Defunct Bitcoin cloud mining firm HashFlare has seen two of its two founders detained in Estonia due to charges of cryptocurrency fraud totalling $575 million, reports found this week.
A United States Department of Justice statement cited court documents that the operation was a “multifaceted scheme [that] defrauded hundreds of thousands of victims.”
Created in 2015, Founders Sergei Potapenko and Ivan Turõgin provided customers with leasing options for its hashing power. Customers would use them to mine crypto and receive shares of profit from the operations. The company later shut down most of its operations in July 2018, according to reports.
The company then halted BTC mining operations and cited problems with revenues due to market fluctuations, but failed to reimburse customers for remaining contract fees. It last publicly stated on 9 August 2019 that ETH contracts had been suspended as the “current capacity has been sold out.”
The enterprise slowly ceased activities but failed to publicly state the circumstances leading up to its collapse. The events triggered a Federal Bureau of Investigation (FBI) case involving victims of HashFlare, HashCoins OU, and Polybius.
What are the Charges?
The charges stated the company was a “massive [crypto mining] operation” but had mined coins at just 1 percent of its stated capacity. It paid out withdrawals to clients with third-party Bitcoin (BTC) purchases.
It added the firm convinced targets to enter “fraudulent equipment rental contracts” and persuaded others to invest money into Polybius Bank, an invalid cryptocurrency bank, which provided SHA-256 Bitcoin and scrypt ETHASH Ether, among others.
The statement also read the two businessmen laundered “criminal proceeds” with numerous items, including luxury vehicles, crypto wallets, mining machines, and roughly 75 properties.
Charges indicated in the case include 16 counts of wire fraud, conspiracy to commit wire fraud, and one count of conspiracy to commit money laundering via shell companies and fake invoices and contracts.
If found guilty, the two founders may face up to 20 years in the Western District of Washington case.
Comments on HashFlare Case
Assistant Attorney General Kenneth A Polite Jr of the Justice Department’s Criminal Division, said in a statement,
“New technology has made it easier for bad actors to take advantage of innocent victims – both in the U.S. and abroad – in increasingly complex scams. The department is committed to preventing the public from losing more of their hard-earned money to these scams and will not allow these defendants, or others like them, to keep the fruits of their crimes.”
According to US attorney Nick Brown, the scheme was “truly astounding,” adding: “These defendants capitalized on both the allure of cryptocurrency and the mystery surrounding cryptocurrency mining, to commit an enormous Ponzi scheme.”
The news comes as now-defunct cryptocurrency exchange FTX faces scrutiny from US authorities, namely as disgraced former CEO Sam Bankman-Fried remains in the Bahamas.
The cryptocurrency exchange faced a huge liquidity crisis, leading to FTX, research wing Alameda Research, and nearly 130 affiliates to file Chapter 11 bankruptcy, sparking outrage from investors.
