Why is bitcoin difficult to call the Ponzi scheme
As the talk about tulips, pyramid schemes and Ponzi schemes grow in proportion to the price of Bitcoin, I decided to be smart with such a tweet : “Rhymes with Fonzi” .
Fonzi [the cult character of the comedy series "Happy Days" - note. Trans.] - this is fun. And it was a funny tweet, but if you think about it, it is not very smart. Fortunately, he found a brilliant answer:
You know what, @DontPanicBurns? You are absolutely, 100% right. We need a new term to describe what is happening madness.
I propose to use your term - "scheme Nakamoto."
When we talk about Bitcoin, Ethereum or any other cryptocurrency, neither “Ponzi” nor “pyramid” are completely accurate descriptions of how these systems actually work.
Traditional Ponzi schemes are usually managed by a central operator (Charles Ponzi, Allen Stanford, Bernie Madoff, Sergey Mavrodi), who is responsible for attracting new funds and payments according to a certain algorithm. Schemes fall apart when payment requirements exceed the amount of funds deposited, so that the scheme operator cannot satisfy investors ’requests, causing loss of confidence or a massive outcome that undermines the system’s liquidity. In turn, this destroys the scheme as a whole (or, rather, brings it to an inevitable end, since the Ponzi schemes are doomed to death from the moment of their creation — nothing can expand forever).
Financial pyramids, by contrast, are more decentralized. In order to recoup their investments, each victim must become a leader in the scheme - and recruit new victims who then pay this leader and the earlier leaders who are on top. Not all pyramidal multilevel schemes are illegal. For example, Avon basically has a real product and uses a legally sound “direct sales” structure. Other types of pyramid schemes are illegal, where the only product is licenses to recruit new members, be it small pyramids for housewives, such as the Secret Sister Gift Exchange , or scandalous pyramids like the Dare to be Great scheme of the 1970s, where the product was right selling a product, a little more.
Therefore, it may be time for the authors of the specialized literature to describe a new type of investment fraud - which is indeed an ugly character only when the cryptomonet bubble bursts - this is a class of fraud where technology, not the operator, mediates the interaction between beneficiaries of investment fraud and its victims.
The Nakamoto scheme is an automated hybrid of the Ponzi scheme and the pyramidal scheme. From the point of view of managing a criminal organization, it combines the strengths of both schemes and (at present) lacks their weaknesses.
The Nakamoto scheme draws strength from the same things that make the pyramids and Ponzi so compelling. It promises an insane return on investment, is accessible to a person from the street with little or no effort, and recruits individual members as new, interested evangelists.
The regulators, blinded by lobbying from Silicon Valley, viewed these schemes as futuristic and ultra-modern, and not as what they really are: factories of victims, which in the next crash will spawn hundreds of thousands of screaming investors with little or no legal resource due to four years inaction on the part of regulators.
In the Nakamoto schemes there is no central operator. This ensures that no one participant or organization can be held accountable (as is the case with the Ponzi or the pyramids), and it hides the identity of the participants from law enforcement.
As in the pyramids, this scheme has the insidious quality of turning each victim into a new active participant when they extol the system in order to attract new investors to pay for their cashout.
These incentives are often combined with 21st century software disciplines for community management and technological evangelism in a powerful combination of marketing and corporate / financial interests that people cannot ignore from the street (Coinbase currently attracts 100,000 new users per day).
The most interesting thing is that the Nakamoto schemes do without the need for cash flow, which gives rise to legal liability. Sometimes in Ponzi schemes, but more often the pyramids provide for the transfer of specific funds to a specific person with a specific calculation for return with interest. If you borrow the term from the tax laws and adapt for colloquial speech, then such a transaction is burdened with a pledge (hypothecated). Legal liability arises because it is easy for the regulatory authorities to identify these cash flows and identify a violation of the law here. For this reason, in many jurisdictions punishment does not follow the initiation and launch of the pyramid, but the act of participation in such an enterprise (more on this below).
