The infamous swindler Charles Ponzi inspired the term "Ponzi scheme". It describes a type of financial scheme in which participants are led to believe that they can make large profits quickly. The scheme tricks investors into believing that the profits are coming from legitimate business activities, when in fact they are coming from the contributions of new investors.
The basic idea behind this financial scam is to pay early investors profits from new investors' money instead of paying out profits from the business. A pyramid scheme works in a similar way by recruiting new participants whose deposits are paid out to earlier participants. The main difference is that in a Ponzi scheme the scammers pretend to invest in a business, whereas in a pyramid scheme the income is generated by recruiting new members. This is feasible as long as new investors join. However, the system ultimately fails when the promised profits are no longer paid out. This leads to a cycle that collapses because the operator cannot attract enough new investors.
Historical roots and importance in the crypto space
In order to pay rewards to current investors, Ponzi schemes constantly seek to attract new investors. The investment is usually presented as a low-risk, high-return option. Initial investors are rewarded, giving the impression that the business is thriving. Ponzi schemes are characterised by the absence of a legitimate investment vehicle or business.
Ponzi schemes have been reported in various forms throughout history. However, they gained worldwide popularity in the early 20th century with Charles Ponzi's fraud. Ponzi schemes are illegal because they are dishonest in reporting the sources of funds and cause great financial damage. In traditional finance, the Bernie Madoff incident is the largest high-profile Ponzi scheme on record. Madoff ran the scheme for decades until it collapsed in 2008 in the wake of the global financial crisis. The total loss was estimated at $65 billion.
OneCoin stands out as one of the largest Ponzi schemes observed in the cryptocurrency industry. The scheme was orchestrated by Ruja Ignatova, also known as Cryptoqueen. Operating from 2014 to 2019, OneCoin attracted a significant number of investors, reportedly raising a total of $5.8 billion. OneCoin positioned itself as a disruptive innovation, the "Bitcoin killer". Behind the façade of this supposed business was a multi-level marketing scheme. Members were paid cash and OneCoin tokens for bringing in new investors. OneCoin lacked its own blockchain, rendering the coins received or purchased worthless as they were not backed by the promised digital asset technology. Eventually, the US government stepped in and brought charges against OneCoin's leaders. However, Ruja Ignatova disappeared before she could be prosecuted by the authorities.
