According to a report by CNN Money, the U.S. Commodity Futures Trading Commission (CFTC) announced this week that it would file suit against a man and his New York-based company over an alleged Ponzi scheme involving bitcoin. This marks a historic (or perhaps notorious) first: the first time that the U.S. government has filed a fraud suit involving bitcoin, the world's leading cryptocurrency. The individual in question is Nicholas Gelfman of Brooklyn, New York, and the related company is a fund called Gelfman Blueprint, Inc. According to the CFTC, the fund "fraudulently solicited more than $600,000 from approximately 80 persons."
Classic Ponzi Strategy
Per the allegations in the suit, the CFTC has suggested that Gelfman, who has been CEO and head trader for the fund, told investors that his firm "employed a high-frequency, algorithmic trading strategy." At the same time, however, the strategy itself was "fake," according to the filing. "The purported performance reports were false, and -- as in all Ponzi schemes -- payouts of supposed profits...actually consisted of other customers' misappropriated funds," the CFTC reported in a statement. The suit further alleges that Gelfman attempted to stage a computer hack as a means of concealing the scheme.
Bitcoin Craze Leaves Investors Susceptible
The director of enforcement for the CFTC, James McDonald, said in a statement that "the defendants here preyed on customers interested in virtual currency, promising them the opportunity to invest in bitcoin when in reality they only bought into the defendants' Ponzi scheme." The result, according to prosecutors, is that investors generally lost "most if not all of their invested funds."
The CFTC, which is an independent agency charged with monitoring the derivatives markets in the U.S., has not as of yet filed any other suits alleging fraudulent schemes related to bitcoin or other cryptocurrencies. Nonetheless, the digital currency space has been rife with fraud, hacks, and other misdeeds. ICOs, the popular crowdsourced fundraising technique pioneered by ethereum, have been particularly susceptible to hacks. In some cases, the trade-off for the anonymity and privacy that dealing in digital currencies provides is a reduced sense of security when conducting transactions. The fact that bitcoin and other cryptocurrencies have skyrocketed in value throughout the year has also primed investors to seek out offers promising huge returns.
A combination of concerns about investor security, money laundering, funding of terrorist activities and more has prompted the Chinese government to issue a widespread ban on domestic bitcoin exchanges. This marks the first time that a national government has stepped in with such a strong degree of authoritarial force, although perhaps in light of recent news other governments may consider a similar tactic in the weeks and months ahead.