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HashFlare $575m fraud: Founders ‘capitalized on the mystery of cryptocurrency mining’

By Raphael Sanis

Edited by Charlie Mellor

10:32, 22 November 2022

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BTC/USD
Bitcoin / USD
23127.90 USD
-709.85 -2.980%

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The HashFlare website URL is displayed on a computer screen
HashFlare was a bitcoin mining platform that allowed investors to rent equipment and earn profits – Photo: Shutterstock

Founders of the bitcoin (BTC) cloud miner platform HashFlare were arrested in Estonia this week for alleged wire fraud and money laundering.

Sergei Potapenko and Ivan Turõgin, the creators behind HashFlare, were charged by the US District Court in Seattle for reportedly running a cryptocurrency fraud scheme and scamming investors out of $575m.

Nick Brown, the US attorney for the Western District of Washington, said in a statement: “The size and scope of the alleged scheme is truly astounding.

“These defendants capitalized on both the allure of cryptocurrency, and the mystery surrounding cryptocurrency mining, to commit an enormous Ponzi scheme.”

What is HashFlare?

Founded in 2015, HashFlare was a BTC mining company that allowed users to hire hash power. In exchange for a fee, investors could rent a percentage of its mining operation and gain a portion of the profits.

Its website allowed users to view the amount of cryptocurrency their mining activity had supposedly generated.

HashFlare drew in thousands of international investors, who spent a total of $575m on the platform. This was invested between 2015 and 2019, afterwards HashFlare mysteriously and quietly disappeared with the money.

XRP/USD

0.40 Price
-3.270% 1D Chg, %
Long position overnight fee -0.0500%
Short position overnight fee 0.0140%
Overnight fee time 22:00 (UTC)
Spread 0.00335

DOGE/USD

0.09 Price
-4.120% 1D Chg, %
Long position overnight fee -0.0500%
Short position overnight fee 0.0140%
Overnight fee time 22:00 (UTC)
Spread 0.0011028

ETH/USD

1,582.11 Price
-3.960% 1D Chg, %
Long position overnight fee -0.0500%
Short position overnight fee 0.0140%
Overnight fee time 22:00 (UTC)
Spread 5.00

BTC/USD

23,127.90 Price
-2.980% 1D Chg, %
Long position overnight fee -0.0500%
Short position overnight fee 0.0140%
Overnight fee time 22:00 (UTC)
Spread 60.00

BTC to USD

The HashFlare and Polybius scam

Another part of Potapenko and Turõgin’s plan included a cryptocurrency bank called Polybius. However, the US Department of Justice said it “was never actually a bank” and did not pay out the promised dividends.

“They lured investors with false representations and then paid early investors off with money from those who invested later,” said Brown. “They tried to hide their ill-gotten gain in Estonian properties, luxury cars, and bank accounts and virtual currency wallets around the world.”

The Estonian founders raised at least $25m in a Polybius funding round. But they allegedly transferred most of the money to other bank accounts and crypto wallets. Kenneth Polite, US assistant attorney general, said:

“New technology has made it easier for bad actors to take advantage of innocent victims – both in the US and abroad – in increasingly complex scams.”

Both the Estonian and US authorities are now looking to “seize and restrain” the assets and profits secured by the HashFlare founders.

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The difference between trading assets and CFDs
The main difference between CFD trading and trading assets, such as commodities and stocks, is that you don’t own the underlying asset when you trade on a CFD.
You can still benefit if the market moves in your favour, or make a loss if it moves against you. However, with traditional trading you enter a contract to exchange the legal ownership of the individual shares or the commodities for money, and you own this until you sell it again.
CFDs are leveraged products, which means that you only need to deposit a percentage of the full value of the CFD trade in order to open a position. But with traditional trading, you buy the assets for the full amount. In the UK, there is no stamp duty on CFD trading, but there is when you buy stocks, for example.
CFDs attract overnight costs to hold the trades (unless you use 1-1 leverage), which makes them more suited to short-term trading opportunities. Stocks and commodities are more normally bought and held for longer. You might also pay a broker commission or fees when buying and selling assets direct and you’d need somewhere to store them safely.
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