The American Securities Exchange Commission is believed to be investigating Bitcoin Savings and Trust, an alleged Ponzi scheme conducted using the virtual Bitcoin currency.
Launched in November 2011 by a user calling himself Pirateat40, Bitcoin Savings and Trust claimed to allow users to invest the virtual currency known as Bitcoins, at an interest rate of seven percent per week, which is more than 3,000 percent per year.
Pirate claimed to be offering such high rates of return by conducting arbitrage, which is essentially moving one commodity from a territory where it is cheap to buy, to one where it is expensive, and he claimed to know where Bitcoins had a higher value than the price most users were paying.
As many as half a million Bitcoins were deposited into the scheme by investors who hoped they would turn a major profit on Pirate's enormous interest rates, a total pot of more than £4m at the time and accounting for one in twenty Bitcoins in existence.
Currently trading for around £7.55 each, Bitcoins are virtual currency that can be traded anonymously online in a peer-to-peer network, and because they do not exist physically they are not subject to any tax or policing.
Founded in 2008, and with honourable intentions from its creators and many users, the BitCoin currency is almost immune to money-laundering and hard to track, making it ideal for users looking to make illegal purchases online.
Back in 2008 each Bitcoin was worth three cents, but prices soon increased to almost $30 each, and with millions of virtual coins in circulation it was inevitable that crime would arise.
For example, in early September more than £150,000 worth of BitCoins were stolen from the online BitFloor trading exchange, leaving investors with huge losses.
On 17 August, the Bitcoin Savings and Trust scheme unravelled and Pirate announced he was in default, raising suspicions that it had been a Ponzi scheme all along.
Pirate's scheme is not too dissimilar to that of Bernie Madoff, the infamous American stockbroker who turned his wealth management business into a Ponzi scheme, conning investors out of billions of dollars.
Bitcoin Savings and Trust has now caught the SEC's attention, according to Willard Foxton at the Telegraph, who claims to have seen an email sent by SEC investigator Philip Moustakis to many of those who invested in Pirate's scheme:
The email (seen by the Telegraph) indicated that the SEC is launching an investigation into Bitcoin Savings and Loan. Last night [26 September] the SEC declined to comment on whether they are investigating, but confirmed that the email carried a correct email address, correct telephone numbers and seemed entirely bona fide. I've since been in contact with several investors in Bitcoin who have confirmed that they have spoken to Mr Moustakis, who is a Senior Attorney in the Enforcement Division of the SEC, with a distinguished record in investigating Ponzi schemes.
While Bitcoin's founders claim it is a secure, open and fair service that lets users buy goods, gifts and services online by paying each other directly, the truth is starting to look less welcoming, and the SEC investigation will no doubt lower the value of Bitcoins and possibly scare investors away from the currency altogether.
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