Cryptocurrency - A Hi-Tech fraud !

"Stay away from MLM schemes selling virutal currencies..."

Amit Kumar, 40, received an sms giving him an investment tip about a scheme promising to pay a 10 per cent return every month. At a time when fixed deposits are offering 6-7 per cent annually, the message caught his attention.

The scheme involved investing in a cryptocurrency called ATC Coin for 18 months. For a minimum investment of Rs. 5,000, it promised to pay 81 ATC COIN (at the rate of `61). The total return for 18 months comes to 162 per cent (18X9, 1 per cent is the commission for running the scheme). The message further said that if the price of ATC Coin goes up like Bitcoin, which is currently trading at Rs. 4.79 lakh, one can earn crores of rupees, with a downside of just Rs. 5,000. "I got immediately interested with the kind of return promised. Moreover, I wanted to invest in virtual currencies given the surge in their popularity," says Kumar.

He called up on the number and was told that there are multiple streams of income that one can create through this scheme. "You just need to add members to your network. Every time the downline grows, you will get commission on the business they bring in. The more the level of members, the higher the income," he was told. The similarity with other multi-level marketing, or MLM, schemes was striking.

Such schemes have suddenly gained prominence due to the extraordinary returns given by crypto, or virtual, currencies in recent years. For example, Bitcoin, the oldest and the most popular virtual currency, has given more than 900 per cent returns in the past one year. The value of the currency surged from $709 in November 2016 to $7,384 in November 2017. Similarly, Ripple, a crypto currency based on interbank settlements, has given a return of 152 per cent over the past one year.

There are plenty of such schemes doing rounds on social media. The aim is to cash in on the euphoria around cryptocurrencies. Consider this: Zakhil Suresh, a 23-year-old student, has filed a complaint on change.org against a person who recently gave large advertisements in a national newspaper for promotion of his book called Crypto Currency for Beginners. His petition says: "With a couple of friends, I flew to Delhi to meet the owner of Gain Bitcoins...He said the mining pool of the company is in China and for every contract we buy by paying 1 Bitcoin, the company would pay us 0.1 BTC for 18 months. One week after coming back to Kerala, I opened six positions in his company by paying six Bitcoins. Soon, the website was closed down for maintenance. I requested for my first withdrawal after three weeks. Now, even after one-and-a-half years, my withdrawals are pending." Zakhil Suresh's petition now has 295 supporters.

Sathvik Vishwanath, Co-founder and CEO, Unocoin, a bitcoin wallet, says, "Whenever there are new technologies, we always have people who can try to cash in on peoples ignorance. When it comes to cryptos, the MLM players usually show the performance of bitcoin and ethereum and lure people into something new that they introduce and control."

What are MLM Schemes

"MLM/Chain Marketing/Pyramid Structure schemes promise easy or quick money upon enrolment of members. Income under such schemes majorly comes from enrolling more and more members from whom hefty subscription fees are taken rather than from the sale of products they offer." This is the RBI definition. Explaining the functioning, the central bank says it is incumbent upon all members to enroll more members, as a portion of the subscription amount collected is distributed among members at the top of the pyramid. "Any break in the chain leads to the collapse of the pyramid, and members lower down in the pyramid are the ones that are affected the most," it says.

These schemes invest your money in a virtual currency claiming to pay you 9-10 per cent every month for a fixed tenure. Generally, a 1 per cent amount is deducted for expenses. However, the fixed return of 162 per cent (9 per cent every month) over 18 months is just one stream of income. When you enrol more members, you get 10 per cent of their contribution, which is called Level 1 income. As your members add more members to the network, you get more from their businesses. There is also a third stream of income. After a certain level, the company pays you royalty from its revenue. If that is not enough, the company says you can pay mobile bills or shop online using their virtual coin. "The awareness is a much needed as danger always arrives in attractive gift packs," says Mohammed Rezwan, COO & Co-founder, Bitxoxo, a bitcoin exchange.

Crypto Origin

Bitcoin, the oldest and the largest circulated currency, was launched after the subprime mortgage crisis in 2008. To bail out their financial institutions, governments of developed countries printed their currencies in billions. Due to oversupply, several top-notch currencies weakened. It was during this time that Satoshi Nakamoto (a pseudonym used by a person or a group of people) launched Bitcoin, a currency allowing people to pay one another without an intermediary. It was decided that only 21 million Bitcoins will ever exist. At present, over 17 million are in circulation; the currency is expected to be fully mined by 2140. The supply has been kept limited to prevent devaluation. However, Bitcoin is not backed by any asset and its value is determined by demand and supply.

Following Bitcoins, several cryptocurrencies have been launched. According to CoinMarketCap, there are more than 1,000 crypto currencies in the world, with a market cap of billion. The problem is that credentials of people behind it are not known in most cases. As a result, many agents have entered the market, promising high returns.

Legal Status

Though trade in cryptocurrencies is not illegal, they do not come under any authority. In case of a fraud, there is no authority where you can complain.

The RBI said on February 1, 2017, that it has not given any licence or authorisation to any entity or company to operate virtual currency schemes or deal with Bitcoin or any other virtual currency. "Any user, holder, investor or trader dealing with virtual currencies is doing it at his own risk," it said.

Such a cautionary note has not been issued for the first time. In December 2013 also, the RBI had cautioned people about virtual currencies and financial, operational, legal and security risks they were exposing themselves to.

To top it all, MLM schemes are illegal. On MLM, schemes the RBI has said that "acceptance of money under Money Circulation/Multi-level Marketing/Pyramid structures is a cognisable offence under the Prize Chit and Money Circulation (Banning) Act 1978."