In China, eight people have been apprehended, and almost 6 million yuan ($946,000) worth of virtual currencies associated with a cryptocurrency scam are under investigation, indicating that Beijing is increasingly cracking down on its cryptocurrency campaigns.
According to the public security bureau of Chizhou city, which is located in Anhui, eastern province, the case entailed virtual currencies totaling 50 million yuan. Scores of investors lost money in a scam which enabled the suspected culprits to:
- Liquidity transfer to an anonymous wallet
- Money laundering without investors’ consent
- Run the scam in multiple provinces such as Guangdong, Sichuan, and Hunan
How the Scam Unfolded
The Investigation Begins
It all began when a single investor lost 590,000 yuan in cryptocurrency in June of last year. Months of investigation led the police to conclude that it was a classic case of using illegal means to obtain virtual currency via blockchain.
The arrests were made in December, and other confiscated items included:d:
- Luxury cars are estimated at tens of millions of yuan
- Luxury villas and other expensive properties
No official statement was made regarding the name of the project, although Chinese blockchain news portal ChainCatcher mentioned it could be a Gainswap token project.
What Is a ‘Rug Pull’?
The rug pull scheme is one form of deception practiced on DeFi networks. It occurs through the following processes:
- The creation of an initial coin offering
- People start depositing money as they expect that the value will appreciate
- The scammer removes all the funds by pulling out the liquidity
More than 2.8 billion dollars worth of assets have been stolen from crypto investors in China by means of rug pulls. This method accounted for 37% of the proceeds from malicious activities in the industry in China in 2021, an increase from 1% in 2020.
China’s Broader Crypto Crackdown
The Regulatory Landscape
China’s central bank issued a complete ban on cryptocurrencies in September last year, intending to eliminate any illegal cryptocurrencies. This ban led to huge implications internationally:
- Significant fall in the prices of Bitcoin and other major altcoins
- Several big mining pools had to exit the space
- China made up 70% of the total mining power before May last year
Why Regulators Are Alarmed
The decentralized aspect of the underlying blockchain network behind digital currencies is especially worrisome for the Chinese authorities. Some of their major concerns are:
- Serving as a medium for making payments that are not legal
- Acting as a conduit for capital flight from the country
- Emergence of counterfeit tokens that defraud common investors
The state broadcaster CCTV aired an exclusive segment on the risks involved in cryptocurrencies for Chinese investors in June. It emphasized the use of counterfeit tokens to trick unsuspecting investors by fraudsters.