What are the common pitfalls behind cryptocurrency investments?

Author: Liu Honglin, Founder and Director of Shanghai Mankun Law Firm

The recently released movie "All-in" has sparked discussions about the "sexy dealers dealing online" and "neck rubbing and bowing to Buddha" by the main characters. This film exposes the insider of the entire industry chain of overseas online fraud. Riding on the popularity of "All-in," today we will discuss the common pitfalls behind cryptocurrency investments. From investors to victims, there is often only one step away.

The Mankun team has received a large number of consultations from victims of cryptocurrency-related scams, and the reasons for being deceived are varied. However, after handling many cases, it was found that the tricks used by scammers are actually quite common. It's the same old tricks in a new bottle.

01 The Road to Being Scammed by Huaying Club

Currently, the Huaying Club has been under investigation by the police in many places. For example, in July of this year, the Yushui Branch of the Xinyu Public Security Bureau issued a notice about the registration of investment losses in the Xinyu area of the Huaying Club investment platform. The notice mentioned that the Xinyu area of the Huaying Club investment platform fraud case is under investigation. The Linquan County Public Security Bureau issued a notice stating that they are investigating the suspected organization and leadership of pyramid selling activities by Cheng, Wang, and Zhang. Some participants in the pyramid selling have not reported to the public security organs. In order to clarify all the criminal facts, accurately combat crimes, and safeguard the vital interests of the people in accordance with relevant legal provisions, victims can register.

The majority of the consultations received by the Mankun team from victims of the Huaying Club are middle-aged people, with a few young people asking on behalf of their family members. These victims not only do not understand blockchain technology, but also do not understand what virtual currency is.

When asked how they learned about the Huaying Club, most of them said it was through friends' introductions, attending offline meetings, and listening to teachers' lectures. They were given USB drives, notebooks, and other gifts just for attending, and better gifts for registering an account. There were also lucky draws at the event, and "several people won cars." When asked why they invested so much money, most of them quickly gained profits in the early stages, and under the brainwashing of the lecturers and group members day after day, they invested more in order to take advantage of the platform's large bonuses for recharging.

Among these investors, there is still a group that remains "unrepentant": although the withdrawal amount in some areas is currently very small, it is still possible to withdraw normally. They believe it is just a temporary issue, but recently they have seen too many rumors online and are a little worried, so they consulted a lawyer. When we informed them that they were very likely to be scammed and should report the case to the police as soon as possible, they still said, "My friends are still involved, and they say everything is fine."

In this regard, the Mankun team specifically reminds that the Huaying Club's routine is actually to induce new members to invest, thereby maintaining a fraudulent project of false prosperity through packaging such as "blockchain" and "digital quantification industry," and achieving the purpose of illegal profit. If you have participated in the Huaying Club project, you should report the case to the local police as soon as possible and provide corresponding remittance receipts, chat records, and other evidence for the police to investigate and handle the case.

02 Cryptocurrency "Ponzi Scheme"

As virtual currency becomes increasingly popular, criminals are following the trend closely. If the "tea leaf Ponzi scheme" doesn't work, they play a new concept of virtual currency.

According to a judgment publicly released by the Hong'an County, Hubei Province in June of this year (Case No.: (2023) E 1122 Criminal First 88), this criminal group set up a false investment and financial management platform. They pretended to be unmarried young women from India, Singapore, and other places in online dating and chat software outside the country, and targeted Indian men (why specifically targeting Indians) for dating.

After gaining the trust of the other party, they recommended gold financial products and lured the other party to purchase and transfer the recharged currency (Indian rupees) to a false trading platform. After entering the platform, the currency had actually been transferred to the virtual currency wallet address controlled by the criminal group. Finally, they manipulated the platform to claim losses and took possession of the currency that the other party had recharged.

03 Virtual Currency Fraud Group

Similar to the Myanmar industrial chain in "All-in," there has also been a large-scale, well-organized, and clearly divided virtual currency fraud group in China. This group defrauded a huge amount of money from victims in just 9 months, with the police confirming losses of over 6 million RMB.

