SEC charges 11 people with crypto pyramid scheme

The U.S. Securities and Exchange Commission (SEC) today announced charges against 11 people involved in an alleged blockchain-enabled Ponzi scheme called Forsage.

Why it matters: The blockchain industry is plagued by a reputation for being rife with scams. Each time news like this comes out, it makes it harder for more legitimate projects to recruit users.

What they're saying: "Forsage is a textbook pyramid and Ponzi scheme. It did not sell or purport to sell any actual, consumable product to bona fide retail customers during the relevant time period and had no apparent source of revenue other than funds received from investors," attorneys Timothy S. Leiman and Patrick R. Costello write in the SEC's complaint.

Catch up fast: Two of the accused have already entered into settlement with the agency, without admitting or denying the allegations.

How it works: Based on Forsage's own marketing materials, it really is a pure multi-level marketing scheme, or pyramid.

• The only thing anyone is selling is Forsage, though. Users buy a slot in the system, recruit others and earn what they pay for joining.
• Once a certain number of people join under one person, the person who recruited that person gets paid.
• There's nothing else to it beyond that. Forsage makes no representation as doing anything else, like offering some sort of financial product or asking people to sell some sort of physical goods.
• Forsage operates on The Binance Smart Chain, Ethereum and Tron, each of which are smart-contract enabled chains that can run a scheme like this automatically.

Of note: When Axios tried to reach the Forsage team through one of the Telegram channels, our message was deleted.

• One member of the community then wrote, "No one is interested here, this is a decentralized system that is not subject to any regulators."
• Axios has been unable to reach anyone representing Forsage for comment.

The SEC seeks disgorgement of all income from Forsage, with interest, and civil penalties.

The bottom line: The SEC claims that over $300 million in investor funds have run through the scheme.

• "As the complaint alleges, Forsage is a fraudulent pyramid scheme launched on a massive scale and aggressively marketed to investors," said the SEC's Carolyn Welshhans in a statement.