A red flag checklist for cryptocurrency Ponzi schemes
| Date | 31 July 2023 |
| Pages | 711-747 |
| DOI | https://doi.org/10.1108/JFC-05-2023-0118 |
| Published date | 31 July 2023 |
| Author | Christiaan Ernst (Riaan) Heyman |
A red flag checklist for
cryptocurrency Ponzi schemes
Christiaan Ernst (Riaan) Heyman
Department of Auditing, Faculty of Economic and Management Sciences,
University of Pretoria, Hatfield, South Africa
Abstract
Purpose –This study aims to, firstly, developa red flag checklist for cryptocurrencyPonzi schemes and,
secondly, to test this red flag checklist against publicly available marketing material for Mirror Trading
International (MTI). The red flag checklist test seeks to establish if MTI’s marketing material posted on
YouTube
V
R
(in the form of a live video presentation)exhibits any of the red flags from the checklist.
Design/methodology/approach –The study uses a structured literature review and qualitative
analysisof red flags for Ponzi and cryptocurrency Ponzi schemes.
Findings –A research lacuna was discovered with regard to cryptocurrency Ponzi scheme red flags. By
means of a structuredliterature review, journal papers wereidentified that listed and discussed Ponzi scheme
red flags. The red flags from the identified journal paperswere subsequently used in a qualitative analysis.
The analyses and syntheses resulted in the development of a red flag checklist for cryptocurrency Ponzi
schemes, with five red flag categories, containing 18 associated red flags. The red flag checklist was then
tested againstMTI’s marketing material (a transcription of a live YouTubepresentation). The test resulted in
MTI’s marketingmaterial exhibiting 88% of the red flags contained withinthe checklist.
Research limitations/implications –The inherent limitations in the design of using a structured
literaturereview and the lack of research regardingthe cryptocurrency Ponzi schemered flags.
Practical implications –The study provides a red flag checklistfor cryptocurrency Ponzi schemes. The
red flag checklistcan be applied to a cryptocurrency investment scheme’smarketing material to establish if it
exhibitsany of these red flags.
Social implications –The red flag checklist can be applied to a cryptocurrency investment scheme’s
marketingmaterial to establish if it exhibits any of these red flags.
Originality/value –The study providesa red flag checklist for cryptocurrency Ponzi schemes.
Keywords Ponzi schemes,Red flags, Checklist, Characteristics, Cryptocurrency, Preventionand MTI
Paper type Research paper
1. Introduction
The digital age has provided fraudsterswith an opportunity to “reheat an old scheme with a
new sauce”(Dupuiset al.,2021,p. 12). Adding cryptocurrency to an existing Ponzi scheme is
a case in point and makes for a schemethat investors fail to recognise, as it is dished up with
the novelty of trendingtechnology [Securities and Exchange Commission (SEC), 2013,p. 1].
Back in 1920 already, Mr Charles Ponzi raised about $10m from approximately 40,000
investors (Kramerand Buckhoff, 2012, p. 48) and promised investorsa 50% return within 45
days and a 100%return within 90 days (Kasim et al.,2020, p. 90). A subsequent investigation
© Christiaan Ernst (Riaan) Heyman. Published by Emerald Publishing Limited. This article is
published under the Creative Commons Attribution (CC BY 4.0) licence. Anyone may reproduce,
distribute, translateand create derivative worksof this article (for both commercial and non-commercial
purposes), subject to full attribution to the original publication and authors. The full terms of this licence
may be seenat http://creativecommons.org/licences/by/4.0/legalcode
Ponzi schemes
711
Journalof Financial Crime
Vol.31 No. 3, 2024
pp. 711-747
EmeraldPublishing Limited
1359-0790
DOI 10.1108/JFC-05-2023-0118
The current issue and full text archive of this journal is available on Emerald Insight at:
https://www.emerald.com/insight/1359-0790.htm
into the scheme resulted in Mr CharlesPonzi being convicted, imprisonedand deported after
his release(Frankel, 2012,p.17).
Even with the Ponzi scheme being an old scheme, it is clearlystill relevant today, as seen
with the most recent collapse of FTX Trading Ltd (FTX). The arrest of its chief executive
officer (CEO) on fraud charges resulted in billions of dollars in losses for investors and has
drawn widespread speculation that it operated as nothing more than a thinly veiled Ponzi
scheme (Yaffe-Bellanyet al.,2022).
The most common trademark of a Ponzi scheme is that it pays declared returns to existing
investors from the contributions of new investors (Bartoletti et al.,2020, p. 259; Lewis, 2012,
p. 294). A Ponzi scheme is also commonly associated with the promise of high investment
returns, namely, more than those returns obtained from a licensed institution (Kasim et al.,
2020, p. 92). Ponzi scheme perpetrators lure and recruit new investors to the scheme with an
investment opportunity that promises high returns with little or no risk to the investor
(Bartoletti et al., 2020, p. 260). Raval and Raval (2019, p. 993) agree that the Ponzi scheme is an
investment fraud that promises a high return but ultimately ends with a misrepresentation
and breach of the investor’s trust (Carey and Webb, 2017, p. 590). In essence, the Ponzi scheme
does not require the purchase of any goods or services and does not explicitly reward the
recruitment of investors (Bosley and Knorr, 2018, p. 82). Even with little to no income from
legitimate business operations, the Ponzi scheme requires a constant inflow of money from
additional investors to sustain the scheme (Bartolettiet al., 2020,p.260).
