scorecardresearchKeyFi-Celsius Crypto Dispute: What is a Ponzi scheme?

KeyFi-Celsius Crypto Dispute: What is a Ponzi scheme?

Updated: 12 Jul 2022, 09:35 AM IST

Ponzi schemes are fraudulent investment schemes that promise quick, easy returns on investments with little to no risk. You've probably heard of Bernard Madoff; we'll enlighten you on some other prominent ponzi schemes.

A Ponzi scheme is an unlawful and fraudulent investment scheme that guarantees rapid, simple, large returns on investments with little to no risk.

A Ponzi scheme is an unlawful and fraudulent investment scheme that guarantees rapid, simple, large returns on investments with little to no risk.

KeyFi filed a complaint against Celsius Network, alleging that the company had manipulated the cryptocurrency market and neglected to implement fundamental accounting controls to safeguard customer money.

Along with the court petition, Jason Stone, the founder and CEO of KeyFi (which was partially bought by Celsius) turned to twitter to detail the parties' dispute.

In his lawsuit, Stone referred to Celsius as a ponzi scheme and claimed that it defrauded him of prospective income in the hundreds of millions of dollars.

What is a Ponzi scheme?

A Ponzi scheme is an unlawful and fraudulent investment scheme that guarantees rapid, simple, large returns on investments with little to no risk. It is a specific kind of pyramid scheme in which the owner buys a small number of investors at the top of the pyramid who are initially given fantastic investment returns using money obtained from the second group of investors.

The second group is compensated with money received from a third group of investors; this process continues until the scheme's prospective investor pool is depleted. Sometimes, when investors get returns, they decide to hold onto their investments rather than making any cash withdrawals. The operator is also delighted and only presents them their earnings balance to uphold the illusion that the plan is delivering on its promises of returns.

The Ponzi scam is named after Charles Ponzi. He was famous for using deceit to induce individuals to make investments with their money. The earliest known Ponzi scam was allegedly operated by Charles Ponzi.

Bernard Madoff - a wall street veteran who pulled off the deadliest Ponzi scheme

Former senior statesman of Wall Street Bernard L. Madoff, who ran the biggest and maybe most disastrous ponzi scheme in financial history, became the face of a period of financial wrongdoings and blunders in 2008.

Pretending to trade stocks, Madoff was conducting a classic ponzi scam, promising constant, double-digit returns to his customers while really utilising funds from new investors to repay the money to older ones. The estimated $65 billion swindle involved victims from all social classes, from the poorest to the most powerful.

Financial experts hypothesised that the reason Mr. Madoff's ponzi scheme persisted for so long was because it had appealed more to the concerns than the greed of his clients: he promised them consistency in a market that was becoming more unpredictable, instead of jaw-dropping profits. And he always followed through, never failing to comply with a request for redemption and never coming up short on the profits he had predicted.

Global Ponzi schemes in recent times

BitConnect- A global Ponzi scam of USD 2.4 billion was allegedly orchestrated by the Indian resident who founded bitcoin investment platform BitConnect in february 2022.

GainBitcoin- More than 1 lakh people were conned by the GainBitcoin scam in different areas including Maharashtra and Punjab. This bitcoin ponzi scheme is estimated to have generated 1 trillion in bitcoin assets .

QuadrigaCX- A study by the Ontario Securities Commission in June 2020 revealed that QuadrigaCX, thought to be Canada's largest cryptocurrency exchange, was a ponzi scheme after millions of dollars vanished post the death of founder Gerald Cotten.

Unique Finance- Under the pretext of investing in Nasdaq, "Unique Finance," a Ponzi scam, has been operating since 2016 in Iran, Iraq, Afghanistan, and Yemen. The firm has received a warning from Finma and claims to be situated in Switzerland.

DC solar solutions- The SEC filed a federal lawsuit in January 2020 accusing Californians Jeff and Paulette Carpoff of running a $910 million ponzi scam. The pair persuaded investors to purchase solar generators by using their businesses, DC Solar Solutions Inc. and DC Solar Distribution Inc., even though at least half of them were never produced.

Saradha group- Operated by the Saradha group, this was arguably the most well-known Ponzi scheme in India. The scheme promised investors excellent returns and swiftly raised enormous sums of money by taking the money as a part of chit funds.

IMA scam- This is a Ponzi scam that was founded in Karnataka by Mohammed Mansoor Khan, and it ultimately unravelled in 2019. The organisation, which went by the name Monetary Advisory Group, used the promise of extremely high returns—between 36 and 64 percent on investments—to attract unsuspecting customers.

The Reserve Bank of India (RBI) has advised individuals to be cautious of ponzi schemes and scams since they can result in significant financial loss for an individual. To safeguard consumers from these types of schemes, RBI has also shared some details on ponzi schemes on their website that everyone should be aware of.

First Published: 12 Jul 2022, 09:35 AM IST