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Dealing With Fraud In The Bitcoin World

This article is more than 8 years old.

Bitcoin has been around since 2008, but it’s still in its infancy. That means a lack of regulation, fraud, ponzi schemes, and more. The Bitcoin industry has it all, making it the new Wild West. Digital gold is hiding “just beneath the surface,” waiting for those opportunistic, innovative and brave enough to test these uncharted territories. So what can you expect to encounter in this new frontier as one of the early pioneers?

When you take your first step into the bitcoin industry, it can feel like you’ve entered the 2015 Doc and Marty visited in "Back to the Future". This new digital currency has big promises, from reducing international wage payment fees and delays (like what we do at Bitwage) to providing banking services to the 2.5 billion people who are financially underserved.

If you dig a little deeper and look at the blockchain itself (the architecture and technology behind Bitcoin), it even has the ability to create systems beyond the financial industry. There are applications popping up for things such as an incorruptible voting system and organizations that are run completely by computers, called decentralized autonomous organizations. It’s not hard to believe flying cars are too far away.

With all this new technology and new opportunities to improve outdated systems, the lack of regulation attracts a world of fraudsters and less savory entrepreneurs looking for a way to make a quick buck. In the past, these ponzi schemes and frauds were aimed at consumers (such as the alleged case against Gaw Miners), but now they’re focusing on business owners within the bitcoin industry too.

Those of us that have been in the Bitcoin Wild West since the beginning know it’s difficult to open a bank account when you’re just starting out. When a company is new, it has no revenue or close to zero investment. They have no financial history and can even be seen as a potential shadow entity for money laundering. So you can’t really blame the banks. The risk is often not worth the potential reward. This bitcoin-averse banking climate across the industry set the stage for my first run-in with a fraudster targeting entrepreneurs.

I went to my first bitcoin and blockchain conference, Inside Bitcoins, in Las Vegas in 2014.  (Before you even say it, yes, this industry definitely knows how to have a good time.) It was there that I met Anthony. He had that classic 1980s mobster look, slicked back hair and a suit that had been worn a couple more times than it should have before getting cleaned.

He came up to me and asked what we are doing at Bitwage. After I explained our mission he asked if we were having trouble getting a bank account. Since it is such a commonly known problem within the industry, I was curious to figure out what his angle was. I said we were, and he responded, “Great, we actually run a bank. The way it works is we provide you banking services in exchange for a 5% stake in your company.” Immediately I thought, “Are you kidding me?! Who in the right mind would do this?!” I listened to the rest of his pitch and walked away thinking, “I’m sure no one takes this guy seriously.”

Over the next few months, I would run into Anthony at various conferences. I’d see him speaking with other members in the industry, many of whom I considered friends. I was baffled. I kept asking myself, “How could people like this guy? Is this guy actually legitimate? Am I missing something?”

A few months later, I found out my suspicions were right. Anthony and his executive team were arrested for allegedly operating an illegal Bitcoin exchange and fraud, among other charges. I was actually a little shocked.  I felt like the guy might be running a scheme through some sort of loophole and I knew I didn’t want to go into business with him, but I did not think he was running an illegal operation. I couldn’t believe it. As of November, 2015, new charges have been brought against Anthony.

Fortunately, neither Bitwage nor none of my personal acquaintances were affected, but there were a few new, early-stage entrepreneurs who fell victim to the unregulated Wild West. What is the lesson here? Well for starters, always make sure to apply the “appropriate level of due diligence” to all of your potential business partners. Luckily, as the market is maturing, we are seeing much less fraud and many more innovative technologies (Such as technologies that help artists protect their intellectual property). Now, enough with all this fraud talk, where’s my hoverboard?