On August 1, 2022, the Securities and Exchange Commission (SEC) charged eleven individuals in connection with a cryptocurrency Ponzi and pyramid scheme. [1] The alleged scheme was perpetrated through a website called Forsage, which operates via smart contracts over the blockchain.
The eleven defendants include Forsage’s four founders as well as several “promoters” of the Forsage scheme. [2] The SEC’s complaint notes that to date, more than $300 million worth of transactions have occurred via Forsage smart contracts, despite the fact that the retail investors powering this scheme have received no good or service of value in return for their “investments.” [2]
Forsage is a classic pyramid scheme in that those at the top – namely the founders and promoters charged by the SEC – stood to gain the most wealth, especially as others joined the scheme after them. In fact, a recent scholarly report on the scheme found that more than 88% of Forsage users incurred net losses on their investments with the platform, with those at the top generating massive gains. [3]
While Forsage was promoted as an “income-generating opportunity” with impressive returns, the SEC alleges that the founders and promoters were well aware that their monetary gains were far higher than, and would be unattainable to, the retail investors they recruited. [2]
The Forsage scheme functioned exactly like a pyramid and Ponzi scheme, as wealth was almost exclusively generated through recruitment of additional “investors.” When an investor joined Forsage, the first step was to create a crypto-asset wallet, which was assigned a sequential Forsage ID. [2] The higher the Forsage ID, the later the investor had joined the scheme, and in turn, the lower returns an investor could actually expect to generate. [2]
Once an investor created their crypto-asset wallet, they could begin purchasing “slots” within Forsage’s smart contracts. [2] The purchase of a slot did not allocate any good or service of value to the investor. Instead, each slot purchased broadened the investor’s compensation earned from both new Forsage recruits and from existing members of the Forsage community. [2]
Upon purchasing a slot, the algorithm-based Forsage smart contracts would automatically direct crypto funds to the investor’s crypto-asset wallet whenever the investor recruited additional investors to join the scheme. [2] The smart contracts also automatically directed shares of funds from the broader Forsage community as a form of profit-sharing. [2]
A Forsage investor could not join the scheme without sending currency, in the form of Ether, over the platform. [3] In line with the structure of the Forsage smart contract code, currency sent by a new investor was automatically sent first to existing investors with lower Forsage IDs, thereby allowing those who had joined earliest to obtain the highest returns. [3]
The SEC’s complaint categorizes the slots within Forsage’s smart contracts as investment contracts which constituted securities. [2] These securities were not registered with the SEC. [2] As a result, the SEC alleges several violations of federal securities law, concluding that the founders and promoters were engaged in the unauthorized offer or sale of securities. [2]
This type of scheme is especially dangerous to unwitting investors because of the relative novelty of the cryptocurrency sector, along with the inability of law enforcement authorities to intervene and halt a scheme which is hosted over the decentralized blockchain. [4]
Additionally, hosting a scheme like this one over the blockchain affords the organizers the luxury of anonymity, something that would not be possible for organizers of a traditional pyramid or Ponzi scheme. [4]
Investors are urged to carefully evaluate their investment prospects to avoid falling prey to a cryptocurrency pyramid or Ponzi scheme like Forsage. While tales of high returns can be tempting, these schemes are specifically designed to trick investors into believing they will see returns that they won’t, while instead buffering the wallets of those who “invested” before them.
If you have questions or concerns about a potential cryptocurrency pyramid or Ponzi scheme, please reach out to the trusted attorneys at Savage Villoch law.
Sources:
[1] https://www.sec.gov/news/press-release/2022-134
[2] https://www.sec.gov/litigation/complaints/2022/comp-pr2022-134.pdf
[3] https://arxiv.org/pdf/2105.04380.pdf