Jeffrey A. Babener, of Portland, Oregon, is the principal attorney in the law firm of Babener & Associates. For more than 30 years, he has advised leading U.S. and foreign companies in the direct selling industry, including many members of the U.S. Direct Selling Association. He has served as legal advisor to various major direct selling companies, including Avon, Amway, Herbalife, USANA, and Nu Skin.

He has lectured and published extensively on direct selling. Jeff is a graduate of the University of Southern California Law School. He is an active member of the State Bars of California and Oregon.

Guest Post by Jeff Babener

First Published in the World of Direct Selling 

MLM Cryptocurrency Scams: Stopping the Brand Killer and Protecting the Direct Selling Channel

I got a coin in my palm

I can make it disappear

I got a card up my sleeve

Name it and I’ll pull it out your ear

I got a rabbit in my hat

If you wanna come and see

This is what will be

This is what will be

Magic, Bruce Springsteen

In March 2018, Google followed Facebook in banning cryptocurrency ads. Why? It was too hard to identify the legitimate from the illegitimate advertiser and that out of control speculation and fraudulent financial schemes were creating confusion for the consumer experience. Given that more than 80 percent of Google revenue derives from ads, Google was rightfully concerned that rampant fraud buried in its signature product, online advertising, could dilute its “brand” and poison the receptive market of its readers and product consumers, its advertisers.

The Google/Facebook actions follow alarms going off at all levels of government. Almost simultaneously, the FTC took one of its first major actions against a cryptocurrency pyramid scheme, upon the heels of a yearlong demonstration of similar actions by the SEC, states and foreign governments against fraudulent cryptocurrency Ponzi/pyramid cloud mining investment schemes.

Just as Google and Facebook realized that cryptocurrency scams could be a “brand killer,” the direct selling industry may have awakened to the prospect that the cryptocurrency scheme species is mutating into various MLM offerings that threaten the “brand” of direct selling itself, poisoning pools of potential customers and sales people. Time for direct selling to join the war on these “brand killers?” Absolutely.

Tulip Mania Redux

From January, 2017 to December, 2017 to March, 2018, the price of one Bitcoin, the acknowledged leader and prototype of various cryptocurrencies, gyrated from $1,000 to $20,000 to $6,000. The recent experience hearkened back to the Dutch Tulip Mania “financial bubble” collapse in the 1600’s in which the value of a newly introduced flower bulb skyrocketed from a mere flower price to a point where one tulip bulb sold for the equivalent of 10-15 times the average annual salary of a skilled craftsman, and then plummeted 99.99 percent back to mere flower pricing.

Will this be the fate of Bitcoin and other blockchain cryptocurrencies? The jury is out. Many financial analysts describe Bitcoin as a fraudulent financial device. Some argue that the majority of cryptocurrencies will crash to zero and disappear in the next few years. At the same time, many, in the financial community, grudgingly acknowledge that Bitcoin is increasingly recognized as a valid storage of value for which financial markets have established its place. Only time will tell.

Cryptocurrency: A “Front” for Ponzi and Pyramid Schemes

Although the ultimate future of cryptocurrency is not clear, the hype and rampant speculation has brought out the “get rich quick” con artists to promote a variety of Ponzi and pyramid schemes, many of which are spread via a MLM-type salesforce. Actually, to call the MLM cryptocurrency salespeople a sales force is a gross misbranding. As a general matter, those spreading the word are over-zealous investors who intentionally or unintentionally “suck” in their friends and contacts into a future collapsing pyramid. All of the MLM schemes have flashed the “New Age” technical terms, “cryptocurrency,” “digital currency,” “cloud mining” as if these were “magic” terms that bestowed some sort of legitimacy on what was, in reality, a scam, trying to defy the proverbial Texas wisdom, “you can put lipstick on a pig, but it’s still a pig.”

The criticism from the direct selling community is not so much about cryptocurrency, itself, as it is that cryptocurrencies such as Bitcoin or others, are the “shiny object” that deflects the viewer from the reality of many MLM cryptocurrency programs, ie., that the presence of cryptocurrency is merely an excuse to cause investors to part with their money in exchange for promises of passive income from appreciation of cryptocurrency, and to cause others to do the same. And the ugly truth is that the source of the stream of passive income/appreciation to early adopters derives from funds contributed by later investors. In short, one is describing a Ponzi and/or pyramid scheme, or both.

One website that tracks the emergence of MLM cryptocurrency Ponzi/pyramid schemes, BehindMLM.com, has unearthed more than a score of such scams already, revealing one or two new ones per week globally, a virulent scourge growing in number and intensity.