Ponzi fraudsters typically keep up with the times by evolving Ponzi schemes with the
latest product,technology or innovation to lure potential investors(Securities and Exchange
Commission[SEC], 2013,p.1;Carey and Webb, 2017,p. 590). This tends to result in investors
asking fewer questions since they may be less sceptical of what is deemed a “cutting edge”
investment [Securities and Exchange Commission (SEC), 2013, p. 1]. With the increasing
global uptake of cryptocurrencies, Ponzi fraudsters may be seen to use cryptocurrency to
entice investors [Securities and ExchangeCommission (SEC), 2013,p.1].Trozze et al. (2022,
p. 1) performed a scoping review on academic research and grey literature relating to
cryptocurrency fraud. Seventeen cryptocurrency frauds were identified, and Ponzi schemes
were discussedin more than half of these studies(Trozze et al.,2022,p.7).
The development of various cryptocurrencies showed enormous growth and created a
market capitalisation of $1.6tn (Trozze et al., 2022, p. 1). Ponzi schemes followed suit;
Kethineni and Cao (2020, p. 329) report, for example, that in 2014 judgement was handed
down to the founder and operator of “Bitcoin Savings and Trust”, one of the first Ponzi
schemes to involve a cryptocurrency (Bitcoin).The scheme cost investors an estimated $7m
(Kethineni and Cao, 2020,p. 329).
Chainanalysis (2021, p. 71) cited that, during 2020, cryptocurrency-related scams
remained a crime that incurred high losses. Although the report cited those losses reduced
from about $9bn in 2019 to below $2.7bn in 2020, it also noted that the number of victims
grew by 48%. The report attributed the loss reduction and increased victims to a lack of
“large-scale Ponzi schemes”in 2020 compared to 2019 (Chainanalysis, 2021, p. 71). The
report did, however, also find that Mirror Trading International (MTI), from South Africa,
was globally the biggest scam in 2020 (Chainanalysis,2021,p.73).
Henderson (2021) notes that MTI was a cryptocurrency Ponzi scheme providing
investors with returnsbased on bitcoin investment trades. Ryan (2021) reportsthat the MTI
scheme collected approximately R 8.6bn Rand’s worthof bitcoin from 470,000 transactions.
MTI was later placed under provisional liquidation as investors battled to withdraw funds
(Henderson, 2021).
JFC
31,3
712
With the inherent risk of fraudulent investments, Jory and Perry (2011) developed a
“checklist of questions”for financial planners to help them advise clients and identify
possible Ponzi schemes. Their checklist contained six categories and questions related to
promised returns, promotor profile, investment offering, reporting, payment frequency and
investor questions. For any category where questions resulted in a “yes”, the investment
adviser ought to advise their clients of a potential Ponzi scheme and advise that the
investment requires further investigation (Jory and Perry, 2011). However, Jory and Perry
(2011) designed the question checklist only for financial advisers to assess and advise their
investors of a potential Ponzi scheme and not for an investor.In addition, the Jory and Perry
(2011) question checklist did not specifically focus on red flags for cryptocurrency Ponzi
schemes.
This study aims to develop a red flag checklist for cryptocurrency Ponzi schemes, to
indicate whether an investment exhibits indicators of a cryptocurrency Ponzi scheme. The
study then aims to test this checklist against publiclyavailable marketing material for MTI
on YouTube to establish whetherMTI exhibits any of these red flags.
To this end, the study develops a red flag checklist for cryptocurrency Ponzi schemes
through a structured literaturereview and a qualitative analysis of the noted red flags. The
research considered literature that specifically focused on/or included any section/part that
related to Ponzi and cryptocurrencyPonzi schemes. Literature searches for “Ponzi schemes”
were limited to a search scope of10 years, performed in EBSCOhost (427 search results) and
ProQuest (1,601 searchresults).
After this screening, journal articles that discussed and/or listed Ponzi scheme red flags
were identified and selected, resulting in four journal articles used for the research. The
journal articles contained verbatim red flags that were used in the subsequent qualitative
analysis of these red flags, resulted in identifying themes and developing five red flag
categories, “Investment”,“Payments”,“Perpetrator”,“Returns”and “Strategy”, whereafter
new red flags were developedfor each red flag category.
The study commences withthe research design used to identify red flags associated with
Ponzi and cryptocurrency Ponzi schemes, thereafter focusing on a structured literature
review relating to Ponzi scheme red flags. Although journal articles provided red flags for
Ponzi schemes, no research could be found that specifically focused on red flags for
cryptocurrency Ponzi schemes. The red flags for Ponzi schemes, therefore, resulted in the
development of a red flag checklist for cryptocurrency Ponzi schemes (Section 3). The
research results and related findingsare discussed before the red flag checklist is tested and
discussed against the MTI marketing materialvideo to establish whether it exhibits any red
flags from the checklist. The researchconcludes with a reflection on related findings.
2. Research design
The research study consists of a structuredliterature review and qualitative analysis of red
flags contained in the identified literature.
2.1 Scope, search, selection and evaluation of the literature
2.1.1 Literature scope. Literature specifically focusing on or including any section/part
related to Ponziand cryptocurrency Ponzi schemeswas considered. Although Ponzi schemes
relate to a specific subject, the literature search was notlimited to a specific discipline but,as
a consequence, limited to all available English language searchresults. Journal articles were
not limited to one particular country or region but excluded any country or region-specific
factors.
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713
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