The Justice Department is moving forward with a case alleging two men in Estonia defrauded investors in a cryptocurrency mining operation that netted $575 million, authorities said.
Sergei Potapenko and Ivan Turygin, 39, were arrested in Tallinn, Estonia and charged with 18 counts in the Western District of Washington. This is stated in today’s statement by the Ministry of Justice.. According to the indictment, the duo claimed they offered clients virtual currency mining rights for a fee, but in reality they relied on fictitious accounts, fabricated documents and cryptocurrency mining power that was less than 1% of what they told clients. Authorities say Potapenko, Turygin and others, who are not named in the indictment, spent the money they were paid on real estate in Estonia, luxury cars and lavish gifts.
“The size and scale of the proposed scheme is truly astounding. These defendants took advantage of both the allure of cryptocurrency and the secrecy surrounding its mining to perpetrate a massive Ponzi scheme.” Nick Brown, U.S. Attorney for the Western District of Washington, said this in a statement.. “They lured investors with false statements and then paid off early investors with the money of those who invested later. They tried to hide their ill-gotten gains in Estonian real estate, luxury cars, bank accounts and virtual currency wallets around the world. U.S. and Estonian authorities are working to confiscate and restrict these assets and profit from these crimes.” The FBI is also investigating the fraud and is actively seeking victims. in the probe.
Authorities said that beginning in 2013, Potapenko and Turygin used a network of shell companies, bank accounts, virtual asset service providers and wallets to funnel fraudulently obtained funds from victims who thought they were buying mining equipment. The duo said their virtual cryptocurrency mining process, the process of validating and adding transactions to the blockchain ledger, has significant power and capacity, according to the U.S. Attorney. Currency mining power is measured by “hash rate,” which indicates the number of calculations a computer can perform per second. With cloud or remote mining, people can rent what’s called hashrate from the mining operation and receive a portion of the virtual coins mined.
Potapenko and Turygin founded the company HashCoins in Estonia in December 2013 and sold equipment they owned for mining Bitcoin and other digital assets. the indictment says. HashCoins did not actually manufacture the hardware, but rather bought, created, and resold parts made by other companies. By 2014, HashCoins had many dissatisfied customers and the company was struggling to satisfy refund requests and fill new orders, authorities said.
In 2015, HashCoins informed some customers that their undelivered currency mining equipment would be operated remotely, rather than providing the actual machines to customers that they had paid for. Under the new deal, clients will receive rights to mining contracts that will pay them a percentage of profits from the entire operation, known as HashFlare, authorities say.
HashFlare allegedly allowed customers to purchase virtual currency mining power, which people paid for using credit cards, bank transfers, and virtual currency transfers. Potapenko and Turygin told customers they could access their accounts through the HashFlare website, view their balances, and withdraw funds or reinvest them to purchase additional hashrate, authorities said. This brought in more than $550 million from customers who wanted to start mining virtual currency. In fact, it is estimated that HashFlare’s mining activity accounted for less than 1% of the hashrate it sold to customers to mine Bitcoin and less than 3% of the hashrate it sold to mine other coins.
And when people wanted to withdraw their purported earnings from cryptocurrency mining operations, they were either blocked from withdrawing funds or could only withdraw small amounts, the complaint alleges. Potapenko and Turygin sometimes bought virtual currency on the open market and paid it to investors. That turned it into a Ponzi scheme, the Justice Department said.
They then created another company, Polybius, in 2017, which was supposedly a digital bank.
Polybius raised $25 million in an initial coin offering from third-party investors. The bulk of the funds were transferred to accounts controlled by Potapenko and Turygin. Authorities say they never created a digital bank and never paid dividends to investors.
Both were arrested in 2022 in Estonia. but were not extradited until April 2024, after they appealed the original decision. The head of the Cybercrime Bureau of the Estonian National Criminal Police, Oskar Gross, said: “The sheer size of this investigation is due to the fact that this is one of the largest fraud cases we have ever had in Estonia.”