Shanghai police bust US$16 million cryptocurrency pyramid scheme amid crackdown on digital token fundraising

Shanghai police have busted an online pyramid scheme that used cryptocurrencies worth more than 100 million yuan (US$15.7 million), the latest example of China’s ongoing crackdown on fundraising activities involving digital tokens.

The company alleged to have committed the crime established a platform in June 2020 that claimed to offer “services to appreciate cryptocurrency”. Users were asked to exchange their fiat currency for platform tokens to gain membership, which came with incentives, but the tokens “had no market value” and their price “was controlled by the platform”, state-owned Xinhua News Agency reported on Wednesday, citing the Shanghai Municipal Public Security Bureau.

Users were also rewarded for new account referrals. By the time police arrested more than 10 suspects in the case, the platform had 60,000 member accounts across 72 levels of hierarchical relationships and membership status, the police said.

The company had located its servers overseas, a move likely aimed at circumventing Chinese regulations that have since 2017 banned all forms of raising capital through the issuance of digital tokens, referred to as initial coin offerings.

The Chinese government has taken a firm stance against cryptocurrencies. It banned Chinese banks from dealing in bitcoin in late 2013, when its price was under US$1,000, a fraction of today’s value.

It is not the first time authorities in China have hunted down perpetrators of cryptocurrency fraud.

In November 2020, a Chinese court sentenced the ringleaders of a multinational cryptocurrency-based pyramid scheme to 11 years in prison after they defrauded investors out of 14.8 billion yuan (US$2.25 billion) worth of cryptocurrencies, according to court documents from the eastern province of Jiangsu.