Revisiting Crypto Ponzi Schemes

That's where I was paying homage to stuff you should know as Chuck Bryant, who I have heard say it's a Ponzi scheme way back in the house stuff works days.

And in that episode, I talked about numerous issues within the crypto community that relate to Ponzi schemes, and today I thought we would do an update to talk about one specific one that really had an enormous impact last year, and then a little additional details because even since twenty twenty one, there's been more examples of either outright Ponzi schemes in the crypto space or closely related issues that had enormous impact. So I'm not talking about every single one,

but I'm talking about the really big ones. Now, first, we need to remind ourselves about what a Ponzi scheme actually is. Now. It takes its name from a guy named Charles Ponzi, who in the nineteen twenties used a method to steal a whole lot of money, reportedly around fifteen million dollars in less than a year. Now that's a lot of money right now, fifteen million. I would not sneeze at fifteen million. I would be shuffed to receive that. But holy cats, think about that in nineteen

twenties money a ridiculous amount of cash. Well, what was he doing? Well? Schtick was centered around International Reply coupons, or IRCs, and essentially an IRC is a voucher for postage stamps in another country. So you would go to the post office and you would buy IRCs if you wanted to write back to your family in the old country and then have them be able to respond without

them having to buy stamps themselves. So instead they would go to their post office, they would use the IRC coupon, and the coupon would cover the cost of stamps to send international mail back to you. You don't have to do this within the same country, because then you could just use a self addressed stamped envelope, but obviously a US stamp doesn't mean anything in a different country. Well, Ponzi's idea was to use IRCs and leverage the differences

in postage costs in different countries. See, when you bought an IRC, you did so at whatever the local postage rate for a stamp was in your area, and even if the postage rate was higher in another country, the IRC would still cover the stamp. So this example doesn't really hold because the rates would be flip flocked. But here we go. If a stamp at the US cost a nickel at the time, so five cents, but a stamp in Germany cost a dime or ten cents in equivalent US cash, what you could do is you could

go to the US post office. You would use a five cent nickel to buy an IRC. You'd send that over to your papaw in Germany, and your papa could use that same IRC to get a ten cent stamp at the post office, even though you only had to pay five cents back in the United States. So Ponzi's idea was to try and leverage this. He wanted to buy IRCs in cheap countries and then redeem them and innsive ones and then sell the stamps out a profit.

So it was like creating money out of nothing. He tried to convince a bank to back this idea, of the banks weren't convinced that the strategy would work, or if it did work, it wouldn't really be scalable. You wouldn't be able to do this in a volume that would actually make you any significant amount of money. It

turns out those banks were right. So instead Ponzi goes and starts talking to friends and acquaintances, and he starts making promises that within three months he could double an initial investment, and he secures a round of investment cash, and sure enough, some of these investors see impressive payouts from Ponzi later down the road. Except it turned out those payouts were not the result of this IRC scam he had in mind, or not even scam his scheme.

This IRC scheme wasn't the reason why Ponzi was paying out the dividends on those investments. Instead, Ponzi actually found the logistics of getting this scheme to work were way more complex than he anticipated it. Like I said, the banks were right, So I think, at least in the beginning, he probably was determined to try and make it work. But in the meantime, what he did was he needed to find a way to give a return on investment

to these initial investors. So he took out a second round of investing, and with some of the money that folks were pouring into the scheme at this round of investment, he took that money and paid out some of his earlier investors. Well, the earlier investors are incredibly excited to see that they got such a rapid and considerable return, so a lot of them reinvested back into Ponzi's scheme, and before long Ponzi shifts away from trying to make

the IRC thing work. He just gives up on that and he steady just runs a scam where he takes the most recent round of investments to pay out returns to earlier investors and himself. Now, to be clear, Ponzi did not invent this idea. This was not a brand new concept. He was not the first to come up with a Ponzi scheme, but we call them Ponzi schemes because he went big time with this, mostly out of Boston, Massachusetts. While previous examples of these schemes followed essentially the same

