Sergei Potapenko and Ivan Turõgin, Crypto Fraud, Washington 2022

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Two Estonian Citizens Arrested in $575 Million Crypto Fraud Scheme

Seattle – In a stunning blow to cryptocurrency scammers, two Estonian citizens were arrested in Tallinn, Estonia on November 20, 2022, on an 18-count indictment charging conspiracy, wire fraud, and conspiracy to commit money laundering.

According to the indictment, Sergei Potapenko and Ivan Turõgin, both 37, are alleged to have induced hundreds of thousands of victims to purchase contracts in a cryptocurrency mining service called HashFlare and to invest in a virtual currency bank called Polybius Bank. Victims paid more than $575 million to the defendants’ companies.

The defendants then used shell companies to launder the fraud proceeds and to purchase real estate and luxury cars. “New technology has made it easier for bad actors to take advantage of innocent victims—both in the U.S. and abroad—in increasingly complex scams,” said Assistant Attorney General Kenneth A. Polite, Jr. of the Criminal Division.

“The size and scope of the alleged scheme is truly astounding. These defendants capitalized on both the allure of cryptocurrency, and the mystery surrounding cryptocurrency mining, to commit an enormous Ponzi scheme,” said U.S. Attorney Nick Brown of the Western District of Washington.

“Mr. Potapenko and Mr. Turõgin are charged with defrauding investors out of more than half a billion dollars” said Richard A. Collodi, Special Agent in Charge of the FBI’s Seattle field office.

According to the indictment, the defendants claimed that their business, HashFlare, operated a massive cryptocurrency mining operation. Cryptocurrency mining is the process of using computers to generate cryptocurrency, such as Bitcoin, for profit. The defendants offered contracts under which customers could pay a fee to rent a percentage of HashFlare’s mining operations in exchange for the virtual currency produced by their portion of the operation. HashFlare’s website enabled customers to see the amount of virtual currency their mining activity had supposedly generated.

Customers from around the world, including from western Washington, bought more than $550 million worth of HashFlare contracts between 2015 and 2019. HashFlare allegedly did not have the virtual currency 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.

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 closed its operations in 2019.

U.S. and Estonian authorities are working to seize and restrain the assets and take the profit out of these crimes. The outcome of the case has not been disclosed yet.