The surge in bitcoin prices that saw prices rise more than eight-fold over the past year has propelled cryptocurrency and blockchain into the mainstream. Yet, while the spotlight has shone on Bitcoin and waves of investors flowing in, there has been a parallel increase in crypto-related criminal activity.
While crypto-related fraud and other crimes exist worldwide, a growing regional epicenter may be Hong Kong, where banking laws toward money laundering are notoriously lax, and mainland China, where the country is also leading the global race to develop a central bank digital currency (CBDC).
More than 400,000 crypto-related scams were identified globally in 2020, up about 40% from the number in 2019, according to the Cryptocurrency Scam Report published by fraud prevention company Bolster, which examined over 300 million websites. Although its analysis doesn’t break down numbers by countries, Bolster anticipates a further 75% increase in crypto scams worldwide in 2021.
Crypto scams on the rise in Hong Kong and mainland China
In Hong Kong, the special administrative region of China, cryptocurrency-related crimes are also on the rise. In a recent case on April 9, Hong Kong police arrested nine people for luring others into investing in foreign currencies or digital currencies. According to Hong Kong Police, over 55 criminal cases were related to this alleged crime ring, defrauding victims out of more than HK$35 million, or US$4.5 million.
In China, the range of crypto- and blockchain-related scams run the gamut. According to local reports, there are companies promoting blockchain-backed traceability platforms, blockchain-supported insurance, and even blockchain investment training workshops that exploit people who had heard the word “blockchain” but knew little about it.
Even though China banned initial coin offerings (ICOs) in 2018, many token projects still went ahead and sought to attract investors among the general public. Some 755 types of “zero token” were found, which according to the government, are either not backed by any real initiatives or have fallen to less than 1% of their original value, if not zero, not long after their inception. Besides that, 102 kinds of token projects were identified as pyramid sales, or Ponzi schemes, according to data provided by The National Computer Network Emergency Response Technical Team/Coordination Center of China (CNCERT/CC), a state-owned cybersecurity technical center.
With a series of actions against underground ICO activities in 2019, including the closing down of six cryptocurrency trading platforms and the expulsion of 203 overseas cryptocurrency trading platforms from the mainland were among the more conspicuous actions taken by the government at the time.
One of the world’s biggest crypto scams, the PlusToken Ponzi scheme, was centered in China. The scam promised investors interest rates of 9% to 15%, but ultimately defrauded them. In total, the scam defrauded 2 million victims out of CNY 14.8 billion, or about US$2.25 billion in cryptocurrencies, according to the Intermediate People’s Court in Yancheng, Jiangsu. The ringleaders were sentenced to up to 11 years in prison.
Central bank conducts large-scale DCEP tests, but DCEP has also become a target for fraudsters
Despite these challenges, globally, Peoples’ Bank of China (PBOC) leads its global counterparts with its CBDC initiatives. It has carried out seven rounds of large-scale testing in pilot cities involving 700,000 people over the past two years, with the most recent and largest one in Chengdu. The wide-scale testing and publicity surrounding the “Digital Currency, Electronic Payment” (DCEP) project means that a significant number of Chinese people already have some familiarity with the concept of a digital yuan. But unfortunately, some of that familiarity stems from scammers taking advantage of the popularity of DCEP to sell their own crypto projects in the name of digital yuan. Some boasted their projects were supported by the PBOC and were associated with the DCEP project.
A very recent example is a token called “Ant Coin Bitant,” which launched in the U.S. on March 10, with a total offering of 50 million tokens. It claimed that it was co-launched by the Digital Currency Institute of the PBOC and Alibaba, the Chinese e-commerce giant.
But later, Ant Group — an affiliate company of Alibaba — clarified that Bitant has nothing to do with Ant Group.
Elsewhere, scammers took advantage of how the DCEP testing process was similar to a lottery system, with only the “lucky ones” being invited to download the DCEP wallet using an invitation link sent by message. In one scam, fake messages were sent to unsuspecting end-users that led them to download fake digital yuan wallets and then extracting their money.
DCEP-related digital currency scams are so rampant that PBOC was compelled to publish a warning on March 21 that summarized the different types of scams. It emphasized that DCEP is still in the testing phase, “so don’t trust or download any so-called digital renminbi apps from other sources.”
Beijing concerned about money laundering and capital outflows via crypto
On March 19, the Supreme People’s Procuratorate and PBOC jointly issued six typical cases of money laundering crimes, including one using Bitcoin. It involves a man named Chen Moubo, registered in a financial information company in 2015 without the correct approvals, and established a cryptocurrency exchange platform to issue tokens and illegally collected CNY 3,000,000 yuan (or about US$457,000) and transferred laundered CNY 900,000 yuan, or US$138,000, to overseas. His ex-wife Chen Mouzhi was sentenced to two years for helping him to launder money. Chen Moubo is still at large.
Behind all those kinds of crypto scams, Beijing is worried most about the capital outflow through cryptocurrency. The Supreme People’s Procuratorate said the typical case showed cryptocurrency as a new means of money laundering, “even though ICO is banned in China, but criminals are using the differences of regulations on cryptocurrency among countries and move the illegal money out of China” and authorities said they will take further actions on combating those crimes.
In 2020, the China Anti-Money Laundering Monitoring and Analysis Center under the PBOC received 2.58 million suspicious transaction reports from financial institutions and payment institutions. PBOC has helped related departments to carry out 7,804 anti-money laundering investigations and 710 cases involving money laundering were detected and solved.
The authorities’ actions have already shown some results. Chinese crypto miners have encountered several waves of having bank accounts frozen, because of their association with money laundering. Authorities also say the situation could get harder for China’s crypto criminals in the future.
China’s Premier Li Keqiang declared at the recent National People’s Congress that the nation “must resolutely crack down on those who commit fraud and illegal fund-raising in the name of new forms of business.”