My Big Coin sued by CFTC (How to understand if a cryptocurrency or ICO is a Ponzi scheme or Scam?)


It has not been a pleasant journey for cryptocurrencies when it comes to law. In addition to the earlier face-offs with the law, recently CFTC sued my big coin cryptocurrency alleging that it is actually a multi-year scam.

According to CFTC, at least $ 6 million have been misappropriated and have been used for the personal purchase of luxury goods as well as expenses. The defendants include my Big Coin Pay Inc along with Randall Crater and Mark Gillespie.

According to CFTC, the defendants did not provide accurate information regarding the value as well as status and trading of the cryptocurrency to the customers. They highly inflated the value as well as other numbers in order to attract customers. Moreover, they even falsely claimed that the cryptocurrency was backed by gold.

As a result of the false claims, the defendants acquired around $ 6 million. Judge Rya Zobel of District Court of Massachusetts issued a freeze on the assets of the company on June 16, 2017.

CFTC is keeping a close watch on the various virtual currencies

CFTC director James Mcdonald, further stated that CFTC is actually monitoring the virtual currency markets and would enforce the antifraud provisions to protect the investors. He also highlighted that the virtual currencies market is actually susceptible to fraud and that is why CFTC is keeping a close watch on the various virtual currencies.

Indicator of a Ponzi scheme

According to CFTC, the customer withdrawals were paid by the funds which were brought in by the new customers. This is a classic indicator of a Ponzi scheme.

As more and more customers of the cryptocurrency raised questions, the company further stated that they had a deal with a cryptocurrency exchange which was not mentioned in the CFTC statement. None of the investors have any details of such a cryptocurrency.

The CFTC is asking the courts for monetary penalties on the defendants as well as disgorgement of gains among other charges.

The virtual currency task force which is a Department of CFTC is handling the case in order to ensure that the defendants do not go free of any charge.

Hundreds of companies have raised millions of dollars in ICO’s

The crackdown against fraudulent cryptocurrencies as well as virtual currencies is increasing. More and more authorities are paying attention to virtual currencies in order to ensure that there is no fraud committed by the companies who are issuing such cryptocurrencies to investors. Up until now, hundreds of companies have raised millions of dollars in ICO’s by providing the investors with cryptocurrencies. It is important to monitor the industry for fraud in order to maintain the confidence of investors in cryptocurrencies.

5 Signs an Initial Coin Offering Is a Scam

Cryptocurrencies, as the name implies, are neither well understood or unregulated.

1. Analyze the team and their background.
Companies that are serious about doing a token offering will have no concerns about publicizing their true identities. It is often an extremely worrying indication if a project does not show detailed information about their founding team, investors and advisors. Chances are, if the company is hiding something from you, they are more than likely covering up something bad.

On the contrary, projects like UbiquiCoin, a “two-coin” price-stable blockchain ecosystem is transparent with the details of their founding story and team. They can demonstrate years of expertise in and around their domain. In the case of UbiquiCoin, this experiences translates to over 100 years of collective experience. This not only establishes legitimacy, but also serves as a differentiating factor and competitive advantage long term.

2. Find an active and thriving community.
Another essential component of any genuine blockchain project is the quality of the community. In a competitive crowdfunding environment, companies need to not only understand their customers, but also cultivate a strong and active presence among them.

The most successful coin offerings host extremely active forums, events and blogs such that the community has a voice in the decision making of the company. You can also leverage these communication channels to ask questions, connect with other interested investors and learn more technical details about the project. It is generally a bad sign for blockchain projects when their community is quiet and vacant.

3. Look for social proof and validation.
Though not everything, it is generally helpful to see when companies have some sort of social proof of user validation. Companies like Cointal, a leading peer-to-peer cryptocurrency marketplace, who have thousands of active users, will publish reviews and press pieces that demonstrate the quality of their product. Their unity service, which enables users to swap currencies instantaneously using everything from credits cards to ACH transfers, has already received a ton of attention from the space.

