Two Estonians have been arrested and face extradition to the United States after being accused of defrauding thousands of people out of approximately $575 million with a crypto Ponzi scheme, according to the US Department of Justice. Sergei Potapenko and Ivan Turõgin, along with four anonymous co-conspirators, are said to be behind a fraudulent crypto-mining company called HashFlare and a fake crypto-banking project called Polybius.
The scheme began in 2013 when Potapenko, Turõgin and the others set up a company called HashCoins, according to an indictment, which you can read in full below. HashCoins has said it has built cryptocurrency mining equipment, although the DOJ says it has in fact only “sometimes” resold equipment and components that it has purchased commercially. In 2015, however, the indictment states that HashCoins had unhappy customers for not receiving the mining equipment they purchased.
HashCoins was apparently not particularly interested in running a mining pool or selling mining machines.
Enter HashFlare. Potapenko, Turõgin and the others allegedly told some customers that instead of getting a physical machine, they would get a share of the profits from some sort of cloud mining pool that the company ran. Other people could also sign up and pay for HashFlare, and they did, according to the inducement – the alleged fraudsters are accused of collecting around $550 million from customers, both in fiat currency ordinary and in crypto.
Unlike some other schemes, the DOJ claims that HashFlare did in fact mine crypto, but nowhere near the amount it said (the indictment says it mined Bitcoin at “less than one percent of hashrate sold to customers” and Ethereum and other coins at less than 3%). HashFlare’s website allegedly showed customers a bunch of statistics on mining pool performance and told them they could withdraw the funds they supposedly earned. According to the indictment, however, the company “resisted” when people tried to withdraw their money (including citing your customer’s regulation) or bought cryptocurrency using other people’s money. customers and sent them instead.
In 2017, HashCoins announced that it was holding an initial coin offering, where it would sell tokens to raise funds so it could launch something called “Project Polybius”, an “all-digital bank” that used blockchain. (That’s an interesting name – in pop culture the word Polybius is mostly associated with a famous video game hoax; not exactly the kind of thing you’d want to associate with what you’re asking people to invest in.) The indictment charges Potapenko, Turõgin and co. to take at least $25 million invested in the project and transfer it to themselves.
The conspirators “used the laundered profits to fund an extravagant lifestyle,” according to the indictment. He later expands on this, saying that the funds were used to buy relatively high-end cars (like an Audi A7 Sportback, several SUVs from Audi, BMW and Lexus, and – of course – a G-wagon AMG), as well as dozens of properties in Estonia.
Potapenko and Turõgin face charges of conspiracy to commit wire fraud, conspiracy to commit money laundering and 16 counts of wire fraud. As for the victims of the alleged scheme, the FBI asks people who have transacted with HashFlare to fill out a form with information about the amount of money they have spent with the company. It currently makes no promises about getting that money back, although the government has been working to get money back for victims of other scams.