Exclusive: Possible $500,000 Bitcoin Cloud Mining Ponzi Scheme Uncovered

Bitcoin Magazine
Exclusive: Possible $500,000 Bitcoin Cloud Mining Ponzi Scheme Uncovered

Roughly nine months ago, Bitcoin Foundation Chief Scientist Gavin Andresen made a rather interesting comment on Reddit in which he claimed, “I suspect many [cloud mining companies] will turn out to be Ponzi schemes.”

There have been a few cloud mining scams uncovered over the past year or two, and it appears that another one could unravel in the near future. An anonymous source has provided information to Bitcoin Magazine regarding the possibility of a scam involving Bitcoin Cloud Services (BCS), which is currently one of the largest cloud-mining providers on the market.

Founded by a known scammer with Photoshop

One of the common attributes of a Ponzi scheme in the Bitcoin world is a reliance on anonymous owners. BTC Cloud Services LTD is registered to Gabriel Kleiman and Esteban Amador Soto Martinez.


While the first name does not bring up any identifying information online, the second name is associated with another bitcoin-related scam, bitcoincloudhashing.com. This information is available publicly on the bitcointalk forums thanks to Puppet’s Cloudmining 101 thread, but it hasn’t stopped an estimated 4,300 users from signing up at Bitcoin Cloud Services.

BCS also claims to be a silver member of the Bitcoin Foundation on their website, even though the foundation recently dropped the cloud mining company as a sponsor.

Further, the pictures of a supposed mining facility on the Bitcoin Cloud Services website contain no information about the mining facility or its owners besides a single banner hanging in the background. Compare to the photo below from Genesis Mining showing CEO Marco Streng in one of the company’s mining farms.



The “company” also released a poorly made video based off the Photoshopped images in an effort to bring more legitimacy to their activities:

The supporting evidence on the blockchain

One of the key pieces of data provided by the anonymous source is a spreadsheet compiled via publicly available data on the Bitcoin blockchain. By watching Bitcoin Cloud Services’ payout address, the anonymous source was able to estimate the number of customers receiving payouts, along with BCS’s profits and losses. BCS seems to have started to operate at a loss near the end of April. How did BCS respond? By offering an extra year on their currently available mining contracts.


This offer could be an attempt to keep a Ponzi scheme going for as long as possible. After all, it will last only as long as new money is coming in. The back-of-the-envelope math based on the spreadsheet indicates that the operators could run off with as much as 2,500 BTC ($570,000 at current prices).

If it looks like a duck…

Going back to Puppet’s Cloud Mining 101 thread, it seems clear that he understands the likelihood that BCS is a Ponzi scheme. The thread lists seven different criteria that are usually found in a Ponzi scheme, and BCS fits the bill in six out of seven criteria.

The only test that BCS seems to have passed is having pictures of their mining facility on their website. Of course, as Puppet notes in his thread, “Pictures can be faked.” This seems to be what has happened in the case of Bitcoin Cloud Services.

Puppet currently has BCS listed under “Likely Ponzi scams that have yet to collapse,” and it’s unclear how long BCS will be able to keep up the charade. Up to this point, Puppet has been correct with 95 percent of his calls of probable Ponzi schemes.

Bitcoin Magazine has reached out to BCS for comment.

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Get Your Security Deposit Back With Bitcoin

In most jurisdictions, security deposits are intended to provide landlords with a financial guaranty against nonpayment of rent or excess damage to a rental property during tenancy. In the past the primary way to provide this guarantee has been for the tenant to deposit funds, in trust, with the landlord. The landlord takes custody, but not ownership of the funds. The obvious problem is that, aside from ethical and legal obligations, a landlord has no incentive to return a tenant’s security deposit – which is why almost everyone who has been a renter has a “they-didn’t-return-my-security-deposit” story.

Custodial security deposits present the same problems as most custodial accounts. Custodial accounts are easy to “borrow” from. In the case of security deposits, the penalties for misuse of funds are comparatively low to the reward of keeping the money and most tenants will not actually sue to recover a deposit. While some jurisdictions require that landlords hold security deposits in a separate account, some don’t. In the end it really doesn’t matter whether the funds are in a separate account or not because they’re controlled solely by the landlord with little, if any, oversight by tenants or anyone else.

