UPDATE: If OneCoin is still participating in “voluntary monthly audits,” Semper Fortis isn’t doing them. According to Georgi Kaloyanov, the firm’s managing partner, Semper Fortis performed just two monthly audits “regarding the consistency of the block regarding OneCoin” [sic] and hasn’t worked with the company since August of 2015.
I had an unusually long conversation recently with a potential client regarding the tax consequences of virtual currency mining and trading. This particular individual was heavily invested in OneCoin, which I had not heard of prior to her call. I am always excited to learn about something new, so I asked for more details. However, as this person told me more about OneCoin, my auditor’s fraud warning antennae began to twitch.
I have been working in the virtual currency space for several years, which is about three lifetimes for the virtual currency ecosystem. I have seen many virtual currency startups come and go for a variety of reasons, but very often due to theft and fraud. Before that, I worked in public accounting, consulting, and retail banking. In my experience, no one likes to be told that they have been suckered- even less so by someone they don’t know and trust. I think I will not get any new business from the potential client who explained OneCoin to me. Nevertheless, I wanted to offer my current impression of OneCoin and point out a few things to potential investors.
What is OneCoin?
OneCoin is a proprietary digital currency created by One Coin Limited, a Gibraltar based company. Unlike Bitcoin, which is based on an open-source, non-proprietary platform and mining network in which anyone can (theoretically) participate, OneCoin is currently owned and controlled by just one organization of related party affiliates. Users who want to invest in OneCoin must first purchase a “package” that claims to show them how to make money trading assets such as gold and cryptocurrencies online. The lower packages also include books such as Napoleon Hill’s “Think and Grow Rich” that are either in the public domain or can be obtained at very low cost from other sources.
Users who want to participate in mining must be inducted by another user who is already a member of the network and then purchase tokens that are exchanged for mining activity. Earlier users share in the “profits” earned by users they recruit.
OneCoin is not actively traded on any known exchange or trading platform that handles digital currencies. The only place it appears to be listed at all (besides OneCoin’s own website and its affiliates) is xcoinx, a seemingly defunct or perpetually incomplete website. The xcoinx website contains several “coming soon” sections and content referencing a hack that appears to be lifted straight from another well-known trading platform’s website. In fact, all of the sites pushing or promoting OneCoin have the same anonymous, amateurish feel to them, as if they were thrown together quickly/cheaply and have not been well maintained.
US participants in OneCoin’s program received a note by e-mail last fall explaining that US trading and withdrawals to US customers had been suspended pending registration with the relevant regulators. OneCoin balances remain inaccessible with no clear timeline as to when they will be available to US users. It isn’t clear what regulators OneCoin (a non-US company) believes itself beholden to or why, but the Securities and Exchange Commission and the Commodities Futures Trading Commission were both cited in the e-mail as regulators with whom the company may need to register before reopening to US persons.
What Do Scams Look Like?
The Association of Certified Fraud Examiners, of which I am a member, has identified the following indicators of common scams:
- The investment opportunity promises “guaranteed” returns.
- The opportunity is described as “once-in-a-lifetime,” or pressures you to buy immediately “before it is too late.”
- The deal sounds too good to be true. Compare any promised return with the returns on well-known stock indexes.
- The investment offer was unsolicited.
- You are unable to find any public information about the investment opportunity. Often, this is explained away as the investment being “by invitation only” and a “secret that is best kept, lest too many people get involved.”
- The opportunities or people touting them are located outside of the United States. This particular point gives the scam an exotic feel and includes the idea (real or implied) that profits can be squirreled away offshore and away from the taxing authorities.
- You do not know the person who is contacting you, or they are just an acquaintance.
What about OneCoin? According to OneCoin’s website:
“OneCoin provides a once in a lifetime opportunity, revolutionizing the business world of todays digital economy. The OneCoin concept is born out of the success of the pioneering cryptocurrency, Bitcoin. It all started back in 2009 when a new digital currency was introduced to the internet and financial world. Only in 2013 this currency has seen a 75 times increase in its starting price. It started at a price of only 0.10 USD per coin and has been traded for over 1.100 USD per coin. Through its success Bitcoin popularized cryptocurrency paved the way for more innovative and better concept. The opportunity has now opened for you to be part of the next big winner in digital currency, OneCoin. OneCoin has the ambition to become the next big cryptocurrency as it uses the latest technology, provides long term value to its investors and has a well thought through concept. This opportunity is only available through a strict by invitation basis, providing you the knowledge you need to succeed in the world of crypto-currency.” [sic]
Notice any similarities between the ACFE’s list and OneCoin’s model and marketing materials?
Also, note the numerous references to Bitcoin, which is not affiliated with or even terribly similar to OneCoin. You may have noticed that OneCoin associates itself with Bitcoin at every possible opportunity in its marketing materials and on its website.
Unfortunately, frauds are often difficult to prove, even when losses start to add up. There is a fine line between a bad investment or bad management and an operation whose intent was to dupe unsuspecting investors all along. However, OneCoin shows many of the hallmarks of at least two types of common frauds- the pyramid scheme and the Ponzi scheme.
If you’ve made it this far, then you’ve likely done a little research on your own and are looking for confirmation for your own conclusion (either for or against). With an operation as vague and opaque as OneCoin, we may not know for sure for many months, or even years, but I think it will likely be sooner than that.
