Bitcoin alternative caught in 'pyramid scheme' storm

The founders of a new digital currency, known as LEOCoin, have hit back at reports published over the weekend linking them with a suspected pyramid scheme back in 2012.

Last week, U.K.-based Learning Enterprises Organisation (LEO) unveiled a trading platform in Hong Kong for its cryptocurrency called LEOCoin, which the company is promoting as an alternative to more popular digital currencies like bitcoin.

At a London launch the previous week, LEO boasted that it had already promoted the product to its current client base, claiming it meant over 100,000 entrepreneurs were already actively using the cryptocurrency in anticipation of its official trading debut, with around 30,000 merchants already signed up.

It also claimed this made it the "second largest digital currency" in the world, second to bitcoin, but has been slammed by reports on industry websites in the last week. Joel Dalais, a virtual currency entrepreneur and the director of bitcoin exchange IBWT, said on cryptocoinsnews.com that LEOCoin was a "good example of what a pump and dump coin looks like." He also dismissed its claims of its sizeable usage as "bulls*t."

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An article by another industry website, called CoinDesk, delved into the history of project founders Dan Anderson and Atif Kamran and said that both were caught up in a controversy surrounding a suspected pyramid scheme, called UNAICO Pakistan, that was warned by the Securities & Exchange Commission of Pakistan in 2012.

Published online, the report by the Pakistani SEC said it had received various complaints from the public claiming that UNAICO was a pyramid scheme. The letter, dated April 2012, concludes that the company's activities did "broadly fall" within the definition of "fraudulent activities" and gave a recommendation to shut down the firm.

LEO's Dan Anderson is named as being the CEO of UNAICO at the time and Atif Kamran was also linked to the company through Sitetalk, a social community platform that is described as a "sister concern" by the Pakistani commission.

Pyramid scheme?

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A pyramid scheme is usually described as a program whereby participants try to make money by recruiting new members to the scheme before the program collapses and some members lose money. The CoinDesk article quotes an expert witness in the prosecution of pyramid schemes, William Keep, as saying that some of LEO's business model does raise questions, in particular highlighting that it provides incentives for users to recruit others.

LEO, meanwhile, has strongly refuted these claims telling CNBC via email that they were "completely untrue."

"Dan Anderson and Atif Kamran have never been involved in any sort of scam and the comments about them have misunderstood the facts entirely," a spokesperson for LEO said in the emailed statement.

Both resigned from UNAICO and Sitetalk after disagreeing about the direction the business was taking, according to the statement, which said that they had also ensured reimbursements for those that lost money. They have been officially discharged of all liabilities and cooperated fully with authorities in all of these matters, the spokesperson added.

'A new era'

The company also aimed to cool talk that it was artificially inflating its user base. At the event in London in March, LEO conceded that the cryptocurrency was targeted more at small and medium-sized businesses - especially in emerging economies - rather than the large conglomerates that have started to accept bitcoin.

A few examples of merchants revealed to CNBC that used LEOCoin were a Pakistani company called Capital Motors, a financial services firm in Slovenia called Profitus Skupina and a German-based energy efficiency services firm called Transformer.

A U.K.-based equine sports massage company called Happy Horse World is also on its roster as well as Strel Swimming, a U.K. based online company that organizes swimming tours around Europe. Borut Strel, a director at Strel, told CNBC via telephone that the company had only seen between 10 and 15 transactions made using the cryptocurrency, but predicted the sector as a whole was on the verge of a "new era."

The more popular bitcoin is a "virtual" currency that allows users to exchange online credits for goods and services. While there is no central bank that issues them, bitcoins can be created online by using a computer to complete difficult tasks, a process known as mining. A plethora of so-called "altcoins," or alternative coins, have sprung up alongside bitcoin. Dogecoin, which was initially started as a joke in 2013 and is based on an internet meme, is still the sixth largest digital currency in terms of market capitalization, according to coinmarketcap.com.