Welcome to tech Stuff, a production from iHeartRadio. Hey there, and welcome to tech Stuff. I'm your host, Jonathan Strickland. I'm an executive producer with iHeartRadio. And how the tech are you? I'm not doing so hot myself. I believe that I am suffering from food poisoning. I was wondering what the heck was going on. Hit me started hitting me last night, and I went through a whole bunch of different possibilities. But it was weird because I was like, how could I have caught the flu or COVID or anything like that because I hadn't even left the house for more than a week. But yeah, I think I think I ate something that didn't agree with me. And as a result, we're going to go to a rerun episode of tech Stuff because I just don't have it in me to research, write, and record a brand new one. My apologies to all of you. You all deserve better, but yeah, it's just just just not in the cards for me today. So we're going to listen to an episode that published January twenty fifth, twenty twenty one, and it's called It's a Brackets Crypto Closed Brackets Ponzi scheme, and yeah, I talk about, you know, what a Ponzi scheme is, and how a lot of cryptocurrency companies have been equated to Ponzi schemes, and yeah, some people even go so far as to say the whole thing is a Ponzi scheme. I wouldn't quite go that far, but I definitely think that the crypto world and the enthusiasm around it facilitates shenanigans and dishonest practices, So I think that that is an issue. Anyway, let's listen to It's a Crypto Ponzi Scheme from January twenty fifth, twenty twenty one. So in this episode, we're going to explore where the Ponzi scheme comes from and how it works in general, and we'll learn about cryptocurrencies and a little bit about what makes them tick from a very high level, and then we'll learn how these two things came together, kind of like a Reese's Peanut buttercup and just as evil. Now, fans of stuff you should know might be aware that way. You back in two thousand and nine, which was, you know, one year into us doing podcasts at all, they did how Ponzi schemes work. It gave birth to the phrase it's a Ponzi scheme, and so I apologize to those longtime fans who also listened to my show, because there's got to be some overlap between those two, right anyway. I know I won't be as entertaining as Josh and Chuck, but then there are two of them and there's only one of me. However, I will give it the old college try. Now. The term Ponzi scheme gets its name from a specific man, Charles Scheme. Wait, no, I'm sorry, I read that wrong, Charles Ponzi. He would be investigated and charged for fraud in the nineteen twenties, but the actual method predates Chuckarino by several decades. An earlier example of the scheme that Ponzi used was the method of choice for one Sarah Howe in Boston in eighteen seventy nine. Even this was not the first instance. There were at least two other cases of very similar schemes, one in Madrid, Spain and another in Berlin, Germany, both perpetrated by women, and the general idea is much much older. But let's explore the story of Sarah Howe. I'd love to tell you all about Sarah Howe, but historical records of her are scant. There are no known photographs of her, there are no sketches. Few details are about her past. At least few verifiable details will get to that. We do know that in eighteen seventy seven she was working in Boston as a fortune teller, so we can assume a few things. Now. Pardon me, because I am a skeptic. So if you believe in stuff like astrology or fortune telling, you're likely going to find what I have to say pretty irritating. But people who are really good at doing stuff like reading fortunes or doing astrology readings tend to be very good at making quick judgments about people, and they also tend to know what sort of things are part of the commonly shared human condition. There's a practice that's called cold reading, and here's how it works. You've got your fortune teller or your mentalist or whatever, and they spout out a bunch of general information toward their mark. Often they are actually addressing a group of people, because that increases the odds of getting a hit if you're talking to more than one person. But the whole goal is to cast a wide net so that something that the person ends up saying ends up being perceived as relevant, and you make the mark do most of the work for you. You don't have to know anything about that person. As long as you get close enough to something that is relevant to that person's life, they're likely to do the rest of the work for you. So here's kind of an example, just as a hypothetical. Let's say that the mentalist or fortune teller says, I, since you have experienced great happiness but also suffer great loss, and I'm picking up on a name. It might start with the letter J or maybe R. The vision is hazy, and meanwhile you're waiting for your mark to fill in the gaps. And people tend to be people pleasers, and they want to believe in these sort of things, and so they become willing participants. So you might have a mark say I had an uncle named Jason, or my sister's name is Rachel or whatever. And to the mark, it seems as though you, as the fortune teller, have divined something you couldn't possibly have known, but in fact they're the ones who are providing you with all the information, and you just go from there. And on a similar note, astrological readings tend to follow a similar approach by giving out a very general message that can apply to nearly anyone. A fun test to do is to take a horoscope for a day and see if you can figure out which of the horoscopes belongs to which sign. But you mix them all up so that way you can't see the sign matched with the horoscope. You're just getting the messages. And then you have somebody else who has an undoctored version of the document to see if you can actually match it up. And if you do it as a double blind, really like if the person who is recording your answers does not have access to those answers right away, you're probably going to find out that your success rate is about what chance would suggest. Double blind tests that try to match people with horoscopes show that there's not really any correlation there, but hey, what do I know? I'm a cancer. There are also warm readings. This is where you start already knowing something about the mark, perhaps through the help of an accomplice. But the reason I even bring this up is that miss Howe must have had a decent knack at reading people, which would come in very handy when it came time to fleece them. Later, in eighteen seventy eight, How launched the Ladies Deposit Company, which was ostensibly a bank. How recognized an opportunity. Unmarried women who had no guardian had difficulty establishing an account at traditional banks because it was a pretty darn patriarchal society and unmarried women were second class citizens. And I should also mention that at this time, if you weren't white, you had an even more difficult time accessing the basic functions of society. Even How, when she was making the Ladies Deposit Company was only catering to white unmarried women. Essentially, white men had access to everything and everyone else was dealing with an enormous amount of opposition. So How opened up a bank that would accept deposits from unmarried women and them alone. And honestly, if How had the means, she might have been able to have a successful business without the need for trickery. But How was making an outlandish promise to her clients. She claimed that deposits would see an eight percent interest rate, meaning that depositing money with Hol would see an eight percent return on that money over time. And she said that if you were to deposit one hundred dollars in her bank, by years end, you would have an additional ninety six dollars earned through interest, and she promised that early investors would get the first three months of that interest paid in advance. Now that interest rate was significantly higher than what banks in the general industry were able to offer, and when pressed on how she could offer such high India rates to her client tell she claimed that her bank had the financial backing of Quakers who were supporting it as a charity for women. And her spiel worked, and she advertised all around the Northeast, gathering clients all along the way, and a lot of the women, when they received their advance would immediately put that money into their account with How in order to reinvest. Historians estimate that she managed to get between two hundred and fifty thousand, five hundred thousand bucks in eighteen seventy nine that would be worth millions of dollars in today's money. Eventually investigators uncovered what was really going on, but it was pretty tricky to do because How was strict on her policy of only serving unmarried women, which cloaked her from most investigations. As this was a male dominated world. Reporters were nearly always men, and they weren't allowed inside Howe's establishments. How claimed this was to protect her customers, these delicate, unmarried women which society perpetually viewed as being helpless and just a potential victim, perpetually a potential victim. And that really showed how clever how was. She had identified a target population ripe for exploitation and at the same time figured out how to exclude people determined to investigate her. But here's what was really going on. How would bring in a round of investors who would give her money to deposit into accounts. She then would seek out a second round of investors, and using money from that second round, she would pay out the advanced interest to her first round of investors. Then she would seek out a third round and use that money to help pay out the second round, and so on. The scheme required how to constantly seek out more investors to pay out dividends to her earlier investors, and meanwhile the clock was ticking. She was helped out considerably by the fact that many women would reinvest their money into the scheme. They were doing so because to them it seemed as though they were getting an incredible interest rate, so more money in the account would mean more money in interest down the road, their money would be making more of itself. But in reality, this cash was largely going to fund Howe's new lavish lifestyle, while she kept reaching for more investors to keep the whole show going