US investigators are accusing a bitcoin entrepeneur of running a Ponzi scheme that brought in nearly $20 million (£13.2 million).
Josh Garza, former CEO of GAW Miners, allegedly defrauded customers by promising vastly larger returns than it was capable of providing in an attempt to trick them into signing up, the US Securities and Exchange Commission says.
New bitcoins are created through “mining” — using computers to solve complex algorithms, helping to contribute to the upkeep of the network powering bitcoin in the process. It can be profitable — but requires costly specialised hardware to get started.
GAW Miners operated a “cloud” mining service: Users could pay for a share of the profits generated by the company’s hardware, meaning they don’t need to buy any kit of their own. These shares were called “hashlets.”
A criminal complaint filed on Tuesday by the SEC, which we saw over at CoinDesk, alleges that “hashlet sales had many of the hallmarks of a Ponzi scheme. Because defendants sold far more computing power than they owned and dedicated to virtual currency mining, they owed investors a daily return that was larger than any actual return they were making on their limited mining operations.”
The SEC says that GAW Miners “earned about $19 million in revenue from the sale of the hashlets.” The company closed down earlier this year.
Garza’s lawyer told CoinDesk in a statement: “Josh Garza is disappointed that the SEC has filed a lawsuit against him. Any further comments will be through the court process.”
Speaking to Business Insider earlier this year, Marco Streng — CEO of Genesis Mining, another cloud mining company — said that fraud was a problem within the industry. “Cloud mining has a major trust issue … [fraudulent companies] don’t ever even own their own mining facilities. They just take pictures from other companies, photoshop them, then pretend they are theirs.” Streng did not accuse any specific companies of fraud.
“Though cloaked in technological sophistication and jargon, defendants’ fraud was simple at its core,” The SEC’s complaint about GAW Mining says. “Defendants sold what they did not own, and misrepresented the nature of what they were selling.”