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Just as unscrupulous businesses have preyed on the ignorance of the public around forex trading, authorities are becoming concerned about the increase in bitcoin and cryptocurrency business offerings that could be fronts for scams. A joint warning was issued by the Reserve Banks, the Financial Services Board, the Revenue Services and the Financial Intelligence Centre about the risks associated with the use of virtual currencies for investments. “While there are benefits associated with this new technology, it is difficult to assess those benefits against the risks of something so novel, innovative and technologically sophisticated,” they warned. “Users of virtual currencies can therefore become susceptible to fraudulent or any other criminal behaviour as they may be less circumspect than usual when faced with the promise of high-return investment opportunities.” Bitcoin sites, an information website for bitcoin investors, warns that there is a trend growing in Africa of schemes using bitcoin hype to make money off “unsuspecting and ignorant people”. It warns against any scheme “in the name of bitcoin, mining or cryptocurrencies that assure any form of fixed return. No fixed returns are possible. “If any company is assuring fixed returns, we believe it’s a Ponzi/multilevel marketing/network marketing scheme, or a scam.” Blan contacted City Press after his mother was approached by a salesperson who told her about this “amazing” concept of buying a “contract” to mine bitcoin in their mining pool.
Reports that the MMM’s Republic of Bitcoin had collapsed this week sent shock waves through the South African investment community who have invested at the local MMM branch. The MMM scheme has been investigated by the National Consumer Commission. In December, the commission handed all information related to MMM to the police’s Specialised Commercial Crime Unit, so it could find out whether MMM was a pyramid scheme. According to the Consumer Protection Act, “a person must not directly or indirectly promote, or knowingly join, enter or participate in a pyramid scheme”. In a development on Friday, Deon Jansen van Rensburg, who said he was an independent financial advisor and acting on behalf of ‘members of the MMM community, issued a statement to the effect that an application had been filed in the North Gauteng High Court to declare that the MMM Community was ‘not a multiplication or pyramid scheme as defined by the Consumer Protection Act’.
READ MORE: Alleged SA Ponzi scheme MMM’s global pyramid collapses MMM: Pyramid scheme, stokvel or wealth revolution I want to tear my hair out in frustration, that people can so slavishly defend the latest pyramid scheme. You get basically two groups... (1) those who should know better, and (2) the poor, who see an opportunity to amass wealth fast, and are essentially duped out of their meagre savings.
The latest salvo in the defence of MMM is crowd funding; specifically, that financial institutions use crowd funding, therefore MMM should be entitled to use the same model.
Fact 1: banks do not use crowd funding. It is correct to note that if we all wanted to withdraw our deposits on the same day, the banks would not be able to honour that request. Because the banks take our money (deposits) and (i) invest it in other financial instruments, and (ii) lend it to others, in order to generate income for the company. If the banks were able to liquidate those investments in a short space of time, i.e. sell their investments and call in the loans they have made, they WOULD be able to pay out all depositors.
Fact 2: life companies do not use crowd funding either. They use a combination of models, the most prominent of which are (1) actuarial risk, and (2) reinsurance. In a pool of 1,000 clients whose lives they insure, for R500 per month each, for R1-m in cover each, they collect R6-m in premiums per year, and the actuarial model determines that they expect fewer than 6 clients to die and be paid out. A portion of the premiums received buys a group policy from a reinsurer, that pays out if there are more than 6 deaths, and the life company stands to lose money.
Of course the corporate entity that stands behind the policy also puts up millions of its own reserves, to cater for deaths that occur "early", where the pool has not been sufficiently built up. Again, all actuarially calculated, to balance: (i) healthy risk cover, (ii) value for the client, and (iii) a reasonable profit to the company.
Why it is not crowd funding, is that when a client withdraws from the scheme, s/he does not receive their premiums back (some companies now offer some cash back after, say, 15 years, but again, if you investigate you will find that the premiums are higher, the cash back is being built in), and the life firm scores - they have gambled on you not dying, and they have won the bet.
Corollary to fact 2 - what about annuities and endowments? Again, not crowd funding. The investment company takes your money, deducts a portion for administration and profit, and invests it on your behalf. Their goal is to grow your cash to a target value, to be achieved in a number of years. If you withdraw early, then (i) it is obvious you will not receive the full target value, and indeed, you will be penalised for not sticking to your end of the deal, by pulling out, and (ii) what you do get out, will take some time, as investments need to be cashed out.
MMM is a pyramid scheme. If you get in early, you're going to make money, because you're closer to the pointy end of the pyramid. And you're going to tell everybody how great it is, and attract other "investors". But the market is finite, and if you're one of the last ones in, you're paying the people above you, nothing is being invested, and you stand to lose everything. It really is that simple.
Think on this: if the scheme is legitimate, why has MMM Global shut down? Why did the creator acknowledge that it was a social experiment that had failed? (And please don't tell me the banks saw it as a threat, and shut it down - the scheme was denominated in Bitcoin, which is free of any corporate control.) Why did investment gurus like Warren Buffett not go large on the scheme? Why are the affluent, educated folks of Houghton, La Lucia and Rondebosch not getting stuck in?
Homework: do some research into a scheme called Krion, operated in the Vaal area in the early 2000s. Then tell me MMM is not the same.
And lastly, there is an adage that is yet to be disproved... if something seems too good to be true, it probably is. Please, good people of Kigali, stay away from this rubbish. It might not be now, or even in 2017, but you WILL lose your money.
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