A criminal complaint filed in the Southern District of New York by the FBI against Konstantin Ignatov, an executive who operated a digital currency exchange and launched an initial coin offering (“ICO“) called OneCoin, sheds some light on the sometimes murky world of digital currency exchange founders.
The ICO and its associated programs, raised approximately €4 billion from investors from 175 countries, and was represented to investors as a legitimate digital currency on its own Blockchain that could be mined. In fact, investigators learned that it did not have a Blockchain, was not actually a digital currency and could not be mined.
The proceeds of the ICO were allegedly laundered through 21 countries, including the Cayman Islands, Jersey and Ireland.
OneCoin was co-founded by Dr. Ruja Ignatov, Konstantin Ignatov’s sister. She is an Oxford graduate and worked at McKinsey. Both are from Bulgaria. The complaint states that Ruja Ignatov acquired intelligence and unauthorized access to law enforcement information in Bulgaria, presumably about an investigation into OneCoin, and went dark. She has since disappeared. And apparently so has much of the money paid by investors for OneCoin.
The complaint alleges that, at sales events to pitch OneCoin, the Ignatovs represented that the OneCoin Blockchain was “transparent” and had anti-money laundering compliance built-in, none of which was true. Such sales pitches took place in the EU, Colombia, Singapore and Argentina. On Instagram, Konstantin Ignatov has posted photos of himself beside a OneCoin-branded airplane in Paraguay, driving a Porsche, on yachts and in exotic places in the world.
The founders of OneCoin also created a digital currency exchange called Xcoinx to ostensibly list the coin, which later also went dark.
Konstantin Ignatov has been charged with wire fraud pursuant to a criminal complaint and Ruja Ignatov has been indicted for money laundering. She is known as the “crypto queen.”
Apparently, even though the exchange and the business were insolvent because the funds raised were not left in the business or used to create Blockchain technology, its founders continued to solicit funds from the public and while the founders were pumping out information to raise money for OneCoin, they were sending various emails to each other that some of the coins were “fake”; that they could manipulate trades on Xcoinx; and that they knew that what they were telling the investing public was “shit.”
Let’s “blame someone else”
The complaint describes how the founders discussed an exit strategy and suggested that one exit option could be that they “take the money and run and blame someone else.” Under this exit strategy, they would take the money at that time (18 months ago) and long after, would blame someone else for the crime. It sometimes happens in criminal law that a person points the finger at someone else a year or two later, not contemporaneously with a now-alleged theft, to deflect from them when they become aware of a law enforcement investigation.
Muslim investors targeted
One of the unique strategies of OneCoin was it promoted itself as a digital currency that was compliant with Islamic finance, apparently with a certificate from the Al-Huda Center of Islamic Banking and Economics. In the UK, Muslim investors believed it was legit and invested in it.
Count the crypto, not the money
Normally, when the pubic invests in ICOs or sends funds to a digital currency exchange, the digital currencies bought for customers or investors, are held in trust in the pooled wallet of the exchange, and preserved until such time as investors make requests to exit out their digital currencies. Irrespective of if actual cash is missing, the key determinant for an exchange for investigative and audit purposes, is whether or not it has, in its pooled wallet, all of the digital currencies bought and not redeemed or transferred out, by its customers at any given time. In other words, does the pooled wallet balance have all the crypto it is supposed to have.
This is the determinant because customers do not send money for ICOs or to exchanges for it to be held in cash. They send it on the expectation and the representation that the exchange or ICO, is holding for them, virtual currencies that they can transfer out at some point in the future. Arguably, digital currency exchanges cannot be deposit-taking to hold cash in a wallet on an exchange unless licenced or exempt from licensing under banking legislation. The only thing they hold, and can hold, are digital currencies and those are in the exchange’s wallet.
Another reason why it is the pooled wallet balance that is the determinant is because some exchanges may gamble or leverage pricing, taking a risk on customer funds. Ethics aside, if they make a windfall on such gambles, they may have excess cash. The opposite may happen and the gamble was a bad one but regardless, they must still have all of the customers’ digital currencies in the pooled wallet, irrespective of risky behaviour they may have engaged in.
So in investigations into digital currency exchanges, or for auditing, one first counts the crypto.
But in this case, count the money
However, in this case, investigators could only follow the money because it appears that there was never any crypto and never any pooled wallet. It appears from the criminal complaint and the indictment, that the Ignatovs did not even buy any digital currencies with funds sent by investors, or create a virtual currency (OneCoin) or convert funds they received into the equivalent number of OneCoins, or give the coins liquidity, as promised to investors.
And follow the receipts for exotic cars, private jets and casino gambling
At the end of the day, Ruja Ignatov’s recommendation to “take the money and run, and blame someone else” can only go so far. When they take the money, some digital exchange and ICO founders don’t so much run as spend and they spend wildly, following precisely the same money laundering typologies the world over, namely they: buy or lease exotic expensive racing cars; move into mansions; travel on private jets; buy expensive watches; and gamble with wads of cash at casinos, all of which is traceable back to them from casino records, travel records and car lease receipts.