Cryptocurrency exchange operated as Ponzi scheme, B.C. regulator alleges

B.C.'s financial markets regulator is accusing three now-dissolved companies and their sole director of fraud related to the "operation of a purported crypto asset trading platform."

The B.C. Securities Commission published its allegations against Michael Ongun Gokturk and his three companies – Einstein Exchange Inc., Einstein Capital Ltd. and Einstein Law Corporation (which, despite the name, was not a law firm) – earlier this week. 

The allegations have not been proven.

According to the BCSC, Gokturk and the Einstein companies "committed fraud by lying to customers about a crypto trading platform and misappropriating deposited customer assets for their own speculative investments and personal use."

Specifically, the commission alleges, the companies claimed that the Einstein Exchange:

• provided safe and secure storage for users' money and crypto assets;
• allowed customers to withdraw funds same-day to their banks;
• kept crypto wallets encrypted and the kept the majority of its assets offline in "cold storage";
• and "provided an unparalleled combination of secure and responsive currency management."

In reality, according to the BCSC, the companies actually transferred their customers' deposits into various Einstein-controlled accounts, and into Gokturk's personal crypto wallets at other, third-party trading platforms.

The BCSC alleges Gokturk and his companies then further misappropriated those funds by making speculative investments, using them to pay for the platform's operations, and paying out other customers' withdrawals.

Because of this, the commission alleges, the platform was neither secure nor responsive and could not facilitate same-day withdrawals.

"After becoming insolvent in January 2018, (the respondents) operated the platform as a Ponzi scheme by continuing to accept deposits and paying out some customers with money and crypto assets drawn from the pooled bank accounts and wallets," the BCSC says in its notice of hearing for the case.

The commission also alleges that Gokturk and his companies "populated customer dashboards with information which falsely suggested that orders had been processed and assets were available."

At one time, the companies held more than US$34 million worth of cash and crypto assets on behalf of their customers, according to the BCSC.

By July 2019, however, they had just US$100,000 in assets, and owed customers a total of US$19.2 million, the commission alleges.

Both the corporate entities and Gokturk, as their sole director, are accused of committing the fraud.

If they wish to be heard before a date is scheduled for a hearing on the allegations, the respondents must attend the BCSC's office at 9 a.m. on May 14.