For what it’s worth, here are my thoughts on OneCoin:
- Assuming for a moment that you could withdraw or trade them, which at least US users are unable to do for the moment, with whom would you trade? Where would you send them? They aren’t accepted anywhere as payment. No known entity makes a market for OneCoin or offers the ability to cash out to fiat currency, which will be a requirement in order to implement the payment card functionality promised by the company’s marketing materials. Today, it looks like your only potential counter parties are other OneCoin users. This is a great deal for early adopters who are in a position to sell their appreciated holdings, but not so much for later ones who buy in as an investment.
- OneCoin’s recruitment model clearly meets the definition of a multilevel marketing program. The problem with multilevel marketing schemes is that they are mathematically unsustainable- there aren’t enough potential recruits for the pyramid to go more than few levels deep. Once again, this is a great setup for early adopters, but few others should expect to earn much, if anything, from downstream recruits.
- OneCoin’s materials are heavy on jargon and rhetorical hand waving, but light on substantive technical or financial details. The company aggressively promotes itself by citing the distinguished, but uncorroborated resume of its founder, and association with others rather than standing on its own history or accomplishments.
- The company proudly points out that an independent auditor reviews its blockchain and issues a report on a monthly basis, but this is hardly conclusive evidence for or against OneCoin as a scam. Semper Fortis appears to be a reputable firm actually in operation in Bulgaria. They probably do quality work, but their work doesn’t prove what OneCoin says it does. Even if it did, OneCoin has deliberately misrepresented the existence and frequency of Semper Fortis’ attest work. The report addresses only the claims made by the company in reference to the OneCoin blockchain, which was created by and is controlled by One Coin Limited. It does not address the solvency, financial structure or business model of the company specifically or OneCoin more generally. It is not an auditor’s report within the legally accepted meaning in the United States or as generally understood with respect to financial statement audits. The auditor was not engaged and makes no attempt to evaluate anything about OneCoin except whether the technical representations made by the company are an accurate reflection of the way its blockchain works. This is important because the report can be true and correct in every respect and OneCoin can still be a scam.
The Big Picture
In my professional opinion, OneCoin is a sophisticated example of a classic pyramid and/or Ponzi scheme with just enough of the sheen of respectability and legitimacy to make it a long-ish con. Here is how I think it works:
- The first phase of the con is the sale of basically worthless self-help type investor education materials while building hype around OneCoin and perhaps seeking outside investment in the company itself. The perpetrators also use this period to build up OneCoin’s legend with public appearances (see the conference talk given by OneCoin’s founder at the link below), paid advertising (the fake profile in Forbes cited by CoinTelegraph), and fake or massively overstated trading and price appreciation history (OneCoin’s back office for insiders and the whole xcoinx website for others). The user pyramid fills out during this phase with early adopters aggressively recruiting downstream users. If investors are involved, they are likely of the small, non-accredited type. Venture capitalists and institutions will be put off by opaque or incomplete business plans or by due diligence work that says that the founders have checkered histories and will stay away.
- In phase two, the cash taken in by some parts of OneCoin’s operations will likely be used to fund limited withdrawals by early adopters. This fuels the hype, since early users who make money (and don’t know they are the beneficiaries of a Ponzi scheme) become OneCoin’s most vocal supporters. The most important aspect of this phase is to control withdrawals through a combination of greed (“you’ll miss out on future gains!”) and lies (“regulators / hackers / banks have disrupted withdrawals at present”) to ensure that the scam isn’t brought down early by a run. Exposure driven by people unaffiliated with the scam will bring in new money and also encourage ambivalent or dubious investors to stick around in the fear that they might miss out on “the next Bitcoin.”
- In the final phase, OneCoin will collapse as the founders take their profits and disappear. With no one supporting the scam, OneCoin will begin to crumble. The percentage of trading activity that wasn’t fabricated may continue on its own momentum for some time before users realize that something has changed. Trading volumes will fall and withdrawals will slow down before stopping altogether. Tech support and customer service will become unresponsive. If the founders don’t disappear outright, then the company may falsely claim that an outside influence is preventing them from making good and pledge to work diligently to restore operations. However, normal operations will never be restored. The key aspect of the final phase is that it must occur before users start to realize that OneCoins can’t be used anywhere, are illiquid, and actually kinda suck as an investment. That is why I believe the lifecycle of this operation is likely to be measured in months, rather than years.
I believe that OneCoin is somewhere between late phase two and early phase three.
What Can You Do?
The IRS has special rules for victims of Ponzi-type schemes, which are discussed here. Generally speaking, Ponzi losses get ordinary loss treatment rather than capital loss treatment, which increases the amount that can be deducted in the year of the loss. If I’m right and you’ve lost on OneCoin, you may be able to lessen the blow by deducting those losses at tax time. You may also be able to obtain some measure of relief by contacting the Federal Trade Commission or another regulator charged with protection of consumers. Contact us for more information.
If you have something to add to the discussion surrounding OneCoin, please comment below.
Other Sites That Discuss OneCoin
- Here is an article published by CoinTelegraph that provides a few (mostly incidental) details suggesting that OneCoin is not what it seems.
- Here is another article from InsideBitcoins that expands on some of the CoinTelegraph points.
- Here is a blog that discusses OneCoin’s business model in more detail and provides links to numerous videos and presentations.
- Here is a video in which OneCoin’s “owner and founder” makes some generic comments about the role that cryptocurrencies have to play at a payments conference sponsored in part by OneCoin in Europe. OneCoin is barely mentioned.
- Here is a post on BehindMLM, a multi-level marketing watchdog site, that discusses the US pullback.
- Here is an article in the Mirror, a UK newspaper, that describes a OneCoin event in that country and the author’s impressions.