Crypto exit scams on the rise

In late April, major Turkish cryptocurrency exchange Thodex went offline and its CEO Faruk Fatih Ozer, was reported as missing. Local media reported that Ozer had flown to either Albania or Thailand and had taken US$2 billion worth of customer’s funds with him.Turkish authorities say this photo shows Faruk Fatih Ozer travelling through passport control before boarding a flight to Albania.

Interestingly, on April 16th about a week before the collapse of Thodex, Turkey’s central bank had banned the use of Bitcoin and other cryptocurrencies in payments for goods and services. In a statement explaining the rationale behind the ban, the bank said transactions carried out through the use of cryptocurrencies presented "irrevocable" risks. Discussing cryptocurrencies, the Turkish central bank said they are "neither subject to any regulation and supervision mechanisms nor a central regulatory authority. Their market values can be excessively volatile."

Ozer’s disappearance left thousands of Thodex users in a spin, concerned that their funds had been stolen. 24-hour trading volume on Thodex’s last day of trading was US$538 million.

Soon after the reports of the Thodex exit scam emerged, local lawyer Abdullah Usame Ceran filed a criminal complaint against Ozer. It stated that Thodex had 400,000 users, of which 390,000 were active, who were affected by Ozer’s alleged theft.

According to local reports, Turkish authorities have now issued an international warrant for Ozer’s arrest. The police have detained 62 people in eight cities across Turkey. Charges leveled against the suspects include creating an organization for the purpose of engaging in criminal activity and fraud by using information systems, banks, and credit institutions as a tool.

Turkey’s Justice Ministry has issued a red notice for Ozer to Interpol, which is used to alert police in all member states about the presence of an international fugitive. Ozer and Thodex are also being investigated by Turkey’s Financial Crimes Investigation Board and the Chief Public Prosecutor’s Office in Istanbul.

Thodex and Ozer have responded to the allegations of an exit scam. Ozer said on Instagram that Thodex has never exploited anyone nor will it in the future. Thodex appeared to be trying to take the heat off itself by making a statement to users which claimed. "World-renowned banks and funding companies whose name we will reveal when the trade is complete have been offering us investment and partnership for a while.” In a rambling statement that remains on the Thodex exchange website Ozer says the whole exit scam allegation is a hit job and a smear campaign.

In his Instagram post, he says that he will soon return to Turkey and that any customer losses will be compensated. He claims that just 30,000 users have been affected by the situation and that reports about $2 billion of losses are “unfounded.” Nonetheless, there has been radio silence from Ozer and his exchange since these statements on April 23rd.

Two weeks ago, a Turkish mafia boss named Sedat Peker also joined the discussion. A major social media presence and whistleblower in Turkey, Peker began posting allegations of relations between the Turkish underworld and government officials He says Interior Minister Süleyman Soylu had received illicit payments from Ozer. The mobster called out Soylu and Ozer in an aggressive tweetstorm and has said that he will soon provide evidence of the interior minister’s corruption. The claims are being taken seriously in Turkey, with calls for a full investigation of Soylu and for his resignation.

The Africrypt exit scam

Another global hub for cryptocurrency adopters, South Africa, is also dealing with a major exit scam and investor losses. Since April, clients of the cryptocurrency investment platform Africrypt have been trying to locate its founder 21 year-old Raees Bilal Cajee and his 18-year old brother Ameer Bilal Cajee.

The investors claim the brothers have disappeared with billions of dollars of digital assets. Africrypt was registered as a private company with the South African Companies and Intellectual Property Commission on the 17th of July 2019, with the brothers as directors. Africrypt directors listing. Source: CIPC

The business was described on its now defunct website as an "Artificial intelligence-driven trading platform”, which used “complex deep learning, machine learning algorithms to effectively and efficiently trade automatically without human intervention". Raees and Ameer Cajee.

In reality, Africrypt was just a ponzi scheme. Investors deposited into a fund run by the Cajee brothers who would then supposedly trade on their behalf with the promise of high returns.

South Africa’s Financial Sector Conduct Authority (FSCA) said in a press release that the fund was offering “exceptionally high and unrealistic returns akin to those offered by unlawful investment schemes commonly known as Ponzi’s.” It urged the public to understand that the “unrealistically high returns suggests that the investment scheme is likely to be fraudulent.”

On April 13, Ameer Cajee, who was employed as the firm’s Chief Operating Officer wrote to Africrypt clients saying the firm had halted operations because of a hack. The letter raised red flags amongst Africrypt investors because it advised them not to pursue the "legal route" as it would "only delay the recovery process."

Some investors who lost money as a result of the supposed hack are now being represented by Capetown law firm Hanekom Attorneys. The firm claimed in late June that Bitcoin valued at US$3.6 billion held on behalf of investors by Africrypt, had been ‘dissipated in its entirety.’ It says that investigations to track where the Bitcoin went has been hampered by the use of "various dark web tumblers and mixers."

An investor speaking to the BBC anonymously said that while the losses were considerable “they were very much less than the billions that had been reported.” Raees Cajee broke his silence on June 28th. Speaking exclusively to the Wall Street Journal from an undisclosed location, he said that the missing amount was nowhere near the US$3.6 billion that lawyers representing Africrypt customer’s had claimed.

He says that at the height of the 2021 bull market the firm was handling about US$200 million. He added that no more than US$5 million was lost and that he and his brother remain in hiding because of death threats they have received.

Cajee says the pair plan to return to South Africa for a court hearing on July 19th tied to the liquidation proceedings of Africrypt. During the WSJ interview Cajee said “We dealt with a lot of high-level South Africans, a lot of politicians, a lot of high-level businessmen within South Africa, as well as celebrities,” he continued. “Some particularly very, very dangerous people—that we had not actually known were clients—have started to come out of the cracks.”

Summary

In crypto intelligence firm Chainanalysis’s Geography of Crypto report for 2020. South Africa is ranked as the 7th highest country on the Global Crypto Adoption Index, while Turkey is ranked 29th on the list and is the highest-ranked country in the Middle East. Both countries have seen above average consumer adoption of cryptocurrency – likely due to fears around the stability of local currencies or untrustworthy governments and bureaucratic corruption.

Unfortunately, these large scale exit scams have negatively impacted the image of the digital asset class to both regulators and potential users in these countries. Indeed, South Africa’s FSCA said it was powerless to act against the Cajee brothers as crypto assets were not regulated by any financial sector law in South Africa. The agency further stated that “to protect the public” it was considering declaring crypto assets a financial product which would give it jurisdiction over all crypto transactions in the country.

It remains to be seen what the FSCA and similar agencies worldwide will do to regulate the digital asset sector, but it is becoming arguable that a hands off approach from governments is no longer in the best interests of the sector, as the increase in lawlessness threatens to destroy the public’s faith in the technology before mainstream adoption can take hold.