We look at the 10 top bitcoin fiascos, related to money laundering, funding criminals, extortion, Ponzi and MLM, drug dealing, kidnapping, dodgy banks and the fall of Mt.Gox. They have helped shape bitcoin into what it is today: well regulated, accessible and safer than ever.
As Bitcoin marches on to becoming more publicly accessible, regulated, and acceptable to the general public, it is sometimes good to look back on how we got to where we are today. Throughout it's rather short but storied history, Bitcoin has managed to attract a lot of attention. Not only from people looking at the potential applications for decentralized currency, but likewise those looking to make a quick buck. In this article we examine what we believe to be the 10 biggest fails in Crypto.
#10: Money laundering and funding criminals with illegal Bitcoin exchanges
Money laundering is a large problem in the modern era. It cuts tax revenue and it helps facilitate the growth of large-scale illegal enterprises.
It's precisely for these reasons that the operators of the Bitcoin exchange Coin.MX, Anthony R. Murgio and Yuri Lebedev, are facing charges of operating an illegal exchange while the former of the two is also being hit with money laundering charges. As the FBI claims, Murgio knowingly exchanged Bitcoins for individuals he knew to be involved in illegal activities. Murgio faces up to 35 years in prison, while Lebedev faces up to ten years.
New York Times writes:
”Federal authorities contend that Mr. Murgio’s company, Coin.mx, allowed online criminals to illegally exchange the digital currency bitcoin for cash as part of a money-laundering scheme.”
#9: Extortion demands in Bitcoin
ISIS in recent years has pervaded media, the radical terrorist organization has become a major international threat. Supporters of the regime of Bashar Al-Assad, which is currently fighting the ISIS calling themselves the Syrian Electronic Army (SEA), has been reported sending threatening emails containing personal information of the recipient, demanding a ransom in Bitcoin to be paid, or else one of the recipients family members will be murdered.
However, according to reports, it seems likely that this is all an elaborate scam, basing itself in social engineering and the fear that the media has instilled. According to a press release of the Justice Department of the United States of America, two of the members of the SEA have been added to the most wanted list of the FBI.
In a press release dated March 22, 2016, Assistant Attorney General Carlin says that some of the activity of the SEA seeks to harm the economic and national security of the US and that members of SEA have used extortion to extract money from “law-abiding people all over the world”.
#8: Ponzi and MLM schemes
Cryptocurrencies have hurdles to climb over - thanks to previous scams, and companies like OneCoin do not help. The purported cryptocurrency based out of Bulgaria has been revealed by an insider source as a massive Ponzi scheme operated by an individual with ties to local criminal circles. Supported by a web of paper companies, created to add legitimacy to OneCoin, the pyramid scheme seeks to entice unaware and gullible individuals.
The Financial Supervision Commission has issued a warning in regards to the company which broadly states that the FSC informs investors and consumers that acquisition, trading and payment of OneCoin are not governed by existing EU and national laws on capital markets.
Eric Grill, CEO of Coinoutlet, says to Cointelegraph:
“OneCoin doesn't need a blockchain since it is closed source and the only place to buy and sell it is via their own internal exchange the OneCoin exchange. While they like to claim they are similar to Bitcoin this is not true in almost every sense.”
#7: Kidnappers and hardcore criminals
It seems terrorists are not the only hardline criminals utilizing Cryptocurrencies for their own ends.
The family of billionaire Pearl Oriental Oil chairman Wong Yuk-Kwan were asked to pay his Taiwanese kidnappers ransom in Bitcoin after they threatened to “dig out the eyeballs or chop off the legs” of Yuk-Kwan, The Standard HK reports.
South China Morning Post reports that the kidnappers demanded HK$ 70 million and the wife of Mr. Yuk-Kwan originally ordered to pay the money in mid-october through a Bitcoin account.
#6: Drug dealing online
As the popular saying about Bitcoin goes "It's only used to buy drugs over the internet!", it would be an oversight not to mention drugs in this article. Following the closure of the Silk Road and Ross Ulbricht's incarceration, a string of wannabe virtual Scarfaces have cropped up. One such individual, Maximilian S. went by the name Shiny Flakes as he sold around 4 million British Pounds worth of tablets, hashish, and LSD from his mother's flat.
Although, there is no clear consensus regarding the Bitcoin Community’s stance over drugs bought via the cryptocurrency, this man’s sentencing is one of a plethora of reasons where drug use advocates support legalizing drug sales on the deep web in order to protect drug users who maybe then able to access safer and of higher quality “merchandise” than having to trade with street dealers.
