Over the years, more and more scams have begun to occur in the world of cryptocurrency. Which one is the worst of them all, however, has never been in doubt.
The Times describes OneCoin as “one of the biggest scams in history.” It’s second only to Bernie Madoff’s 20-year Ponzi scheme, discovered in 2008.
From 2014 through 2017, OneCoin managed to scam nearly 3.5 million people from 175 countries. It reportedly stole 4 billion dollars, though, according to a BBC podcast detailing the investigation of OneCoin, the real number is estimated to be closer to $15 billion.
Ironically, despite its being the biggest cryptocurrency scam ever, OneCoin wasn’t a cryptocurrency. It was a multi-level-marketing scheme. And that’s where its story gets truly frightening.
How Did People Not Realize that OneCoin was a Scam?
As the name Satoshi Nakamoto is now internationally known as the alias for the figure, or figures, behind Bitcoin, the face of Dr. Ruja Ignatova was internationally known for the innovation of OneCoin. Ignatova had all the impressive credentials required to make her appear as a noteworthy and trusted figure. She had a PhD in European private international law, and extensive work experience at McKinsey & Company, a global management consulting firm.
Ignatova knew how to play on appearances. In addition to being famous for founding OneCoin, she was also widely known for her deep red lipstick, elegant princess dresses, and expensive jewelry. Her glamor struck the wall-to-wall packed stadiums she lectured, as she spun the legend of the great new cryptocurrency she had created that would eventually overtake Bitcoin.
OneCoin was presented as the first transparent and centralized cryptocurrency, with a promise of great fortune to all those who had “missed out” on Bitcoin. By 2014, Bitcoin had already shown an 899,739.183% investment return to those who bought it back in 2010. These staggering numbers made Ruja’s promises regarding the success of OneCoin enticing.
Perspective OneCoin investors were smart enough by then to know that cryptocurrency relies on something called a blockchain, but, like most of us, they couldn’t say exactly how. This made it very easy for Ignatova to mislead them about not only the role, but even the existence of OneCoin’s blockchain. Blockchains by nature are decentralized. A “centralized cryptocurrency” is an oxymoron, not a real thing.
Ignatova played on people’s fear of missing out, or FOMO, about the next big score. Many of those interested in OneCoin knew about the people who became multi-millionaires effortlessly from Bitcoin – and wanted in on the action. All Ruja had to do was promise great returns, pitch impressive-sounding nonsense and look rich to get people to buy OneCoin. FOMO, in this case, looked a lot like greed.
The crypto community did try to fight back against Ignatova’s misinformation. They contacted and warned the investors that were being pulled into the scheme, to little success. However, some few did heed their warnings, and raised concerns with OneCoin representatives about blockchain specs and coin liquidity. They received the following response:
“OneCoin verifiably fulfils all criteria of the definition of a cryptocurrency. Our wish and aim is for the OneCoin to be traded to much further extent. Trading of our currency is being slowed down by authorities, regulators, and haters.”
OneCoin’s skillful defense explains why so many people were hesitant to believe the warnings issued their way. With Bitcoin’s success used as a kind of credential, the message turned investors’ doubts themselves into a kind of insidious internal enemy, standing in the way of their getting rich. Ignatova spent a great deal of effort emphasizing the fact that OneCoin would become so successful that it would eventually overtake Bitcoin as the number #1 cryptocurrency. It was “The Bitcoin Killer”.
How Did OneCoin’s Scam Work?
The biggest appeal of OneCoin was that it actually did make people “rich” quite quickly.
Anyone who bought OneCoin through the company’s server unknowingly sent their money straight to the organization’s private accounts. On screen, they’d see the value of the OneCoins they’d purchased in dollars. That value would climb very fast, keeping people excited and encouraging them to tell their families about this great investment opportunity.
Predictably, those dollar values were entirely fake.
OneCoin was a digital asset based on a centralized database (the polar opposite of a decentralized blockchain), so anyone with access to their server could easily change the value of the coin. When OneCoin promised that their package of OneCoins worth $118,000 would turn into a cool few million in three months – they delivered on their promise every time.
Of course, they were the only people in the world who assigned it that much value.
That is to say, people couldn’t liquidate Onecoins in exchange for real money. When they inquired about making withdrawals, they got this response: “Trading our currency is being slowed down by authorities, regulators, and haters.”
Ignatova stated on multiple occasions that OneCoin was applying to be listed on certified cryptocurrency exchanges like Coinbase. In fact, she assured her investors, OneCoin was developing an exchange of its own. This exchange would allow OneCoins to be traded for cash and be used to purchase real-world items.
To convince people of the substance of their fake exchange company, they sold OneCoin merchandise – such as T-shirts and mugs – purchasable with Onecoins. This gave people the joyous sensation of supposedly buying something with digital currency while OneCoin continued to accumulate money, inflate its numbers, and mislead them.
Pro Tip: More Coins Do Not Mean More Value.
Most people are aware that as more money is pumped into the economy, the value of that money decreases. That’s one of the causes of inflation, with which we are currently all too familiar.