strong. She was also helped by the fact that the banking industry at the time was largely free of regulation, making it something of the wild West. But for money schemes, it was an environment that allowed for exploitation with less risk of oversight, and so there was opportunity for the enterprising scammer. But How's scheme eventually was laid bare, and the press absolutely tore her to shreds. And by tore her to shreds, I mean they didn't just point out the fraud, but they disparaged how beyond what the facts could support. They claimed she was illiterate, They said she was uneducated, They said that she was hideous to look upon. In fact, how was clearly very well educated and witty, and the fact that earlier accounts of how never brought into account her looks tells us that she was probably pretty ordinary. Looking. Not only that, but the reports on How began to fabricate an entire history of this mysterious woman, complete with salacious and frankly racist overtones. So we don't know much about How's history. The history that was published was fabricated. I won't go into the whole thing here, but to call it a smear campaign would be going lightly. Yes, How had pulled a fast one, but it seems to me that the media was more upset that a woman would find such success in what was generally considered to be a man's domain than the fact that she did so through underhanded methods. In other words, the misogyny was thick here, folks. How stood trial for accepting money under false pretenses because she had claimed that this was an extension of the Quakers. She served three years of a prison sentence, she got out, then she did the whole thing all over again. And while I don't condone crime at all, part of me admires the hell out of a woman who, when faced with a society that actively resisted the efforts of women to play a part beyond just being servileed to men, she rejected that notion and decided to go her own way. But the fact that she was targeting other women certainly takes the romance out of it, doesn't it. I mean, if she were targeting like fat cat businessmen who were accustomed to putting the screws to the little guy, this would be almost a Robin Hood like story. But with how it was more like I rubbed from the poor and give to myself. She was caught a second time and decided to give up the practice, and she went back to fortune telling. She lived out the remainder of her days in relative obscurity and modest living, still fooling people into believing she had some sort of mystical insight into their fortunes. It's more like she had a pretty regular insight into their wallets. But the heart of this scheme is the idea that you get people to pour money into what you're claiming is an investment, but in fact there's nothing there, and then you use the money from subsequent rounds of investors to pay out the dividends to the first round while keeping most of the money for yourself. And to convince people to back something without thinking too much about it, you got to do a few fairly simple things. First, you need to promise a lucrative return on your investment, and it has to be high, but not so high as to be completely unbelievable. But you can definitely stretch believability quite a bit. This taps into a particularly common human trait. It's called greed, you know, the desire for more. Second, you just need to be really picky about your clients. Now, this is helpful for a couple of reasons. For one thing, by limiting who can participate, you can reduce the chance that someone skeptical is going to catch on to you. For another, by restricting who can participate, you create a sense of exclusivity. And people love to feel like they are special. They want to be part of that exclusive club. There's this rush of serotonin when you get the sense of acceptance as you're brought into the fold of an otherwise exclusive group. You made it, you merited inclusion. And then there's the old fomo or fear of missing out. People also really hate the idea that they were unable to pounce on an opportunity. And I feel this one a lot. I can't tell you how many times I felt low because I discovered too late something that I could have participated in, but I missed out on. So hey, if you're trying to manipulate me playing upon my fomo works, I'm just kidding. Don't manipulate me. I'm on to you. So using these psychological tactics and leveraging aspects that most of us share, hucksters can gather an entire population of marx and through careful management and selection, the fraud fiend can keep things going for quite a while, at least until the scheme grows too large to support it and the whole thing crashes down. Because ultimately that's what happens with these schemes. They can't work perpetually. You will eventually hit a point of saturation where it is impossible to maintain the scheme any longer. So you might live high on the hog for a while, but eventually you will need an exit strategy, perhaps a literal one, if you plan to escape prosecution. Sarah Howe clearly had at least a feel for all of this, as her version of the scheme took advantage of some of the very limitations that otherwise held her and other unmarried women down. She preyed upon affinity, meaning she was targeting a group of people who had something in common. If you remember my episode about Earthlink, that investor, or, that scam artist was largely targeting people who belonged to the Church of Scientology, again, affinity. So she took the restrictions of society and then turned those to her advantage, at least temporarily. But again, it's not called a How's scheme, It's called a Ponzi scheme. So who was Ponzi? Well, despite my habit of mixing up people who share similar names, Ponzi was not the guy in Happy Days who wore a leather jacket, kicked jukeboxes or jump sharks. He was a different person, and I'll talk about him more after this quick break. So Charles Ponzi. He was born in Italy in the early eighteen eighties, while Sarah HALLLL was serving time in the joint for her first foray into financial fraud yea for alliteration. He immigrated to North America in the early nineteen hundreds. He worked a series of odd jobs and occasionally he got in trouble for petty theft, and his dreams were much less petty but still involved plenty of theft. Ponzi himself was reportedly a man of small stature, standing only five foot two. Reportedly, he knew no English when he first traveled to the United States. He learned it through immersion, like many other immigrants. Even if he hadn't already shown a habit of dipping into criminal activity beforehand, he probably would have found it really challenging to stay on the straight and narrow because America is in fact a country made up of immigrants. But the America of the early twentieth century had a pretty nasty xenophobic streak going through it. Communities of immigrants, like those from Ireland or Ponzi's home country of Italy, were frequently the subject of scorn and suspicion, which in turn would become something of a self fulfilling prophecy. And when there are very few avenues for legitimate prosperity open to you, there isn't much choice but to explore the illegitimate pathways. So sure, Ponzi already had a history of larceny, but I think even if he was as innocent as can be before he arrived in America, he would face realities that created a lot of, let's say, incentives to dip into crime. At any rate, that's moot speculation, because we know he definitely dove into some illegal activities. He would spend three years in prison after being caught forging checks, and he spent another two years in prison after being caught in an operation that was smuggling Italian immigrants illegally across the Canadian border over to the US, But that did very little to deter him from a life of crime. Rather, his determination to pull a scheme was taking shape, largely influenced by his experience working for a crooked bank back in Montreal, Canada. The bank was essentially following the same practice Sarah Howe had made famous decades earlier, paying out extravagant dividends to customers by taking money from later rounds of depositors. Ponzi wasn't managing that particular bank, but he did work there and apparently picked up some tricks along the way. In nineteen nineteen, he hit upon the heart of his scheme, which involved something called international reply coupons, or IRCs. And here's how they worked. Let's say you immigrated to America from Europe and you have family back on the continent. You're struggling to attain the American Dream. In the meantime, your family writes to you to stay in touch, and because you're still getting up on your feet, your family encloses an IRC in their letter to you. The IRC is a coupon for return postage which allows you to write back to your family without having to purchase your own postage, thus saving your money so you can try and prosper. But there was a possible disparity in the value of the IRC because the cost of the IRC was dependent upon the country of origin. So let's say your family's in Spain, and let's say the cost to send a letter from Spain to the United States is five cents, and an IRC costs the same amount. So your family spends five cents on an IRC to put inside the letter and then spends another five cents to post the letter to the United States. But let's say that in the US it costs ten cents to send a letter back to Spain. So you take this IRC, which remember your family paid five cents for back in Spain, and you redeem it in the United States for postage back to Spain. But the IRC allows you to get ten cents worth of postage. So while the IRC cost five cents in Spain, you can redeem it for ten cents in the United States. And that was the heart of Ponzi's scheme. In a way, it was an extension of the basic idea that you should buy commodities at a low price and sell them for a high price, which generally means you've got to find a place where the price of something is pretty low, usually because that region produces a lot of whatever the commodity is so supply is high. Then you transport those goods to a place that has a higher demand for that commodity, and you sell it for a profit. Now, over time, this can lead to changes in price at both locations. The source might start raising prices and the destination might start decreasing demand. But for a time there's a lot of profit to be made, and this is completely legal and