Our trust can be used against us. Photo / Getty Images
OPINION:
This week the Commerce Commission issued a "Stop Now" order to a woman promoting what is likely to be a pyramid scheme.
The letter sent to Shelly Cullen in respect of her promotion of the Lion's Share cryptocurrency-themed scheme only scrapes the surface of the multi-level marketing that blights social media.
A Commerce Commission spokesperson tells the Herald the watchdog is investigating a number of other schemes that similarly have the characteristics of a pyramid structure built into the offer.
"We have also received complaints about individuals who are allegedly promoting schemes that complainants believe are illegal pyramid schemes," said the spokesman.
The ongoing investigation precludes the commission from naming any of those schemes, but warnings posted to the Financial Markets Authority (FMA) website indicate that there's already some regulatory heat on a few others.
As recently as December and November 2020, the FMA issued warnings about Karabit and Bitcoin Future, which are both suspected of being online scams.
Get-rich-quick schemes are hardly new, and the power of such scams lies in the fact that the recruitment strategy is built on the trust of friends and family members.
Research from the 2020 Edelman Trust Barometer, which gives an annual rundown of trust trends in society, shows that we tend to trust our peers over CEOs, successful entrepreneurs, company directors, journalists and government officials.
It turns out that the only people we trust more than our mates (and only moderately) are technical or academic experts.
The most effective recruiters capitalise on this deficiency in trust by reframing their social media identities to reflect something akin to an influencer who has tapped into the secrets of financial independence. They often exhibit their wealth, share the results of their returns and rain scorn on those who dare to continue working in ordinary jobs.
The pitches are often couched in the language of conspiracy. We're told that the government, media and elites want to keep this rare opportunity from you; that this all part of their grand scheme to ensure that too much control isn't relinquished to normal people; and that we have only a limited time to capitalise on the opportunity.
When regulators inevitably come knocking, these arguments are further emboldened with an "us versus them" dynamic that pits the investors against the government, like some kind of grotesque revolutionary moment.
This narrative can be incredibly compelling when pitched to the right person. But as everything unravels, the bluster and impassioned defences eventually die down and those at the lower levels of the pyramid are left with financial pain and broken relationships.
It might seem outrageous that anyone would fall for the promise of consistent 10 per cent commissions on money they've invested, but bitcoin pyramid schemes have been remarkably successful at pulling in investors.
One of most notorious recent examples was Bulgaria-based OneCoin, which brought in US$4 billion from investors around the world. Included in that haul was $88,000 in life savings invested by an Aucklander, according to an earlier RNZ report.
Just in the last month, a South Africa-based scam called Mirror Trading International, worth around $1.1 billion at current Bitcoin rates, collapsed when the CEO of the company fled to Brazil.
Data from "The 2020 State of Crypto Crime" report, from blockchain analytics firm Chainanalysis, reveals that Ponzi schemes led to investors losing US$3.95b ($5.5b) in 2019 – a number that is only expected to rise when the 2021 iteration of the report is released.
The problem with these scams, regardless of where they're founded, is that the multi-level marketing web quickly expands and jumps borders. Every new link takes the scheme a little further away from the founders, who steadily rake in money and wait to orchestrate their exit.
To put this into perspective, if each person in a multi-level marketing scheme recruits six people, it takes only 13 levels to include more people than the entire population of the world.
A spokesman for the FMA advises New Zealanders to avoid investing in any online opportunities or schemes that are based internationally. "Our powers are confined to the jurisdiction of New Zealand borders," he says.
"Unfortunately, there is often little we can do to take enforcement action against overseas scammers or companies so New Zealanders considering investing in foreign businesses should tread carefully."
The FMA does what it can to warn people about the scams, but the efforts increasingly look akin to game of whack-a-mole, with the spokesman admitting the regulator is aware of many scams currently promoted through social media.
Scam artists have also become adept at tweaking their approach once they start to feel the regulatory heat – meaning that FMA warnings can become dated relatively fast.
"It's important to remember that scammers regularly change their names or start up a new website or social media page under a new name," the spokesman says.
"Just because a name is not on the FMA's warning list doesn't mean it's not a scam."
This is becoming apparent in social media feeds, with promoters quickly moving on from one scheme to the next – almost as if nothing ever happened. Your friends or family members who were previously pushing one failed scheme have probably moved on to a number of others since then.
The same also applies to the most high profile figures involved in these schemes. Take, for instance, notorious OneCoin promoter Igor Alberts, who had already moved on to a new scheme while authorities were still trying to make sense of what happened at his previous gig.
Even those near the top of these schemes always have the escape clause of claiming ignorance of what the top brass was actually up to. This might well be true in some instances, but it will do little to appease those who have been left empty-handed by the collapse.
While Bangladesh took the extraordinary step of banning all types of domestic and foreign multi-level marketing in 2015, the activity remains incredibly difficult to regulate. TikTok did the same thing late last year.
In many ways, it brings together the dark sides of social media and cryptocurrency in a dangerous cocktail that gives scammers a direct link to billions of possible recruits and also a decentralised payment method that can be accessed as long as you have a decent internet connection.
Removing the allure of that poisoned chalice is as simple as fixing social media, addressing the criminal underbelly of bitcoin and ameliorating the crisis of trust in the media. We may as well add climate change and Auckland house prices to the list while we're at it.
The event is described as a series of aggressive sales pitches.