The Enduring Nature of Pyramid Schemes

“Easy money is often the most difficult path to true prosperity” Socrates

This week, a Rio de Janeiro-based lawyer was fatally shot in front of his office. Police are investigating whether the motive for his assassination is linked to his role in dismantling a cryptocurrency pyramid scheme. This barbaric crime prompts reflection on how pyramid schemes persistently resurface in new guises, now augmented by the sophisticated capabilities of technology, the internet, and its applications. It is a fascinating phenomenon, exploiting inherent human vulnerabilities.

Cases such as Boi Gordo (Brazil 1990), MMM (Russia, 1990), Banco Santos (Brazil 2004), Avestruz Master (Brazil 2005), Bernard Madoff (2008), Telexfree (Brazil 2013), Atlas Quantum (Brazil 2018), PlusToken (China, 2019), and the most egregious among them, Albania in 1997, which led to the overthrow of the government and thousands of fatalities, continue to emerge globally. Cryptocurrencies are now being leveraged for this purpose.

How is it possible for a system, whose mathematical limitations are readily demonstrable and whose practical failures are widely known, to persist in the era of instant communication?

Attempts to explain this phenomenon often cite the illusion of easy gains, social pressure from “friends” and family, lack of financial literacy, and the desire for rapid wealth accumulation. Psychologists and economists attribute this collective ignorance to an intrinsic human factor within capitalist society, drawing parallels with other consumption-related issues such as drug addiction, gambling, and eating disorders, where the dysfunction originates from poor socialization and insufficient information. The media is also implicated as a factor stimulating fraud, as it can inadvertently induce consumers into detrimental habits.

Without wishing to negate the aforementioned reasons, I consider the primary culprit to be the pervasive distrust in the traditional financial system and the perpetually convoluted and tedious comprehension of financial operations. Attempt to explain to an ordinary citizen what constitutes a derivative, variable income, fixed income (which is not fixed), funds, CDI, CRI, CRA, and how, despite being unaware of Lojas Americanas' existence, the money they deposited in the bank ended up in a multi-market fund that invested in this company without their knowledge, resulting in the loss of their investment. This individual, who likely had no prior knowledge of the company, was disadvantaged by the market's “geniuses”.

This sophistication of traditional financial applications sustains a myriad of professions orbiting private capital, yet they often fail to articulate in common language how funds are being deployed and how investors can benefit from these investments.

In this knowledge vacuum, investors often fall prey to fraudsters, typically charismatic and articulate, who exploit individual and collective self-deception mechanisms to blind their victims to the inconsistencies of miraculous investment schemes.

It works because pyramid schemes cyclically resurface like Egyptian plagues, devouring all external investments.

Market regulatory bodies endeavor to impede the formation of new pyramid schemes, but practical results remain inconsistent.

The solution involves banks attracting investors to simpler, easily comprehensible operations and re-establishing personal contact with their clients. When funds are securely invested in reputable financial institutions, it eliminates opportunities for fraudsters, compelling these pyramid scheme architects to finally seek legitimate employment.

Each day, the world becomes more technologically advanced, and genuine human relationships grow more distant, rendering us more solitary and emotionally disconnected, despite the apparent digital connectivity. This autonomous force of technology shapes society and increasingly alienates us from one another.

Thus, in an era where bank branch managers are relics of the past and client interaction occurs solely through electronic means, fertile ground is sown for these "pharaohs" to operate pyramid schemes. These purveyors of illusion maintain a physical presence, engaging in extensive personal conversations with their victims until funds are invested. Pyramid schemes do not utilize telemarketing, electronic messages, or toll-free numbers. Greater human interaction in the financial market would help deter fraudsters.