History repeats itself. Of all the people who once dug for gold, very few made big money. The ones who did make money were the ones who focused on selling products like jeans or shovels to those searching for the treasure at the end of the rainbow. People under the influence of easy money make stupid mistakes. It's like a documentary about the Wolf of Wall Street.
It feels like there's a crypto currency pyramid scheme bubble bubbling away inside direct selling right now. There's nothing new under the sun, as they say. It usually takes a couple of years before the market figures out the game and the so called business dies. The victims are uneducated and anonymous, which makes the game a lot easier.
I got the inspiration for this blog post from Kevin Thompson. A well known attorney who works a lot with the legal side of direct selling. This man is perhaps the most qualified person to untangle what this is really about, since he's probably the leading voice in the field and he also trains companies and organisations in how direct selling should be done from a legal point of view. After many hours of studying everything he's shared, I found a post I felt I needed to shed more light on in Swedish. You'll find the post in full here.
People who run scams see the development crypto currencies have made in recent years, and concepts that combine a new crypto currency with some sort of direct selling system to get hold of leverage are popping up like mushrooms. You want to know what's good and what's bad so you can define the grey area in questionable concepts, but here there's neither a grey area nor a gold mine.
Mr. Thompson argues that if it isn't an open currency, there's no way to confirm the currency's legitimacy or value. If it's been developed in a closed environment, the value is driven solely by new money coming into the closed system, in other words a so called Ponzi scheme. That means your money is used to pay out commissions to those who've already paid in and are sitting around waiting for a return.
These fraudsters look like anyone else. The difference is that they spend most of their time building their "business" far away from our authorities. They operate out of Thailand, Hong Kong, China or Bulgaria. They know they're doing something wrong. That's why they keep their distance. They gather as much money as possible before things come to the surface and people understand what it was really about.
Crypto currency
Instead of relying on banks to run the financial system, encryption allows a digital currency to exist. Crypto currency is an open system that makes it possible to create and send digital assets. Just like digging for gold, there's a process here for creating the encrypted currency, where cloud mining services produce "digital coins". You rent hardware offered by someone else who agrees to share the fruits.
Thompson goes on to say that the value of a real crypto currency can always be established by an independent party. It's crystal clear, which means there are no margins. With currencies that are freely traded on the market, there's no real point in a company using the currency as a product of its own in the business. If you can only get hold of the currency from one place, the price can be manipulated internally and can rise over time based on "demand", which is really just new money coming into the system. A chain letter scheme, according to the definition used by Lotteriinspektionen (the Swedish gambling authority).
What we have to understand is that if a currency is going to be legitimate, it needs to be usable as a means of payment in the market. Consumers have to be able to do business by transferring money to a merchant in exchange for products or services. Why would a shop accept an experimental currency without knowing its real value? If the currency can't be used in the market, then it's only about the return on the "investment".
Chain letter schemes
In a pyramid scheme, the value of a digital coin is set inside a closed system, not on the free market. In a closed system the value is controlled and manipulated. The whole point of crypto currency is that it should be open and operate in an environment where its existence doesn't depend on trust.
The Securities and Exchange Commission writes that they are "concerned about the increased use of virtual currencies in the global market, since fraudsters can easily lure investors into Ponzi schemes and other types of fraud", because these systems often promise high returns for getting in at the start of a growing internet phenomenon. They go on to say that investments tend to go up and down over time, especially for those seeking high returns, and that you should be suspicious if something is claimed to generate consistent returns regardless of external market conditions. Price swings are practically guaranteed, so if a company talks about a currency that will climb in value, stay away. Then it's directly tied to new money coming into the pyramid.
If the value isn't confirmed from the outside, then as I said the company may have manipulated it. Investors see returns and put in more money, which becomes a self fulfilling prophecy until the whole thing collapses. In a Ponzi scheme, money is needed inside the system to prevent a crash when growth slows down.
The question is how a direct selling company could find a business model that would work with crypto currency without the authorities classing it as an investment scam and eventually shutting the business down. In a perfect world, the value of the "digital coins" would exceed the cost of producing them, which isn't always the case. So if a direct selling company were to sell the service of producing crypto currency, the prices would have to be lower than the value of the coins, otherwise it would be pointless, Thompson writes.
The currency would be traded publicly and the company would be one of several players selling the same service. If the currency really were open, there would be other players working on production, others guaranteeing that the prices are competitive and legitimate. If the prices were too high, competition would drive the company into bankruptcy. Simple.
If the digital coin is the product, stay away. If the concept is built on making money from producing new currency, stay away. Avoid companies that give away their currency in exchange for you buying their training packages. Stick to companies that have real customers buying real products for real money.
In some cases it's fun to be first, in other cases it's terrible, Mr. Thompson concludes.
The reason fraudsters sometimes use direct selling systems is that it's a powerful way to get anything out into the market, just like a phone or the internet is a powerful tool for reaching people. A scam is a scam because the person running it is trying to trick someone, regardless of industry, profession or business model.
The foundation of lawful business is that customers buy products that make their lives better (that bring a value to the market). If you understand this at that basic level, you'll never fall victim to a Ponzi scheme or a pyramid scheme, because you've learned to recognise it for what it is.