legitimate. Ponzi's pitch revolved around this idea that he would be able to purchase IRCs for a low price in other countries and redeem them for much higher returns elsewhere. It wasn't that different from people who try to make money in currency markets, relying on the exchange rates of various currencies Ponzi might have originally been sincere in his plans, hoping to leverage the market to make a profit. But even if you were sincere, the plan was never going to work at scale. Virtual value of IRCs was very low, just a matter of a few cents each, so to operate at a scale equivalent to the investments that Ponzi would start accepting would require more IRCs than the market actually had. If I give you a check for one thousand bucks and you have promised that you're going to give me a fifty percent return and interest within forty five days, which was what Ponzi was promising people, and it's all through buying up IRCs that just cost a penny in one place and can be redeemed for five cents somewhere else. That's going to require an awful lot of IRCs to make up that fifty percent you're going to owe me in forty five days. And I'm just one investor. So this plan just could not work at scale, and so Ponzi was going to follow in the footsteps of how and others. The premise of the scheme was a bit complicated, this whole idea of IRCs, but that worked to Ponzi's benefit. It helps if the flim flam you're selling to Marx is a little bit on the complex side, because it makes it harder for people to suss out that it's a scam. If what you're selling is complicated enough that the average person can't really follow it, but it sounds legit enough to fool them, you've got yourself a potential gold mine. You just need to sound like you understand how it all works, even if it doesn't work. It puts the confidence in con man. Sound assured enough, and folks will tend to think you really got it together. Ponzi was promising a pretty incredible return, that fifty percent return on investment within the first forty five days, with future payoffs making everyone truckloads of cash. He began the old practice of robbing Peter to pay Paul, with that old gimmick of taking newcomers money and paying out dividends to early investors and pocketing the rest, and all of those early investors reinvesting that money and then just rents and repeat, same scam, just different trappings. He attracted a lot of cust Some were poor Italian immigrants, much as Ponzi had been when he came to America in nineteen oh three, so again we have that affinity going on there. Others were people of high social stature and those with respectable occupations, And over the course of eight months, Ponzi was rolling in dough, bringing in an estimated fifteen million dollars in nineteen twenty. If we adjust for inflation, that's nearly two hundred million dollars in today's money. To say that Ponzi lived in luxury is kind of under selling it a bit. He bought a very expensive mansion in Boston, he bought a luxury automobile. He really was living the dream. He also attempted to invest in legitimate businesses in an effort to try and shuffle some money around to pay off investors of his primary scheme, as it was becoming increasingly difficult to meet the interest payments of The various rounds of investors helped that. Again, a lot of those investors would turn around and reinvest their interest payments in the scheme, but it still meant he had to come up with those dividend payments on a regular schedule, and it was getting more challenging to do that. Ponzi was also the subject of a lot of publicity. This was actually something that Ponzi sought out, because, after all, he needed more people to be aware of him in order to get more investors to keep the whole thing going. But it also meant that more people were paying closer attention to his activities, and at least a few of those people knew that if something seems too good to be true, it probably is, and so the net was gradually closing around Ponzi. In July of nineteen twenty, the Boston Post published an article revealing that the math just didn't add up to support Ponzi's story. The reporter pointed out there just weren't enough IRCs in circulation to support the amount of money that Ponzi was handling, and that the very foundation for his investment scheme was literally impossib Now, that should have been the end of it all, but Ponzi spun a story about how he had actually long since switched over to a different investment strategy that didn't involve IRCs at all, but he never revealed that trade secret in order to prevent others from stealing his business. In other words, he was saying, oh yeah, no, if I were just using IRCs, I'd totally be a liar and a thief. But I'm using this other method only I can't tell you what it is, but trust me to keep things moving. Ponzi even paid out about two million dollars worth of dividends to investors, which actually helped prevent a run on his company. In fact, a lot of those investors, once they were reassured by this payment, chose again to reinvest in Ponzi's scheme, and so he was able to keep things afloat a little bit longer. But the net cinched tightly because of a decision that Ponzi himself made. He hired on a public relation manager who happened to be honest, and this manager suspected that Ponzi's methodology was in fact fraud, and he went to the press and the authorities. Ponzi was arrested on charges of fraud. He was tried and convicted and sentenced to go back to prison for three and a half years before he was let out on parole. He was then arrested again. He jumped bail, headed to Florida and tried to run a real estate scam, but there he was arrested again, sent back to Massachusetts and sentenced to another seven years in jail, and then subsequently the United States government deported him to Italy and said, there you handle this guy. The investors back in the United States and Canada lost almost all of their money. Some of them saw a return of around thirty percent of their actual investments, but no matter what, it was a loss. As for Ponzi, well, he hooked up with Mussolini back in Italy and joined the Fascist movement. He was briefly an official in Mussolini's treasury department. However, it became clear that Ponzi's business acumen wasn't all there. He knew how to run a convincing scam, but not how to handle real financial matters. So Mussolini decided to send Ponzi off to Rio di Genio in Brazil, where he would manage an airline called Altalia until all Talia was forced to close due to World War Two. Ponzi ultimately would live in poverty in Brazil and died in a charity ward in nineteen forty nine. The publicity and the over enthusiastic support of Ponzi before the scheme came tumbling down are likely what led people to refer to this practice as a Ponzi scheme. But as we've learned, Ponzi was not the first to do it, nor was how and honestly, the whole idea of robbing Peter to pay Paul as a very old one, and of course he wouldn't be the last person to do it either. When we come back, i'll talk about one of the most recent incarnations of the p Ponzi scheme and how it ties into the complicated world of cryptocurrency. But first let's take another quick break. So cryptocurrency. After even just a brief overview of this topic, you will see how it becomes an ideal focus for a Ponzi scheme. The way it works is pretty hard to explain to the uninitiated, which frequently can include people who happen to have a lot of money but they want to have more of it investors in other words, and moreover, one of cryptocurrency's most important features is that you're usually talking about an unregulated currency that is independent of any government or financial institution backing, which means that, like the banking industry of the late nineteenth century, it's prime real estate for Scam City. But we should really start with defining cryptocurrency. A lot of folks think cryptocurrency and bitcoin are synonymous, but that is an oversimplification. Bitcoin is a type of cryptocurrency, but not all cryptocurrencies are Bitcoin, just like all dogs are mammals, but not all mammals are dogs. Bitcoin's identity is tied to the concept of blockchain, which in itself can be used for other things besides cryptocurrency. But what the heck is cryptocurrency? Oxford defines the term as quote a digital currency in which transactions are verified and records maintained by a decentralized system using cryptography rather than a centralized authority end quote. So, in other words, instead of having a government or a financial institution overseeing and verifying transactions and keeping a ledger of everything, there is some computational system in place to perform this task, and it is dependent upon cryptography. Okay, So one is cryptoc will simply put its encoding. It's taking information and using some form of reversible transformation on that information. In the transformed state, it is difficult or ideally impossible to determine what the encoded information actually is only by performing the reversible transformation. Can you get at the original form of that information? With Bitcoin, the system has transactions that are awaiting verification, and as part of the verification process to update the system wide ledger that keeps track of where bitcoins have been spent and how they have changed hands. Obviously that's important, Otherwise you could, in theory, spend the same bitcoin more than once and then the whole system cracks. Well, the system will generate an equation that is missing a random number to solve it, and computers connected to the system try to essentially guess that random number, and when a computer does this, the equation is solved. The winning computer selects which transactions are going to make up the next block in the blockchain. Those transactions are verified, and the block of verified transactions joins the growing chain of transactions that trace all the way back to the very beginning of bitcoin. Oh and every machine on that system receives an update on this chain, so that this distributed ledger is up to date across the entire system, and that's how you know that all of these transactions are legit. In return, the computer that succeeded in guessing the number is awarded a certain number of bitcoins. The quantity of bitcoins is fixed, meaning that eventually every bitcoin that will ever exist will be in circulation