A full month after the Philippines' Securities and Exchange Commission flagged Forsage as a likely Ponzi, it remains the second-most popular Ethereum DApp on internet rankings.
As of Aug. 6, Forsage has 390,000 users and a turnover of $3.11 million per 24 hours - despite being marked in dappstat.com rankings as “high risk."
Speaking to Cointelegraph in July - weeks after the SEC’s official warning - Miguel Cuneta, the co-founder of Phillipine fintech Satoshi Citadel Industries - wrote:
"I received numerous inquiries from friends and family about Forsage and 'investing' in Ethereum just within the last month or so. People are posting screenshots of their wallets turning a small amount of money into a large amount of money in a short time."
"It's the run-of-the-mill Ponzi scheme using Ethereum, or in the case of the earlier ones that were already busted, Bitcoin, as the 'product' they are selling," Cuneta noted.
"Join by paying X amount of money, and then either do nothing and earn in ETH, or if you want to earn more, recruit three people and let them do the same thing. They use the rising BTC and ETH prices to prove that the investment is really earning. It's the same formula every single time. Sadly, people are desperate to earn extra income in this pandemic crisis and fall for these schemes more easily," he said.
Forsage's pandemic tactics
In one recruitment post that remains online as of the time of publication, the author capitalizes on the pandemic crisis to pitch Forsage as a "work from home" smart contract crypto earnings program, which offers investors the chance to "earn a long term residual income" just by recruiting three others.
The pitch attributes the program's alleged reliability to the inherent properties of smart contracts, citing their automated and "almost unbreakable and unchangeable" qualities.
This purportedly "means that no human being can ever interfere or prevent the intended functioning of the prescribed process, either by bad intention or incompetence."
Blockchain as a technology designed for decentralized and trustless interactions is thus apparently being exploited to provide an innovative aura for older, fustier forms of investment recruitment schemes.
Cuneta said he believes that "most of these people" involved in propagating the program "are not aware it is a Ponzi scheme and are victims as well."
Courting a high penalty
Victims or otherwise, the Philippines' SEC told Cointelegraph that any of Forsage's "members and/or representatives that are still actively offering, endorsing, selling and recruiting others to join said illegal scheme despite our prevailing Advisory will be dealt with accordingly."
Oliver Leonardo, Officer-in-Charge of the SEC's Enforcement and Investor Protection Department, told Cointelegraph, "We are in the process of gathering information on these representatives to formally file a complaint."
In the Commission's view, there is no ambiguity about whether or not Forsage is a violation of national securities laws:
"Forsage's scheme partakes of the nature of securities through an investment contract which is absolutely within the purview of the SRC [Securities Regulation Code]. That being the case, being decentralized or foreign in nature, as claimed by FORSAGE and its members, does not necessarily imply that its activities are not within the Commission's jurisdiction considering that it is engaged in investment-taking operations within our country."
Activities or postings that are intended to recruit others to join a program or invest money are considered as a public offering of investment, requiring prior registration with the SEC, Leonardo wrote.
Any person or entity using Forsage as an “income-generating tool” within the country is therefore within the SEC's authority and is subject to taxation as well as other applicable laws, notably the Philippines' 2017 central bank circular containing guidelines for Virtual Currency Exchanges.
The circular is intended to provide a solid framework to regulate the sale or offering of securities "on a limited scale to help raise capital and resources for micro, small and medium-sized local enterprises."
Forsage, which "appears to offer perpetual or unlimited securities through its smart contract or program, is certainly not exempted” under the central bank’s circular, Leonardo said.
Under Philippine law, a maximum fine of 5 million pesos ($100,000) or imprisonment of 21 years - or both - can be dealt to anyone who acts as salesmen, broker, dealers or agents of entities engaged in unauthorized investment schemes.
"Just a 'decentralized' financial fraud"
While appearing to offer securities brings Forsage under registration obligations, as a minimum, the Commission went further in its characterization of the program.
"Based on the foregoing, we wish to make it clear that Forsage is just a 'decentralized' financial fraud which depends solely on new investments lured to its referral system for its continuous operation," Leonardo wrote.
Within what Cuneta characterized as the country's "very proactive regulatory environment'' for crypto, the SEC has followed up the central bank's regulatory framework by issuing draft regulations for Digital Asset and Token Offerings as well as proposed Rules for Digital Asset Exchanges.
The Commision has made several interventions by warning the investing public about crypto scams in recent years. It has also issued cease and desist orders and cooperated with the Philippine National Police on arrest warrants for the heads of similar operations.
Despite these precedents and what would appear to be ample deterrents, Cuneta observed that the public health crisis has amplified the existing challenges for taking enforcement action on blockchain scams:
"The issue is that besides the fact that this is supposedly a decentralized platform, the pandemic isn't making it easy for them to enforce physical action. A lot of movement has been put on hold because priority is on the pandemic on all fronts."