thing that what Ponzi was doing. Ponzi's version propelled him to such wealth that before the whole thing came crashing down, he was pretty famous in the New England area. Newspapers would cover his business favorably, and that of course led to even more investments. So when a newspaper would say, hey, these investors are super happy because they got so much money back on their investment, more people were begging to give Ponzi their money. Was able to perpetuate the scheme

and make him even richer. But here's the thing. Even the best run Ponzi scheme will not last forever. Eventually, the incoming investments are not enough to cover all the previous investors, and you either have to pay out smaller and smaller dividends, which is going to upset your investors, or you got to take the money and run while you can. But while the scheme is booming, you can

have yourself a swell time. Just you know, you've got to remember that at some point the piper will demand to be paid, and you'll likely also have some government agencies with some scary initials, and they'll be really, really interested in talking to you. Another way to describe the Ponzi scheme is the old saying robbing Peter to pay Paul, or sometimes it's borrowing from Peter to pay Paul. But you get the idea. You're not creating wealth, you're really

just redistributing it. And it only works as long as you can keep finding more Peters so that you can keep paying all those Palls and keep them at bay. As for Ponzi himself, well, several months after he rocketed to wealth, the investigators began to close in on him. The US Postal Office denounced the underlying principle of his supposed business, which, remember, was not actually what he was doing.

It was just what he said he was doing. But the US post Office said, there's just no way he could be making that much money through IRCs because the volume he would have to trade in was greater than what the supply was, so literally, there was no possible way for him to make his money through the way he was claiming, because there weren't enough IRCs out there

to make it happen. And local newspapers began to suspect that perhaps they had been hoodwinked, and so chagrined, they began to launch their own investigative efforts and a way to try and save face, because if you talk someone up and then it turns out that they're a flim flam artist, that does not go well for your reputation. Right, So these newspapers are like, we need to if something is hinky here, we need to really look into it.

There were a couple of points where it seemed like the mob was about to turn on Ponzi, that everyone was gonna pull their money out, which would have sent

the whole thing into a collapse. But a couple of times he was actually able to dissuade them, and some folks who were determined to withdraw their money once the investigations began would later reconsider because Ponzi seemed to be on the up and up, like he was returning money to investors who were requesting it, like millions of dollars early on, and so folks began to say, well, if he was actually a crook, he wouldn't be returning money,

so he must be honest. That means I might actually stand to make a whole bunch of money from this guy. And so people who had initially thought I'm out, ended up not just staying in, but some of them put even more money into the scheme. Now, ultimately, an audit by the US government found that Ponzi's business was thoroughly corrupt and totally baseless. The investigation ultimately found there was around sixty one dollars worth of IRC's in the whole

dang business. You are not going to be making millions of dollars in profit off of sixty one dollars of these coupons, And it proved that what Ponzi really was doing was just convincing more and more people to hand him money to pay off the earlier investors and to

make himself rich. Ponzi ultimately would go to jail, though not before having a few more adventures through skipping bond and running off to different states before he was ultimately apprehended and sentenced, and after serving his sentence, he was deported to Italy. He was an immigrant from Italy to the United States. He did not return to the US, but he did immigrate to Brazil and set up a

business there until in nineteen forty nine he passed away. Now, there are a couple of scams that closely relate to a Ponzi scheme, but are slightly different. For example, a pyramid scheme. This is where you've got one person or a group of people at the very tip top of the pyramid, and then they recruit a layer of investors

who pay money into the scheme. In return, these initial investors have to go out and recruit another layer of investors, and they keep a little bit of the money that those folks are contributing to the organization, and they pass the rest of the money up the pyramid and then this new layer, so now we're two layers down from the top. They have to go on and recruit yet another layer of investors, and so on. So each group

of investors needs to get more investors. And if you want to think of a simple one, let's say that each investor needs to get two other investors to pay into the system. And it expands rapidly as you would imagine. And that's just if you only had to get two. And so meanwhile, the people at the top, they're getting payouts with every successive layer that's added to this pyramid. Each person along the top is getting a small amount per investment till you get to the tippy top where