and no more will be made. At the time I'm recording this, the value of bitcoins is astronomical, with one bitcoin equal to nearly thirty seven thousand dollars. It might be even more by the time you hear this. And if your computer, or more accurately, your network of very powerful computers, is the one that solves the equation, you would get six point two to five bitcoins right now, which means you rake in around two hundred and thirty thousand dollars per block solved. This explains why there's such a rush to scoop up stuff like powerful graphics processing units or GPUs, which are better suited to solving these kinds of problems. Oh and to compensate for that, the system can actually adjust the difficulty of the next problem that spits out when it's time to verify a new block. The goal is for the time between the problem being broadcast to the system and the solution coming back is around ten minutes, So if a computer on the system is solving the problem in less time than ten minutes, the system will essentially make the future problems more challenging. Now, if that sounds a little weird to you, that's a pretty common reaction, and it's what scammers bank on figuratively speaking, because with that unusual approach comes a lack of understanding and familiarity. But because of the success of Bitcoin, there's a general sense that cryptocurrency is a way to make stupid amounts of money super fast, and it's deregulated. You couldn't ask for a better setup. As a confidence artist. You just need to demonstrate that you know what you're talking about, or at least you appear to, and you can lure folks in with the promise of untold riches and you've got success stories like Bitcoin to point at as your evidence. Now, according to a report titled the twenty twenty State of Crypto Crime published by an analytics firm called Chainalysis, in twenty nineteen, the cryptocurrency community saw four point three billion dollars worth of digital money go to scammers. Now, that includes all types of scams, including selling customers fake tokens for digital currency, but ninety two percent of all the cash fleece from victims followed the old ponzi scheme, and yeah, the actual scheme is the same as it always has been. There is a promise of a means of generating a high and rapid return on investment, and the meteoric rise in value of bitcoin in particular makes this seem plausible. I mean, when bitcoin's first emerged, they were peaking in value at about eight cents per bitcoin, eight cents in twenty ten, and a decade later there worth nearly forty thousand dollars for one bitcoin. That is a fact. It is also a very difficult to believe. Fact. It does feel unbelievable, but it's true. And when you've got a truth that seems impossible, it's pretty easy to sell people on the idea of equally impossible things. So convinced that the scammers are going to use the weird, seemingly magical world of cryptocurrency to make investments balloon exponentially, people poured mind into these schemes, and the scammers, like those in years past, take the money of new investors, use a little bit of it to pay out dividends to earlier investors, and then hold on to the rest. And like schemes of the past. They frequently will see those early investors reinvest the quote unquote earnings, which aren't really earnings. You're not earning more money, you're just bilking more investors. So the scammers end up getting to keep way more money than they ever pay out, and they keep it going for as long as they can. But like every other Ponzi scheme, this strategy only works for as long as you're able to get new people to sign on, and you often just need to seem semi legit and appeal to people's greed in order to get bites. Take the scam plus Token for example. This was a scam out of China that primarily targeted investors or suckers if you prefer in China, Korea, and Japan. The pitch was that plus token was a type of digital wallet, and the scammers claim that if users purchased a plus token with digital currencies like bitcoin or ethereum, they would see huge returns on that investment. The scammers went big with their approach, taking out ads in supermarkets and using the messaging service we chat to reach potential targets. Reportedly, more than three million people fell victim to this scam signing over their digital currency to these hucksters who were really just selling fake tokens. And like all Ponzi schemes, the scammers used money from later investors to pay out a dividend to the earlier ones, And because of the nature of cryptocurrency, it's pretty darn hard to track down all the perpetrators and punish them. That plus scam was reportedly a monumental success, with the scammers stealing what amounted to around three billion dollars that's billion with a B. The scam ran its course through July of twenty nineteen, when the scammers tried to high tail it out of there, and Chinese authorities claimed to have arrested one hundred and nine people connected with the scam, including twenty seven believed to be chiefly responsible for it. And while investors lost a huge amount of money, it's not exactly easy to get cryptocurrency out of the system and converted into other forms of currency. In other words, it's hard to launder and get hold of that cash, especially in those amounts. It requires tons of money laundering, which in turn can sometimes create enough of a digital noise for authorities to take notice and then try and track down who is behind the activity. The plus token shenanigans were so disruptive that they affected the exchange rate of bitcoins, the value of bitcoins, and for a while the cryptocurrency's value against the dollar took a big hit. Now it has since fully recovered and then some. There are other examples of cryptocurrency ponzi schemes. In the United States, the Department of Justice filed charges against five defendants alleged that they had defrauded investors out of seven hundred twenty two million dollars using a similar ponzi scheme called the bitclub network. The bitclub approach involved pitching investors the chance to put their money into cryptocurrency mining pools. So from what I can gather, they were claiming that the investment money would go toward building out computer systems that would solve those equations I mentioned earlier, and do so at a rate fast enough to be a profitable investment, So the bitcoin's mind would end up generating value that could be distributed to the investors. When you're talking about making a couple hundred thousand dollars potentially every ten minutes or so, assuming you've actually got the computer power that can outclass all the other computers on the system trying to do the same thing. Well, it sounds like a no brainer, but an investigation show that, counter to what the bitclub network claimed, the payouts for investments had little or nothing to do with the performance of the cryptocurrency mining pool. The scammers were using investment rounds to help pay out high dividends early on, which attracted more investors, and then they gradually began to decrease the amounts they were paying out. Meanwhile, the actual performance of the mining pool wasn't really providing much in the way of revenue. It was all down to that classic robbing Peter to pay Paul. According to investigators, internal communications within the bitclub network showed that the scammers held their targets in contempt, calling them morons and sheep, so it seems pretty safe to say that they were fully on board with pulling a fast one on their marks until they got caught. Anyway, the use of cryptocurrency as the foundation for ponzi schemes is bad enough to prompt the US Securities and Exchange Commission or SEC to publish a brochure warning people about them, and it's a good reminder that when you are faced with an opportunity, you should examine that opportunity critically. If the promised returns seem too high, if they are significantly higher than you would find elsewhere on the market, If the means for generating revenue seem overly complicated or even convoluted, those are all red flags. If the opportunity is reliant on people with a shared affinity, such as when Sarah Howe targeted unmarried women, that's another big red flag. I think the real lesson here is that the smoke and mirrors can change over time, but in the end, these schemes all rely on the same old tricks as what we saw that more than a century ago, and as long as the scam seems to work on people, there will no doubt be con artists willing to use it. It can be extremely profitable, at least in the short term. Now, you don't hear many stories of people who ran that kind of scheme and then were able to make a clean getaway. A lot of these stories ultimately end with the con artists caught and prosecuted. So I guess crime does pay, but it also demands its own high price. And that wraps up this episode of Tech Stuff. I wanted to cover it because again, I think critical thinking is something we all can focus on and get better at, myself included. And it's good to remember that just because something might involve a cutting edge technology doesn't mean that underneath there isn't a very old hoax or scam at play. We've seen it over and over with a lot of companies. Farnose is one that comes to mind that wasn't so much a Ponzi scheme, but it did look like it was a bit of a shell game with trying to keep investors in the dark as far as how far along or not far along the technology was. So again, it's good for you to use critical thinking when you're looking at chances to invest money. You don't want to get burned. You want the best chance for success, and you want to support people who are, you know, doing real work out there. I hope you enjoyed that episode of tech Stuff, and I'm hoping that tomorrow I'll be able to do a regular news episode. I mean, I will say I'm feeling better today than I was last night, but I'm not I'm nowhere close to one hundred percent, So I'm hopeful that maybe by resting up today, I'll be back in fighting shape tomorrow and we can do another rousing tech Stuff news episode. Anyway, I hope all of you are well, that you've all avoided food boys name because boy, it's the pits, and I'll talk to you again really soon. Tech Stuff is an iHeartRadio production. For more podcasts from iHeartRadio, visit the iHeartRadio app, Apple Podcasts, or wherever you listen to your favorite shows in the

