Chinese Police Arrest 9 in alleged $13 million Crypto Pyramid Scheme

Avi Rosten

Chinese Police have arrested the founding members of an alleged cryptocurrency pyramid scheme following several weeks of investigation. Police in the Chinese city of Xi’an shut down the operation that is claimed to have already obtained 86 million yuan ($13 million) from over 13,000 participants in the scheme.

According to the report by the local Huashang News, the scheme has already affected members in 31 provinces and municipalities across the country despite only launching on March 28th of this year.

The report describes how the scheme sold a cryptocurrency – DBTC – at a token price of 13 yuan ($0.48) and promised new members returns of 80,000 (c.$13,000) yuan a day for an initial investment of 3 million yuan ($480,000).

The police added that to bolster their international appeal to investors, the operation - linked to the Hong Kong-registered DTC Holding – spent 30,000 yuan to hire a foreign-looking man as chairman of DTC.

To further convince investors, the project organised promotional events in several cities across China and in Cambodia and promised DBTC listings on several Chinese exchanges.

After arousing the suspicions of the of the Xi’an Public Security Bureau on April 4th, the Economic Investigation Department launched an investigation into the scheme and its alleged ringleader going by the name of Zheng.  

Arresting nine suspects in total, the police believe that suspects had been planning the scheme since October 2017 and had hoped to capitalise on the popularity of Blockchain to attract investors.

Chinese Crypto Fraud

This latest alleged fraud is by no means the first to hit the news in China.

Crypto-scams such as the fraudulent Gemcoin Ponzi scheme of 2015 affected many Chinese and Chinese-American investors, and the infamous $1.5 billion dollar EDG pyramid scheme of January 2017 have pushed Chinese law enforcement to take a tough stance towards crypto-fraud.

The Ministry of Public Security in a statement on Jan 19th affirmed their commitment to stamping out this kind of financial fraud, making a commitment to: 

“punishing the members of the pyramid selling field, [and] annihilate and destroy the network pyramid selling and criminal activities.”

The Ministry of Public Security

Unregulated Crypto Derivatives Exchanges Dominate Regulated Alternatives

Trading volume on unregulated Bitcoin (BTC) derivatives exchanges is growing rapidly, and continuing to far outpace their regulated-institutional counterparts, according to the most recent (March) CryptoCompare Exchange Review.

unregulated exchange volume(source: CryptoCompare)

Both OKEx and bitFlyer exchanges hosted an average daily derivative trading volume worth well over a billion dollars during March - $1.5 billion and $1.14 billion respectively according to CryptoCompare. It seems then that the older derivative stalwart BitMEX, at $645 million daily average volume, has been rapidly eclipsed by the newer exchanges.

regulated exchange volume(source: CryptoCompare)

Institutional, fiat-dealing (regulated) exchanges hosted a fraction of this volume, the highest being $70.5 million on the CME exchange. CryptoGlobe reported last month the CME’s primary competitor, the CBOE, was shuttering its Bitcoin futures products citing low demand. CME volume spiked last month, but is down this month below to January levels.

However, despite the relatively low average volume, the CME did have one bumper day of record-breaking Bitcoin futures trading volume, trading nearly $550 million worth of bitcoin on April 4th - days after Bitcoin’s unbelievable breakout from its $4,200 resistance.

Outflanked

The ease of onboarding new customers may explain why the unregulated exchanges get more attention.

In a recent interview, BitMEX CEO Arthur Hayes underlined his exchange’s ability to “onboard a [new] customer within 10 minutes,” by accepting Bitcoin and only Bitcoin for funding. In addition, no KYC/AML checks are required to trade on BitMEX, merely an email address; whereas OKEx offers margin trading only after basic KYC/AML checks. These exchanges are registered in Seychelles and Malta, respectively, specifically to avoid such onerous accounting requirements for their customers.

As CryptoGlobe covered early in 2019, however, BitMEX and other derivative exchanges including OKEx officially exclude certain citizens from trading on their platforms due to regulatory concerns, most notably US citizens.

Hayes also intimated at the upcoming launch of an interest bearing Bitcoin-only bond, which he speculated could be used to leverage credit into future Bitcoin-denominated economic activity.