they're really making bank. But the people at the bottom are not making anything at all unless they are recruiting new people into the organization, so they're feeding into the pyramid. And like a Ponzi scheme, a pyramid scheme will ultimately fall apart because at some level the base of the pyramid is so large that there's no way to recruit more people to pay into the system, and the whole

thing starts to fall apart. And really the only people who make any serious money are the ones near the top layers, like maybe the first couple of layers, and the tippy top being the ones who make the most money out of the whole thing. Now relate into that

are multi level marketing schemes. These aren't necessarily outright scams, they are not necessarily illegal, but they also rely heavily on recruiting new members, and sometimes they rely more on the recruitment side than they do with whatever they're actually supposedly selling or marketing. And there are tons of these,

and they're known for selling all sorts of stuff. The classic example is cosmetics, where you have people who get pay into the system in order to get access to cosmetics supplies to sell to people, but very quickly they see that the real money isn't in selling the cosmetics, but recruiting other people to join in to sell these cosmetics. And once you really start stripping things away, it starts to look like the cosmetics are just an excuse for

the organization to exist. The real money comes in looping in more and more people into the scheme until you've saturation, and then if the cosmetics can support that, if selling the cosmetics can keep the organization going, it's technically a legitimate organization. It's just that it's probably not making the same amount of money it was when it was in

the recruitment phase, and it's still kind of questionable. And then we've got the crypto version, and these can take a lot of forms, but the basic sequence tends to be someone creates a new cryptocurrency, either on an existing blockchain or possibly through a new one, and they hold an initial offering of coins ioc Man. There's a lot of initialisms in this episode, and sometimes I stands for initial,

and sometimes it stands for international. It's initial in this case, so in return for an investment, the investor gets an initial offering of coins or digital tokens that are awarded to them, and they are newly minted, fresh, crispy crypto coins. We'll talk about where this can go wrong after we take this quick break. Okay, an initial offering of coins where you jump in on a brand new blockchain offering, whether it's on a brand new blockchain itself or on

an existing one. You want to be an initial investor, so you put some of your real money into the system, and you are awarded some digital tokens, some crypto coins that have been mented specifically for this purpose to attract investors, and so your investment now is represented by these digital tokens. There's nothing inherently wrong with that, right. There are legit cryptocurrencies, or as legit as you believe cryptocurrencies to be. That's

kind of a sliding scale in public perception. But there are also schemers who would follow this exact same chain of events in order to rake in that investor money. They'd meant out cryptocurrencies that ultimately would end up being worthless.

Once the whole scheme comes down and the ringleader runs off with the investment cash, and everyone else's left with digital tokens that don't hold any value, and due to the fact that crypto allows for a certain amount of anonymity, it can be possible for the same scam artist to pull the scheme again at a later date with a new,

equally worthless crypto coin. It's also possible for a well intentioned person or group to fall into this trap of a Ponzi scheme because they found themselves in a tough spot that they hoped was just a temporary situation, and they start practicing the whole Rob Peter to pay Paul approach just as a way to stay afloat while still hoping to make a legitimate recovery and not have to

continue that practice. And maybe sometimes that works. Some folks might be able to use creative accounting to stay above water long enough to regain stability, But it definitely doesn't always work right, because there are lots of examples where this kind of thing will ultimately lead to a total collapse.

And I want to add that one of the factors that I believe really helps fuel this is the combination of high enthusiasm and low knowledge or experience that the promise of a huge return, which is a typical red flag of any Ponzi scheme can really excite someone who has some money that they would like to invest and see that money increase. And the fact that cryptocurrency itself is a difficult thing to describe and explain. It's hard to teach someone how it works in a way that

doesn't make them go cross eyed because it is very complicated. Ultimately, well, lack of information can end up helping if you're pulling a scam because people just know, oh, cryptocurrency, that's something that can in some cases at least lead to massive increase in value. So I could get rich overnight by investing in this, And because they don't have a full understanding of it, they aren't aware of the potential risks, and that's what creates this perfect environment for running scams.