Welcome to tech Stuff, a production from iHeartRadio. Hey there, and welcome to tech Stuff. I'm your host, Jonathan Strickland. I'm an executive producer with iHeartRadio. And how the tech are you? I'm not doing so hot myself. I believe that I am suffering from food poisoning. I was wondering what the heck was going on. Hit me started hitting me last night, and I went through a whole bunch of different possibilities. But it was weird because I was like, how could I have caught the flu or COVID or anything like that because I hadn't even left the house for more than a week. But yeah, I think I think I ate something that didn't agree with me. And as a result, we're going to go to a rerun episode of tech Stuff because I just don't have it in me to research, write, and record a brand new one. My apologies to all of you. You all deserve better, but yeah, it's just just just not in the cards for me today. So we're going to listen to an episode that published January twenty fifth, twenty twenty one, and it's called It's a Brackets Crypto Closed Brackets Ponzi scheme, and yeah, I talk about, you know, what a Ponzi scheme is, and how a lot of cryptocurrency companies have been equated to Ponzi schemes, and yeah, some people even go so far as to say the whole thing is a Ponzi scheme. I wouldn't quite go that far, but I definitely think that the crypto world and the enthusiasm around it facilitates shenanigans and dishonest practices, So I think that that is an issue. Anyway, let's listen to It's a Crypto Ponzi Scheme from January twenty fifth, twenty twenty one. So in this episode, we're going to explore where the Ponzi scheme comes from and how it works in general, and we'll learn about cryptocurrencies and a little bit about what makes them tick from a very high level, and then we'll learn how these two things came together, kind of like a Reese's Peanut buttercup and just as evil. Now, fans of stuff you should know might be aware that way. You back in two thousand and nine, which was, you know, one year into us doing podcasts at all, they did how Ponzi schemes work. It gave birth to the phrase it's a Ponzi scheme, and so I apologize to those longtime fans who also listened to my show, because there's got to be some overlap between those two, right anyway. I know I won't be as entertaining as Josh and Chuck, but then there are two of them and there's only one of me. However, I will give it the old college try. Now. The term Ponzi scheme gets its name from a specific man, Charles Scheme. Wait, no, I'm sorry, I read that wrong, Charles Ponzi. He would be investigated and charged for fraud in the nineteen twenties, but the actual method predates Chuckarino by several decades. An earlier example of the scheme that Ponzi used was the method of choice for one Sarah Howe in Boston in eighteen seventy nine. Even this was not the first instance. There were at least two other cases of very similar schemes, one in Madrid, Spain and another in Berlin, Germany, both perpetrated by women, and the general idea is much much older. But let's explore the story of Sarah Howe. I'd love to tell you all about Sarah Howe, but historical records of her are scant. There are no known photographs of her, there are no sketches. Few details are about her past. At least few verifiable details will get to that. We do know that in eighteen seventy seven she was working in Boston as a fortune teller, so we can assume a few things. Now. Pardon me, because I am a skeptic. So if you believe in stuff like astrology or fortune telling, you're likely going to find what I have to say pretty irritating. But people who are really good at doing stuff like reading fortunes or doing astrology readings tend to be very good at making quick judgments about people, and they also tend to know what sort of things are part of the commonly shared human condition. There's a practice that's called cold reading, and here's how it works. You've got your fortune teller or your mentalist or whatever, and they spout out a bunch of general information toward their mark. Often they are actually addressing a group of people, because that increases the odds of getting a hit if you're talking to more than one person. But the whole goal is to cast a wide net so that something that the person ends up saying ends up being perceived as relevant, and you make the mark do most of the work for you. You don't have to know anything about that person. As long as you get close enough to something that is relevant to that person's life, they're likely to do the rest of the work for you. So here's kind of an example, just as a hypothetical. Let's say that the mentalist or fortune teller says, I, since you have experienced great happiness but also suffer great loss, and I'm picking up on a name. It might start with the letter J or maybe R. The vision is hazy, and meanwhile you're waiting for your mark to fill in the gaps. And people tend to be people pleasers, and they want to believe in these sort of things, and so they become willing participants. So you might have a mark say I had an uncle named Jason, or my sister's name is Rachel or whatever. And to the mark, it seems as though you, as the fortune teller, have divined something you couldn't possibly have known, but in fact they're the ones who are providing you with all the information, and you just go from there. And on a similar note, astrological readings tend to follow a similar approach by giving out a very general message that can apply to nearly anyone. A fun test to do is to take a horoscope for a day and see if you can figure out which of the horoscopes belongs to which sign. But you mix them all up so that way you can't see the sign matched with the horoscope. You're just getting the messages. And then you have somebody else who has an undoctored version of the document to see if you can actually match it up. And if you do it as a double blind, really like if the person who is recording your answers does not have access to those answers right away, you're probably going to find out that your success rate is about what chance would suggest. Double blind tests that try to match people with horoscopes show that there's not really any correlation there, but hey, what do I know? I'm a cancer. There are also warm readings. This is where you start already knowing something about the mark, perhaps through the help of an accomplice. But the reason I even bring this up is that miss Howe must have had a decent knack at reading people, which would come in very handy when it came time to fleece them. Later, in eighteen seventy eight, How launched the Ladies Deposit Company, which was ostensibly a bank. How recognized an opportunity. Unmarried women who had no guardian had difficulty establishing an account at traditional banks because it was a pretty darn patriarchal society and unmarried women were second class citizens. And I should also mention that at this time, if you weren't white, you had an even more difficult time accessing the basic functions of society. Even How, when she was making the Ladies Deposit Company was only catering to white unmarried women. Essentially, white men had access to everything and everyone else was dealing with an enormous amount of opposition. So How opened up a bank that would accept deposits from unmarried women and them alone. And honestly, if How had the means, she might have been able to have a successful business without the need for trickery. But How was making an outlandish promise to her clients. She claimed that deposits would see an eight percent interest rate, meaning that depositing money with Hol would see an eight percent return on that money over time. And she said that if you were to deposit one hundred dollars in her bank, by years end, you would have an additional ninety six dollars earned through interest, and she promised that early investors would get the first three months of that interest paid in advance. Now that interest rate was significantly higher than what banks in the general industry were able to offer, and when pressed on how she could offer such high India rates to her client tell she claimed that her bank had the financial backing of Quakers who were supporting it as a charity for women. And her spiel worked, and she advertised all around the Northeast, gathering clients all along the way, and a lot of the women, when they received their advance would immediately put that money into their account with How in order to reinvest. Historians estimate that she managed to get between two hundred and fifty thousand, five hundred thousand bucks in eighteen seventy nine that would be worth millions of dollars in today's money. Eventually investigators uncovered what was really going on, but it was pretty tricky to do because How was strict on her policy of only serving unmarried women, which cloaked her from most investigations. As this was a male dominated world. Reporters were nearly always men, and they weren't allowed inside Howe's establishments. How claimed this was to protect her customers, these delicate, unmarried women which society perpetually viewed as being helpless and just a potential victim, perpetually a potential victim. And that really showed how clever how was. She had identified a target population ripe for exploitation and at the same time figured out how to exclude people determined to investigate her. But here's what was really going on. How would bring in a round of investors who would give her money to deposit into accounts. She then would seek out a second round of investors, and using money from that second round, she would pay out the advanced interest to her first round of investors. Then she would seek out a third round and use that money to help pay out the second round, and so on. The scheme required how to constantly seek out more investors to pay out dividends to her earlier investors, and meanwhile the clock was ticking. She was helped out considerably by the fact that many women would reinvest their money into the scheme. They were doing so because to them it seemed as though they were getting an incredible interest rate, so more money in the account would mean more money in interest down the road, their money would be making more of itself. But in reality, this cash was largely going to fund Howe's new lavish lifestyle, while she kept reaching for more investors to keep the whole show going