Supervision Upgraded: Chinese Five Ministries and Commissions Warn against Illegal Fund Raising in the Name of Cryptocurrency and Blockchain

On August 24, 2018, the five Chinese ministries and commissions, including CBIRC, issued an alert on illegal fund raising in cryptocurrency and blockchain.

According to China Banking and Insurance Regulatory Commission (CBIRC), Cyberspace Administration of China (CAC), Ministry of Public Security (MPS), People’s Bank of China (PBC) and State Administration for Market Regulation (SAMR), recent crimes in the name of “financial innovation” and “blockchain” have violated the legitimate rights and interests of the public by issuing so-called “virtual currency,” “virtual assets” and “digital assets” to absorb funding. Such activities are not based on blockchain technology, but the illegal fundraising, pyramid selling and fraud in the concept of blockchain.

They have the following features:

• 1. Internet-based and cross-border: These trades are conducted via the Internet or Instant Messaging (IM), and the transaction is completed via online payment. The risk is spread wide and fast. Some criminals construct websites with rented foreign servers, but they actually target and manipulate domestic citizens remotely. Some claim that they have obtained certain amounts of high-quality investment for foreign blockchain projects, and they can invest on your behalf. These kinds of statements are likely to be fraudulent. The funds of these illegal activities mostly flow overseas, so it is difficult to supervise and track down.
• 2. Highly deceptive, confusing and concealing: By hyping up with hot issues, making up all kinds of seemingly advanced theories, advertising through celebrities and big V and seducing the public with “candies”, criminals claim that the currency value will only increase with short investment cycle, high returns and low risks, which is highly deceptive. In practice, they make exorbitant profits by illegal means such as manipulating the so-called price trend of the crypto-currency behind the scenes and setting up thresholds for profits and cash deposit. Besides, some issued tokens in the name of ICO, IFO and IEO or hype crypto-currency by means of IMO in the name of sharing economy, which are highly concealing and confusing.
• 3. Illegal risks: Through public advertisement, criminals lure the public with “static returns” (make profits by hyping the currency) and “dynamic returns” (make profits through offline expansion) to absorb funds and investors. Such activities feature illegal fundraising, pyramid schemes and fraud.

Labeled as “financial innovation,” this kind of activity is essentially a Ponzi scheme, and the capital operation cannot be sustained long. The general public should view blockchain rationally, not blindly believe in the promise of hype, equip themselves with correct monetary and investment mentality and effectively improve their awareness of risks.