On the other hand, compensation for damages from the Ponzi scheme includes: 1) tracking operations that went through the managers of the scheme; 2) determining the nature of these operations: they were bona fide or fraudulent; 3) rollback of remittances that may be taken from recipients; 4) determining the appropriate nature of compensation: for example, a proportional distribution or with the loss on the fact. Making a profit from the Ponzi scheme turns a person into a victim and, possibly, a recipient of fraudulent funds, but not necessarily an active participant in the scheme, as is the case in the pyramid scheme.
Cryptocurrency cash flows avoid these problems because they lack collateral . An additional layer of abstraction in the form of cryptocurrency exchanges they eliminate what would otherwise be considered absolutely illegal cash flow and contracts. They disguise the essentially identical investment program under the general pool of aggregate demand, satisfying the general pool of aggregate supply.
Until now, this structure and the lack of adequate legal instruments (or the will of law enforcement agencies) allowed adherents and promoters of cryptocurrency schemes to avoid responsibility as participants in the scheme, principals (as they would be in the pyramid) or as recipients of unfairly acquired money actions (as is the case with Ponzi).
As a result, we observed a seemingly endless spread of technically illiterate adepts. They roll out false arguments for sale, such as Value in the Network itself, or inflate the value of the new coin, linking it with the prominent Valley Venture Funds to stimulate demand and, consequently, their own profits, even if the scheme is doomed to failure .
This is completely illogical from the point of view of software, since the performance of cryptocurrency networks is significantly inferior to existing systems:
For comparison, Bitcoin processes about 3 transactions per second in one “currency”, and the memory is now scored [article left in December 2017 - footnote. trans.].
Rather, it can be assumed that bitcoin is primarily bought for resale and speculation, and not for some real benefit.
Incomparably inferior in performance to systems like Visa, these networks use “markets” for liquidity, rather than specific cash flows, which is much more convenient for criminal organizations, because it is much more difficult to prove that a random transaction under a pseudonym is part of a criminal conspiracy than for example, a suitcase with banknotes of 500 euros or an e-mail instruction for processing a transfer to a bank account in the Cayman Islands.
The Old Testament says: "Thieves have no honor." Nakamoto says: "Thieves should not have the honor."
The blockchain consensus allows thieves to coordinate and control this system without having to trust the central operator.
This means that the activity is carried out without any individual responsibility on the part of the participants. But to make this possible, the system makes cheating very expensive:
If you compare with the alternative (use the usual financial system, be traced and be put in jail), I can imagine that some people consider this as an adequate price for access to the billions of dollars currently spinning on cryptocurrency markets. I include in the notion “some people” not just users of these cryptocurrencies, but also some developers, mainly ICO promoters, who disclaim responsibility for their creations as soon as they release them into the wild (pre-selecting a large portion of coins in advance) to reward your rampant genius).
What will we do if this bubble starts to spin wildly out of control, and the government begins to fight the cryptocurrency with medieval methods? And I'm not talking about applying the laws of KYC / AML (Know your client and about countering money laundering), like today. I mean strict liability without a statute of limitations, special forces raids on cryptomites, brutal methods in the spirit of "Pulp Fiction."
Easy peasy.
Taking into account the standard clause that I am a British lawyer and not an American lawyer, the English rules are a bit confused and relate either to common law fraud or to the rules of unfair trade practices, therefore they are not very specific to Ponzi and, accordingly, articles.
Fortunately, I found a super convenient network distribution law (Chain Distributor Schemes) in the New York Business Law Code, which hypothetically fits much better:
1. Any person, partnership, corporation, trust or association, as well as any of their agents or employees should be prohibited from promoting, offering or providing participation in network distribution schemes.
Cool. It seems that in New York, no one has the right to participate in the "network distribution scheme."
What is considered such?
2. The “network distribution scheme” used in this document is a sales mechanism, whereby a person receives a license or the right to offer or hire one or several people for profit or economic benefit who also receive such licenses or rights for conditions of investment and in the future may further increase the network of persons who have received such licenses or rights under the same conditions. Limiting the number of participants in the program or the existence of additional conditions affecting the right to obtain such a license or the right to hire or make a profit does not affect the definition of a scheme as a network distribution. In this document, the term "investment" means any acquisition, except for the acquisition for personal consumption, services, property, tangible or intangible, and includes, among other things, franchises, business opportunities and services, as well as any other types and means or transmission channel funds, regardless of whether it is associated with the production or distribution of goods or services. The concept does not include demonstration equipment and materials at cost used in the sale process, and not for resale.
