Fraudsters have been collecting investments for the creation of a non-existent bank for 3 years.
On November 20, at the request of the United States, the Estonian police and the FBI arrested two Estonian citizens in Tallinn on suspicion of organizing a pyramid scheme and illegal mining of $575 million in cryptocurrency.
Sergei Potapenko and Ivan Turygin, 37, persuaded hundreds of thousands of victims to invest in cryptocurrency mining service HashFlare and virtual currency bank Polybius, according to court documents.
The two men, who are in custody awaiting extradition to the US, have raised over $500 million in investments and have used front companies to launder money and buy real estate and luxury cars.
HashFlare was a massive cryptocurrency mining operation that allowed customers to rent out their computing power and collect a portion of the cryptocurrency they produced. However, HashFlare did not actually have mining hardware, contrary to what the scammers claimed to their investors.
According to the investigation, the HashFlare "hardware" was mining bitcoins at a rate of less than 1% of computing power. When investors wanted to withdraw their earnings, the scammers were unable to pay with the extracted currency. Instead, the defendants either postponed the transfer of funds under various pretexts, or paid the investors not with the mined cryptocurrency, but with the currency they bought on the exchange.
HashFlare has been operating since 2015, and in 2018 the service was closed, allegedly due to “instability in the cryptocurrency market and high maintenance costs.”
According to the US Department of Justice, the HashFlare service was a pyramid scheme. Potapenko and Turygin purposefully made it difficult for clients to withdraw funds, including by establishing KYC (Know Your Customer) requirements that require users to upload identification documents before they can withdraw funds.
Potapenko and Turygin also raised investments to create a virtual currency bank Polybius - the defendants raised more than $25 million, but never created a bank or paid dividends.
They are also accused of using shell companies and fake contracts to launder proceeds, and their case included “at least 75 properties, 6 luxury cars, cryptocurrency wallets and thousands of computers for cryptocurrency mining.”
Potapenko and Turygin are charged with 17 counts of wire fraud and 1 count of conspiracy to commit money laundering—each charge punishable by up to 20 years in prison.
The FBI has set up a feedback page to collect additional information from the victims of this scam.