Unfortunately, many landlords have a standard practice of not returning security deposits regardless of the condition of the premises. When the tenant receives a form notice that they’re not getting their deposit back, they’re faced with two choices: fight or walk away. Often the deposit amount simply isn’t enough to justify taking time away from work, traveling to a jurisdiction where they may no longer live, and presenting evidence before a court where success is never guaranteed. Undocumented residents and those hiding from domestic abusers cannot go to court to recover deposits. Regardless of the reason, many tenants simply walk away. Angry at the landlord. Angry at the system.

We can do better.

Using bitcoin’s multisignature address feature we can create a 2-of-3 address, where the tenant is a signer, the landlord is a signer, and a trusted disinterested third party holds the third key. In minutes, and from anywhere in the world, the tenant, landlord, and third party can combine public addresses to create a multi-signature address with a 2-of-3 signing configuration. Once the address is created, the tenant funds the address. All parties can verify on the public blockchain, within 10 minutes, that the funding has occurred and within about an hour the landlord can be confident that the funds will be there at the end of the term. Then nothing happens for a year. Or more. The landlord cannot misappropriate funds, as it takes two signers to move funds out of the account. At the end of the lease, the tenant creates a transaction transferring the entire deposit to another tenant-owned address. The tenant sends the transaction to the landlord for signing. If the property is damaged the landlord can send a counter transaction and ask the tenant to sign. The landlord and tenant can then negotiate among themselves. If they cannot reach agreement, they can get the third party signer involved.

Alternatively, a transaction can be structured to acknowledge the most common scenario – where there is no damage to the premises and the deposit should be returned in-full to the tenant at the end of the lease. To make the deposit refundable by default, at the beginning of the term, both the landlord and tenant sign a transaction refunding the deposit at a future date. Bitcoin’s nLockTime feature allows them to create a post-dated transaction that cannot be processed before a stated date. By signing an nLockTime transaction, dated for the length of the lease plus 30 days, the landlord will have 30 days to make a claim and get the third party to override the transaction. A time-locked refund transaction shifts the burden of proof to the landlord, who must make a claim and prove damages in order to obtain deposit money. If the landlord and tenant agree to extend the lease, the funds can be relocked with two simple transactions.

With or without nLockTime, bitcoin’s multisignature addresses are superior to traditional custodial landlord accounts because they ensure landlords do not unlawfully commingle, keep, or spend the tenant’s funds. It balances the power between the parties and provides public oversight through the network. Importantly, the third party is not involved if the landlord and tenant agree on the refund amount themselves. This keeps costs down and encourages communication. Finally, the parties are still protected by traditional landlord/tenant laws and the third party would be required to follow those laws. This is one example of ensuring due process through technology.

So often in fintech we see solutions in search of problems. In this case, technology can quickly, easily, and cheaply solve a real problem for millions of renters. While in the short-term price volatility and the lack of incentive for landlords to adopt this solution may make it less likely to gain widespread adoption, neither minimize its potential. Bitcoin’s built-in multisignature feature can simultaneously protect landlords and tenants while righting the grossly imbalanced power dynamic between the two. With multisig you could actually get your security deposit back in-full without going to court. Imagine that!


Photo modified from BTC Keychain / CC BY 2.0

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LifeLock Sues Xapo Executives Over Bitcoin Wallet Intellectual Property

Bitcoin bank and payment processor Xapo faces uncertain waters as much of the company’s executive team is being sued for contract violations.

The misgivings center on the last months that Xapo co-founder and CEO Wences Casares, along with other Xapo employees, worked for the mobile wallet Lemon.

In December 2013, the $1.5 billion online security company LifeLock acquired the mobile wallet for $42.5 million (and rebranded it LifeLock Wallet). As reported by Fortune, the lawsuit is over whether Xapo was originally developed during his and other Xapo employees’ time working for Lemon. Or as LifeLock’s compliant puts it, “using a product developed by Lemon employees, in Lemon’s facilities, on Lemon’s computers, and on Lemon’s dime.”

Several months before Lemon would be acquired by LifeLock, the mobile wallet startup started working on a Bitcoin product, but the project was quickly terminated by its board of directors. Casares, Lemon CEO at the time, pushed on with the digital currency product, which was a Bitcoin storage service for himself and other Lemon executives (one of Xapo’s core services).