Any options applied to securities?
3. The network distribution scheme must comply with the security in the sense described in this article and must be subject to all the provisions of this article.
Why regulators may want to consider a scheme from the angle of such financial regulation? Because in the end, the market treats these things as investments, and the laws were originally created to protect, as you can guess, investors. Therefore, the law should regulate cryptomoney as it regulates other types of investments.
First proof:
So let's adapt this law of New York to cryptocurrency and along the way we are going to completely make crypto-advocate lawyer Peter van Valkenburg and the Coin Center guys crazy, changing the NY GBS § 359-fff (2) as follows:
2. The “network distribution scheme” used in this document is (A) a sales scheme or mechanism whereby a person receives a license after the investment made or the right to hire one or several people for profit or economic benefit who also receive such licenses or rights subject to investment and in the future may further increase the network of persons who have received such licenses or rights under the same conditions ; or (B) a sales scheme or mechanism where a customer purchases a digital token, awaiting an estimate of its value mainly based on an estimate of the number of additional participants who will be involved in a digital token scheme where the token is intended primarily for money or cash equivalent , and not to secure a contract for a specific and specific product, service, security, license or other tangible or intangible property, other than cash or cash equivalent, except for the type of license or and the rights set out in paragraph (A) above . Limiting the number of participants in the program ... etc.
Good idea or not?
Let's discuss.
Fonzi [the cult character of the comedy series "Happy Days" - note. Trans.] - this is fun. And it was a funny tweet, but if you think about it, it is not very smart. Fortunately, he found a brilliant answer:
"In fairness, now Ponzi should be called Nakamoto circuits"
You know what, @DontPanicBurns? You are absolutely, 100% right. We need a new term to describe what is happening madness.
I propose to use your term - "scheme Nakamoto."
Why is bitcoin difficult to call the Ponzi scheme
When we talk about Bitcoin, Ethereum or any other cryptocurrency, neither “Ponzi” nor “pyramid” are completely accurate descriptions of how these systems actually work.
Traditional Ponzi schemes are usually managed by a central operator (Charles Ponzi, Allen Stanford, Bernie Madoff, Sergey Mavrodi), who is responsible for attracting new funds and payments according to a certain algorithm. Schemes fall apart when payment requirements exceed the amount of funds deposited, so that the scheme operator cannot satisfy investors ’requests, causing loss of confidence or a massive outcome that undermines the system’s liquidity. In turn, this destroys the scheme as a whole (or, rather, brings it to an inevitable end, since the Ponzi schemes are doomed to death from the moment of their creation — nothing can expand forever).
Financial pyramids, by contrast, are more decentralized. In order to recoup their investments, each victim must become a leader in the scheme - and recruit new victims who then pay this leader and the earlier leaders who are on top. Not all pyramidal multilevel schemes are illegal. For example, Avon basically has a real product and uses a legally sound “direct sales” structure. Other types of pyramid schemes are illegal, where the only product is licenses to recruit new members, be it small pyramids for housewives, such as the Secret Sister Gift Exchange , or scandalous pyramids like the Dare to be Great scheme of the 1970s, where the product was right selling a product, a little more.
Therefore, it may be time for the authors of the specialized literature to describe a new type of investment fraud - which is indeed an ugly character only when the cryptomonet bubble bursts - this is a class of fraud where technology, not the operator, mediates the interaction between beneficiaries of investment fraud and its victims.
Description of the "Nakamoto scheme"
The Nakamoto scheme is an automated hybrid of the Ponzi scheme and the pyramidal scheme. From the point of view of managing a criminal organization, it combines the strengths of both schemes and (at present) lacks their weaknesses.
The Nakamoto scheme draws strength from the same things that make the pyramids and Ponzi so compelling. It promises an insane return on investment, is accessible to a person from the street with little or no effort, and recruits individual members as new, interested evangelists.
