What is Ponzi Scheme? Is it Legal? or Scam?

Ponzi Scheme Image

Ponzi schemes are generally based on fraudulent investment operation services. Principally, investors contribute some investment to the company, which promises them higher returns than others. Also when those investors want their money back, they paid out with the incoming funds contributed by the new investors.

The person organizing this type of fraud is in charge of controlling the entire operation; they simply transfer finances from one customer to another and abstain from any real investment conditioning. 

Is the Ponzi scheme Legal? or a Scam?

Ponzi schemes are not considered legal as they do not invest the sum provided by the investors. They collect money from new investors and pay their initial investors.

Basically, they transfer funds from one client to another but they don’t do any investment in reality. Moreover, they charge some fees for the service they offer.

Origin and history of the Ponzi Scheme:

The origin of the Ponzi scheme dates way back to the year 1919. The Ponzi scheme is named after Charles Ponzi. He was known for his tricks to move people to invest their money. Charles Ponzi is known for running the first-ever Ponzi scheme. 

The Postal service in The U.S.A  back then had come up with transnational reply tickets. These tickets were allowing the transfer of pre-purchase postage and attaching the same in their correspondence. The receiver would change the pasteboard for precedence prints in their reply. 

Nonstop variation in stamp prices resulted in prints being expensive in many countries. Ponzi had arranged agents in other countries to buy cheap tickets and shoot them to him. He also changed them for prints of advanced value. These prints were also sold for profit. 

The Ponzi Mania

The most notorious Ponzi scheme in recent history and the single largest fraud of investors in the United States was orchestrated for further than a decade by Bernard Madoff, who had allegedly swindled investors in Bernard L. Madoff Investment Securities LLC.

Madoff made a large network of investors that he raised cash from, pooling his near guests’ investments into an account he withdrew from. In reality, he never invested the sum he had collected from various investors, and once the fiscal extremity of 2008 took hold, he could no longer sustain the fraud.

The SEC values the total loss to investors to be around$ 65 billion. The contest sparked a period in late 2008 that’s known as Ponzi Mania, in which controllers and investment professionals were on the quest for other Ponzi schemes. 

Ponzi scheme Vs Pyramid Scheme:

A pyramid scheme is a business model in which the members at the higher position in their respective hierarchy appoint a few new members who make investments in their scheme.

In this process, they are asked to recruit more members and collect money from them. Once the company gets the fee, they send the commission to the first tier member.

Pyramid schemes and Ponzi schemes have numerous similar characteristics grounded around the same conception in which unknowing individuals get wisecracked by investors who promise them extraordinary returns in exchange for their money.

Still, in discrepancy to a regular investment, these types of schemes can offer harmonious” gains” only as long as the number of investors continues to increase. Once the number tapers off, so does the investor’s money.

Are Cryptocurrencies similar to Ponzi Schemes? :

Cryptocurrency is a digital payment system that does not rely on banks to verify its transactions. It’s a peer-to-peer system that can enable anyone anywhere to make payments.

Rather than being physical money carried around and changed in the real world, cryptocurrency payments live purely as digital entries to an online database describing specific transactions. When you transfer cryptocurrency finances, the deals are recorded in a public tally. 

Cryptocurrency is stored in digital wallets. 

Cryptocurrency got its name because it uses encryption to verify deals. This means advanced coding is involved in storing and transmitting cryptocurrency data between wallets and public checks. The main goal of encryption is to give security and safety to its users.

Some experts agree with this fact that when it comes to various crypto products, there are chances that many products with projects might be trying to work like Ponzi Schemes.

Cryptocurrency is being used by people as it’s easier to make any payment all over the world. Also with the use of Crypto; anyone can come up with a Ponzi scheme and open it to the whole world rather than being confined to a particular region or country.

Red Flags to check on fraud Sites: 

A. Higher returns and no risks: Anyone with mere or almost no knowledge about investments can still be clear about the risks that there are in this field. If a company claims higher returns and no risks that should be considered as a red flag.

B. Irregularities in paperwork: Issues with paperwork from the company’s end are also one of the very common red flags so it’s highly recommended to be sceptical when the company you’ve invested in fails to provide you with any paperwork.

C. Irregular Payments: People or companies involved in Ponzi Schemes often tell their investors to wait as they might get a huge profit if the payment is delayed.

D. Consistent Returns Offered: Investments are always subject to market risks. But fake investment sites always offer consistent high returns. 100% good is always bad.

E. Unlisted Investment:  Ponzi schemes typically involve investments that have not been registered with the seC or with state securities regulators.

F. Unlicensed Sellers: State securities laws require certain investment professionals and their firms to be licensed or registered. Many Ponzi schemes involve unlicensed individuals or unregistered firms. 

G. Investor Qualification Not Required: legit companies want serious investors, therefore, they follow due diligence to know their members. But on scam sites, investor qualification doesn’t matter.

H. Information Not Shared: fraudster never share their information. They hide their company name. The most they mention will some company’s certificate. This certificate is of no use, as it is not proof of legitimacy.

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