MLM cryptocurrency scams come in many iterations. A few approaches pop up with regularity.

1. Out-and-out pyramid. In a classic “airplane” scheme, participants buy into positions in a “cryptocycler” with either cash or Bitcoin, and are rewarded for getting others to do the same.

2. Disguised pyramid. Investors contribute to the support of a pseudo cryptocurrency trading platform or trading services, and are rewarded for recruiting others to do the same. Sometimes, a passive “return on investment” (ROI) is promised to traders from appreciation of purchased cryptocurrency. The source for commissions comes from funds invested by new investor/consumer/distributors, and the only reason “consumers” pay money is to buy into payoffs in the MLM opportunity.

3. Ponzi/pyramid cloud mining investment scheme. Investors purchase shares or memberships in a company which claims to mine cryptocurrency with thousands of computers that are programmed with algorithms to yield “digital coins” and are promised outrageous passive returns on their investment. Investors find others to do the same. In fact rewards and returns merely come from investments by new investors.

This scheme is obviously a pyramid.  It is also a Ponzi scheme. Says the SEC, the investment in cloud mining ventures is also the sale of an unregistered security.

4. Ponzi/pyramid ICO or Cryptocurrency purchase scheme. Investors are urged to buy coins in an ICO (Initial Coin Offering), or buy existing cryptocurrency coins, in which they are promised substantial returns on their investment, sometimes guaranteed returns. Investors make money by finding new investors. The return on investment invariably comes from new investor money.

In short, MLM cryptocurrency offerings represent:

1. Sale of unregistered securities.

2. Ponzi Schemes.

3. Pyramid Schemes.

4. Fraudulent financial schemes.

Regulators Speak Out in Action and Words

The SEC was sufficiently concerned about the proliferation of ICOs that in December 2017, it issued an SEC alert on the dangers of this new phenomenon. It also clarified its position to announce that the SEC regards an Initial Coin Offering (ICO) a securities offering that must be registered with the SEC. Of course, in the context of sales people, this would prohibit sales persons, whether compensated through an MLM format or not, to be licensed sellers of securities, a virtually impossible task for 99.99 percent of MLM businesses.

Similarly, on March 13, 2018 IMF (International Monetary Fund) Managing Director, Christine Lagarde noted the global promise and peril of cryptocurrency, including rank speculation, financial fraud and use in criminal money laundering:

Whether Bitcoin’s value goes up or Bitcoin’s value goes down, people around the world are asking the same question: What exactly is the potential of crypto-assets?

The technology behind these assets—including blockchain—is an exciting advancement that could help revolutionize fields beyond finance. It could, for example, power financial inclusion by providing new, low-cost payment methods to those who lack bank accounts and in the process empower millions in low-income countries.

The possible benefits have even led some central banks to consider the idea of issuing central bank digital currencies. Before we get there, however, we should take a step back and understand the peril that comes along with the promise.

The peril of crypto-assets

The same reason crypto-assets—or what some people call crypto-currencies—are so appealing is also what makes them dangerous. These digital offerings are typically built in a decentralized way and without the need for a central bank. This gives crypto-asset transactions an element of anonymity, much like cash transactions.

The result is a potentially major new vehicle for money laundering and the financing of terrorism.

And in February, 2018, China unveiled a new set of regulations to ban cryptocurrency by blocking access to exchanges that trade cryptocurrency. Sooner or later blockchain technology will be recognized in China, but, for now, the government, like so many others, is trying to catch up with a phenomenon that also carries great risk of “out of control” speculation and financial fraud.

MLM Cryptocurrency Scams

Among potentially dozens of MLM cryptocurrency scams is the poster child, One Coin, which originated from Belize and Bulgaria, issuing its own “coin” which was promoted globally from 2015 using a MLM compensation plan. Ostensibly, purchasers did not buy One Coins, but instead purchased educational packages that explained trading in One Coin which were accompanied by “mining contracts” that created One Coins.

Through a stormy history One Coin was prosecuted, shuttered or placed on observation and warning lists as a Ponzi/pyramid in many jurisdictions, including India, Vietnam, Croatia, Norway, Finland, Sweden, Latvia, Thailand and other countries.

U.S. states are also in motion.  While the typical MLM cryptocurrency program is based in, or emanates from, foreign jurisdictions that may include Hong Kong, Dubai and European countries, these programs are often active in the U.S. with distributors and management of contacts occurring in America.

On March 2, 2018 the North Carolina Securities Division issued a cease and desist against a MLM cryptocurrency scheme originating from web hosting in France, Power Mining. Power Mining collected funds from investor/MLM distributors who were promised a return on investment from “cloud mining” of various crypto currencies.