In the last two months, over $15 million in trading volume has been processed by Cointal, providing more social proof. This is a positive signal that the team has been able to gain support from the broader blockchain community.

4. Find a product roadmap and technical details.
While any creative designer can come up with some ideas and develop a fancy landing page, it takes a true technologist to actually scope out a technical roadmap for a product. Most, if not all projects will have a publically accessible whitepaper that details exactly how and when they will build the product.

In reading this implementation plan, you should be able to pick out when projects make unrealistic claims about the feasibility of their roadmap. Further, if the plan lacks any technical grounding or specific feature-sets, chances are the team is way too early stage in the process to be collecting any form of significant funding in the first place. Another area to benchmark against and check for progress is the codebase of the blockchain project. At the minimum, you want to see that the team has begun to set up repositories to store their code. And if empty, it may be an extremely worrying sign.

5. Do your own independent research.
As an informed investor, it is your responsibility to conduct thorough, independent research before making any investment of capital. In today’s society, where everyone and their family members are pretending to be certified experts, it can be extremely difficult to understand who to trust.

According to Entrepreneur, The short answer is that you should always make decisions on your own, filtering out the noise of marketers and salespeople who want you to support their personal interests. Pay attention to implicit biases from writers and creators who have their own hidden agendas. It is very easy to fall for a scam when you do not know what you are looking for, so always approach any offering with a keen eye.

How to spot an ICO scam?

1. Research the team
If you haven’t heard of reverse Google image search, now is the time to learn how to use it.

Many of the biggest debunkings in the ICO space came from people who tried investigating the team. For example, AIOS was identified as a scam by a user in the community who was able to cross reference the “Marketing Lead’s” photo as a generic stock image used in various other locations. Like in Khaled’s endorsement, the team that was said to be experienced in the space actually didn’t even exist. Giving your money to real people is step one of not trashing away your investment.

2. Look for a whitepaper
It’s really easy to set up a website splash page with a few graphics and some general marketing text. What is substantially harder is actually outlining the intricacies of how your tech will work.

You do not only want to see a very thorough whitepaper, but also look for a variety of complementary resources such as SWOT analysis, financial model, wallet design, competitor analysis, institutional studies, and more (Ex: Naga provides all of this directly on their main website).

If you want to know if this is a sound business that will be around past the ICO, here is the place to start doing your own research. Make sure there is a strong business case for this technology. Sometimes you have to ask yourself…is this project inevitable? Or is it going to fade away quickly?

3. Benchmark their progress
The fraudulent ICO that DJ Khaled was promoting on his Instagram wasn’t run by technologists. It was run by previous car salesmen.

The purpose of a legitimate ICO is to kickstart a project into fully scaled development with venture capital or private investing. In order to do this, the organization should have some form of developmental or product timeline that you can compare to other organizations and see if their benchmarks make sense.

The more transparent and open to the community a project is — the more likely they are to be viable.

According to Hackernoon, It also definitely doesn’t mean that they will be successful; blockchain is still a risky space with lots of technical challenges, so no one is a guaranteed success. But if you are the bullish type who is looking for the next Bitcoin, make sure to check all your bases for you make your investment.

According to Techcrunch: 6 red flags of an ICO scam

Use case does not require blockchain

Not every venture needs a blockchain, and not everything needs to be decentralized. This might seem obvious, but with all the hype around blockchain technology and its disruptive potential, it can be easy to latch on to an idea the moment its whitepaper mentions a large industry the project is purportedly tackling.

Even projects that require cryptocurrencies as payment (e.g. Steemit, which rewards writers on its platforms with a native “digital points system,” Steem) could very well survive with existing cryptocurrencies like Bitcoin and Ether.

When evaluating an ICO, a good first question to ask is: “Do we need a blockchain or a native token for this project?” If the answer is no to both, chances are the ICO project is an example of solutionism — crypto for crypto’s sake — or a scam.

Empty repositories for open-source projects

If an ICO project is proposing open-source code, an empty or nonexistent GitHub is often a red flag.