strong. She was also helped by the fact that the banking industry at the time was largely free of regulation, making it something of the wild West. But for money schemes, it was an environment that allowed for exploitation with less risk of oversight, and so there was opportunity for the enterprising scammer. But How's scheme eventually was laid bare, and the press absolutely tore her to shreds. And by tore her to shreds, I mean they didn't just point out the fraud, but they disparaged how beyond what the facts could support. They claimed she was illiterate, They said she was uneducated, They said that she was hideous to look upon. In fact, how was clearly very well educated and witty, and the fact that earlier accounts of how never brought into account her looks tells us that she was probably pretty ordinary. Looking. Not only that, but the reports on How began to fabricate an entire history of this mysterious woman, complete with salacious and frankly racist overtones. So we don't know much about How's history. The history that was published was fabricated. I won't go into the whole thing here, but to call it a smear campaign would be going lightly. Yes, How had pulled a fast one, but it seems to me that the media was more upset that a woman would find such success in what was generally considered to be a man's domain than the fact that she did so through underhanded methods. In other words, the misogyny was thick here, folks. How stood trial for accepting money under false pretenses because she had claimed that this was an extension of the Quakers. She served three years of a prison sentence, she got out, then she did the whole thing all over again. And while I don't condone crime at all, part of me admires the hell out of a woman who, when faced with a society that actively resisted the efforts of women to play a part beyond just being servileed to men, she rejected that notion and decided to go her own way. But the fact that she was targeting other women certainly takes the romance out of it, doesn't it. I mean, if she were targeting like fat cat businessmen who were accustomed to putting the screws to the little guy, this would be almost a Robin Hood like story. But with how it was more like I rubbed from the poor and give to myself. She was caught a second time and decided to give up the practice, and she went back to fortune telling. She lived out the remainder of her days in relative obscurity and modest living, still fooling people into believing she had some sort of mystical insight into their fortunes. It's more like she had a pretty regular insight into their wallets. But the heart of this scheme is the idea that you get people to pour money into what you're claiming is an investment, but in fact there's nothing there, and then you use the money from subsequent rounds of investors to pay out the dividends to the first round while keeping most of the money for yourself. And to convince people to back something without thinking too much about it, you got to do a few fairly simple things. First, you need to promise a lucrative return on your investment, and it has to be high, but not so high as to be completely unbelievable. But you can definitely stretch believability quite a bit. This taps into a particularly common human trait. It's called greed, you know, the desire for more. Second, you just need to be really picky about your clients. Now, this is helpful for a couple of reasons. For one thing, by limiting who can participate, you can reduce the chance that someone skeptical is going to catch on to you. For another, by restricting who can participate, you create a sense of exclusivity. And people love to feel like they are special. They want to be part of that exclusive club. There's this rush of serotonin when you get the sense of acceptance as you're brought into the fold of an otherwise exclusive group. You made it, you merited inclusion. And then there's the old fomo or fear of missing out. People also really hate the idea that they were unable to pounce on an opportunity. And I feel this one a lot. I can't tell you how many times I felt low because I discovered too late something that I could have participated in, but I missed out on. So hey, if you're trying to manipulate me playing upon my fomo works, I'm just kidding. Don't manipulate me. I'm on to you. So using these psychological tactics and leveraging aspects that most of us share, hucksters can gather an entire population of marx and through careful management and selection, the fraud fiend can keep things going for quite a while, at least until the scheme grows too large to support it and the whole thing crashes down. Because ultimately that's what happens with these schemes. They can't work perpetually. You will eventually hit a point of saturation where it is impossible to maintain the scheme any longer. So you might live high on the hog for a while, but eventually you will need an exit strategy, perhaps a literal one, if you plan to escape prosecution. Sarah Howe clearly had at least a feel for all of this, as her version of the scheme took advantage of some of the very limitations that otherwise held her and other unmarried women down. She preyed upon affinity, meaning she was targeting a group of people who had something in common. If you remember my episode about Earthlink, that investor, or, that scam artist was largely targeting people who belonged to the Church of Scientology, again, affinity. So she took the restrictions of society and then turned those to her advantage, at least temporarily. But again, it's not called a How's scheme, It's called a Ponzi scheme. So who was Ponzi? Well, despite my habit of mixing up people who share similar names, Ponzi was not the guy in Happy Days who wore a leather jacket, kicked jukeboxes or jump sharks. He was a different person, and I'll talk about him more after this quick break. So Charles Ponzi. He was born in Italy in the early eighteen eighties, while Sarah HALLLL was serving time in the joint for her first foray into financial fraud yea for alliteration. He immigrated to North America in the early nineteen hundreds. He worked a series of odd jobs and occasionally he got in trouble for petty theft, and his dreams were much less petty but still involved plenty of theft. Ponzi himself was reportedly a man of small stature, standing only five foot two. Reportedly, he knew no English when he first traveled to the United States. He learned it through immersion, like many other immigrants. Even if he hadn't already shown a habit of dipping into criminal activity beforehand, he probably would have found it really challenging to stay on the straight and narrow because America is in fact a country made up of immigrants. But the America of the early twentieth century had a pretty nasty xenophobic streak going through it. Communities of immigrants, like those from Ireland or Ponzi's home country of Italy, were frequently the subject of scorn and suspicion, which in turn would become something of a self fulfilling prophecy. And when there are very few avenues for legitimate prosperity open to you, there isn't much choice but to explore the illegitimate pathways. So sure, Ponzi already had a history of larceny, but I think even if he was as innocent as can be before he arrived in America, he would face realities that created a lot of, let's say, incentives to dip into crime. At any rate, that's moot speculation, because we know he definitely dove into some illegal activities. He would spend three years in prison after being caught forging checks, and he spent another two years in prison after being caught in an operation that was smuggling Italian immigrants illegally across the Canadian border over to the US, But that did very little to deter him from a life of crime. Rather, his determination to pull a scheme was taking shape, largely influenced by his experience working for a crooked bank back in Montreal, Canada. The bank was essentially following the same practice Sarah Howe had made famous decades earlier, paying out extravagant dividends to customers by taking money from later rounds of depositors. Ponzi wasn't managing that particular bank, but he did work there and apparently picked up some tricks along the way. In nineteen nineteen, he hit upon the heart of his scheme, which involved something called international reply coupons, or IRCs. And here's how they worked. Let's say you immigrated to America from Europe and you have family back on the continent. You're struggling to attain the American Dream. In the meantime, your family writes to you to stay in touch, and because you're still getting up on your feet, your family encloses an IRC in their letter to you. The IRC is a coupon for return postage which allows you to write back to your family without having to purchase your own postage, thus saving your money so you can try and prosper. But there was a possible disparity in the value of the IRC because the cost of the IRC was dependent upon the country of origin. So let's say your family's in Spain, and let's say the cost to send a letter from Spain to the United States is five cents, and an IRC costs the same amount. So your family spends five cents on an IRC to put inside the letter and then spends another five cents to post the letter to the United States. But let's say that in the US it costs ten cents to send a letter back to Spain. So you take this IRC, which remember your family paid five cents for back in Spain, and you redeem it in the United States for postage back to Spain. But the IRC allows you to get ten cents worth of postage. So while the IRC cost five cents in Spain, you can redeem it for ten cents in the United States. And that was the heart of Ponzi's scheme. In a way, it was an extension of the basic idea that you should buy commodities at a low price and sell them for a high price, which generally means you've got to find a place where the price of something is pretty low, usually because that region produces a lot of whatever the commodity is so supply is high. Then you transport those goods to a place that has a higher demand for that commodity, and you sell it for a profit. Now, over time, this can lead to changes in price at both locations. The source might start raising prices and the destination might start decreasing demand. But for a time there's a lot of profit to be made, and this is completely legal and