility of Bitcoin. However, Bitconnect was exposed as a Ponzi scheme in 2018, when it abruptly shut down its platform, leaving investors with worthless tokens. Bitconnect is estimated to have defrauded investors of more than $2 billion.

• MMM Global: MMM Global was a reincarnation of a Russian Ponzi scheme that collapsed in the 1990s, losing millions of people their savings. MMM Global claimed to be a "social financial network" that offered investors 100% monthly returns, plus bonuses for referrals and testimonials. MMM Global used Bitcoin as its currency, and operated in various countries, especially in Africa. MMM Global collapsed in 2016, after running out of new investors. MMM Global is estimated to have defrauded investors of hundreds of millions of dollars.

• Loom Money: This is a Ponzi scheme that targeted investors in Nigeria, which is one of the largest and fastest-growing cryptocurrency markets in Africa. It operated as a WhatsApp group, where participants were required to pay a fee of 1000 naira to join the group and then invite others to do the same, in order to receive a payout of 8000 naira when they reached the top of a queue. It promised a 700% return on investment, but it collapsed in 2019, after failing to pay out the participants.

RED FLAGS AND WARNING SIGNS

Ponzi schemes in the blockchain world may have different names, features, and strategies, but they share some common characteristics that can help investors to identify and avoid them. Some of the red flags and warning signs are:

• Unrealistic and guaranteed returns: Ponzi schemes often promise investors high and consistent returns, regardless of the market conditions, risks, or performance. They also claim to have a secret or proprietary system, algorithm, or technology that enables them to generate such returns. However, these claims are usually false and unsustainable, as no legitimate investment can guarantee such returns in the volatile and uncertain blockchain world.

• Lack of transparency and verifiability: Ponzi schemes often operate in a secretive and opaque manner, hiding or falsifying information about their founders, team, location, registration, license, audit, or source of income. They also avoid or discourage investors from asking questions, verifying facts, or seeking independent advice. They may use complex or technical jargon, or appeal to emotions, to confuse or manipulate investors. However, these tactics are usually meant to conceal the true nature and operation of the scheme, as legitimate blockchain projects should be transparent and verifiable by anyone.

• Dependence on recruitment and referrals: Ponzi schemes often rely on a network of promoters, affiliates, or influencers, who recruit new investors into the scheme, in exchange for commissions, bonuses, or rewards. They also encourage or require existing investors to recruit more people, or to reinvest their returns, to keep the scheme going. They may use social media, online forums, or events, to spread positive testimonials, reviews, or propaganda, about the scheme. However, these practices are usually indicative of a pyramid structure, where the returns are derived from the money of new investors, rather than from actual profits.

PROTECTIVE MEASURES FOR INVESTORS

Investors can take some proactive and preventive measures to protect themselves from falling victim to Ponzi schemes in the blockchain world. Some of the protective measures are:

• Educate yourself: Investors should educate themselves about the blockchain technology, its applications, and its risks, before investing in any project or platform. They should also research and verify the background, reputation, and legitimacy of the project or platform, its founders, team, partners, and investors. They should also check the reviews, ratings, and feedback, from other users, experts, and regulators, about the project or platform. They should also be wary of unsolicited offers, recommendations, or endorsements, from unknown or untrusted sources.

• Diversify your portfolio: Investors should diversify their portfolio, by investing in different types of assets, projects, and platforms, that have different levels of risk, return, and correlation. They should also allocate only a small portion of their portfolio, to high-risk and speculative investments, such as cryptocurrencies and blockchain projects. They should also avoid putting all their eggs in one basket, or investing more than they can afford to lose.

• Secure your wallet: Investors should secure their wallet, by choosing a reputable and reliable wallet provider, that offers features such as encryption, backup, recovery, and multi-signature. They should also protect their wallet, by using a strong password, a PIN code, a biometric authentication, or a hardware device. They should also keep their wallet, private keys, and recovery phrases, safe and confidential, and never share them with anyone. They should also be careful of phishing, malware, or hacking, that may compromise their wallet or transactions.

REPORTING AND TAKING LEGAL ACTION

Investors who have been scammed or suspect a scam, should report and take legal action, to recover their losses, and to prevent further harm to themselves and others. Some of the steps to report and take legal action are:

• Collect and preserve evidence: Investors should collect and preserve evidence, such as screenshots, receipts, statements, contracts, emails, messages, or recordings, that show their involvement and transactions with the scam project or platform. They should also document their personal details, such as name, address, phone number, email, bank account, or wallet address, that may be relevant to the case.

• Contact the authorities: Investors should contact the authorities, such as the police, the financial regulator, the consumer protection agency, or the cybercrime unit, in their jurisdiction, and file a complaint or a report, with the evidence they have collected. They should also cooperate with the authorities, and provide any additional information or assistance, that may be required for the investigation or prosecution of the case.

• Seek legal advice: Investors should seek legal advice, from a qualified and experienced lawyer, who specializes in blockchain, cryptocurrency, or fraud cases. They should also consult with the lawyer, about the possible options, remedies, and outcomes, of pursuing a legal action, against the scam project or platform, or its promoters, affiliates, or influencers. They should also be aware of the costs, risks, and challenges, of taking a legal action, especially across different jurisdictions, where the laws and regulations may vary.

CONCLUSION

Ponzi schemes are a serious and widespread problem in the blockchain world, that can cause significant losses and damages to investors, and undermine the trust and reputation of the blockchain technology and its applications. Investors should be vigilant and cautious, and educate themselves, diversify their portfolio, secure their wallet, and report and take legal action, to shield themselves from these scams. Investors should also remember the golden rule of investing: if it sounds too good to be true, it probably is.