Bitcoin, Cryptocurrencies and MLM: Part 2

    Kevin Thompson is an MLM attorney, proud husband, father of four and a founding member of Thompson Burton PLLC. Named as one of the top 25 most influential people in direct sales, Kevin Thompson has extensive experience to help entrepreneurs launch their businesses on secure legal footing. Recently featured on Bloomberg TV and several national publications, Thompson is a thought-leader in the industry.

    Courtesy of jason_benjamin @ Flickr

    Courtesy of jason_benjamin @ Flickr

    In Part 1 of the MLM Cryptocurrency series, I discussed the basics about cryptocurrency MLMs. In this section, I provide specific information to help consumers stay safe.

    UPDATE: After the writing of this article, the SEC has sued a Bitcoin cloud mining company and alleged them to be engaging in the unregistered selling of securities. The case is SEC v. Garza, et al. The case makes it clear that when the primary motivation leading people to purchase cloud mining packages is ROI, it will likely be considered an unregistered security. And when it comes to alt-coins, where there’s no real use for the coins in the general marketplace, ROI will always be a strong motivating factor. Lack of control was another strong factor that led the SEC action. The buyers of the cloud mining packages had zero ability to influence the results. In other words, the fact that it was purely a passive exercise for buyers / investors, the SEC is arguing that the program was phony investment scam. When it comes to network marketing programs, it’s best to steer clear of any program that involves cloud mining.

    The Basics

    Before I get into the specifics, I want to answer three questions:

    (1) What is cryptocurrency? Cryptocurrency is digital money that relies on cryptography. Instead of relying on a centralized company (banks) to govern the ecosystem, cryptography allows the entire network to exist publicly without triggering privacy concerns. In other words, cryptocurrency is an OPEN system that allows for the creation and distribution of digital assets (money, coins, tokens, whatever).

    (2) What is a cryptocurrency MLM? It’s a network marketing program that either sells a Coin in exchange for money or provides some sort of ancillary service (i.e. cloud mining) that supports a Coin’s network.

    (3) What is mining? Mining is the process of contributing your computer resources to ensuring the transactions on the Bitcoin network (or any other coin’s network) are authentic. Translated into English: Miners volunteer their computers to ensure that all activity on the network is clean. In exchange for this, miners are rewarded with Coins. “Cloud mining” is where you’re not using your own computer. Instead, you’re renting hardware offered by someone else that agrees to share the rewards.

    Ponzi Schemes / Pyramid Schemes

    Can a digital coin like Bitcoin, by itself, serve as a product for purposes of fueling an MLM? The answer is clearly NO. It would be similar to operating an MLM by selling ten dollar bills. The value of the piece of paper is clear: it’s $10. There’s no room for markup, no room for retail activity. The only way to operate an MLM by selling ten dollar bills would be to sell the paper for MORE than $10. This would clearly be a pyramid scheme where the “product” was merely incidental for the right to participate in the scheme. In other words, the price was inflated JUST to spice up a pay plan.

    With Bitcoin and other alt-coins, the value is clearly established by online exchanges (Coinbase, Kraken, Bittrex, etc). The values fluctuate up and down based on market activity. The value is crystal clear; thus, there’s no opportunity for markup. And with the coins being freely exchanged in the marketplace, there’s no real opportunity for a company to claim ownership over the coin and use the coin as a proprietary product.

    With cryptocurrency MLMs, there are very few coins (if any) that are publicly available via an exchange. In this scenario, the Coins must be bought exclusively from the company. How is the price determined? The price is manipulated internally, increasing over time based on “market demand” (determined by new enrollments into the scheme). See the problem? Ponzi scheme! Understand, in order for a Coin to have real legitimacy, there needs to legitimate usage in the marketplace. Consumers need to do business with the coins, transferring funds to merchants in exchange for products. As the Coin’s usage increases, its value will grow. If there’s no usage, there’s no real way to measure value. Why would a merchant ever accept an experimental coin without knowing its real value? The answer is obvious…it’s not about user adoption, it’s about the return on investment.