legitimate. Ponzi's pitch revolved around this idea that he would be able to purchase IRCs for a low price in other countries and redeem them for much higher returns elsewhere. It wasn't that different from people who try to make money in currency markets, relying on the exchange rates of various currencies Ponzi might have originally been sincere in his plans, hoping to leverage the market to make a profit. But even if you were sincere, the plan was never going to work at scale. Virtual value of IRCs was very low, just a matter of a few cents each, so to operate at a scale equivalent to the investments that Ponzi would start accepting would require more IRCs than the market actually had. If I give you a check for one thousand bucks and you have promised that you're going to give me a fifty percent return and interest within forty five days, which was what Ponzi was promising people, and it's all through buying up IRCs that just cost a penny in one place and can be redeemed for five cents somewhere else. That's going to require an awful lot of IRCs to make up that fifty percent you're going to owe me in forty five days. And I'm just one investor. So this plan just could not work at scale, and so Ponzi was going to follow in the footsteps of how and others. The premise of the scheme was a bit complicated, this whole idea of IRCs, but that worked to Ponzi's benefit. It helps if the flim flam you're selling to Marx is a little bit on the complex side, because it makes it harder for people to suss out that it's a scam. If what you're selling is complicated enough that the average person can't really follow it, but it sounds legit enough to fool them, you've got yourself a potential gold mine. You just need to sound like you understand how it all works, even if it doesn't work. It puts the confidence in con man. Sound assured enough, and folks will tend to think you really got it together. Ponzi was promising a pretty incredible return, that fifty percent return on investment within the first forty five days, with future payoffs making everyone truckloads of cash. He began the old practice of robbing Peter to pay Paul, with that old gimmick of taking newcomers money and paying out dividends to early investors and pocketing the rest, and all of those early investors reinvesting that money and then just rents and repeat, same scam, just different trappings. He attracted a lot of cust Some were poor Italian immigrants, much as Ponzi had been when he came to America in nineteen oh three, so again we have that affinity going on there. Others were people of high social stature and those with respectable occupations, And over the course of eight months, Ponzi was rolling in dough, bringing in an estimated fifteen million dollars in nineteen twenty. If we adjust for inflation, that's nearly two hundred million dollars in today's money. To say that Ponzi lived in luxury is kind of under selling it a bit. He bought a very expensive mansion in Boston, he bought a luxury automobile. He really was living the dream. He also attempted to invest in legitimate businesses in an effort to try and shuffle some money around to pay off investors of his primary scheme, as it was becoming increasingly difficult to meet the interest payments of The various rounds of investors helped that. Again, a lot of those investors would turn around and reinvest their interest payments in the scheme, but it still meant he had to come up with those dividend payments on a regular schedule, and it was getting more challenging to do that. Ponzi was also the subject of a lot of publicity. This was actually something that Ponzi sought out, because, after all, he needed more people to be aware of him in order to get more investors to keep the whole thing going. But it also meant that more people were paying closer attention to his activities, and at least a few of those people knew that if something seems too good to be true, it probably is, and so the net was gradually closing around Ponzi. In July of nineteen twenty, the Boston Post published an article revealing that the math just didn't add up to support Ponzi's story. The reporter pointed out there just weren't enough IRCs in circulation to support the amount of money that Ponzi was handling, and that the very foundation for his investment scheme was literally impossib Now, that should have been the end of it all, but Ponzi spun a story about how he had actually long since switched over to a different investment strategy that didn't involve IRCs at all, but he never revealed that trade secret in order to prevent others from stealing his business. In other words, he was saying, oh yeah, no, if I were just using IRCs, I'd totally be a liar and a thief. But I'm using this other method only I can't tell you what it is, but trust me to keep things moving. Ponzi even paid out about two million dollars worth of dividends to investors, which actually helped prevent a run on his company. In fact, a lot of those investors, once they were reassured by this payment, chose again to reinvest in Ponzi's scheme, and so he was able to keep things afloat a little bit longer. But the net cinched tightly because of a decision that Ponzi himself made. He hired on a public relation manager who happened to be honest, and this manager suspected that Ponzi's methodology was in fact fraud, and he went to the press and the authorities. Ponzi was arrested on charges of fraud. He was tried and convicted and sentenced to go back to prison for three and a half years before he was let out on parole. He was then arrested again. He jumped bail, headed to Florida and tried to run a real estate scam, but there he was arrested again, sent back to Massachusetts and sentenced to another seven years in jail, and then subsequently the United States government deported him to Italy and said, there you handle this guy. The investors back in the United States and Canada lost almost all of their money. Some of them saw a return of around thirty percent of their actual investments, but no matter what, it was a loss. As for Ponzi, well, he hooked up with Mussolini back in Italy and joined the Fascist movement. He was briefly an official in Mussolini's treasury department. However, it became clear that Ponzi's business acumen wasn't all there. He knew how to run a convincing scam, but not how to handle real financial matters. So Mussolini decided to send Ponzi off to Rio di Genio in Brazil, where he would manage an airline called Altalia until all Talia was forced to close due to World War Two. Ponzi ultimately would live in poverty in Brazil and died in a charity ward in nineteen forty nine. The publicity and the over enthusiastic support of Ponzi before the scheme came tumbling down are likely what led people to refer to this practice as a Ponzi scheme. But as we've learned, Ponzi was not the first to do it, nor was how and honestly, the whole idea of robbing Peter to pay Paul as a very old one, and of course he wouldn't be the last person to do it either. When we come back, i'll talk about one of the most recent incarnations of the p Ponzi scheme and how it ties into the complicated world of cryptocurrency. But first let's take another quick break. So cryptocurrency. After even just a brief overview of this topic, you will see how it becomes an ideal focus for a Ponzi scheme. The way it works is pretty hard to explain to the uninitiated, which frequently can include people who happen to have a lot of money but they want to have more of it investors in other words, and moreover, one of cryptocurrency's most important features is that you're usually talking about an unregulated currency that is independent of any government or financial institution backing, which means that, like the banking industry of the late nineteenth century, it's prime real estate for Scam City. But we should really start with defining cryptocurrency. A lot of folks think cryptocurrency and bitcoin are synonymous, but that is an oversimplification. Bitcoin is a type of cryptocurrency, but not all cryptocurrencies are Bitcoin, just like all dogs are mammals, but not all mammals are dogs. Bitcoin's identity is tied to the concept of blockchain, which in itself can be used for other things besides cryptocurrency. But what the heck is cryptocurrency? Oxford defines the term as quote a digital currency in which transactions are verified and records maintained by a decentralized system using cryptography rather than a centralized authority end quote. So, in other words, instead of having a government or a financial institution overseeing and verifying transactions and keeping a ledger of everything, there is some computational system in place to perform this task, and it is dependent upon cryptography. Okay, So one is cryptoc will simply put its encoding. It's taking information and using some form of reversible transformation on that information. In the transformed state, it is difficult or ideally impossible to determine what the encoded information actually is only by performing the reversible transformation. Can you get at the original form of that information? With Bitcoin, the system has transactions that are awaiting verification, and as part of the verification process to update the system wide ledger that keeps track of where bitcoins have been spent and how they have changed hands. Obviously that's important, Otherwise you could, in theory, spend the same bitcoin more than once and then the whole system cracks. Well, the system will generate an equation that is missing a random number to solve it, and computers connected to the system try to essentially guess that random number, and when a computer does this, the equation is solved. The winning computer selects which transactions are going to make up the next block in the blockchain. Those transactions are verified, and the block of verified transactions joins the growing chain of transactions that trace all the way back to the very beginning of bitcoin. Oh and every machine on that system receives an update on this chain, so that this distributed ledger is up to date across the entire system, and that's how you know that all of these transactions are legit. In return, the computer that succeeded in guessing the number is awarded a certain number of bitcoins. The quantity of bitcoins is fixed, meaning that eventually every bitcoin that will ever exist will be in circulation