Let's talk about the world's longest running Ponzi scheme, MMM, which has been running in some form for 32 years. And the uncanny similarities to crypto investments. (1/)🧵
Like so many of these stories go, when countries have a major shift in their economic model or political upheaval there is a vacuum left by non-functioning institutions and fraudsters come out of the woodwork to defraud the public. (2/)
Albania saw this in 1997 when it moved from a communist system to a market economy and the massive proliferation of pyramid schemes collapsed the economy and drove the country into civil war. (3/)
Similarly in the late 80s Russia was transitioning from a communist model and we saw the same pattern emerge there. A Russian voucher investment fund scheme emerged that began promising 3000% annual returns to early investors. (4/)
Ponzi schemes maintain their existence by supposing that you can rob Peter to pay Paul by infinitely recruiting more people into the scheme and controlling redemptions. All the while the operators are robbing everyone. (5/)
The only difference between the Albanian schemes is that MMM is unapologetically non-economic. And just like crypto tokens there's no pretense that the money is being invested in *anything* at all to generate a yield.

It's based purely on bringing more suckers in. (6/)
"People were perfectly aware that MMM was not a honest company. Their motive was that they thought they could withdraw money before it collapsed." (7/) csmonitor.com/1994/0811/1108…
The clever trick this scheme first invented is that you can exploit the fact that most low-information investors simply aren't capable of understanding the structure or won't care if you obscure it with enough populist rhetoric. (8/)
There's nothing new under the sun. In times of political crises these financial frauds wrap themselves in this folk-hero narrative and market themselves as providing financial inclusion untethered from the corruption of the economic orthodoxy. (9/)
MMM wrapped itself in Marxist ideology as a "mutual aid network" that claimed to let its investors circumvent the corrupt government of the day and support their fellow man. While in reality the promoters were just stealing from everyone. (10/)
When MMM collapsed, like all Ponzi schemes must, the promoter tried to embed himself in government in hopes of gaining immunity from his crimes and using public funds to make his victims right. The revolving door of government and fraud is a common theme in these stories. (11/)
The initial scheme was shut down in Russia, but the same promoters realised they had to go global and moved their operations to Africa where there are less regulatory controls to prevent these things from systemically spreading through the public. (12/)
These schemes have absolutely ravaged Nigeria, where three million investors lost 18 billion naira (the local currency) to this one this scam. Since then they simply moved their operation on to the Ethereum blockchain to avoid controls. (13/)
This should all sound familiar The United States has its own version of MMM Global now. It's called cryptocurrency and it's exactly the same story to a tee. (14/)
We see this pattern repeated over and over again, just with different names and different structures replacing the old scams that collapsed. Cryptocurrency and mutual aid investment scams are entangled in Africa and now claim millions of victims. (15/)
1) Vacuum left by distrust in institutions
2) Ponzi structure, outsized non-economic returns
3) Negative-sum investments which funnels money up the pyramid to promoters
4) Populist folk-hero narrative
5) Expansion of victim pool to developing countries with less regulation
History has a lot of insight into how crypto scams evolve. In times of political upheaval charlatans and hucksters and sell financial snake oil as a way to capitalise on public anger and institutional distrust.

And it always end badly unless we stop it before it spreads.


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More from @smdiehl

22 Jul
Let's talk about the mechanism by which government regulation will effectively kill cryptocurrency. 🧵
Seems inevitable at this point that the US government and EU are going to clamp down hard on cryptocurrency because of three recent developments: (2/)
1) The ransomware pandemic is starting to threaten national security

2) Elon's wake of destruction caused hundreds of thousands of citizens to lose their life savings, and they're complaining to consumer protection bodies

3) Potential systemic risk to traditional markets

Read 19 tweets
18 Jul
It may surprise people, but I actually have zero issues with a digital money market fund that theoretically used a cryptographic ledger for tracking investor holdings. Effectively a regulated "stablecoin".
Now I do think these things would have to be highly regulated, because opaque MMFs and shadow banking were a big component of why things blew up in in 2008. And we don't want a repeat of that.
And if they were as transparent as traditional funds, reported their portfolio holdings, bought sensible paper, followed all the FinCEN guidelines on withdrawals and transfers, and were set up as proper legal entities (i.e. not in a Caribbean tax haven).

Read 6 tweets
16 Jul
I've been hammering on this point for quite some time, but it's worth repeating in the simplest English possible that you could explain to a twelve year old.

Cryptocurrencies aren't currencies. They're investments, and pretty bad ones at that.
They may have started out with that idea to be magical internet money, but that idea failed.

Now most people they treat it like an investment. People want to get more dollars than they put in.
Unlike investing in shares in a real company which does something in the world, buying a crypto token doesn't do anything.

It's like a casino chip.
Read 10 tweets
15 Jul
Thinking a lot about the Jackson Palmer thread on my commute home. It's is a scathing and brilliantly written synopsis of one man's soul searching and conclusion of thinking through the consequences of actions.

Takes a lot of courage to do that in public.
There are probably tens of thousands of other people in exactly the same situation, they found themselves in too deep in what is very much a echo bubble that reinforces the normality of these scams and they just don't have anyone yet in their lives to convince them otherwise.
It takes a fair bit of research at the intersection of some very disparate fields to understand the core of why crypto is so harmful to society.

It's important to give people time and space to reach those conclusions. It's very much like cult or MLM deprogramming in some sense.
Read 6 tweets
15 Jul
I don't think it's widespread public knowledge how social media companies try and fail to protect against employees prying on users. But it's a lot more widespread than the public knows and it here's how it happens... 🧵
So basically social media companies have giant databases that store user accounts, messages, profiles and these are separate tables in the databases. Associated with each user is something called a primary key or unique user identifier.
Access to the databases for rank and file employees usually has some "safety pre-processor" where all queries (written in a language called SQL) are sent to it are scanned to determine if they are looking up a specific individual or doing bulk queries.
Read 7 tweets
11 Jul
If you're curious about the mechanism by which crypto exchanges act like Ponzi schemes, it's quite simple:

They take your real money and give you money on paper. You trade their paper money and put it in negative-sum lotteries run by their mates.

You think you're winning but..
... when you go to cash out your paper wins, your account is frozen, the wins evaporate, or you can never withdraw any real money.

In reality these exchanges have a massive liquidity problem where they comingle a very small pool of real money they have to prop up the illusion.
None of these token products the exchanges offer actually generate any real income because they're non-econmic, they just shift money around. The only way they continue to exist is they pay out early investors from later ones by recruiting more greater fools into the scheme.
Read 5 tweets

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