    So there’s the first clue: In a ponzi scheme, the value of the Coin is determined in a CLOSED system, free from market tension. In a CLOSED system, the value is controlled / manipulated. The whole point of cryptocurrency is to be OPEN and operate in a TRUSTLESS environment where its existence does not hinge on a controlling entity (hence, the word “trustless” i.e. there’s no need for trust because it’s all in the open).

    Second clue: we can look no further than the SEC. The SEC has written a solid article on the subject titled Ponzi Schemes Using Virtual Currencies. The SEC’s statement is included in full at the end of this article. If you’re reading this via email, click here.

    The SEC writes, “We are concerned that the rising use of virtual currencies in the global marketplace may entice fraudsters to lure investors into Ponzi and other schemes . . . These schemes often promise high returns for getting in on the ground floor of a growing Internet phenomenon.”

    The SEC provides several red flags to watch for when reviewing one of these programs. I’ve provided some commentary about the two largest and easiest to spot below.

    Overly consistent returns

    The SEC writes, “Investments tend to go up and down over time, especially those seeking high returns. Be suspect of an investment that generates consistent returns regardless of [external] market conditions.”

    When it comes to alt-coins, one thing is guaranteed: price volatility. Cryptocurrencies are so new, the market is having a difficult time landing on a consistent value. Bitcoin has held a more stable value in recent months, due to the transaction volume increasing, which leads to more stability. But with all other coins, they’re a mess. If you see a company that’s promoting a coin that commands a predictable climb in value, stay away. It’s a ponzi scheme. The predictable “climb in value” is directly tied to new enrollments into the program. And if the coin is not listed on any kind of exchange, the company can manipulate the value, pretending that the token has more value than it really deserves. Investors, seeing an incredible return on their investment in the back office, pour more money into the schemes. If the gains are formulaic, stay way.

    Difficulty receiving payments

    The SEC writes, “Be suspicious if you don’t receive a payment or have difficulty cashing out your investment. Ponzi scheme organizers sometimes encourage participants to β€œroll over” promised payments by offering higher investment returns.”

    If the company holds your money hostage via convoluted withdrawal requirements, there’s a good chance it’s operating as a ponzi scheme. What do Zeek Rewards, WCM777, TelexFREE, Cyber Kids, Zhunrize and eAdGear all have in common? They were all shut down as ponzi schemes within the past three years AND they all had auto-reinvestment components. In legitimate network marketing programs, rewards go out based on volume. There’s no need for the company to hold YOUR money. If you earn it, you get it. In a ponzi scheme, they need to keep cash inside the system to protect itself in the event enrollments (money coming in) slow down. What do these requirements look like? Daily withdrawal limits, percentage of your commissions automatically used to purchase more “product,” hold periods for when you can actually sell your “Coins” after purchase, etc. These measures are taken to keep cash inside the system, protecting itself in the event of a crash.

    Bottom Line: If the value of the coins go up in a predictable fashion, steer clear. And if the company has requirements that make it difficult for you to pull out your commissions, steer clear.

    So how can it be done legally?

    So how can a company participate in the cryptocurrency movement without being pegged as a pyramid or ponzi scheme? It’s difficult. The answer lies in the selling of legitimate mining services. But even still, this is theoretical. The entire point of “mining” is where participants throughout the world lend their computers to the task of supporting the coin network. As transactions are processed, computers need to verify the transactions to ensure authenticity. As a reward for mining, miners are awarded coins. In a perfect world, the value of the coins would exceed the cost of mining. This is not always the case, as we’re recently seeing in Bitcoin where the costs are going up and the value is going down.

