{"id":1869,"date":"2018-03-12T10:20:56","date_gmt":"2018-03-12T10:20:56","guid":{"rendered":"https:\/\/atozcrypto.org\/?p=1869"},"modified":"2018-03-12T10:36:38","modified_gmt":"2018-03-12T10:36:38","slug":"the-rise-of-cryptocurrency-ponzi-schemes","status":"publish","type":"post","link":"https:\/\/atozcrypto.org\/the-rise-of-cryptocurrency-ponzi-schemes\/","title":{"rendered":"The Rise of Cryptocurrency Ponzi Schemes"},"content":{"rendered":"

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Scammers are making big money off people who want in on the latest digital gold rush but don\u2019t understand how the technology works.<\/h4>\n

Last month, the technology developer Gnosis sold $12.5 million worth of \u201cGNO,\u201d its in-house digital currency, in 12 minutes. The April 24 sale, intended to fund development of an advanced prediction market, got admiring coverage from\u00a0Forbes<\/i><\/a>\u00a0and\u00a0The Wall Street Journal<\/i><\/a>. On the same day, in an exurb of Mumbai, a company called OneCoin was in the midst of a sales pitch for its own digital currency when financial enforcement officers\u00a0raided the meeting<\/a>, jailing 18 OneCoin representatives and ultimately seizing more than $2 million in investor funds. Multiple national authorities have now described OneCoin, which pitched itself as the next Bitcoin, as a Ponzi scheme; by the time of the Mumbai bust, it had already moved at least\u00a0$350 million<\/a>\u00a0in allegedly scammed funds through a payment processor in Germany.<\/p>\n

These two projects\u2014one trumpeted as an innovative success, the other targeted as a criminal conspiracy\u2014claimed to be doing essentially the same thing. In the last two months alone, more than two dozen companies building on the \u201cblockchain\u201d technology pioneered by Bitcoin have launched what are known as Initial Coin Offerings to raise operating capital. The hype around blockchain technology is turning ICOs into the next digital gold rush: According to the research firm Smith and Crown, ICOs\u00a0raised $27.6 million<\/a>\u00a0in the first two weeks of May alone.<\/p>\n

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Unlike IPOs, however, ICOs are catnip for scammers. They are not formally regulated by any financial authority, and exist in an ecosystem with few checks and balances. OneCoin loudly trumpeted its use of blockchain technology, but holes in that claim were visible long before international law enforcement took notice. Whereas Gnosis had experienced engineers, endorsements from known experts, and an operational version of their software, OneCoin was led and promoted by known fraudsters waving fake credentials.\u00a0According to a respected blockchain engineer<\/a>\u00a0who was offered a position as OneCoin\u2019s Chief Technology Officer, OneCoin\u2019s \u201cblockchain\u201d consisted of little more than a glorified Excel spreadsheet and a fugazi portal that displayed demonstrably fake transactions.<\/p>\n

And yet, OneCoin attracted hundreds of millions of dollars more than Gnosis. The company seems to have targeted a global category of aspirational investors who noticed the breathless coverage and booming valuations of cryptocurrencies and blockchain companies, but weren\u2019t savvy enough to understand the difference between the real thing and a sham. Left unchecked, this growing crypto-mania could be hugely destructive to one of the most promising technologies of the 21st century.<\/p>\n

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This danger exists in large part because grasping even the basics of blockchain technology remains daunting for non-specialists. In a nutshell, blockchains link together a global swarm of servers that hosts thousands of copies of the system\u2019s transaction records. Server operators constantly monitor one another\u2019s records, meaning that to steal money or otherwise alter the ledger, a hacker would have to compromise many machines across a vast network in one fell swoop. Even as the global banking system faces\u00a0relentless cyberattacks<\/a>, the more than $30 billion in value on Bitcoin\u2019s blockchain has proven essentially immune to hacking.<\/p>\n

That level of security has potential uses far beyond digital money. Introduced in July of 2015, a platform called Ethereum pioneered the idea of more complex and interactive applications backed by blockchain tech. Because these systems can\u2019t be altered without the agreement of everyone involved, and maintain incorruptible records of every change, blockchains could eventually streamline sensitive, high-value networks ranging from health records to interbank transfers to remote file storage. Some have called the blockchain \u201cCloud Computing 3.0.\u201d<\/p>\n

Using most of these blockchain applications will require owning the digital currencies linked to them\u2014the same digital currencies being sold in all these ICOs. So, for example, to upload your vacation photos to the blockchain cloud-storage service Storj will cost a few Storj tokens. In the long term, demand for services will set the price of each blockchain project\u2019s token.<\/p>\n

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