The cryptocurrency industry has matured by one year, but investors are still way too trusting. With the support of stars and large companies, fraudulent ICO projects still find their victims. DeCenter has collected the most high profile scams and stories of fraudulent projects that took place in 2018.
On December 21, the Seoul Southern District Attorney’s Office indicted three senior members of the South Korean UPbit exchange with fraud, including its founder Song Chi-Hyung. Allegedly, from September to December last year, they carried out fraudulent transactions by using a fake corporate account to create bogus orders worth 254 trillion won ($226.2 billion) to inflate trades and attract more users to the exchange.
UPbit, launched in October 2017 by the largest South Korean messenger Kakao Talk, actually developed quite rapidly. According to data provided by the Coinmarketcap website in January 2018, it was the largest exchange in the world with a daily turnover of $8.38 billion, while Binance and Bithumb respectively took second and third places.
However, UPbit denied the allegations, saying that "the company provided liquidity to the corporate account in order to stabilize trading at the launch stage." UPbit reported that this stage lasted from September 24, 2017, to December 11, 2017, and stressed that the corporate account has no withdrawal function. The exchange stated that it “did not profit and did not trade” during this period, but acknowledged that it had carried out several transactions over the first two months for marketing purposes. According to the exchange, they did not affect the market and made up about 3% of the total trading volume at that time.
And while we hope that one of the largest exchanges will not turn out to be a scam, let us recall the main scams of 2018.
In January, the ICO of the adult content website Fantasy Market attracted particular attention by promising investors the role of porno directors, while the platform token would be used to pay the actors. However, the site was never launched, and a person, who was not related to the project got accused of fraud. Porn entrepreneurs admitted that the so-called CEO Jonathan Lucas, who was described as "a Frenchman living in Las Vegas, who graduated from the Stevens Institute of Technology, New Jersey, with a bachelor's degree in cybercrime and counterterrorism," and, among other things, “teaches karate for free and speaks English a little”, was made up, while his name and the photo for the LinkedIn profile were borrowed from a person who had nothing to do with the project. According to representatives of the project, they considered it “too dangerous to use real names, so they made them up.” The Fantasy Market ICO raised $4.4 million, which it promised to reimburse to the investors. However, today the domain of the site is down, and since January there has been no information about the project (and neither any compensation). At the same time, back in January, one of the investors said that he managed to get a refund, threatening to file police and FBI reports. “Within hours they refunded me ethereum with a dollar amount equal to what I had contributed in early September, but since the coin has more than tripled in value since then, they kept the rest of my contribution, essentially stealing quite a lot of money from me,” said the investor. At the same time, another participant stated that Lucas was actively trading on the exchange. The very same Lucas, on November 14, 2017, even before the publication of this story, wrote in a chat “I’m not in the business of scamming people, or again, I wouldn’t have used my real name for the project” which in the context of later discoveries looks like a mockery.
In late January, another scam ICO ended in a swift and unexpected way. The Benebit project team fled with the investor funds 3 days after the launch of the ICO. According to various estimates, during this time it managed to raise from $2.7 to $4 million. Like Fantasy Market, Benebit used a popular trend among ICO scammers, namely identity theft. The fraud was discovered when someone found out that the photos of the project members were taken from a school website. One of the investors reports a loss of 14 Bitcoins, another speaks of 300 ethers. Benebit announced the creation of a “loyalty cryptocurrency”, and its ICO received a lot of support with more than 9000 subscribers in Telegram and positive ratings in ICO rating agencies. By the time of the exposure, many sites had removed the startup from their lists or changed its rating. As of January 22, the Benebit site no longer existed, as did most of its channels on social networks, with the exception of Telegram, which has not yet been deleted, but has long been spammed. At the same time, Benebit looked legal, was active on Twitter for over a year and gathered a large community. The project was not suspected of fraud, in particular, due to the scale of the advertising campaign, which, according to estimates, cost $500,000.
The LitePay service promised to make the use of Litecoin possible in any business outside of cyberspace and to provide instant withdrawals via ATMs using a Visa card. The project enlisted the support of the Litecoin Foundation, as well as Litecoin founder Charlie Lee, who actively supported the service on his Twitter account. The first sign of trouble came when scheduled launch of LitePay did not take place on February 26th. Then the company referred to “hostile actions against crypto companies by card issuers”. One month later, it became clear that LitePay CEO Kenneth Asare stopped all operations and was preparing to sell the company. He reported this to the Litecoin Foundation after the company approached him, expressing concern about his non transparent policy and the previous AMA session on Reddit. In response, Kenneth asked Litecoin to allocate more funds to support future development of LitePay. But the Litecoin Foundation denied the project further support, because “it was not able to provide a satisfactory picture of what the funds were spent on, and refused to give details about the company or present evidence of its claims.” The Litecoin Foundation apologized for the fact that “they didn’t have a proper examination that would have revealed dubious moments earlier,” and said that they are currently working on “improving their expertise to ensure that this does not happen again.” “Like everyone else, we got too excited about something that was too good to be true and we optimistically overlooked many of the warning signs,” as Charlie Lee wrote in his Twitter, also apologizing for “having hyped up” LitePay.
In January, the Kodak KashMiner miner was presented at the International Consumer Electronics Show (CES) in Las Vegas, which promised an income of $9,000 in two years (or $375 per month). The miners were to be produced and rented under the brand Spotlite, a company licensed to manufacture Kodak LED lamps. Critics accused Kodak of using KashMiner to increase the price of their shares and called the miner "cryptocurrency stupidity under the Kodak brand" because of its unrealistic promises.
