How to detect and guard against fraud. Is Bitcoin a Ponzi scheme?

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Should Bitcoin, Ponzi and Maddoff be considered together? Diana Henriques was the original reporter who interviewed Bernie Madoff in gaol (jail). She reminds usThe #1 lesson Madoff’s fraud teaches anti-fraud professionals is that no deterrence program, however elaborate, will work if it can be switched off when we are approached by people we trust.” Even the most financially literate and sceptical professionals can be duped by crooks who talk the talk and make the numbers look right.

Lesson #2 is to understand how easy a Ponzi scheme is to operate. Diana says “it is simply a liar with a bank account.”  Madoff succeeded for at least two other reasons besides his humble but rich, successful and trustworthy business persona. He limited membership of his investment group (exclusivity & FOMO) and he never promised returns above the ordinary (this reassured financially savvy investors). In other words, he sidestepped or explained away the usual Ponzi-fraud red flags. Ponzi schemes should always be high on the list of explanations for quick or unusual financial success.

What stops a structure being a Ponzi scheme is a third-party custodian to segregate funds but it’s not foolproof because both entities may be unlawful. However, legitimate financial schemes will proudly incorporate such separation to reassure investors that unlawful money movements such as ‘robbing Peter to pay Paul’ cannot occur.

In conclusion, we ask you to consider this in Forbes recently: “to extract actual money from the system (Bitcoin) you have to find someone willing to buy the tokens you are holding. And this is only likely to happen as long as they believe they will be able to on-sell them to someone who’ll pay even more for them … if at any point one stops being able to find people willing to buy those tokens on just the promise of them being worth more in the future, the whole scheme might well come crashing down.”

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Auxilium Partners is a WA owned and operated insolvency, forensic accounting and mining advisory firm based in West Perth.

Our partners Bob Jacobs and Andrew Smith are Registered Liquidators with ASIC and Paul Cockburn is a Certified Fraud Examiner.

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