The modus operandi of this criminal group is strict and comprehensive, strictly following the four steps of "finding targets, building trust, inducing investment, and defrauding property," and members at different levels receive commissions based on the net inflow of funds.

Finding Targets

Using multiple mobile phones to register and package WeChat accounts, they disguised their WeChat accounts as false identities of investors with certain economic strength according to the company's requirements, and regularly sent materials to maintain the authenticity of the WeChat accounts in their circle of friends.

Through a network system designed by the criminal group, they found customers with economic strength and an intention to invest in stocks, added them as WeChat friends, and then used templates to chat with the victims to cultivate trust.

Building Trust

After establishing trust, they brought the victims into stock trading WeChat groups, where each victim had a unique number and a separate WeChat group.

In the WeChat groups, members of the criminal group impersonated "lecturers," "lecturer assistants," "account opening managers," and investors. The lecturers were responsible for explaining, analyzing stocks, and guiding victims to invest in stocks. The assistants were mainly responsible for adding people to the group and chatting with customers, sending information about the lecturer's live broadcasts. The impersonating investors were mainly responsible for cooperating with the lecturers and assistants, creating an atmosphere, and praising the lecturers, using templates to cultivate trust with the victims.

For customers interested in investing, they were brought into live broadcasts, where the lecturers further guided them in buying and selling stocks and maintaining stickiness, deepening the victims' trust in the lecturers.

Inducing Investment

After about a month of lectures in the live broadcasts, team members used WeChat to cooperate in the live broadcasts, forwarding scripts, giving likes, and sending flowers to praise the lecturers, making the victims trust the lecturers even more. The lecturers would then introduce virtual currency products and promote the value and appreciation space of virtual currency, claiming that they could lead investors to achieve wealth multiplication.

For customers interested in purchasing virtual currency, the account opening manager would send the platform link and invitation code for the virtual currency, guiding customers to download, register, open an account, apply for funds, deposit money, and purchase virtual currency. The customer's funds would enter the personal account controlled by the platform.

Defrauding Property

After the victims deposited money, the virtual currency would continue to rise in the early stages and could be withdrawn, allowing the victims to make a small profit. However, the lecturers in the live broadcasts would claim that the virtual currency would continue to rise for various reasons, and the assistants would bring the victims into different levels of WeChat groups based on the amount of virtual currency they invested, encouraging customers to continue to increase their investments.

When the amount of investment from the victims reached a certain target, the criminal group would manipulate a cliff-like drop in the virtual currency, creating the appearance of the customer's losses, thus achieving the goal of defrauding the victims' property.

In this way, after one round of "harvesting" virtual currency products, the criminal group would change their WeChat nicknames, live broadcast names, lecturer aliases, virtual digital currency names, platform affiliations, and other means, for the next round of "harvesting" in the next round of fraudulent activities. Round after round, the cycle continues.

04 Conclusion

China maintains a conservative attitude towards the trading of virtual currency. The "Notice on Further Preventing and Dealing with the Risks of Speculation in Virtual Currency Trading" issued in 2021 clearly states that virtual currency does not have the same legal status as legal tender; virtual currency-related business activities are illegal financial activities; and losses caused by investing in virtual currency and related derivatives are to be borne by the investors themselves.

However, China's crackdown on virtual currency-related criminal activities is not lenient. Searching for cases related to virtual currency on the China Judgments Online website using "virtual currency" as a keyword shows that in the past two years, there have been criminal judgments on virtual currency-related cases across the country.

Therefore, when investing in blockchain projects, it is essential to first understand the project's issuance method, trading method, market trends, price fluctuations, and other mechanisms. Do not be tempted by small profits and blindly enter the market. If you encounter a virtual currency scam similar to the above, you should collect evidence as soon as possible, organize key evidence materials, and assist the police to reduce the pressure of case investigation and provide investigation efficiency.

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