#5: Dodgy next generation “banks”
NextBank's press release might be one of the most fanciful tales ever spun. The company, which claims to be a next-generation bank, offers you the ability to store value in 135 currencies, precious metals and, of course, cryptocurrencies. NextBank claims to offer a wide variety of services like international debit cards and escrow service, in reality, it claims that it will offer ALL the services you can think a bank can offer. On top of this, it will also have a help desk in 50 and more languages.
On closer investigation however, it turns out that NextBank is only out to scam gullible investors and does not in fact have the infrastructure, staff, or know-how to to deliver on its grandiose promises. Yet another in a long-line of companies that only serve to damage Cryptocurrencies’ reputation.
John Biggs, Techcrunch, in his piece about NextBank concludes,
“Unfortunately this is a scam. Even if it wasn’t, it would be a piss-poor investment since it fails before it begins and will never exist. It is, however, a good way to make your money not exist.”
Techcrunch reports having been at the receiving end of legal threats after the coverage went online.
#4: Unlicensed Online Gambling Dens
Gambling has always been in a legal grey area, and online platforms for the activity are no exception.
Bryan Micon, operator of the closed down bitcoin-fueled poker site Seals With Clubs, has been charged by the Nevada Attorney General with operating an unlicensed gambling enterprise, and faces up to ten years in prison and a US$50,000 fine. Interestingly enough it seems he is willing to try an unconventional and as-of-yet untested defense strategy, arguing that Bitcoin is not the same as Currency in the context of gambling law.
According to information available from Nevada’s Attorney General’s website, the investigation into Micon is unique as it is believed to be the first state-level criminal prosecution of an illegal poker website operating with Bitcoin. In a statement released on the Attorney General’s website, AG Burnett, Chairman of the Nevada State Gaming Control Board said that his organisation was “pleased to work” with the office of the Attorney General to stop an interactive gaming website operating without a gaming license.
#3: Bitcoin high priests who fell hard
Charlie Shrem was originally charged with a range of offenses including money laundering conspiracy, operating unlicensed money transmitting business and failing to file suspicious activity reports. The case was based off Shrem and his co-defendant, Robert Faiella allegedly attempting to sell over US$1 Mln. in Bitcoin on the Silk Road.
Shrem is well known in the cryptocurrency community. He was CEO of BitInstant, a Bitcoin exchange company, before taking a position with the Bitcoin Foundation, a Bitcoin advocacy and trade group. After being charged for money laundering in the Silk Road scandal however Shrem decided to resign his post with the Bitcoin Foundation.
In the end, he opted to take a plea deal, feeling that due to previous rulings in similar cases he was out of luck.
“I screwed up,” Shrem told U.S. District Judge Jed Rakoff in his guilty plea according to Bloomberg.
#2: The Silk Road Fiasco
The seizure of Silk Road, the trial of Ross Ulbricht, and the revelation that a former DEA Agent stole over 700,000 during the case has become somewhat of a phenomenon.
As one of the few cases from Crypto to have broken major headlines several times, it comes as no surprise that it is so high on our list. More has been said on this than can ever be condensed in a single article, but it is worth pointing out that unsurprisingly shutting down a single platform does little to stop the ever flowing river of drugs pouring into people's lives.
Adding onto this a trial that in it's absurdity would make Kafka laugh hysterically simply adds to the absurdity.
#1: The Mother of All Bitcoin Exchange Frauds
As a singular event, nothing has done more to damage Crypto than the fall of Mt.Gox. Not only did the fraud committed by former Mt. Gox CEO Mark Karpeles lead to Japan turning it's back on Bitcoin for quite awhile, it led to increased regulation and growing difficulty of operation for any company involved in the industry. While originally masquerading as simply internal mismanagement and attacks by hackers, it has since been revealed that it is likely a fraud masterminded by Karpeles that caused the company to go belly-up.
Aleksandar Matanovic, CEO of Serbian Bitcoin exchange, ecd.rs, says to Cointelegraph:
“Short term, it made bitcoin look bad and damaged its image in the public. Long term, maybe it was even a good thing. We needed something like that to become aware of all the risks associated with keeping bitcoins on an online exchanges. In 2013 we learned that one can earn a lot with bitcoin, then, at the beginning of 2014, we learned that one can lose just as much. While MtGox collapse might have slowed bitcoin adoption a bit, it has opened our eyes and made us more cautious.”
At its peak, more than two-thirds of all Bitcoin transactions ran through Mt. Gox’s exchange, the fail of the exchange truly reverberated throughout cryptospace and will forever serve as both a reminder and a black-stain on the industry's record. In a Telegraph article Yoshimitsu Homma, head of Japan Digital Money Association, called Mr Karpeles' arrest a “good news".