The regulators, blinded by lobbying from Silicon Valley, viewed these schemes as futuristic and ultra-modern, and not as what they really are: factories of victims, which in the next crash will spawn hundreds of thousands of screaming investors with little or no legal resource due to four years inaction on the part of regulators.
1. The absence of an operator, many operators
In the Nakamoto schemes there is no central operator. This ensures that no one participant or organization can be held accountable (as is the case with the Ponzi or the pyramids), and it hides the identity of the participants from law enforcement.
As in the pyramids, this scheme has the insidious quality of turning each victim into a new active participant when they extol the system in order to attract new investors to pay for their cashout.
These incentives are often combined with 21st century software disciplines for community management and technological evangelism in a powerful combination of marketing and corporate / financial interests that people cannot ignore from the street (Coinbase currently attracts 100,000 new users per day).
To find a new source of money, create a religion around them. The main teaching is HODL [do not sell - footnote. trans.] at any cost, regardless of temptation, until all unbelievers capitulate.
2. No deposit
The most interesting thing is that the Nakamoto schemes do without the need for cash flow, which gives rise to legal liability. Sometimes in Ponzi schemes, but more often the pyramids provide for the transfer of specific funds to a specific person with a specific calculation for return with interest. If you borrow the term from the tax laws and adapt for colloquial speech, then such a transaction is burdened with a pledge (hypothecated). Legal liability arises because it is easy for the regulatory authorities to identify these cash flows and identify a violation of the law here. For this reason, in many jurisdictions punishment does not follow the initiation and launch of the pyramid, but the act of participation in such an enterprise (more on this below).
On the other hand, compensation for damages from the Ponzi scheme includes: 1) tracking operations that went through the managers of the scheme; 2) determining the nature of these operations: they were bona fide or fraudulent; 3) rollback of remittances that may be taken from recipients; 4) determining the appropriate nature of compensation: for example, a proportional distribution or with the loss on the fact. Making a profit from the Ponzi scheme turns a person into a victim and, possibly, a recipient of fraudulent funds, but not necessarily an active participant in the scheme, as is the case in the pyramid scheme.
Cryptocurrency cash flows avoid these problems because they lack collateral . An additional layer of abstraction in the form of cryptocurrency exchanges they eliminate what would otherwise be considered absolutely illegal cash flow and contracts. They disguise the essentially identical investment program under the general pool of aggregate demand, satisfying the general pool of aggregate supply.
Until now, this structure and the lack of adequate legal instruments (or the will of law enforcement agencies) allowed adherents and promoters of cryptocurrency schemes to avoid responsibility as participants in the scheme, principals (as they would be in the pyramid) or as recipients of unfairly acquired money actions (as is the case with Ponzi).
As a result, we observed a seemingly endless spread of technically illiterate adepts. They roll out false arguments for sale, such as Value in the Network itself, or inflate the value of the new coin, linking it with the prominent Valley Venture Funds to stimulate demand and, consequently, their own profits, even if the scheme is doomed to failure .
People continue to talk about it as about different things that correspond to different phenomena. This is a new dollar! No, wait, this is actually digital gold! No, this is a technical product / network (LOL, not too good, because no one uses most of these coins). Characteristic signs of pumping. However, keep seeing what you want.
This is completely illogical from the point of view of software, since the performance of cryptocurrency networks is significantly inferior to existing systems:
Bitcoin's market capitalization has just exceeded Visa's market capitalization. Yes, this is Visa: the world's largest electronic payment system with a turnover of $ 8.9 trillion and 141 billion transactions per year. Supports 160 currencies in more than 200 countries.
For comparison, Bitcoin processes about 3 transactions per second in one “currency”, and the memory is now scored [article left in December 2017 - footnote. trans.].
Rather, it can be assumed that bitcoin is primarily bought for resale and speculation, and not for some real benefit.
Incomparably inferior in performance to systems like Visa, these networks use “markets” for liquidity, rather than specific cash flows, which is much more convenient for criminal organizations, because it is much more difficult to prove that a random transaction under a pseudonym is part of a criminal conspiracy than for example, a suitcase with banknotes of 500 euros or an e-mail instruction for processing a transfer to a bank account in the Cayman Islands.