    When it comes to alt-coins, the value of the coins dramatically swing up and down. It’s the wild west full of speculators trying to position themselves to ride a wave. If an MLM company were to be selling mining services for an alt-coin, the prices of the mining service would need to be less than the value of the coins being mined, otherwise it would be a pointless exercise. And with most alt-coins, the value of the coins are usually close to $0. See the problem? It’s a chicken or the egg thing. Without much attention, the coins lack value. But to drum up attention, MLMs need to (a) develop a coin with unique properties; (b) drum up interest from merchants to use the coin; and (c) slap a pay plan to the mining services. With network marketing, the pay plan needs to be somewhat competitive with other MLMs out there. Thus, the mining services are likely priced too high, well beyond the normal costs associated with mining a cheap, experimental alt-coin. All in all, it’s a problem UNLESS the coin has value out the gate (I’m not sure this is even possible).

    Also, it’s unclear whether the SEC would view cloud mining services as unregistered securities. Securities exist when there’s (a) an investment of money; (b) into a common enterprise; (c) with an expectation of profits from the efforts of others. Are cloud mining companies engaging in the selling of unregistered securities? It’s such a new territory, nobody knows. An argument can be made both ways. The SEC, in my opinion, should provide a statement on this precise issue.

    In a perfect world, the MLM company that sells cloud mining would (a) be mining for a coin that was OPEN and traded publicly on an exchange; and (b) be one of many companies providing mining services. If a coin is truly open, and there are other miners out there, there’s market tension that would ensure the fees being charged by the MLM company are competitive and legitimate. If the fees are too high, it goes out of business. Plain and simple. Bear in mind, this is a theoretical scenario. UPDATE: See the update at the start of the article. This theory is made even more of a stretch by recent developments. Bottom line: Avoid any company with cloud mining as it’s center-piece. And for those companies that “give away” coins as some sort of a “free prize” for buying the cracker jack box (i.e. online education), avoid those too.

    Conclusion

    There you have it. If the the Coin is the product, just steer clear. There’s a good chance it’s a ponzi scheme. If mining is the product, be very careful. It’s possible that it’s a pyramid scheme where the value of the mining service is untested and unclear. It’s also possible that the coin being mined is garbage. And remember, pioneers are the people that end up with arrows in their back. It’s fun to be first in some cases, and in others, it’s absolutely terrible.

    Ponzi schemes Using virtual Currencies

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      Kevin Thompson is an MLM attorney, proud husband, father of four and a founding member of Thompson Burton PLLC. Named as one of the top 25 most influential people in direct sales, Kevin Thompson has extensive experience to help entrepreneurs launch their businesses on secure legal footing. Recently featured on Bloomberg TV and several national publications, Thompson is a thought-leader in the industry.

      • Jennifer Korol

        If you’re attempting to write this based on an educated thesis style by adding a conclusion after presenting your case (which is the direction to go when writing articles based on educational material), you have failed to do so. You forgot to include examples that back up your claims, you completely overlooked the “arguing” side of the issue (also using examples and citations), not to mention the reiteration of one idea barely constitutes the 80% original to 20% repeated/quoted rule, which in turn, can present a self plagiarized piece. Paraphrases are included! Yes, it is possible to plagiarize yourself. Please look this over again. You get a C-

      • Ken Stewart

        Great article Kevin!

        • Kevin Thompson

          Thanks, Ken.

          • Ken Labine

            where is my thanks for exposing you?
            where is your appology for deleting my main comment where i pointed out how silly your blog sounds…?

            • Kevin Thompson

              I….DID….NOT…..DELETE……YOUR……COMMENT! By all means, repost.

              • Ken Labine

                πŸ™‚ Fair enough appreciate you saying that, ive had people accuse me of deleting there youtube post too when i never did its possible i typed to much lmao plus i did spam it to a lot of the comments maybe that why its gone,

                HOW ABOUT THIS πŸ™‚

                Take me up on my offer and lets do a live hangout… from the research ive done you dont seem like a TOTAL bad guy but that not how your acting in my opinion but opinions are like belly buttons we all have one, im a facts kinda guy! There lots of things being said.. BY YOU, and well by others, would love to hear what you say is the way it went… or is the way im under the impression close enough? fair enough “not canned” but what happen?

