(Commonwealth Union)_The two creators of the now-defunct Bitcoin cloud miner HashFlare were detained in Estonia on suspicion of participating in a $575 million crypto fraud conspiracy.
HashFlare was a cloud mining start-up founded in 2015 with the intention of allowing clients to lease the company’s hashing power in order to mine cryptocurrencies and receive an equal portion of its revenues. The company was regarded as one of the industry’s leading names at the time. However, it shut down a substantial chunk of its mining activities in July 2018.
According to a statement from the US Department of Justice citing court papers, the entire mining operation, led by founders Sergei Potapenko and Ivan Turgin, was part of a “multi-faceted conspiracy” that “defrauded hundreds of thousands of victims”. This includes getting victims to enter into “fraudulent equipment leasing contracts” through HashFlare and convincing other victims to invest in a bogus virtual currency bank called Polybius Bank.
The pair is also accused of conspiring to launder their “criminal gains” through 75 residences, six luxury automobiles, cryptocurrency wallets, and hundreds of cryptocurrency mining machines. The scale and complexity of the alleged plan were described as “really remarkable” by U.S. Attorney Nick Brown for the Western District of Washington. “These defendants used the attractiveness of cryptocurrencies, as well as the mystery around cryptocurrency mining, to execute a massive Ponzi scheme,” he added.
The HashFlare founders face up to 20 years in prison if convicted of conspiracy to commit wire fraud, 16 charges of wire fraud, and one count of conspiracy to commit money laundering using shell businesses and fake invoices and contracts.
Potapenko and Turgin formed HashCoins OU, HashFlare’s parent company, in 2013, and HashFlare began mining services in 2015. It first provided contracts for SHA-256 (Bitcoin) and scrypt. According to the indictment, the couple claimed HashFlare was a “large cryptomining enterprise”. However, the company was allegedly mining at less than 1% of what it stated, and was paying out withdrawals by purchasing Bitcoin from other parties, rather than revenues from mining operations.
HashFlare announced a halt to BTC mining services in July 2018, citing problems producing money amid market swings. Customers were not compensated for the remaining annual contract costs that they had paid in advance. Other crypto assets in the platform’s portfolio continued to function normally. Allegations of fraud against the company were made but never proven in an official capacity.
HashFlare’s most recent public message was on August 9, 2019, when they said they were pausing the selling of ETH contracts due to “current capacity being sold out”. The company pledged to resume operations in the “very near future” and teased further announcements, but no information about what had happened was ever made public, and HashFlare silently vanished.
The FBI is now looking into the issue and is looking for information from customers who participated in the suspected fraudulent schemes of HashFlare, HashCoins OU, and Polybius. A grand jury in the Western District of Washington produced an 18-count indictment against Potapenkos and Turgins on Oct. 27 and it was unsealed on Nov. 21.
