What Happened?
The US Securities and Exchange Commission (SEC) has accused Richard Heart, HEX CEO, and a serial crypto entrepreneur also known as Richard Schuler, of violating securities and fraud laws. The regulator disclosed the nature of the accusations in the press releases.
According to the SEC, Heart raised over a billion dollars through his HEX, Pulse Chain, and PulseX projects. The SEC claims that the entrepreneur was simultaneously involved in selling unregistered securities disguised as tokens. The commission also accused Heart and PulseChain of a $12 million fraud. For the claimed amount, the entrepreneur purchased various luxury goods such as sports cars and watches. Additionally, it is believed that they acquired Enigma, the world's largest black diamond weighing 555 carats.
As of April 2023, Richard Heart’s net worth was $500 million. This is based on his Bitcoin holdings, angel investments in crypto assets, and his stake in the HEX and Pulsechain networks.
Heart was able to attract about 2.3 million Ethereum (ETH) through the Hex project in less than a year. According to the US exchange regulator, the entrepreneur has been promising for enriching HEX investors since 2018. In September 2021, amidst the Bitcoin Rally (BTC), the price of the HEX token experienced a significant increase. However, since then, it has remained in a downward motion according to CoinMarketCap. Additionally, the serial entrepreneur was able to raise hundreds of millions of dollars in the PLS and PLSX tokens, which, according to the SEC, are also unregistered securities.
Against the backdrop of accusations, the HEX rate fell by 30% and PLS quotes dropped by 41%. The decentralized exchange (DEX) Uniswap deemed HEX an unreliable asset, and the cryptocurrency wallet MetaMask declined to support the problematic token.
The market capitalization of the HEX token fell by nearly $500 million.
What Is HEX?
HEX is an open-source ERC-20 token based on the Ethereum blockchain. The token was released in December 2019 by Richard Heart, who was originally known as a writer, but later more intriguing details of his biography emerged.
Previously, the founder of HEX was not known for creating crypto projects and was not a crypto analyst. He was involved in Internet fraud and even earned the title of "King Spam." In 2002, he was convicted of violating the anti-spam laws of Washington State. At that time, he operated under the name Richard James Schuler.
Since its release, the token had multiple problems already. The reason for this lies not only in its structure but also in the extensive advertising during the initial stages of the project.
The role of the token creator has sparked numerous controversies since his introduction to the cryptocurrency industry. Some consider him a typical fraudster and do not trust his "innovative" approach. Heart believed that his life experiences and numerous attempts to implement business strategies were the foundation for the success of his new project.
The HEX token was distributed to Bitcoin holders through a snapshot of the UTXO Bitcoin set, which occurred on December 2, 2019, at the height of block 606227. The distribution of HEX among Bitcoin holders is 10,000 HEX per 1 BTC.
HEX's Dubious Reputation
Problems surrounding Heart's projects began in 2019. The official HEX website explicitly promised investors to increase their investments "at an unprecedented pace in history." According to Heart, the return on investment ratio in HEX tokens could be as high as 369% per annum.
In November 2022, the editors once again reported on issues concerning HEX, PulseChain, and PulseX. The SEC subpoenaed Richard Heart, a promoter of his cryptocurrency projects, to testify under oath. Simultaneously, amidst recent news, the leading news channel on HEX has urged users on Telegram to utilize secret chats to prevent unauthorized access to their correspondence. The HEX Telegram channel also published a video on YouTube, urging viewers to not cooperate with the investigation.
At that time, Richard Heart did not comment directly on reports of contacting promoters in court. Instead, he posted a tweet in which he emphasized the importance of using encrypted chats with a self-destructive timer feature for secure correspondence. Against the backdrop of the SEC lawsuit, the serial entrepreneur feigned ignorance of any issues with the project.
Is HEX a Ponzi Scheme?
Many consider the project a pyramid because the HEX token is slightly different from other coins. The official website of the project states, "This is the first highly profitable deposit on the blockchain." According to the project website, the price of coins has increased almost 10,000 times since 2019. In addition to earning money from regular sales, HEX holders can generate substantial income by "freezing" their assets. By signing a smart contract for a period ranging from 1 to 5555 days, you have the opportunity to earn up to 25% of the annual profit. The precise profit can be determined using a fixed rate and schedule. If you signed a contract early on in the project, your percentage would be significantly higher. Do not forget the system of fines. If the contract is terminated ahead of schedule, you can not only lose the expected profit, but also a portion of the coins staking. What is most interesting is that the project refers to this investment process as a "wonderful innovation.”
Tempting numbers, loud slogans on the site, and bonus schemes like "bring a friend for a percentage" in the early stages of the project all resemble a typical pyramid scheme. However, the creator of the project assures us that the "top" does not profit at the expense of the "bottom," and that the system of theft in the project is more secure and reliable than any bank. Furthermore, before its launch, the token underwent several independent audits, a level of scrutiny that Bitcoin lacks.