                Can we do a live hangout going over your blog on air so instead of me typing we can talk about it πŸ™‚

                ps. We both know why you did this, Your a MLM guy not a cryto guy stick to your strengths… or keep Assumeing… you know did your mom not teach you when you assume you make a ass-u-me ass or yourself and others!

                ex. like me assuming you deleted my comment oops im a ass for assuming… Your turn,…

              • Barb

                So please explain what is incorrect about what he states in the article for those of us doing due diligence

        • Ken Labine

          Its so not a great article, take a screen shot of that comment years from now you will talk to others about how you need to follow what your gut says and not what some dude who is a. MLM Laywer, like that not even sheep in wolf clothing … this st8 wolf in wolf clothing lol, but remember, when online if your not paying for the product you are the product!
          Reading nonsense blogs like this above is just a example

        • Ken Labine

          If you want solid info from someone who was not let go from this great opportunity and is now bashing it indirectly like a whiner …
          http://www.OneCoinFamily.com

      • Ken Labine

        Kevin, Im on vacation with the family so cant waste much more time today… Hoping tomorrow around 10am PST will work for you and I to have a recorded chat that i can share with all πŸ™‚
        http://www.facebook.com/kenlabine

        • Kevin Thompson

          If you want to discuss cryptocurrency MLMs in general, I’ll be happy to do a recorded hangout with you. I cannot speak specifically about thoughts about a former client. Regarding your repeated questions about how my engagement with OneCoin ended, the engagement ended. I’m not able to divulge anything confidential, and I’m not going to. Ask Ruja for a statement. That’s fine. But for me, I’m not able to go there. I can assure you, the engagement did not end because I was making weird requests as you suggest i.e. requesting a position (I’ve NEVER done that), getting coins, etc. If that’s what you heard, it’s an absurd lie. I’ll send you an email and we’ll get something scheduled.

      • Ken Howard

        As always Kevin, you bring a lot of VALUE to this Industry. Very well written and extremely relevant to current events. It’s amazing how greed for fast money brings the worst out in people. Also, it’s very SAD that this same GREED is giving the Crypto Currencies a bad rap, sad, because I truly had hoped that Crypto Currencies would one day deliver the world from CENTRAL AUTONOMOUS Bankers and put the FREEDOM of Peer to Peer exchange back into the hands of everyone globally for a fraction of the FEES CENTRAL BANKERS and PAYMENT PROCESSORS charge; potentially sparking a real REVOLUTION of FREEDOM…however, this GREED could severely dampen the expansion, acceptance and global usage of crypto currencies as well bring down more Government REGULATION on the crypto’ which could BOX them in to the point they offer no better solution than our current money system…very SAD this GREED has become the proverbial “Bad Apple” that sadly soured the whole basket.

        • Kevin Thompson

          Thanks, Ken. I bet the bad apples get cleared out pretty quick. Regulators are slow, they’re not stupid.

        • I communicated with the Swedish Central Bank about the Crypto Currencies as BitCoin and OneCoin etc. Their response was that they are not against the technology at all. They are welcoming it. However they were against that there exists people (companies) that use illegal activities (violating the law) when it comes to Crypto Currencies. Especially when there are activities besides the actual crypto currency.

      • Nguyen Thai

        Hello My name is Jacky Nguyen.Please read my fb when you have time : https://www.facebook.com/ILC-ilcoin-ilgamos-1699595683608570/

      • Very good article Kevin!
        Now OneCoin is something that is a hot discussion topic. In some countries investigation if OneCoin is legal is on-going.

        What are your viewpoints of OneCoin and their operations from a legal perspective?

        To my understanding, OneCoin markets the benefit with a virtual currency, crypto currency. But when looking deeper into it, what they actually use as a method to provide a quick return, is by selling educational packages.

        Your thoughts appreciated…

        Kind regards,
        Andreas