He approached LifeLock’s board with a letter that asked them to acknowledge they sought no stake of his Bitcoin vault’s intellectual property. In a letter dated February 12,  2014 and signed by LifeLock president Hillary Schneider, LifeLock acknowledges that it does not hold any claim to Bitcoin intellectual property and transfers all rights to Casares.

Casares also asked for letters requesting permission for Lemon/LifeLock employees to work on his bitcoin project in their free time. When four out of five of these requests were rejected by Schneider, Casares announced he would resign from his role as Lemon’s CEO. A week later, on March, 13, 2014, Xapo’s launch was announced, along with a $20 million funding round raised from Benchmark, Ribbit Capital and Fortress Investment Group.

According to LifeLock, the security company has found overwhelming evidence that Casares, former Lemon engineer Frederico Murrone (Xapo co-founder and COO), and former Lemon general counsel Cynthia McAdam (Xapo president), along with two other former Lemon employees, were developing the Bitcoin startup with Lemon’s resources.

LifeLock is not suing Xapo, at least not yet (a judgment in Lifelock’s favor in current lawsuits could open the door to the Bitcoin startup being next). But the security company is seeking damages from its former employees for their alleged misactions. Specifically, they are seeking reimbursement for “the value of the Xapo product attributable to Defendants’ misrepresentations, omissions, breaches of duty, and other wrongful conduct.”

Besides having to potentially pay back a large settlement to their former employer, having much of Xapo’s executive team losing a civil lawsuit could be damaging for the financial service startup’s reputation and relationship with existing financial institutions, such as banks.

Neither Xapo nor any of the accused former Lemon employees have made any public statements on the lawsuit, but Casares’ attorney Steven Ragland, who also is representing McAdam, provided Bitcoin Magazine the following:

“This is a baseless lawsuit. LifeLock has no right to any Bitcoin-related business or IP that Wences Casares or his colleagues may have worked on during their time at Lemon or after. As LifeLock’s President has attested in a legally binding document, LifeLock does not have any right, claim or interest to any Bitcoin IP. LifeLock’s claims lack merit and we look forward to proving their allegations false.”

This story has been updated with additional information about the letter regarding Bitcoin intellectual property signed by Caesares and Schenider.

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Blockchain Startups Named ‘Top Innovations’ at Citibank’s EMEA Mobile Competition

Blockchain-based social network GetGems was named ‘Most Visionary Social Media Solution,’ while bitcoin wallet Billon took home the title, ‘Most Innovative Blockchain Solution,’ during the Citibank Europe, Middle East and Africa (EMEA) Mobile Competition.

The annual competition, started just last year, was put together by leading global bank Citi and sponsored by IBM Cloud Computing and Mastercard Start Path, the payment company’s fund to boost financial innovation.

Startups from 18 countries pitched 77 financial products and services to Citi executives and technology experts at showcases held in Nairobi, Jerusalem, Warsaw and London. Citi made the call for startups to apply in February and held the actual competition in April.

Other startups that took home titles in the EMEA competition included textbook subscription app Kytabu, omnichannel digital banking platform Avoka Transact, and mobile banking solution for the visually impaired Allianz.

Citi also hosted similar competitions in Latin America and the United States, but EMEA was the only one to have digital currency startups take home titles.

“We invited technology developers to re-imagine digital banking, and they went far beyond,” said Heather Cox, chief client experience, digital and marketing officer for Global Consumer Banking at Citi. “They presented solutions that could transform financial services and fuel progress in other industries like transportation and education. These developers are truly inspiring. Selecting the top innovations was a challenge, and we are excited to explore bringing their solutions to market.”

Besides the free press and networking opportunities, GetGems and Billon might have the chance to work with partners from this event to help take their products and services to market. Israel-based GetGems already launched its social network in October of last year after raising $111,0000 in a crowdsale and receiving a $400,000 investment from Magma VC.

Billon, which describes itself as a banking solution for the unbanked (and uses bitcoin as the payment rails), has yet to launch and is currently conducting a private beta in the startup’s home country of Poland. According to its website, Billion was founded late last year by a team including ex-Mastercard employees and bankers, and already has partnered with Plus Bank, Alior Bank and E-Card.

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