Two Estonian nationals were arrested in Estonia on Sunday after being charged in the United States for running a massive Ponzi-like cryptocurrency scheme that resulted in losses of more than $575 million.

The defendants, Sergei Potapenko and Ivan Turõgin, 37, are accused of defrauding hundreds of thousands of victims along with four other accomplices residing in Estonia, Belarus and Switzerland between December 2013 and August 2019.

They allegedly funnel victims’ funds through a complex web of front companies, bank accounts, virtual asset services and cryptocurrency wallets designed to help them launder the money.

As of December 2013, they ran a company named HashCoins OÜ that imported and assembled other companies’ cryptocurrency mining hardware instead of manufacturing their own, as advertised.

After failing to deliver prepaid equipment and avoiding refunding payments, the defendants tricked customers who had already paid for the mining hardware into signing cloud mining contracts via a new cryptocurrency mining service they called HashFlare (launched February 2015).

Those who accepted the program were promised to receive “rights under mining contracts entitling the client to a percentage of the profits” from a pooled remote mining operation, according to the indictment.

Instead, Potapenko and Turõgin operated HashFlare as a massive Ponzi scheme where returns and currency balances were fraudulent.

“To conceal this fact, when the investors submitted requests to withdraw their mining income, the defendants either refused to make payments or paid the investors using virtual currency that the defendants had simply purchased on the market. free, as opposed to currency generated by actual mining operations,” the court said. the documents say.

Revolutionary digital crypto-bank

Finally, they also started a new company in Estonia called Polybius Foundation OÜ (aka Polybius Bank) and guest potential investors to fund the projects via an “initial coin offering” (ICO) in exchange for virtual tokens called Polybius tokens (PLBT), as part of “a true revolution in the world of digital crypto-banking”.

After two weeks, a Polybe press release claimed that “the ICO raised approximately $17 million from over 14,250 participants”, with over $6 million in less than three days, “thus meeting the requirements to receive a European banking license”.

In total, they have successfully raised over $31 million from third-party investors (according to the FBI’s HashFlare investigation), funds that were transferred to defendants’ bank accounts and virtual currency wallets instead of being used to fund Polybius Bank. They never paid dividends to investors and never formed a bank.

Instead, the fraudulently obtained funds were used to purchase at least 75 real estate properties, luxury vehicles, fill their wallets with cryptocurrency, and invest in thousands of cryptocurrency mining machines.

“The size and scope of the alleged scheme is truly staggering. These defendants capitalized on both the lure of cryptocurrency and the mystery surrounding cryptocurrency mining to commit a massive Ponzi scheme,” said US attorney Nick Brown.

“They lured investors with false representations, then paid early investors with the money of those who invested later. They tried to hide their ill-gotten gain in Estonian properties, luxury cars, accounts banks and virtual currency wallets around the world. United States and Estonian authorities are working to seize and detain these assets and profit from these crimes.”

The two are charged with 16 counts of wire fraud, one count of conspiracy to launder money and conspiracy to commit wire fraud.

If convicted, each faces a maximum sentence of 20 years in prison.