How Bitcoin killer OneCoin turned out to be just another Ponzi scheme

Konstantin Ignatov pled guilty to wire fraud in a US court earlier this month. Konstantin – arrested in March at LA Airport – had headed OneCoin since the disappearance of its former leader, his sister Ruja Ignatova, in the autumn of 2017. The trial in the USA and the recent wildly successful podcast series The Missing Cryptoqueen by British tech reporter Jamie Bartlett have helped reveal a fraud committed on a staggering scale sucking in money everywhere from the UK to China to rural Uganda and beyond. In 2017 alone some estimate OneCoin had revenues of some €17 billion. But what was OneCoin?

In simple terms – a vast pyramid scheme. Purportedly OneCoin was a blockchain based cryptocurrency. Blockchain is the supposedly revolutionary technology which advocates say will transform finance and business. Critics say it has been wildly overhyped for years. In essence, it is supposed to create a decentralised distribution chain – creating simultaneous copies of batches of data or transactions. The theory is that this eliminates fraud and allows companies and individuals to create more secure ways of doing business with each other that need not involve conventional banks.

OneCoin’s inventors used the usual cryptocurrency jargon, proclaiming it would empower ordinary consumers and let them take on big banks and governments. Other cryptocurrencies supposedly paled in comparison with OneCoin which called itself “the Bitcoin killer,” Bitcoin being the first and most famous cryptocurrency.

In the poorly regulated and poorly understood world of cryptocurrency grandiose claims and dubious returns are common. However, OneCoin was not just another example of this phenomenon. Its blockchain system, vital to any cryptocurrency, does not and never has existed and there were essentially no means to convert OneCoins into any other currency. The product was not just worthless, it lacked even virtual existence.

Despite this OneCoin managed to suck in millions of persons who paid billions of Euros for its non-existent product. This incredible fraud appears to have been started by Dr Ruja Ignatova, who was born in Bulgaria in 1980 and grew up in Germany before studying at Oxford and working at McKinsey. However, the scandal seems to have outpaced her and now two years after her disappearance, she faces further charges against her in the USA.

OneCoin exploited a multi-level marketing system in which users received a commission on OneCoin packages they sold to others, and a commission from every sale made by those they had previously recruited as salespersons. The system incentivised a quick spread as investors recruited friends and family. Many seem to have sincerely believed that they would get rich and help their loved ones do so as well when OneCoin became freely tradeable as was promised, even as the day this would happen was forever delayed. In the meantime commissions helped provide income, much of it reinvested in OneCoin by the loyal believers.

Two other factors drove its virus-like spread. The first was an incredibly effective image campaign. At glitzy events Dr Ruja was cheered by adoring investors. In Bartlett’s podcast a number of people even draw comparisons to a cult in which believers are promised wonderful rewards and any critics dismissed as “haters” out to destroy the great project for selfish reasons.

Secondly, its architects exploited the lack of understanding surrounding cryptocurrency. For many who may have heard vague stories of Bitcoin’s rapid spike in value, and not about its sharp slumps, it can seem like a fantastic opportunity to access previously undreamt of wealth. Those worried about money or keen to improve their lot from a low base are the most susceptible. Most people had no context for what a genuine cryptocurrency looks like so struggled to realise OneCoin was a scam.

The concept of the cryptocurrency has shot from being a peripheral phenomenon to the mainstream with dizzying speed.

Regulators have yet to catch up although a few governments in areas such as South Korea, Hong Kong, and Singapore have begun to involve themselves. Facebook’s plan to launch its own cryptocurrency Libra has sparked a flurry of political interest in the USA and opposition in Europe.

Still, the general lack of regulation makes for a ripe environment for scams. Even real cryptocurrencies pose risks given their vulnerability to manipulation and common usage for money laundering. As such while the underlying blockchain technology is intriguing and cryptocurrencies themselves may increasingly find a purchase in everyday life it seems likely a rocky road lies ahead. Things will only stabilise once consumers understand the risks and there is a proper regulatory framework worked out.