and no more will be made. At the time I'm recording this, the value of bitcoins is astronomical, with one bitcoin equal to nearly thirty seven thousand dollars. It might be even more by the time you hear this. And if your computer, or more accurately, your network of very powerful computers, is the one that solves the equation, you would get six point two to five bitcoins right now, which means you rake in around two hundred and thirty thousand dollars per block solved. This explains why there's such a rush to scoop up stuff like powerful graphics processing units or GPUs, which are better suited to solving these kinds of problems. Oh and to compensate for that, the system can actually adjust the difficulty of the next problem that spits out when it's time to verify a new block. The goal is for the time between the problem being broadcast to the system and the solution coming back is around ten minutes, So if a computer on the system is solving the problem in less time than ten minutes, the system will essentially make the future problems more challenging. Now, if that sounds a little weird to you, that's a pretty common reaction, and it's what scammers bank on figuratively speaking, because with that unusual approach comes a lack of understanding and familiarity. But because of the success of Bitcoin, there's a general sense that cryptocurrency is a way to make stupid amounts of money super fast, and it's deregulated. You couldn't ask for a better setup. As a confidence artist. You just need to demonstrate that you know what you're talking about, or at least you appear to, and you can lure folks in with the promise of untold riches and you've got success stories like Bitcoin to point at as your evidence. Now, according to a report titled the twenty twenty State of Crypto Crime published by an analytics firm called Chainalysis, in twenty nineteen, the cryptocurrency community saw four point three billion dollars worth of digital money go to scammers. Now, that includes all types of scams, including selling customers fake tokens for digital currency, but ninety two percent of all the cash fleece from victims followed the old ponzi scheme, and yeah, the actual scheme is the same as it always has been. There is a promise of a means of generating a high and rapid return on investment, and the meteoric rise in value of bitcoin in particular makes this seem plausible. I mean, when bitcoin's first emerged, they were peaking in value at about eight cents per bitcoin, eight cents in twenty ten, and a decade later there worth nearly forty thousand dollars for one bitcoin. That is a fact. It is also a very difficult to believe. Fact. It does feel unbelievable, but it's true. And when you've got a truth that seems impossible, it's pretty easy to sell people on the idea of equally impossible things. So convinced that the scammers are going to use the weird, seemingly magical world of cryptocurrency to make investments balloon exponentially, people poured mind into these schemes, and the scammers, like those in years past, take the money of new investors, use a little bit of it to pay out dividends to earlier investors, and then hold on to the rest. And like schemes of the past. They frequently will see those early investors reinvest the quote unquote earnings, which aren't really earnings. You're not earning more money, you're just bilking more investors. So the scammers end up getting to keep way more money than they ever pay out, and they keep it going for as long as they can. But like every other Ponzi scheme, this strategy only works for as long as you're able to get new people to sign on, and you often just need to seem semi legit and appeal to people's greed in order to get bites. Take the scam plus Token for example. This was a scam out of China that primarily targeted investors or suckers if you prefer in China, Korea, and Japan. The pitch was that plus token was a type of digital wallet, and the scammers claim that if users purchased a plus token with digital currencies like bitcoin or ethereum, they would see huge returns on that investment. The scammers went big with their approach, taking out ads in supermarkets and using the messaging service we chat to reach potential targets. Reportedly, more than three million people fell victim to this scam signing over their digital currency to these hucksters who were really just selling fake tokens. And like all Ponzi schemes, the scammers used money from later investors to pay out a dividend to the earlier ones, And because of the nature of cryptocurrency, it's pretty darn hard to track down all the perpetrators and punish them. That plus scam was reportedly a monumental success, with the scammers stealing what amounted to around three billion dollars that's billion with a B. The scam ran its course through July of twenty nineteen, when the scammers tried to high tail it out of there, and Chinese authorities claimed to have arrested one hundred and nine people connected with the scam, including twenty seven believed to be chiefly responsible for it. And while investors lost a huge amount of money, it's not exactly easy to get cryptocurrency out of the system and converted into other forms of currency. In other words, it's hard to launder and get hold of that cash, especially in those amounts. It requires tons of money laundering, which in turn can sometimes create enough of a digital noise for authorities to take notice and then try and track down who is behind the activity. The plus token shenanigans were so disruptive that they affected the exchange rate of bitcoins, the value of bitcoins, and for a while the cryptocurrency's value against the dollar took a big hit. Now it has since fully recovered and then some. There are other examples of cryptocurrency ponzi schemes. In the United States, the Department of Justice filed charges against five defendants alleged that they had defrauded investors out of seven hundred twenty two million dollars using a similar ponzi scheme called the bitclub network. The bitclub approach involved pitching investors the chance to put their money into cryptocurrency mining pools. So from what I can gather, they were claiming that the investment money would go toward building out computer systems that would solve those equations I mentioned earlier, and do so at a rate fast enough to be a profitable investment, So the bitcoin's mind would end up generating value that could be distributed to the investors. When you're talking about making a couple hundred thousand dollars potentially every ten minutes or so, assuming you've actually got the computer power that can outclass all the other computers on the system trying to do the same thing. Well, it sounds like a no brainer, but an investigation show that, counter to what the bitclub network claimed, the payouts for investments had little or nothing to do with the performance of the cryptocurrency mining pool. The scammers were using investment rounds to help pay out high dividends early on, which attracted more investors, and then they gradually began to decrease the amounts they were paying out. Meanwhile, the actual performance of the mining pool wasn't really providing much in the way of revenue. It was all down to that classic robbing Peter to pay Paul. According to investigators, internal communications within the bitclub network showed that the scammers held their targets in contempt, calling them morons and sheep, so it seems pretty safe to say that they were fully on board with pulling a fast one on their marks until they got caught. Anyway, the use of cryptocurrency as the foundation for ponzi schemes is bad enough to prompt the US Securities and Exchange Commission or SEC to publish a brochure warning people about them, and it's a good reminder that when you are faced with an opportunity, you should examine that opportunity critically. If the promised returns seem too high, if they are significantly higher than you would find elsewhere on the market, If the means for generating revenue seem overly complicated or even convoluted, those are all red flags. If the opportunity is reliant on people with a shared affinity, such as when Sarah Howe targeted unmarried women, that's another big red flag. I think the real lesson here is that the smoke and mirrors can change over time, but in the end, these schemes all rely on the same old tricks as what we saw that more than a century ago, and as long as the scam seems to work on people, there will no doubt be con artists willing to use it. It can be extremely profitable, at least in the short term. Now, you don't hear many stories of people who ran that kind of scheme and then were able to make a clean getaway. A lot of these stories ultimately end with the con artists caught and prosecuted. So I guess crime does pay, but it also demands its own high price. And that wraps up this episode of Tech Stuff. I wanted to cover it because again, I think critical thinking is something we all can focus on and get better at, myself included. And it's good to remember that just because something might involve a cutting edge technology doesn't mean that underneath there isn't a very old hoax or scam at play. We've seen it over and over with a lot of companies. Farnose is one that comes to mind that wasn't so much a Ponzi scheme, but it did look like it was a bit of a shell game with trying to keep investors in the dark as far as how far along or not far along the technology was. So again, it's good for you to use critical thinking when you're looking at chances to invest money. You don't want to get burned. You want the best chance for success, and you want to support people who are, you know, doing real work out there. I hope you enjoyed that episode of tech Stuff, and I'm hoping that tomorrow I'll be able to do a regular news episode. I mean, I will say I'm feeling better today than I was last night, but I'm not I'm nowhere close to one hundred percent, So I'm hopeful that maybe by resting up today, I'll be back in fighting shape tomorrow and we can do another rousing tech Stuff news episode. Anyway, I hope all of you are well, that you've all avoided food boys name because boy, it's the pits, and I'll talk to you again really soon. Tech Stuff is an iHeartRadio production. For more podcasts from iHeartRadio, visit the iHeartRadio app, Apple Podcasts, or wherever you listen to your favorite shows in the