Authorities on Friday announced the arrest of one of the founders of Bulgarian cryptocurrency business OneCoin, saying it was nothing more than a pyramid scheme designed to defraud users. While crypto scams are disturbingly common, according to a Department of Justice press release, prosecutors allege that this particular fraud ran into the billions of dollars.
OneCoin chief Konstantin Ignatov faces a charge of conspiracy to commit wire fraud, which could carry a maximum sentence of 20 years in prison, while his older sister Ruja Ignatova is at large and faces several charges, including wire and securities fraud and money laundering. If convicted, those charges could land her up to 85 years in prison. A third defendant, Mark Scott, stands accused of helping the two launder more than $568 million in illicit proceeds.
The DOJ wrote that OneCoin operated more or less as a classic pyramid scheme, with members being paid commissions to bring in new members and grow the network:
OneCoin Ltd. operates as a multi-level marketing network through which members receive commissions for recruiting others to purchase cryptocurrency packages. This multi-level marketing structure appears to have influenced rapid growth of the OneCoin member network. Indeed, OneCoin Ltd. has claimed to have more than 3 million members worldwide, including victims living and/or working within the Southern District of New York. OneCoin continues to operate to this day.
OneCoin claimed that it was operating a cryptocurrency that was generated through traditional “mining” — a network of computers solving complicated maths problems to process transactions and generate new tokens — but the DOJ wrote that “the value of OneCoin is determined internally and not based on market supply and demand; and OneCoins are not mined using computer resources.” (As Quartz noted, the operators fooled investors in part by deploying their best crypto jargon.)
The DOJ alleged that between Q4 2014 and Q3 2016 alone, the scammers pulled in nearly $5 billion in transfers to OneCoin-controlled bank accounts, with “profits” of over $4 billion. Much of the illicit earnings came from China.
In one email, the DOJ further claimed, Ignatova described a possible “exit strategy”: “Take the money and run and blame someone else for this.”
While Ignatov was detained at Los Angeles International Airport, Ignatova has yet to be found.
Authorities in at least 16 countries have advised potential investors to be wary of OneCoin since at least 2016, according to industry publication CoinDesk. Members of the pyramid scheme have been arrested and/or charged in China and India, while financial regulators have gone after its payment processors and trading network.