Cryptocurrency not immune from greed

08 February 2021 Gareth Stokes

It has taken just over a decade for bitcoin to achieve its goal of becoming a de facto means of exchange for the purchase of goods and services. Thousands of users worldwide dip into their bitcoin wallets each day, copying and pasting recipients’ wallet addresses to finalise transactions with as much ease as tapping a credit or debit card or transferring funds by EFT. Why an individual would not simply use these existing technologies to effect payment is the topic for another newsletter. Today we reflect on the latest hurdle cleared by digital currencies as they attempt to gain widespread public acceptance, namely being used in financial scams.

Our musings follow the late-2020 implosion of Mirror Trading International (MTI), which was placed under provisional liquidation by the Cape Town High Court on 29 December 2020. The media has devoted many column inches to speculation around the potential size of the scheme. We have, for example, seen estimates of between 17000 and 23000 bitcoins going amiss. That translates to around R8.5 billion to R11.5 billion at the recent ridiculous valuation of half-a-million rand per bitcoin; though investors will have been lured in at much lower price points. It will be interesting to see how the liquidators go about tracing and recovering the missing bitcoins over the coming years, assuming they have any success in this regard. 

A brief history of MTI

The media has been quick to brand MTI as a failed bitcoin scheme; but it did not start off that way. It started in April 2019 as a foreign exchange trading opportunity that promised to pay investors handsome returns north of 10% per month. Investors in the scheme were initially asked to move bitcoin from their wallets to a wallet controlled by MTI. These funds were then allegedly transferred to a Belize-registered broker called FX Choice Limited, which offered derivative instruments over foreign exchange pairs. Forex trading, which has burned many an individual and institutional investor in the past, was the perfect backdrop against which MTI could sell its unrealistic return promise. 

A media statement issued on 17 December 2020 by the Financial Sector Conduct Authority (FSCA) provides some insight into the history of MTI, from its humble beginnings in assisting members with forex trading, to participating in automated crypto assets derivatives, to its eventual outing as an alleged Ponzi scheme. During the course of investigations, MTI told the FSCA that its members had lost significant amounts of their capital between April and August 2019, with the result “MTI requested its members to de-link their respective FX Choice accounts from the multi account manager account and move their bitcoin to an [MTI-controlled] pooled account” instead. 

Separating fact from fiction

The FSCA and MTI have walked a long road since the authority first warned the public about the scheme. At that time MTI claimed that the forex trading issues were behind them and that they were making consistent profits using a high frequency artificial intelligence (AI) trading algorithm (or bot) assisted by a head trader and trading team. MTI-linked social media posts claimed that this bot, which “made all of the trading decisions with great success” was virtually infallible, having only suffered one unprofitable trading day. This win-loss ratio is something asset managers would sell their souls for! 

At some point between August 2019 and October 2020 MTI changed track from forex trading to trading derivatives over crypto assets, with the scheme evolving from one of ‘bitcoin being applied to forex trading’ to a pure crypto asset play. Bitcoin, it turns out, is just complicated enough to confuse the lay investor and a post-mortem of the MTI saga will likely reveal that few of those who participated understood how bitcoin worked, let alone the risks involved in derivatives trading on volatile ‘assets’. How else could one explain the decision to transfer bitcoin to a relatively unknown third party or the acceptance of massive return claims from an infallible trading bot. The preceding statement assumes that investors’ funds were being used in trading activities. 

Evidence in short supply

It has since emerged that the FSCA “found no evidence that any crypto trading was being conducted as communicated with members of MTI”. When the FSCA approached FX Choice about various MTI investor trading statements they were told that these statements had been produced by MTI, based on demo trading accounts rather than actual trades. Although FX Choice held some bitcoin in an MTI account, it seemed likely that the bulk of MTI investors’ funds had not reached FX Choice at all. It emerged that only 566.68 of the 1846.72 bitcoin transferred to FX Choice between 29 January 2020 and 3 June 2020 remained. And FX Choice could not support MTI’s claims that 16444 bitcoins were transferred from it to another platform called Trade 300 in July 2020. 

On 26 October 2020, the FSCA executed three search and seizure warrants, one each at the homes of the MTI CEO and marketing director, and another at the company’s offices in Stellenbosch. This raid was part of an investigation carried out in terms of the Financial Sector Regulations Act, which is aimed at protecting the South African investing public and to ensure a secure financial sector. Prior to the raid, the regulator had informed MTI that it was “conducting illegal unregistered financial services business” but MTI countered that it had changed its trading activities to trade in derivative instruments based on crypto currency and that it no longer fell within the jurisdiction of the FSCA. This argument fell flat because the FSCA has jurisdiction over all derivative instruments regardless of what asset or commodity forms the basis for the trade. 

Another bonanza for liquidators?

The 17 December release was brutal. The FSCA said that “MTI was not licenced to conduct financial services and had not applied for such a licence”. It also noted that “MTI and its senior management were conducting an illegal operation, misleading clients and contravening several laws”. But it was too late for investors who were unable to withdraw their capital or returns. They will now stand alongside other creditors in the hope that the liquidators do not chew through all of the assets recovered during the liquidation process. South Africa has a rather sketchy track record when it comes to such processes, as illustrated by the winding up of Krion, which had lured in around 14000 members and R1.5 billion in investments. 

Krion was declared a Ponzi-type scheme by the High Court of South Africa as far back as 2002. Yes, the court-appointed liquidators recovered R100 million; but around R84 million went to cover their and other recovery costs, according to the Business Day. It took 11-years after the 4 June 2002 liquidation for the process to finalise. The investors who brought the court application against MTI are in for another shock. In a podcast with Simon Brown of, Brandon Topham, Divisional Executive Investigations and Enforcement at the FSCA, confirmed that liquidators could claw back any investment returns that had been paid out by MTI. “It is common law in SA. If you are a participant in an unlawful scheme, the liquidators are in a position to claim that money back,” he said. Failure to do so would result in some creditors being favoured over others. 

The FSCA is pursuing criminal charges in the matter and will, no doubt, work closely with the liquidators as all parties develop strategies to address misconduct allegations in a crypto asset context. “Our earlier warning to the public to exercise extreme caution when investing (sic) with any person or organisation not registered as a financial services provider or in terms of a properly executed prospectus registered with the CIPC or registered as a financial institution with the Prudential Authority, remains in place,” concluded the FSCA. It would appear investors are in for a long wait. And many will be kicking themselves for ignoring the red flags of MTI’s multi-level type marketing structure, crazy return claims and, of course, the bot with the Midas touch. 

Writer’s thoughts:
An observation made by financial advisers and regulators is that those lured into schemes such as MTI often become its most vocal supporters. These supporters view any criticism of the opportunity as a personal attack and even blame regulators rather than the schemes’ founders for any losses they incur. Brandon Topham of the FSCA is on record that South Africa is home to many who seek out Ponzi-type schemes to make a quick buck. I would love to hear your thoughts on the MTI saga. Please comment below, interact with us on Twitter at @fanews_online or email us your thoughts [email protected].


Added by Gareth Stokes, 08 Feb 2021
Bitcoin does not make money. It is a crypto asset which is being touted as an alternative store of value, similar to gold. So, if you do not trust fiat currencies you would invest in bitcoin or gold instead.

The price of a Bitcoin is determined in the market by forces of demand and supply, underpinned by the fixed number of coins that will be created. You can spend hours on YouTube listing to for / against arguments for the digital currency...
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Added by old timer, 08 Feb 2021
I've never been able to figure out how Bitcoin and the like makes its money. Block chain sounds like a virtual paper trail so how can that create wealth? Where is the money invested?
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