China Cracks Down on $1.5 Billion Virtual Currency Pyramid Scheme

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People’s Daily, the most popular newspaper in circulation in China, has recently published a story about a virtual currency pyramid scheme, named EGD. The pyramid scheme involved over 500.000 members, and 1.09 billion Chinese yuan ($1.5 billion). EGD even had a clone named Wanfubi, with over 120.000 registered members, and 1.2 billion yuan ($173 million) involved. At the end of the operation, 77 suspects were arrested, and $121 million were frozen.

The pyramid scheme was first discovered by the Xuzhou Department of Public Security (DPS) back in March, 2016. The scheme was launched back in August 2014, by Pei and Wang, a couple that registered a large number of companies in Guangdong and Shenzhen, in order to legally cover up the pyramid scheme.

The Pyramid Scheme

EGD was composed of 3 main platforms, 12 recruitment platform that gathered new members, an online exchange to trade EGD-Super (ES), and an e-commerce website where members could trade their “future vouchers”, a form of virtual currency, for commodities.

The recruitment sites were administered by Pei, a self-proclaimed “king”. The recruitment websites were deemed “cities” and the administrator of each “city” was the “mayor”. EGD’s goal was to create a free world based on a business model that one benefit all those involved. To spread the word, Pei and all his “mayors” spammed the internet.

Once members signed up on one of the recruitment websites, they were able to purchase coupons for 10.000 yuan ($1.440), which would reportedly then be turned to 12.000 ($1.730). For the purchase, members also got EGD-Super loyalty bonus point. Members were hierarchized in 4 levels, composed of 20 layers.

To incentivize new members, an instant refund process was adopted, in which new members got a protein of their money back as soon as they invested it, thanks to the use of a third-party payment platform.

Victims were promised their money back within 20 weeks, with more profit coming in if they recruited more members. The recruitment hierarchy wasn’t disclosed, but it is known members got trapped in a cycle where they had to find new members.

Damage Done

By the time the EGD pyramid scheme was taken down, it already had over 500.000 members. The group managed to grow without getting caught thanks to a legal loophole. EGD’s leading group changed its headquarters to Hong Kong in July, 2015, and deployed its servers in the USA. By doing this, it managed to remotely control its platforms.

Since members weren’t trading money, but their own form of virtual currency masked as loyalty points, they managed to get away with everything. In China, there are no regulations regarding loyalty points transactions. Loyalty points have been adopted throughout the country in recent years, but usually they cannot be converted into fiat currencies or commodities.

Chen Lei, an official at the Xuzhou Department of Public Security, said in a translated statement:

The online shop feature is quite deceiving; people were convinced that they were funding some sort of e-commerce project.” Many victims were unable to tell the difference and still believed that they were participants of a new business model instead of a pyramid scheme.

Image from Shutterstock.

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Francisco is a cryptocurrency writer who's in love with technology and focuses on helping people see the value digital currencies have. Twitter: https://twitter.com/FranciscoMemor