I frequently say, if there's a lack of information and an overabundance of enthusiasm, that is an enormous warning sign and you should take a moment to really think things through before you jump in and participate. Doesn't mean that it's necessarily going to go bad, but it's just that conditions are perfect for that thing to kind of happen, So you need to take that step back and start asking questions and make sure that you understand can you

evaluate the answers before you start making decisions? All right? This finally brings us to talk about Terraform and UST and Luna. So Terraform Labs would be the company we'll be talking about. And the co founders were Quan Do Jung, although in the crypto community he's known as Do Quan and his business partner Daniel Shin. Quan had previously worked for some big tech companies in the US before he moved from the United States back to his home country

of South Korea. He went into business for himself, and then in twenty eighteen, he moved to Singapore and co founded Terraform Labs in January of that year. So he located in Singapore, and you might wonder why, and a lot of these crypto companies they will locate in places that have lax regulatory bodies in an effort to be able to do business without having two much interference from

government agencies. So Terraform Labs then introduces the terra blockchain and ultimately would begin to mint two different cryptocurrencies, although not right out of the gate. These were actually unveiled in different times. But one I want to talk about is terra USD, which we usually just refer to as UST. That does get confusing because UST stands for terra us D, and then the other cryptocurrency is Luna. All right, even though it came out second, we're going to take Ust

first to explain what it is. Terraform introduced Ust as an algorithmic stable coin. Now we need to break that down. A stable coin is a type of cryptocurrency that has its value connected or pegged, as they say, in crypto, to some other asset. This is why ideally would keep this particular type of cryptocurrency stable. The value of the stable coin, at least theoretically, would only change if the

value of the pegged asset also changed. So if you were to peg your cryptocurrency stable coin to the US dollar, which is a pretty common thing, then in theory, as the US dollars value rises, so would your stable coin that's pegged to it. Or if the US dollar value decreased, then the value of your stable coin would decrease in kind.

Typically we're looking at a one to one relationship when we're talking about fiat currency, So one US dollar and one Ust would be equivalent in value, assuming that everything is going correctly. Stable coins try to address an issue

that non backed cryptocurrencies often encounter, which is volatility. Now you've probably heard me say way too many times that one of my big problems with cryptocurrencies like bitcoin is that their value can fluctuate so much that you are discouraged from using it as actual currency unless you're willing

to encounter some potentially significant problems. For example, the value of some cryptocurrencies like bitcoin can change by significant amounts so quickly that when you start a transaction, you're exchanging a certain amount of value or purchasing power, but by the time the transaction is complete, that amount could have changed dramatically. So let me give you a very oversimplified example.

This is one I've used before. So let's say you walk into a convenience store and you want to buy a candy bar, and the candy bar is priced at one US dollar. So you pick up the candy bar, you go to the cash register, you hand over your hard earned US dollar, and in return, you get to

take the candy bar and leave the store. But right at the moment that you're doing this exchange, let's say that the value of the dollar changes wildly, and now that one dollar bill has five dollars worth of purchasing power, because now the value of the dollar has changed, So what you could have bought with one dollar before has increased by five times. Now like technically that one dollar is equivalent to the value of five candy bars, not

just one. But now that means the candy bar you bought is way overpriced, right, because it should now cost twenty cents, because the presumably the candy bar's value is independent of how much a dollar is worth. It's not like a candy bar is magically one dollar. No matter how much a dollar is valued, a candy bar has its own intrinsic value, and that value the price should, in theory, fluctuate with the value of the dollar, at least at some point. It's probably gonna trail because these

things are not instantaneous, but it will change. So it would mean that perhaps in the future you would come to that same store and now you'd see all the candy bars are valued at twenty cents, not a dollar, because the value of the dollar itself has changed. On the flip side, let's say that at the moment of purchase the value of the dollar decreases by half, which means you've got yourself a one dollar candy bar, but at the purchasing equivalent of fifty cents before this change.

