Shanghai police bust $16M digital currency pyramid scheme

Getting your Trinity Audio player ready...

A digital asset pyramid scheme that allegedly defrauded over RMB 100 million from 60,000 Chinese investors has been busted by police in Shanghai, the first time that the city has cracked down on a digital asset scam.

The Shanghai police bureau recently announced the successful crackdown on its official WeChat account, confirming that it had also led to the nabbing of over 10 suspected scammers.

It started six months ago when the bureau opened an investigation against the suspected criminals. It tracked down the suspects and their activity across a number of provinces all over China, gathering evidence against them and taking victims’ testimonies.

The bureau said the scam dates back to June 2020 when the suspects set up an online digital asset platform and then went into marketing it to potential victims. They offered membership rewards and promised guaranteed passive returns to lure the victims.

To become a member, users had to buy the platform’s native token with their fiat currency. However, as with most scams, the tokens were worthless beyond the small ecosystem. Further, the Shanghai police said the suspects controlled the price of the token, manipulating it as they saw fit to give a false sense of profitability.

Users were encouraged to bring in as many people as they could so that they could earn referral money and climb up the rankings in the pyramid scheme-like hierarchical structure. Over its lifetime, the scam saw 60,000 investors become members, divided into 72 levels of hierarchy dependent on level of activity and length of investment.

The police said that the scammers touted their platform as a blockchain unicorn (a startup that’s worth at least a billion dollars) and spent massive amounts of time and money organizing lectures to promote the venture, both online and offline, as The Paper reports.

In total, over RMB 100 million ($16 million) was channeled into the project.

The digital asset scam in Shanghai took place despite China’s strict anti-Bitcoin stance. While the government has fought hard to stamp digital assets out of the country, investors have continued to seek out opportunities to invest in the nascent sector. And since the industry is illegal, it has gone underground, making it much easier for scams to thrive.

Follow CoinGeek’s Crypto Crime Cartel series, which delves into the stream of groups—a from BitMEX to Binance, Bitcoin.com, Blockstream, ShapeShift, Coinbase, Ripple, 
Ethereum, FTX and Tether—who have co-opted the digital asset revolution and turned the industry into a minefield for naïve (and even experienced) players in the market.