That’s because when there is a finite or scarce amount of a commodity everybody wants, it becomes more valuable as time goes by because less and less is available after more and more gets bought up. Before the issuance of metal coins by rulers, many European countries would use salt as a medium of exchange. This resource was considered to be scarce, so when countries transacted with each other they respected its value. However, when a big salt mine was discovered and there was more of it to go around, merchants began to demand more salt in exchange for their products. People who did not discover these salt mines and therefore could not take a portion for themselves were suddenly left with savings worth far less.
(Incidentally, salt–”saline”–is the root of the word “salary.”)
When Ignatova boasted about billions of OneCoins being generated, she was essentially acting as if the basic rules of economics didn’t exist: as if less scarcity made something more precious. She claimed that the more coins that were out there, the more valuable they would become. Despite that being obviously illogical, investors were thrilled.
How Did OneCoin Hide All the Money they Scammed People Out Of?
So all of the new OneCoin “millionaires” had no way to convert their coins back into dollars, and were enthusiastically purchasing more and more of a worthless asset. That leaves the question of where the money they were making those purchases with ended up.
OneCoin promised that they were working on a solution to the “withdrawal issue,” as Ignatova’s bank accounts flooded with billions of dollars from all over the world. She was making so much, in fact, that banks began to freeze her accounts, suspicious that she was laundering money.
Ignatova hired a corporate lawyer, Mark S. Scott, who, for the low price of $50 million, set up a number of offshore investment accounts, The Fenero Funds, that were used to buy property and shares in various companies. All in all, Scott helped Ignatova launder $400 million dollars, all of which was eventually recovered.
Authorities all over the world, however, are still looking for the remaining $3.6 billion.
How OneCoin Got Caught
After the FBI realized what OneCoin was doing, the German authorities raided OneCoin’s offices.
But, in 2017, someone secretly told Ignatova that the FBI had issued a warrant for her arrest. She disappeared. There are rumors that Russian oligarchs were behind the tipoff, and helped her escape.
Her younger brother, Konstantin Ignatov, an associate of OneCoin, was arrested on March 6, 2019. He pled guilty to the charge of conspiracy to commit wire fraud. Ignatov’s sentencing has been delayed twice, the second time recently, on August 10, 2022, due to a plea deal.
In November 2019, Mark S. Scott was convicted of one count of money laundering and one count of conspiracy to commit bank fraud. His sentencing has also been delayed multiple times due to ongoing “medical tests and procedures.”
Many other associates of OneCoin were arrested and charged with similar crimes. Their sentences have also been delayed.
Ignatova was charged in absentia with wire fraud, securities fraud, and money laundering. On June 30, 2022, she was added to the FBI Ten Most Wanted list. A reward of $100,000 is being offered for any information leading to her arrest. Ignatova is also on Europe’s most wanted list, with €5,000 promised to anyone with crucial information that leads to her arrest.
Did OneCoin’s Victims Ever Get Their Money Back?
Since all of the OneCoin purchases were conducted on a database and not on a blockchain, they can technically be traced. The issue is that OneCoin’s leaders have had a multi-year head start: plenty of time to move that money around between banks, or even launder it through real cryptocurrencies.
The path to OneCoin’s victims’ money has become so convoluted that even if their money could be recovered, it would take years and a huge amount of resources and effort.
Remember: in real cryptocurrency transactions, if you send your crypto to the wrong wallet address or send someone money because they asked and promised you rewards in return, you should consider that money gone. Any transaction conducted on the blockchain is irreversible. That is a quality of the network that makes cryptocurrencies so secure, but it requires those using it to be extremely careful and responsible with their funds.
After all, the whole idea of cryptocurrency is that you are 100% in control and responsible for your money. While there’s no one to charge you commissions or fees, that means there’s also no bank or credit card company you can complain to that will give back the cryptocurrency that you lost.
The Moral of the Story: Don’t Be Greedy, Be Safe.
There are many cryptocurrency scams out there, and being familiar with them should be part of the research you do before investing in cryptocurrency.
Hackers and scammers make large profits by stealing cryptocurrency and deceiving people who are too impatient to conduct the necessary research. Fortunately, we can help make that easier for you.
Here is a list of ten (10) questions new crypto investors should be able to answer before they put down a cent of their hard-earned money:
- What is a cryptocurrency?
- Why do we need cryptocurrencies?
- How do you tell the difference between a fake cryptocurrency and a real one?
- What is a blockchain and how does it work?
- What is the significance of the connection between blockchains and cryptocurrency?
- How do you know what coins to invest in?
- How do you keep track of your cryptocurrency?
- How are cryptocurrencies taxed in your country?
- What is a cold wallet?
- What are transaction and gas fees?
Once again, you should be able to answer all of these questions easily from memory before you invest.
Don’t be greedy. Be safe.
Tax attorneys for cryptocurrency
The developing world of cryptocurrency can be a scary thing, even if–perhaps especially if–you think you understand it perfectly already. Having a knowledgeable advisor on hand is a smart play.
Fortunately, Moskowitz LLP has the expertise to make your transition into cryptocurrency investing easier and more profitable, especially from the tax perspective. Contact our office for further information.