Definition of a Pyramid Scheme
The pyramid schemes deploy fraudulent business models, where the initiatives are earned by persuading new members to join the enterprise. Its operators utilise the money from the latest recruits to pay earlier members.
Finally, the program runs out of new members, halting payments. Afterwards, the entire system plummets, and most members lose funds.
Pyramid schemes existed earlier, with a critical illustration being Charles Ponzi’s 20th-century scam. Older investors earned from the subsequent collection of recruits.
Various jurisdictions have since the 1930s initiated measures to shield investors from such scams. The changes led the pyramid schemes to transform into multilevel marketing (MLM) by the mid-20th century.
Despite MLMs legality, the regulatory agencies limit them to avert potential abuse. The internet offers an effortless channel to spread camouflaged information regarding the scams, making them difficult to spot and crack down on.
Cryptocurrency Pyramid Schemes
They resemble conventional schemes, with the major difference being that they utilize cryptocurrencies. Scammers trick victims by exploiting their curiosity regarding digital coinslikes Ether or Bitcoin.
People are tricked into investing in a new coin and bringing in more individuals to boost returns. However, the project lacks value and disguises itself as initial coin offerings, mining pools, or investment clubs.
A June 2023 disclosure estimated that $7.8 billion was funnelled to the Ponzi scheme in 2022. Such illustrates the prevalence of scams.
Illustrations of Crypto Pyramid Schemes
OneCoin
In 2014-19, the initiative was portrayed as the groundbreaking crypto to rival Bitcoin. Investors were guaranteed significant returns, but a pyramid scheme emerged where referrals made profits.
While Ruja Ignatova disappeared in 2017, fellow co-founder Karl Sebastian has been serving a 20-year sentence since September last year.
Bitconnect
It was unveiled in 2016 and promised significant profits via an automated trading bot. However, a pyramid scheme involved new investor funds paying out profits.” Bitcoinnect’s token value fell following the scheme’s collapse, resulting in significant losses. In September 2022, Arcaro, its founder, was sentenced to 38 months behind bars.
Differences Between Genuine Crypto Projects and Pyramid Schemes
The major difference between the two is how revenue is generated. Value originates from service quality and innovation for real projects, while new investments are needed for pyramid schemes to keep running.
How Crypto Pyramid Schemes Function
The hook: Scammers generate a new investment opportunity or coin and hype it up via social media or influencers.
Recruitment: Once a person is in, scammers motivate them to bring in new members.
Initial payments: Despite good returns, the payouts originate from new members’ investments, not actual profits.
The bubble expands: The scheme grows bigger as more individuals join. Promoters motivate people to reinvest their profits.
The fall: Finally, the scheme runs out of recruits. The promoters vanish with most of the funds, leaving participants with losses.
Red Flags to Spot a Crypto Pyramid Scheme
The red flags to watch out for include:
- Promises of significant returns without risks.
- Emphasis on recruitment as the primary means of generating funds.
- The absence of transparency means a lack of clear information concerning how the money will be utilised.
- The absence of real products or services.
Protecting Oneself From Crypto Pyramid Schemes
- People should dig into the details, for instance, researching about the founders and how long the project has been around.
- People must seek transparency, for instance, by checking if a white paper explains the underlying technology.
- People should evade recruitment-focused opportunities.
- People must confirm where an actual product or service behind the investment exists.
Legal Consequences of Being Involved in Pyramid Schemes
One can encounter legal trouble for participating in pyramid schemes. Some of the regulations against the schemes include:
- Canada’s Competition Act
- The U.S’s Federal Trading Commission regulations.
- UK’s Trading Schemes Regulations
- South Africa’s Consumer Protection Act of 2008
What To Do After Being Scammed
- The scam should be reported to the local authorities or financial regulators.
- A person should seek legal and financial advice.
- One must learn from experience to avoid future scams.
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