Two Estonians have been arrested and face extradition to the US after being charged with defrauding thousands of people out of around $575 million with a crypto Ponzi scheme, according to the US Department of Justice.. Sergei Potapenko and Ivan Turõgin, along with four unidentified co-conspirators, were allegedly behind a crypto mining scam called HashFlare and a fake crypto banking project called Polybius.
The scheme began in 2013 when Potapenko, Turõgin and the others started a company called HashCoins, according to an indictment, which you can read in full below. HashCoins said it built cryptocurrency mining equipment, though the DOJ says it really only “sometimes” resold equipment and components it bought on the market. However, by 2015, the indictment says that HashCoins had customers who were not happy because they had not received the mining equipment they had purchased.
Supposedly, HashCoins was 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 the company was running. Other people could also sign up and pay for HashFlare, and they did, according to the incitement: The alleged scammers are accused of collecting around $550 million from customers, in both regular fiat and cryptocurrency.
Unlike other schemes, the DOJ says HashFlare actually mined some crypto, just nowhere near the amount it said it was (the indictment says it mined Bitcoin at “less than one percent of the hashrate sold to customers ” and Ethereum and other coins less than 3 percent). The HashFlare website allegedly showed clients a bunch of statistics about the mining pool’s performance and told them that they could withdraw the funds they allegedly earned. However, according to the indictment, the company “resisted” when people tried to withdraw their money (even citing know-your-customer rules) or bought cryptocurrency with other customers’ money and sent it instead.
In 2017, HashCoins announced that it was conducting an initial coin offering, in which it would sell tokens to raise funds so that it could start something called “Project Polybius”, a “fully digital bank” using the blockchain. (It’s an interesting name: in pop culture, the word Polybius is mostly associated with a famous video game hoax; not exactly the sort of thing you’d like to associate with what you’re asking people to invest in). The indictment accuses Potapenko, Turõgin and company. to take at least $25 million people invested in the project and transfer it to themselves.
The conspirators “used the laundered proceeds to finance an extravagant lifestyle,” according to the indictment. He later elaborates on that, saying that the funds were used to buy some relatively high-end cars (such as an Audi A7 Sportback, various SUVs from Audi, BMW, and Lexus, and, of course, a AMG G Wagon), as well as dozens of properties in Estonia.
Potapenko and Turõgin face counts 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 is asking people who transacted with HashFlare to fill out a form with information about how much money they spent with the company. It is not currently making any promises to return that money, although the government has worked to obtain cash back for victims of other scams.