In a press release by the US Commodities Futures and Trading Commission (CFTC) on Oct. 18, the agency confirmed that Gelfman Blueprint Inc. (GBI) and its CEO, Nicholas Gelfman, had been ordered to pay more than $2.5 million in civil monetary penalties and restitution by a New York federal court.
This judgment came in relation to a civil enforcement action filed by the CFTC on Sept. 21, 2017. The action charged both GBI and Gelfman with “fraud, misappropriation, and issuing false account statements in connection with solicited investments in Bitcoin, a virtual currency.”
In layman’s terms, the complaint alleges that the company was a classic “Bitcoin Ponzi scheme.” According to the complaint, GBI purported to be a Bitcoin-denominated hedge fund built on a high-frequency trading algorithm. The company apparently claimed that said algorithm, nicknamed “Jigsaw,” could earn its customers a 7% to 9% monthly return on their Bitcoin investments.
The complaint goes on to allege that for a period of two years beginning Jan. 2014, GBI and Gelfman solicited over $600,000 from about 80 individuals to be put into a trading pool for the aforementioned algorithm to manage.
Concealment and Misrepresentation of Trading Losses
Of course, since there is no algorithm in the world that can generate guaranteed returns, especially not ones of 7% to 9% monthly (which translates to annual returns of 84% to 108%), GBI had to make it appear that trading profits were being generated to keep the Ponzi scheme going. As in all Ponzi schemes, new investor funds were used to pay out returns to older investors.
As per the complaint, GBI and Gelfman created false performance reports showing positive Bitcoin trading gains when in fact the trading account managed by the algorithm showed only infrequent and unprofitable trades. In a daring final maneuver, Gelfman is said to have staged a fake computer hack to further conceal such losses and misappropriation.
The judgment calls for Gelfman and GBI to pay about $1 million in restitution to customers and about $2 million in civil monetary penalties, in addition to permanent trading and registration bans on both parties. However, as in many cases, the penalties and restitution imposed may exceed the capability of the defendants to pay, meaning that customers are unlikely to get all their funds back.
A Classic Scam With a New Look
While Bitcoins and cryptocurrencies may be new, there is nothing new about Ponzi schemes. Some claim that the first Ponzi scheme goes back as far as 1860, even before it was called a Ponzi scheme, named after Charles Ponzi in 1920. The assets being invested by the scheme may change; it can be fiat money, Bitcoin, or even postage stamps (which was what Charles Ponzi used), but the structure remains largely unchanged.
Given the mostly unregulated nature of cryptocurrencies, the onus is on the individual to conduct proper due diligence into such schemes. But as the old saying goes, if it seems too good to be true, it probably is.