In fact, the reality is much more mundane. Mathematically, this platform only generates versatile HEX tokens, which provide higher dividends to initial investors compared to the latter ones. It looks like a pyramid, right? However, it is still impossible to call it a pyramid in a strict sense, despite the accusations made by Reddit users. This is because investors are not promised any specific financial returns, and profits for the "top" do not come at the expense of those lower down. A completely different mechanism is at work here, which is unique. They are both subtle and significantly unethical.
What's Wrong With HEX, Then?
The process of profiting through HEX is simple. You need to register on the site, choose one of the three methods to obtain a miracle coin and activate the process of earning interest for a period of one week to 50 years. The first has an advantage — in addition to numerous bonuses – they are entitled to a large percentage from staking.
Although the HEX project is not considered a financial pyramid, it openly utilizes pyramidal mechanics. There are no hit bonuses. Participants could count on a generous referral reward of 20% to attract a beginner. A newcomer who registers through a referral link will receive an additional 10% HEX from above.
In addition to bonuses, there are several other tactics that are skillfully employed by the enthusiasts of Ponzi schemes. Even an analog of the "happiness calculator" is available, which enables us to determine the profile that can be assisted. In general, the entire site is driven by human greed. Even the so-called "promotion" of receiving free tokens for BTC holders every seven days comes with a catch – it reduces the potential reward by 2% to encourage immediate participation. There were even hefty fines. For example, for the premature termination of a lease, the tenant must pay half the potential profit that they can earn. Fines can even put investors into a negative balance.
However, the site does not mention that early investors bought Bitcoin not solely for speculation but also for the sake of technology. However, it was not created as a speculative tool. Bitcoin is rising in price because networks of the same name and blockchain technology are being widely utilized in the modern world. In the HEX universe, everything is tied exclusively to money. For some reason, despite having no backing, digital tokens are expected to provide much higher profitability than the two leading cryptocurrencies in the world.
The Main Problem with This Project
All the above is only half the truth. The secret of the HEX lies much deeper at the core of the project. To avoid imprisonment, Richard Heart posted genuine technical information and even source code on the website. However, this information is supplied in such a small font that gullible investors will simply not notice it. So, on the website, you can find a page titled "Disclaimer," which says that there are no coins involved, only numbers in the database. No one gives or receives anything and there is no call for action. This is not a fork or airdrop, but rather a "wonderful innovation" that will prevent you from getting back all the ETH you sent.
This is the tip of the iceberg. Problems were present in each of the three popular methods of purchasing a token. BTC holders must "claim" free HEX by providing Richard Heart's team with their private keys. This is the only method used to verify the ownership of coins. Buying tokens on the exchange carries the risk of experiencing a significant decline. Despite the promises of "wonderful innovations" and continuous growth programming, the price of tokens is solely determined by the supply and demand ratio, similar to any other speculative asset.
However, the transformation of ETH to HEX is of great interest. As you may have already guessed, errors do not "disappear" anywhere but rather persist. That is, the coins are not burned, as proposed by Mika White in dETH. All sent coins cease to be yours and become Richard Heart’s property. According to information on the website, they will never be returned to you. HEX positions itself as the only platform offering "deposit certificates on the blockchain," but in reality, HEX can only be acquired by selling ETH, and there is no actual connection to interest-bearing deposits. Given that on the first day alone, users "donated" Ethers worth $3 million, and by December 16, the amount had already surpassed $5 million, we can confidently assume that even if Richard Heart does not succeed with HEX, he will certainly not have to live in poverty.
Richard Heart consistently avoids giving a direct answer and fails to openly acknowledge his access to investor funds. During a live stream with Peter McCormack, the creator of HEX noted that individuals who have access to these assets "can spend them as they please."
However, Heart does not intend to be content with millions of dollars in the air. The HEX project seems to be primarily focused on enriching Heart rather than investors. If you navigate to the "technical specifications" section on the website, scroll down to the subtitle "code," click on the first link to access the Google Docs document, and then proceed to page 14. You will come across several lines that will alter the entire context. The project has a designated "starting address, " which receives half of all fines and a copy of all bonus payments. Goldman Sachs blogger suggests that within a year, approximately 45% of all HEX tokens will be held at this address. It is likely that this "starting address’ also belongs to Heart, whose share will increase every day due to theft, copying bonuses, and receiving half of the fines.
Such a significant stake in the project suggests that investors are essentially entrusting the fate of their coins to a single individual who, at any given moment, could orchestrate a massive sell-off and drive the price to zero. Heart created a game in which he owned Aces and Jokers, by default.
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