One of the key traits of many public blockchain projects is the fact that they are open-sourced. This means the code base is often uploaded to repositories like GitHub for all to examine. For those who have blockchain programming experience, looking through the published code can allow them to gauge a project’s validity.

If something seems like a scam, it probably is.

One of the most obvious red flags for a scam project is the lack of detail on how the technology works. For nontechnical investors, it can be helpful to simply check if a project has any existing files uploaded to public repositories or if a project has a functioning product.

While Reddit is generally not an advisable source for investment advice, sub-threads dedicated to discussions of specific ICOs or crypto assets often offer a good entry point for the more technical evaluations.

Mining structure disproportionately favors development team
While not always an accurate litmus test for scams on their own, the supply schedule and mining structure of an ICO can be used to cross-reference other data points and validate the intention of the founders.

In simple terms, a premine refers to when a portion of the tokens for a crypto project is made available to a small group prior to being made publicly available. At times, this can be a necessary vehicle to reward developers and early investors. However, if the percentage of total tokens supplied throughout the lifetime of the project reserved for a premine is high, there is reason for concern.

For instance, Paycoin, whose founder was found guilty of operating a $9 million fraud scheme, had the majority of their tokens reserved for developers on the project. Favoring the development team could be an indication that the team’s intent is to maximize their personal financial gain from the appreciation of the token, rather than maintain the viability of the blockchain network over time.

Anonymous team or team with weak experience
Understanding who is on the team behind a blockchain project is perhaps the most important step in your due diligence. Even if the premise of the venture and the addressable market seem attractive, one of the biggest determinants of a venture’s success is the makeup of the team behind it.

It is often a red flag if the team behind an ICO does not have any named full-time developers. Additional caution should be taken if none of the leadership team has any domain knowledge in the specific vertical.

When looking at a team and verifying their experience, platforms like Twitter and LinkedIn are useful. However, it’s important to note that they are not infallible, as profiles can be faked. If members of the team claim prior association with universities or companies, double-checking with reputable third-party sources (e.g. a university newspaper or the company website) can provide the facts.

ICOs often list their advisors on their websites. You should also verify whether the advisors are legitimate.

Insufficient information on website/whitepaper
If something seems like a scam, it probably is. When you are unsure whether a project is a scam, it is better to err on the side of caution. While it is possible that the lack of well-designed websites and detailed information for a crypto project is because the project is still in its infancy, it can be hard to determine whether a project is underdeveloped or a scam.

In many cases, they can be both. In those cases, interested investors can either wait for more information (such as in the case of Asia-based ICOs, where information is only translated into English later on in the project), or simply avoid ICOs they do not fully understand.

Nothing can compete with quality due diligence.

Another crucial source of information for all ICOs is the whitepaper — the document that outlines the mission, technical details, team and other crucial details behind the venture. While the amateur investor may not have the technical background to fully understand every aspect of a whitepaper, general understanding of blockchain concepts is a must when evaluating whitepapers.

Some more legitimate projects (e.g. Ethereum) offer a high-level whitepaper outlining the key points of the venture, alongside a detailed technical document that explains the technology behind the project.

No clear roadmap
Typically, ICO projects list their funding and development goals on a clear timeline for investors to see. The lack of a clear roadmap could indicate that the developing team has no long-term plan for the project, and as such is likely to be motivated solely by short-term financial gain. Paired with a large premine reserved for the developing team, this could be a strong indicator that an ICO project is not to be trusted with your money.

Often, ICO projects will have dedicated Slack or Telegram channels that the public can join. Through periodic updates distributed on these channels, potential investors can get a sense of how the project is developing.

However, malicious scammers can easily create a timeline out of thin air or provide fake updates on chat apps. While the lack of a timeline is certainly a red flag, the existence of one is not a wholly sufficient condition to indicate the legitimacy of an ICO project.

Adam Webb is editor in Smartereum, blockchain and currency news, where he produces updates on Blockchain, Ethereum and other alternative cryptocurrencies.


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