A Ponzi scheme is a fraudulent investment scam that promises high rates of return with little risk to investors.

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In a recent post by RegTech firm Flagright, the company took aim at the infamous scheme and outlined what it involves.

According to the firm, the scheme creates the illusion of profitability, while in reality, it’s an elaborate facade. The returns are not from any successful business or investment strategy but from the funds provided by new investors.

This form of scheme operates on the principle of “Robbing Peter to pay Paul.” Initial returns are paid from the funds of new investors rather than profits earned by the scheme’s operator. Early high returns encourage more people to invest, creating a constant flow of cash for the fraudster.

The central characteristic of a Ponzi scheme is its reliance on attracting new investors to pay returns to existing ones. Keeping the scheme afloat requires a continuous influx of new capital. As long as new investors keep entering and existing investors do not demand repayment, the scheme seems profitable.

The false promise of high returns with low risk is enticing but deceiving. In legitimate investments, higher returns come with higher risk. Ponzi schemes exploit human greed, often dazzling investors with unrealistic returns, becoming the bait that traps them.

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