3. Automation
The Old Testament says: "Thieves have no honor." Nakamoto says: "Thieves should not have the honor."
The blockchain consensus allows thieves to coordinate and control this system without having to trust the central operator.
This means that the activity is carried out without any individual responsibility on the part of the participants. But to make this possible, the system makes cheating very expensive:
As Bitcoin costs increase, the energy used for cryptocurrency mining has reached a staggering 30.59 TWh.
This is comparable to the energy consumption of the whole country of Morocco .
If you compare with the alternative (use the usual financial system, be traced and be put in jail), I can imagine that some people consider this as an adequate price for access to the billions of dollars currently spinning on cryptocurrency markets. I include in the notion “some people” not just users of these cryptocurrencies, but also some developers, mainly ICO promoters, who disclaim responsibility for their creations as soon as they release them into the wild (pre-selecting a large portion of coins in advance) to reward your rampant genius).
4. Legislative measures
What will we do if this bubble starts to spin wildly out of control, and the government begins to fight the cryptocurrency with medieval methods? And I'm not talking about applying the laws of KYC / AML (Know your client and about countering money laundering), like today. I mean strict liability without a statute of limitations, special forces raids on cryptomites, brutal methods in the spirit of "Pulp Fiction."
Easy peasy.
Taking into account the standard clause that I am a British lawyer and not an American lawyer, the English rules are a bit confused and relate either to common law fraud or to the rules of unfair trade practices, therefore they are not very specific to Ponzi and, accordingly, articles.
Fortunately, I found a super convenient network distribution law (Chain Distributor Schemes) in the New York Business Law Code, which hypothetically fits much better:
1. Any person, partnership, corporation, trust or association, as well as any of their agents or employees should be prohibited from promoting, offering or providing participation in network distribution schemes.
Cool. It seems that in New York, no one has the right to participate in the "network distribution scheme."
What is considered such?
2. The “network distribution scheme” used in this document is a sales mechanism, whereby a person receives a license or the right to offer or hire one or several people for profit or economic benefit who also receive such licenses or rights for conditions of investment and in the future may further increase the network of persons who have received such licenses or rights under the same conditions. Limiting the number of participants in the program or the existence of additional conditions affecting the right to obtain such a license or the right to hire or make a profit does not affect the definition of a scheme as a network distribution. In this document, the term "investment" means any acquisition, except for the acquisition for personal consumption, services, property, tangible or intangible, and includes, among other things, franchises, business opportunities and services, as well as any other types and means or transmission channel funds, regardless of whether it is associated with the production or distribution of goods or services. The concept does not include demonstration equipment and materials at cost used in the sale process, and not for resale.
Any options applied to securities?
3. The network distribution scheme must comply with the security in the sense described in this article and must be subject to all the provisions of this article.
Why regulators may want to consider a scheme from the angle of such financial regulation? Because in the end, the market treats these things as investments, and the laws were originally created to protect, as you can guess, investors. Therefore, the law should regulate cryptomoney as it regulates other types of investments.
First proof:
Please invest responsibly - an important message from the Coinbase team .
So let's adapt this law of New York to cryptocurrency and along the way we are going to completely make crypto-advocate lawyer Peter van Valkenburg and the Coin Center guys crazy, changing the NY GBS § 359-fff (2) as follows:
2. The “network distribution scheme” used in this document is (A) a sales scheme or mechanism whereby a person receives a license after the investment made or the right to hire one or several people for profit or economic benefit who also receive such licenses or rights subject to investment and in the future may further increase the network of persons who have received such licenses or rights under the same conditions ; or (B) a sales scheme or mechanism where a customer purchases a digital token, awaiting an estimate of its value mainly based on an estimate of the number of additional participants who will be involved in a digital token scheme where the token is intended primarily for money or cash equivalent , and not to secure a contract for a specific and specific product, service, security, license or other tangible or intangible property, other than cash or cash equivalent, except for the type of license or and the rights set out in paragraph (A) above . Limiting the number of participants in the program ... etc.
Good idea or not?
Let's discuss.
Source: https://habr.com/ru/post/410613/