Now the candy bar company or the convenience store is hurting because the dollar they collected isn't worth as much as it would have been pre purchase. Now that's a very silly example, right, But that sort of stuff actually happens with cryptocurrencies because the transaction times can be long. With bitcoin, you're talking about potentially ten minutes, and the fees that you pay with transactions are fairly high, and

then you pair that with the currency's volatility. People end up being discouraged from actually using cryptocurrencies as currency because you could end up losing a huge amount of money just in the process as you're completing a transaction. However, stable coins, because theoretically they lack volatility, they can be more useful as digital currency. You could actually buy into a stable coin and be relatively sure that your money will be good wherever you spend it, and you don't

have to worry about massive fluctuations and value. You can use it as a currency. Now, a lot of people use stable coins to move money into and out of non backed cryptocurrencies. Right, so instead of just immediately withdrawing bitcoin into US dollars, you might convert bitcoin into a stable coin first, then go through the conversion of the stable coin into US dollars. If you want to liquefy

or liquid date, I should say your assets. Liquidity is very important for there to be confidence in the crypto market. But Ust is not a backed stable coin. It's an algorithmic stable coin. That means UST relies on a set of rules that's one algorithm is Ultimately, it's just a set of rules in order to keep the coins value stable. And this involves stuff like keeping very careful control of the supply of stable coins and by extension, the supply

of the related but non stable cryptocurrencies. And that brings us to Luna. So unlike Ust, which is on the again the Terra blockchain and also traded on other blockchains, Luna was not a stable coin, and Ust, rather than being backed by a fiat currency or other commodity, was

instead backed by Luna. And you might say, huh, so you've got one digital token and it's being used to help stabilize a different digital token, neither of which are connected to any real world commodity, and we could get into a discussion about how money in general is also a step away from real world, but then I'm just going to descend into madness, so we'll leave that for now. So terraform Labs, the company was using Luna to not just peg ust to another currency, but also to act

as a proof of steak for the Terra blockchain. Proof of steak is how blockchains like Terra and now Ethereum allow for transaction verification. Members who want to participate put up a portion of their crypto holdings their steak in an effort to win the right to validate a block of transactions, and if they win that, they get a reward then the form of more digital tokens. So really the more you have, the more you can earn on

these proof of steak models. Luna was also used to pay transaction fees on the Tara blockchain, because while proof of state doesn't require the massive compute power of the proof of work cryptocurrencies like Bitcoin, there's still are bills that have to be paid and also holding onto Luna gave Tara blockchain members the right to vote on proposals that would shape the network. So let's say you held some Luna and you wanted to trade that Luna out

and withdraw your money from the Tara blockchain. First, you would trade the Luna for UST, and this would burn the Luna tokens, essentially destroying the specific tokens you held, and you would be paid an equivalent value in UST, with one UST being equated to one dollars worth of Luna.

That's important, we'll come back to that. And since Ust was meant to be more or less the same value as a US dollar, this was like being paid out in US dollars, but it required another step, so it wasn't exactly the same because you would still have to convert your UST to US dollars at a crypto exchange and also pay some transaction fees along the way. This would set up the scenario that would allow for absolute disaster once things began to unravel. I'll explain more when

we come back after this quick break. Okay, let's say that you had Luna. You had let's say eighty five dollars worth of Luna. Well, because the UST was supposed to be equivalent to a US dollar, even though it wasn't pegged to the US dollar. You do this transaction and Luna ends up converting over into eighty five US t right, and then they would burn Luna. That Luna token would get burned, and then you would liquefy your UST holdings. Let's say you want to pull that out,

you want to make them into dollars. Well, in order to preserve the value of stable coins and keep them stable, the Tarra blockchain would then meant more Luna, and this was meant to keep the UST stable. Right, So even though we're talking about two different digital tokens that are not backed by anything other than each other, and as you are pulling out one, you have to ment more

of the other to keep things stable. And then as you end up purchasing more Ust, you might end up having some different issues with the Luna supply as well. We'll get to that. So you could use your Ust to buy Luma. And you know, as I said, one, Ust was established as being worth one dollar of Luna. However, because Ust was not actually pegged to the US dollar, that meant that if UST was to slip and value and dip below a dollar, well, it gave you an opportunity.