The state cases are piling up. On December 20, 2017, the Texas State Securities Board shut down USI-Tech, another MLM cryptocurrency cloud mining firm.

And the same sort of cease and desist issued from the South Carolina Securities Commissioner, on March 9, 2018 for MLM cryptocurrency scheme Genesis Mining and Swiss Gold Global.

Onn March 7, 2018, the New Jersey Bureau of Securities joined other states with a cease and desist order against Bitcoiin, another MLM cryptocurrency program for which famed actor, Steven Seagal, is the official global brand ambassador.

And so on and so on… and Into the Fray Stepped the U.S. FTC…

In February, 2018, the FTC followed MLM cryptocurrency scam concerns by the SEC, states and foreign governments, in its first prosecution, FTC vs. Bitcoin Funding Team/My7Network/Jetcoin.

Said the FTC:

The defendants claimed that Bitcoin Funding Team could turn a payment of the equivalent of just over $100 into $80,000 in monthly income…

According to the FTC, Bitcoin Funding Team and My7Network participants could only generate revenue by recruiting new participants and convincing them to also pay cryptocurrency. For example, Bitcoin Funding Team participants were required to make an initial Bitcoin payment to an earlier participant and pay a (platform) fee to Bitcoin Funding Team. With these payments, participants were eligible to recruit new members and receive payments from them. Promoters claimed participants could earn bigger rewards if they paid additional Bitcoins...

The FTC alleges that a fourth defendant, Scott Chandler, promoted Bitcoin Funding Team and another deceptive cryptocurrency scheme, Jetcoin. Jetcoin also promoted a recruitment scheme and additionally promised investors a fixed rate of return on their initial Bitcoin investments as a result of Bitcoin trading. In a series of promotional calls, Chandler claimed Jetcoin participants could double their investment in 50 days.

In fact, notes the FTC, few investors made money and the revenue for payment just came from recruiting new investors. The Bitcoin Funding and My7Network models were alleged to be out and out cash pyramids. Said the FTC, the Jetcoin model, which promised substantial guaranteed returns on purchase of Bitcoins, was both a headhunting recruitment pyramid and a Ponzi scheme, in which guaranteed returns would come to early investors from later investors.

Enough Said… We’ve Reached the Tipping Point of “Brand Dilution”

Everyone understands that the emergence of blockchain digital currency may be a serious positive development in the world of finance. But, in such a short time, the number of scams, financial frauds, unregistered securities offerings, crazy speculation, Ponzi schemes, pyramids and money laundering may taint and poison any legitimate activity with which it becomes associated. Hence Google and Facebook ban cryptocurrency ads on their platforms. And similarly, the brand of “direct selling/MLM” is endangered if MLM cryptocurrency scams are viewed as somehow being part of legitimate direct selling and MLM.

Time for Direct Selling Industry Involvement

The direct selling industry needs to step up to the plate. Google sees the brand dilution. Facebook abhors the brand dilution. The SEC, the FTC, the IMF, U.S. state and foreign governments abhor the fraud. It is time for the direct selling industry to protect the livelihood of its sales persons and the financial security of its consumers before the public begins to mistake these MLM cryptocurrency scams as belonging to the same gene pool as legitimate Direct Selling/MLM.

This should be done in a unified manner with an industry voice. One viable starting point is for the U.S. Direct Selling Association (DSA) and the World Federation of Direct Selling Associations (WFDSA: Membership of direct selling associations of approximately 60 countries) to each establish and fund a Cryptocurrency Task Force.

Among other goals to protect the integrity of the direct selling “brand,” this and other industry task forces should monitor, study, analyze, educate, inform and thwart financial fraud. They should become one of the “go to” sources for the public on these issues.

And One More Thing… Time to Join with Government

In November, 2017, Acting FTC Chair, Maureen Ohlhausen, presented to the U.S. DSA, and graciously invited the DSA and all its members to be “stakeholders at the table” to forge a new cooperation to help ensure the dual goals of success of the direct selling industry and protection of its sales force and consumers. Simultaneously, the industry invited the FTC to be a stakeholder in proposed federal anti-pyramid legislation, H.R. 3409.

It is time for the industry to return the hospitality, and offer all its U.S. and global resources, expertise and full-throated support to every governmental agency that is combatting cryptocurrency pseudo-MLM/direct selling financial fraud. The task forces, set up by the industry, could become tremendous and valuable partners to the SEC, FTC, IMF, and U.S. state and foreign consumer protection agencies. It is time for the industry to step up.