Indian authorities have arrested two individuals accused of operating a bitcoin Ponzi scheme that defrauded some 300 bitcoins, approx. $2.6 million in current prices, from 5000 victims. The duo, alleged to be running multi-level marketing (MLM) scheme that incentivized investors to lure others into the scheme, by promising high returns on bitcoin investments.
Investigating officers found that the company was offering a 12% return on their bitcoin investments. Trusting them people invested in around 300 bitcoins.
DCP (Cyber Cell) Anyesh Roy said that a team led by his colleague DCP K P S Malhotra, arrested the prime accuse Deepak Jangra (37) and Deepak Malhotra (56). “Their basic idea was to form a multilevel marketing scheme involving bitcoins. The people were given monthly payouts and additional income for referring the scheme to more people,” stated an investigating officer, adding that initially, some people also received their returns in the form of bitcoins. After paying investors their returns in bitcoin in the beginning, the company began offering dividends in ‘BMP’ - its own custom-created cryptocurrency that offered no value. Eventually, the operators fled with their investors’ money before law enforcement caught up and apprehended the two individuals.
How does MLM work?
Multi-Level Marketing a.k.a. Pyramid Scheme is a tool that direct selling companies use to motivate their existing members(distributors) to recruit new members. The existing members receive a percentage of these recruits & sales. Also, some companies offer Pyramid (also known as Binary) schemes to lure their existing members to bring in new members. Existing members can also make money by selling their products directly to the end users.
Multi-Level Marketing is a legitimate business strategy, though it is always in controversy. The main problem lies within pyramid schemes, which use money from new members to pay the people at the higher authority, often taking advantage of people by pretending to be engaged in "legitimate" multi-level marketing. Pyramid schemes can easily be spotted because their greater focus is on recruitment than on product sales.