At last, Josh Garza, the founder of the PayCoin Ponzi scheme and CEO of GAW Miners pleaded guilty to wire fraud following an official complaint by the SEC filed in 2015.
The US Department of Justice’s letter read:
“We are currently negotiating an agreement with defendant Homero Joshua Garza to enter a plea of guilty to one count of wire fraud. A plea would result in a final resolution of this criminal matter without the necessity of going to trial. A plea hearing is scheduled in this case for June 1, 2017.”
In a period of 12 months, from 2014 to 2015, Garza and the rest of the GAW Miners team including former CTO Joe Mordica and ZenMiner head Eric Capuano scammed investors within the cryptocurrency market with a Ponzi scheme called PayCoin.
Introduced in early 2014, PayCoin was marketed by Garza and GAW Miners as a cryptocurrency designed specifically to gain massive mainstream adoption by providing stability in its price. According to the GAW Miners team, the price of PayCoin was to be stabilized or fixed at $20 after a certain period of time to provide a digital currency in which users can rely on for low volatility rates.
However, the majority of investors and traders within the cryptocurrency community recognized the fraudulent and scam-like proposition offered by Garza and GAW Miners at its early stage. Inevitably, the US Securities Exchange Commission (SEC) became involved with the case of PayCoin and Garza and filed a complaint against GAW Miners.
Traders and investors were able to discover the scam-like features of PayCoin due to its 12.5 million insta-mined coins and its fixed price offering. In order for a price of a cryptocurrency to be fixed, a centralized institution must be set in place which controls the market. In that case, a cryptocurrency is no longer a currency, but a Ponzi scheme, as early investors are paid with the investment of later investors.
A SEC complaint filed on December 1, 2015, read:
“Defendants used the lure of quick riches from a twenty-first-century payment system known as virtual currency to defraud investors. Though cloaked in technological sophistication and jargon, defendants’ fraud was simple at its core – defendants sold what they did not own, and misrepresented the nature of what they were selling. From approximately August 2014 through December 2014, defendants sold – to over 10,000 investors – investment contracts representing shares in the profits they claimed would be generated from using their purported computing power to “mine” for virtual currency.”
Governments and financial regulators in other regions such as Japan and South Korea are also taking cryptocurrency-based scams and Ponzi schemes extremely seriously with severe legal consequences. Bank of Korea in particular, the central bank of South Korea, tasked a team of investigators in cooperation with South Korean financial regulators to crackdown potential cryptocurrency scams in Korea. Such strict maintenance of the local cryptocurrency market provided an efficient and practical ecosystem for startups to prosper.
On February 9, 2015, Hong Kong’s central bank also issued a warning against virtual currencies that demonstrate pyramid scheme-like attributes after the crackdown which took down a bitcoin-based scheme operator MyCoin. Reuters reported that MyCoin promised clients a $129,000 over a four month period if investors invested a certain amount of money in bitcoin.
As the global digital currency industry and markets become more thoroughly regulated, Ponzi schemes such as PayCoin, MyCoin, and OneCoin will not be able to operate as easily without running into conflict with regulators and law enforcement.