The digital currency Bitcoin may have its own Bernie Madoff. An investment scheme promising a 7% weekly return was in fact a fraudulent "Ponzi" scheme, in which a Texas man used new investors' money to pay interest to existing ones, according to charges filed by the US Securities and Exchange Commission.

Trendon T Shavers, from KcKinney in Texas, was the founder and operator of "Bitcoin Savings and Trust" (BTCST), allegedly raised a total of 700,000 Bitcoins in 2011 and 2012 – then worth about $4.5m – for his scheme, claiming that he made his profits on market arbitrage.

Using online handles such as "Pirate" and "pirateat40", Shavers sold "investments" to people around the US. He claimed that "I have yet to come close to taking a loss on any deal"and that the "risk is almost 0" when challenged. He also said that he couldn't reveal his investment strategy: "If I told you, then I couldn't do what I do," he once wrote.

The SEC alleges that Shavers transferred at least 150,649 Bitcoins into his personal account – which he used to pay for rent, food, utility bills, shopping and gambling. "In reality BTCST was a sham and a Ponzi [pyramid] scheme in which Shavers used Bitcoin from new investors to make purported interest payments and cover investor withdrawals on existing BTCST investments," the SEC said on Tuesday.

In November 2011 he said he was closing the fund, saying that "As the fund grew there were larger and larger coin movements which put strain on my reserve accounts and ultimately