You could purchase UST with US dollars and remember, at this point the UST is worth less. Let's say it's worth ninety cents instead of a dollar. You could use US dollars to buy more Ust, because the US dollars worth more than the UST is at this point. Then you could exchange the ust each UST for one dollar

worth of Luna. So if UST dropped to ninety cents, but you could still buy a whole bunch of UST and then use that to secure Luna, you could buy Luna at a ten percent discount because that one Ust equals one dollar of Luna. That wouldn't change. So UST's drop in value would give you the chance to buy Luna at a discount and potentially make a whole lot of money. Now let's get to the Ponzi scheme side

of this. The Tara blockchain launched in twenty eighteen, and for the first three years things were pretty quiet, but in twenty twenty one things would change. So one of the things that helped this was an initiative that do Quan had previously introduced as an incentive to attract new investors to the Tara network, and that was promising a twenty percent annual return on investment if you posted your ust holdings the stable coin holdings against a lending platform

called Anchor, which Doquan had also established Anchor. This lending platform was built also on top of the Tara blockchain, So you've got your stake right however much you decide to put on Anchor, and then on top of that, you make twenty percent every year, and you still have the original steak, So if you decide that you're done, you could just withdraw your steak, plus you have all those returns you've made over the years. Side note, in

my experience, people never get tired of making money. So the thought was people will put up their steak and they'll just leave it there because it'll just continue to generate a twenty percent return year over year. So in five years, you've doubled your investment, right, because you could always pull your steak and then you'd have twice as

much money as when you put it in. But these kind of promises are exactly the red flags for stuff like Ponzi schemes, and typically those promise an incredible return on a relatively short time frame, and the Anchor platform itself was a decentralized money market that again was built on top of the Tara blockchain, and its purpose was to loan out money to investors so that they could pour that money into, you know, another investment, perhaps right

back into the system. So, in other words, they were encouraging UST holders to post money to Anchor. Doquon would then apparently take that steak and loan it out to investors who would then pour the money into investments, potentially right back into the tarra form blockchain. And meanwhile Doquan was promising the initial Anchor backers a twenty percent return on their investment. And people said, you know, this is sounding more and more like a Ponzi scheme. You're taking

investor money to pay out other people. Things started to go south in the spring of twenty twenty two. On May seventh, twenty twenty two, some investors who had staked Ust on the Anchor platform began pulling their stakes to the tune of about two billion dollars worth of UST, and a lot of folks began to liquidate their assets entirely,

meaning they were pulling it off the Tara blockchain. They weren't just converting to Ust, they were converting it to something else, whether it was another stable coin or a fiat currency. And there were questions initially about whether this started as a purposeful attack on the Tarra blockchain, that someone was specifically doing this to orchestrate the events that followed, because these were things that people had been warning about ever since the launch of UST, and it's pegging to

the Luna cryptocurrency. People were saying, this sets things up for disaster, and that's exactly what was happening. So it led people to say, oh, did someone look at the warnings and take that as an instruction booklet on how to do an attack? But further investigations suggested that perhaps this wasn't so much an attack. It may have just been that investors were getting concerned because interest rates were on the rise around the globe and they wanted to

start pulling their money. But whatever the cause, it all started a massive domino effect. So people started to cash out and the value of UST began to slip. And again, like when the value of UST goes down, it means technically you have the opportunity to purchase more Luna at a lower price. You're getting it for a discount, so the ust slipped to almost ninety cents, and cryptotraders pounced

on it. They started to buy up Ust in order to convert it into Luna, and Luna was trading at a very high value up to that point, like in April of twenty twenty two, it was almost one hundred twenty dollars per Luna token. So if you could suddenly buy a ten thousand dollars stake of Luna for nine thousand dollars, and then because Luna's value had exploded since early twenty twenty one, like in early twenty twenty one, it was trading at around a dollar, well now is

