US, Estonian authorities arrest two over $575 million cryptocurrency fraud

Two Estonian citizens were arrested in the capital of Tallinn on Sunday for allegedly running a $575 million cryptocurrency mining operation that authorities said was no more than an "elaborate Ponzi scheme."

Sergei Potapenko and Ivan Turõgin, both 37, convinced hundreds of thousands of victims to invest in a cryptocurrency mining service called HashFlare and a virtual currency bank called Polybius, according to court documents published Monday. The two men, who are held pending extradition to the U.S., collected more than half of a billion dollars and used shell companies to launder the cash and use it to buy real estate and luxury cars.

According to the indictment, the entire scheme the two men ran was a fraud. Potapenko and Turõgin claimed HashFlare was a massive cryptocurrency mining operation that allowed customers to rent out computing power and collect a portion of the virtual currency it produced. However, HashFlare did not actually have the mining equipment it claimed to have.

"In fact, according to the indictment, HashFlare's equipment performed Bitcoin mining at a rate of less than one percent of the computing power it purported to have," the Department of Justice said. "When investors asked to withdraw their mining proceeds, the defendants were not able to pay with the mined currency as promised. Instead, the defendants either resisted making the payments, or paid off the investors using virtual currency the defendants had purchased on the open market—not currency they had mined."

HashFlare operated from 2015 to 2018, when it shut down purportedly due to instability in the Bitcoin market and high maintenance and electricity expenses.

In reality, Potapenko and Turõgin had been operating the service as a Ponzi scheme, according to the indictment. They took steps to make it difficult for customers to collect their funds, including imposing "Know-Your-Customer" requirements that mandated users upload identification documents before they could make withdrawals.

Potapenko and Turõgin are also charged with offering investments in a virtual currency bank they created called Polybius — the defendants allegedly siphoned $25 million from investors and never formed a bank or paid any dividends. They also are charged with using shell companies and phony contracts to launder their proceeds, and the money laundering conspiracy involved "at least 75 real properties, six luxury vehicles, cryptocurrency wallets, and thousands of cryptocurrency mining machines."

The FBI created a web page seeking information from victims of the fraud. Potapenjo and Turõgin are being charged with 17 counts related to wire fraud and one count of conspiracy to commit money laundering — each charge is punishable by up to 20 years in prison.

Read the full indictment below:

US vs Sergei Potapenko and Ivan Turogin on Scribd