The United States government is investigating an alleged $45 million-plus Ponzi scheme that targeted investors in the financial technology space, the SEC said on October 20th.

The Alleged Scheme

According to the SEC’s complaint, which was made public last week, the alleged scam, dubbed “Mikado,” began in June 2017. The SEC claims that Mikado and its promoters, including an employee of Cambridge Global Solutions, a wholly owned subsidiary of Cambridge Enterprise Inc., sought to profit from the growth in popularity of so-called “initial coin offerings” (ICOs).

ICOs are a form of crowdfunding, where an “initial coin offering” is used to “fund… new digital currencies, and/or to fund the development of new digital currencies.” In return for their investment, ICO participants are promised compensation in the form of more cryptocurrency, company shares, or physical commodities (like gold or platinum coins).

The complaint alleges that Mikado and its co-conspirators, including Cambridge Global Solutions, used a “pump-and-dump” scheme to enrich themselves at the expense of unsuspecting ICO investors. According to the SEC, between June and October 2017, Mikado and its co-conspirators raised nearly $13.5 million from at least 150 investors across North America and Europe. The funds raised during this time were used to purchase over 100,000 Bitcoin (BTC), and over $7 million in altcoin and/or virtual currency.

The Alleged Collusions

The U.S. Attorney’s Office in New York City has reportedly begun an investigation into the case, which the SEC says involves potential securities law violations and/or wire fraud. The SEC also alleges that Cambridge Enterprises’ Chief Compliance Officer and Chief Ethics Officer, as well as three senior executives of the company, were aware of the alleged fraud and failed to stop it.

The SEC points out in its complaint that Mikado and its co-conspirators used a combination of fraudulent and misleading sales materials and communications with investors to dupe them into buying Bitcoin and other cryptocurrencies. For example, the SEC says that investors were told that (i) Bitcoin was under a significant amount of pressure from speculators and short-term traders; (ii) “high-quality” crypto exchanges were demanding large premiums for Bitcoin and other cryptocurrencies; (iii) Bitcoin and other cryptocurrencies could be acquired and sold at a profit; and (iv) the investments were secure and guaranteed by the company.

In fact, the SEC says there is “no reasonable way” that an investor could have understood that they were being scammed based only on the information provided by Mikado and its co-conspirators. To add insult to injury, between August 2017 and October 2018, Mikado and its co-conspirators raised an additional $40 million from at least 100 unwitting victims, the SEC claims.

Reasons For Concern

The sudden popularity of cryptocurrencies—especially Bitcoin—surprised many in the financial industry, who had previously viewed them as simply a speculative investment. Indeed, the value of a single Bitcoin increased tenfold from $3,600 to $38,400 between July and October 2017.

One of the primary reasons for this surge in popularity is that cryptocurrencies provide a form of digital anonymity (similar to cash transactions), which the mainstream financial world has come to appreciate. Another factor is that, unlike with traditional investments, such as stocks or bonds, users don’t need to worry about the price of cryptocurrencies rising or falling after an investment has been made. This is because the value of a cryptocurrency is determined by a variety of factors, including supply and demand, and there’s no cap on how much a coin can be worth.

It’s also worth noting that, although cryptocurrencies are a popular investment with new and experienced investors alike, they’re not for everyone. Those who purchase cryptocurrencies without doing proper research, for example, risk losing their entire investment because they didn’t understand how volatile and risky this type of investment can be. This risk becomes even more apparent when paired with high fees and low liquidity.

Finally, it’s worth pointing out that cryptocurrencies aren’t for everyone, even those who would consider themselves to be sophisticated investors. Because this is such a new and unregulated field, there are no guarantees that you’ll get back what you put in. Before investing, it’s essential that you do your due diligence and understand all the risks.