at one hundred twenty dollars or close to it. So you started to think, Wow, if it continues on that trajectory and I'm able to essentially buy a thousand dollars of it for free, I'm if I'm already sinking ten grand into it, man, I'm going to get stinking rich and it's just going to take a year, right if we're on the same trajectory. So you had all these

these crypto traders jumping on that opportunity. Well, it turns out the assumption that the value of the lunatoken would hold was a really bad one because UST continued to slip and it became completely unpegged to the US dollar, and that led to a panic. Folks began to liquidate their UST holdings in an effort to save as much of their investment as they could. They were pulling out, you know, maybe they had made some money in the past and they're hoping like, all right, let's cut and run.

This is about to go south. I want to get my money out before I take a bath on this. And some people got out with a considerable amount of money, but they were acting super early. And in the process, as people were liquidating their UST, it meant, because of the nature of this UST to Luna relationship, that the Terra blockchain had to mint more Luna to cover UST

and stabilize it. Well. By minting more Luna, it meant that you were increasing the supply of the Luna cryptocurrency token, and opportunists meanwhile had been grabbing up more and more

Luna due to UST's value taking a hit. But now all the Luna they had scooped up was worth less than it had been because you had this new rush of supply right, Supply and demand are the two things that determine stuff like value, and when the supply dramatically increases, the demand decreases and then you start to see the

value drop. So at this point, crypto exchanges began to jump in because the value of Ust was plummeting and Luna was following suit, and so the crypto exchang just in order to reduce their liability, began to delist Ust and Luna because both currencies were seen as being extremely unstable. But obviously by delisting the cryptocurrency, that added to that instability.

And you know, it's really hard to keep value with a cryptocurrency if it turns out there's nowhere you can go to exchange it for something else, because then it just exists on its own, isolated little blockchain. It's trapped there and its utility is greatly reduced, and that again impacts value. So perfect storm situation. The crash of Luna's value sent a massive shockwave through the entire cryptocurrency community.

So it's one of those big events that precipitated the collapse of several companies that were connected to the crypto world. Like there were crypto exchanges there were crypto loaners. All sorts of companies that were related to the cryptospace began to take a massive hit due to this collapse. Some estimates put the amount of wealth lost in the wake

of the crash at hundreds of billions of dollars. Now this has prompted several massive government agencies in countries like South Korea and the United States to look into what happened. They are very very interested in speaking with Doquan. Quan so far has evaded them. But the SEC, for example, believes that Doquan failed to inform investors of risks, that he made promises on returns that were unrealistic and unsustainable, and that he had outright lied about how Terraform worked.

In fact, the SEC alleges the Doquan was engaged in securities fraud and that quote the Terraform ecosystem was neither decentralized nor finance. That's a sick burn, the quote continues. It was simply a fraud propped up by a so called algorithmic stable coin, the price of which was controlled by the defendants, not any code. Quote. The SEC is saying there wasn't any algorithmic nature to the stable coin at all, it was maintaining its value based upon just

Terraform Labs saying it dead. Now do Quan's last known location with Serbia. He apparently fled there after he left Singapore because Singapore police are now investigating Terraform Labs as well, and do Quan had already picked up stakes and left. He fled to Dubai first and now is in Serbia, or at least his last known location with Serbia. My guess is he'll continue to try and keep a low profile and move around because he is a very much

wanted man at this point in several countries. Now, before I wrap up, I should also mention the FTX debacle. I did an entire episode on FTX and Sam Bankman freed, the co founder, and arguably FTX isn't quite the same thing as a Ponzi scheme, but it does come down to a robbing Peter to pay Paul situation all the same. So the cliffs Notes version of the FTX debacle goes something like this. Sam Bankman Freed, or SBF as the folks who used to be his friends and believers called him,

co founded a crypto investment company called Alimator, Research. So this company essentially what it did was it would take investor money and it would put it into different crypto investments in an attempt to create a profit. So far, so good. It's not a guaranteed moneymaker, right because the crypto markets can be pretty fickle, but it's fairly straightforward. And he located the business off shore because that helps and avoid those imperial entanglements. As obi Wan would say,

that's important to remember. One of the big anchor points for the crypto philosophy tends to be that crypto could be free from regulations as opposed to the big established financial systems in various countries. However, this is something that's rapidly changing because governments around the world find themselves saying, wait, you lost how much investor money? So the regulatory agencies around the world have definitely been closing in on crypto anyway.

