Supporting Local Payments on a Single Global Platform

March 2018
« Apr    

Bitcoin pyramid scheme in Hong Kong makes off with $387M of investors’ money

February.09.2015 0 Comments

bitcoin-0002A scam involving bitcoin in Hong Kong has robbed investors of HK$3 billion (US$387 million), according to the South China Morning Post., a small local bitcoin exchange, suddenly closed and boarded up its office last month. The company reportedly ran a pyramid scheme wherein as many as 3,000 local investors signed up for the promise of a HK$1 million (US$129,000) return on HK$400,000 (US$52,000) bitcoin mining contracts.

When Tech in Asia staff attempted to register an account on MyCoin to investigate, the sign up page returned an error saying the email has already been registered (it has not been). The mainland China phone number plays a recording of a nearly inaudible woman’s voice being drowned out by music.

To be clear, this is not the same scenario as Mt. Gox where thieves targeted assets of traders on the exchange. The calamity arose mainly from a lack of due diligence from investors.

“Mycoin was offering its customers to invest in mining contracts, promising them 300 percent year-on-year profits. It is really a basic case of Ponzi scheme, exactly like what Madoff had done for years in the US with more classical investments,” says Aurélien Menant, founder of Hong Kong bitcoin exchange Gatecoin. “Investors were supposed to buy shares in mining rigs, and therefore get a proportional share of the returns of the mining activity.”

“Mining” refers to the high-level computational process used to verify bitcoin transactions on a public ledger called the blockchain. In return for verifying these transactions and thereby securing the bitcoin network, miners are rewarded with new bitcoins. Mining on a large scale – such as what an exchange would need to meet the demand of customers – requires a huge investment in high-powered computer rigs.

It’s unknown at this point if MyCoin’s mining operation was ever active or if it simply pocketed investor’s money and used it to pay back investors further up the pyramid.

Investors collectively approached Hong Kong lawmaker Leung Yiu-chung about the situation, and they will file reports to the police on Wednesday, says SCMP. Each victim reportedly invested an average of HK$1 million. Besides the exorbitant return on investment, they were also lured by extra cash prizes and even a Mercedes-Benz car for investors who found new clients for MyCoin.

Real estate agents, law firm clerks, and insurance agents were among those reported as evangelists for the scheme. One elderly woman who says she invested HK$3 million (US$387,000) only recovered HK$1.2 million (US$155,000). The biggest loss by a single client is said to be HK$50 million (US$6.45 million). SCMP says some victims even mortgaged their homes to invest.

MyCoin staged events at luxury hotels and went on a roadshow in Macau, Asia’s biggest hotbed of gambling, sometime last year. It brought in investment professionals to speak at its events including Jim Rogers, SCMP reports.

Warning signs

Investors were to get their return on investments back in the form of bitcoin, which they could then cash out through the exchange. However, the company altered its trading rules in December, placing a limit on how much investors could withdraw unless they found more clients.

The price of bitcoin on MyCoin’s homepage is grossly inaccurate. As of press time, it states that one bitcoin costs US$1.54, a fraction of the market price of around US$222. That would seem to indicate MyCoin was either selling fake bitcoin, or it predicted traders and investors would empty their exchange accounts as a result of this news and wanted to limit its own losses by setting a fake price.

The “proof of qualification” page on MyCoin’s website indicates the company is registered in Hong Kong under the name Rich Might Investment Limited. It shows no financial services licenses. MyCoin’s office has been closed for “renovation” since January 3.

“I think it is a new example of the importance of the counterparty risk, whenever you invest or entrust your money to someone else, whether it is bitcoin related or not,” Menant told Tech in Asia. “MyCoin especially had no license, was not habilitated to receive deposits from investors, and just used bitcoins as a buzzword to attract potential targets. Those people were blinded by the huge return promised, and did not take the time to conduct a proper due diligence, investigating who they were dealing with and what were the possible rationales of a such profitability, while those are the basics of any investment.”

Investors told SCMP that they have no written records of their dealings with MyCoin – just a trading account on the website. They expressed worry that the police would not take up the case as a result.

The broader points of the sceme look very similar to GBL, a bitcoin exchange also based in Hong Kong that went dark in November 2013 with about US$4.1 billion of investors’ money.

In response to the scam, financial expert and professor at the Chinese University of Hong Kong called for bitcoin to be banned in the city, according to RTHK.