A little later after founding Alimator Research, spf CO founds another company called FTX, and this is a crypto exchange. So this is a business that exchanges currencies for other currencies and it takes a little bit off the top to pay for its own operations. So an exchange is somewhere where you might swap your UST for Luna, for example, or vice versa, or UST for US dollars. You get the idea. These are the entities that make it possible

to jump into different cryptocurrencies and participate in the crypto world. Now, FTX would actually grow to become the second largest crypto exchange in the world, and folks could keep their money in the exchange itself. They could treat it kind of like a bank, and when the dust would settle a FDx collapsed, it would appear as though SPF and his crew were a bit lucy goosey with the money stored

in customer FTX accounts. So, just ahead of the collapse came this expose that included screenshots of spreadsheets that appeared to show that the FTX folks had been funneling money from customer accounts to Alimta Research to help cover investor returns there so again it looked like they were robbing Peter in the form of FTX customers to pay Paul

the Alimator Research investors. This expose set off a chain of events that would lead to the collapse of FTX, and FTX had its own native token the FTT, and folks started to cash out their FTT investments because that expose showed that FTX probably didn't have enough FTT to cover all the money that customers had actually put into the exchange. So you're thinking, ha, they don't have as much money as people had invested into it, so I should pull my money out because I don't want to

be left holding the bag. So people started to cash out, and not included Binance, the largest cryptocurrency exchange in the world, which coincidentally had also at one point offered to bail out FTX, and then TOTS changed their mind. They ended up cashing out their considerable amount of FTT tokens in FTX, and this accelerated the collapse, so FTX didn't have all the money they needed to pay this out. The reveal about the elimated research problem got published and everything came

crashing down. So it wasn't exactly a Ponzi scheme, but there's a lot of overlap in the Venn diagram here, and it's stuff like Ponzi schemes that have really hurt the cryptocurrency industry in general. Like not every cryptocurrency is an outright scam or at least it wasn't initially created to be a scam, but there are enough examples that have really damaged the whole industry, including banks that didn't start in the crypto world but ended up getting tangled

up in it. If you are interested in learning more about that, you should look up the bank silver Gate. This was a real estate bank or is a real estate bank in southern California that about a decade ago, a little less than a decade ago, got involved into the cryptocurrency world and now is in real crisis mode because of things like the FTX collapse and the collapse

of several other cryptocurrency companies that had been customers. It has even gotten the attention of the US government to look into silver Gate, which may or may not have done anything wrong. Silver Gate might not have done a single thing wrong, but once you start getting the attention of the authorities, then customers start to get really nervous, and a lot of cryptocurrency companies have pulled their accounts

with silver Gate. So this kind of activity, these ponzi schemes and stuff, can end up having a very large ripple effect beyond just the initial investors who lose their money. It could end up poisoning the well for everyone. There's the saying one bad apple can spoil the bunch. In this case those Ponzi schemes and related scams. That's the bad apple, and it could poison the entire blockchain community.

Even though blockchain on its own is not necessarily a bad thing, it's just that it's prone to this, largely due to the lack of regulation, which again means that potentially to solve this, the crypto world needs to change its stance and its thoughts about regulation and its role in finance. It goes flies in the face of the original, like crypto anarchists who thought that deregulation was the way

of the future. As it turns out, it does create the perfect opportunity for scam artists to steal lots of money, which hurts everyone. Okay, that's the update on It's a crypto Ponzi scheme. Hope you enjoyed this. If you have questions or maybe you've got an idea for a show I should do in the future, a couple of different ways you can reach out to me. One is you can send me a message on Twitter. The handle for the show is tech Stuff HSW or you can download

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