Spotlite CEO Halston Mikail reported that the devices would be located at Kodak headquarters in New York because of the cheap electricity from the local power plant. It was reported that hundreds of KashMiners will be delivered soon, and 80 miners were already working. The prepayment for the rent of the miner should have been $3,400.
Six months later, Mikail in an interview with the BBC said that these statements were false. “Although it has been under our CES license, the KashMiner is not a Kodak licensed product. They had never been installed at our headquarters,” said Mikail. He also admitted that the project was never launched, and referred to the SEC, which allegedly prevented the implementation of the plan, by not endorsing the lease of miners. In the same interview with the BBC, Mikail reported that the company plans to launch the miners independently by installing equipment in Iceland.
In January, the news about the launch of the miners appeared almost simultaneously with the start of another Kodak cryptocurrency project “Kodak Coin — cryptocurrencies for photographers” and the Kodak One blockchain platform. Although information on the cancellation of this project has not yet appeared, the ICO, scheduled for January 31, 2018, was initially postponed for "a few weeks" due to the "widespread interest from regulators" and a careful check of investors and the token sale itself for compliance with regulatory requirements, however, the latest launch date for the ICO was 21 May. At the same time, there is still no information on the weather the token sale was successful or not. However, there is news that KodakOne can be facing a lawsuit, as the project is delaying payment to contractors developing the blockchain platform, while by November, company's debt has already exceeded $100,000.
Ifan and Pincoin
The organizers of the two ICOs of Ifan and Pincoin made an exit scam in April. These projects operated in Singapore and Dubai, respectively, however, according to the local edition of Tuoi Tre News, the operator of both projects was Modern Tech company, which was based in Ho Chi Minh. It raised funds for their development as part of the ICO. The owner of the office building where Modern Tech was based told the Viet Bao publication that the company had suspended the rental contract and left the offices in early March, and “no one knows where they are now.”
The websites and marketing materials of both ICOs showed signs of financial pyramids, promising 48% of monthly income and the payback of the initial investment in four months. The bonus program encouraged early investors and promised an 8% reward for attracting new members. It is reported that the concepts used in the promotional materials (for example, the Lamborghini car) also appeals to the idea of rapid enrichment. By promising "risk free activity," Ifan was positioned as a cryptocurrency for the stars and their fans and, according to the organizers, had to "grow every day," as more Vietnamese singers would join the project. The Ifan site is still operational, while the Pincoin site is down.
It is reported that the ICO was organized by seven Vietnamese people who, apparently, held conferences in Hanoi, Ho Chi Minh City and other cities to attract investors. The victims number is around 32,000, the exact amount of damage is unknown. Presumably, the scammers could have raised 15 trillion Vietnamese dongs ($660 million). In April, the investors held a strike in front of the former office of Modern Tech, to which the Vietnamese authorities responded by launching an official investigation. In a conversation with Reuters, the head of the police of Ho Chi Minh then stated that "all cryptocurrencies and crypto transactions in Vietnam are illegal." On April 4, the office of Prime Minister Nguyen Suan Fuk issued a directive that obliges the central bank and the securities regulator to “strengthen control over activities related to Bitcoin and other similar cryptocurrencies.”
The Turkish Turcoin ICO launched in October 2017, was recognized as a pyramid after one of the founders fled the country with investment funds worth 100 million Turkish liras (according to various estimates, this amount reaches 1 billion Turkish liras, or ~ $212 million). 10,000 contributors are affected.
“The first Turkish cryptocurrency” was launched by the Hipper company based in Istanbul, which was founded in 2017 by Mohammed Satiroglu and Sadun Kaya. They claimed that Turcoin would be a “national currency,” even if the government did not accept it. Many Turkish celebrities took part in the advertising campaign, which was also broadcasted on local TV stations. Early investors got rewards in the form of expensive cars. “Some cars were really given out, and others were only part of an elaborate show to convince more people to join the system,” says one of the first investors. Under the pyramid scheme, each participant received additional income from attracting new participants. The company stopped paying dividends in early June and stopped responding to investor calls. Satiroglu, who was a partner of the project and had a 49% stake in Hipper, said that he was “only an intermediary.” “Our company does not have a single dollar in the bank. All the money went to the company Saduna Kaya Cyprus. A lawsuit was filed against Kaya, who owns a 51% stake in Hipper and fled with the money.
Ushering In the New Year Without Scams
In 2018, many cryptocurrency pyramids around the world were rounded up, some of which had existed for several years.
On April 4, Bitcoin entrepreneurs, brothers Amit Bhardwaj and Vivek Bhardwaj were arrested in India. They were charged with fraud and deception of 8,000 investors in the amount of 2,000 crore ($300 million).
The brothers launched and managed several cryptocurrency projects, including the first Indian Bitcoin mining platform GBMiners, as well as the investment scheme GainBitcoin, which was launched in 2013 and was supposedly a pyramid.
The arrest was issued by the Central Bank of India, the Directorate of Law Enforcement and the Cybercrime Division of the Pune City Police Department in response to a formal complaint filed by entrepreneur Parvendra Singh.
On April 18, the police of China arrested the founders of the “nationwide cryptocurrency pyramid” Da Tang Coin (DTC), which allegedly received 86 million yuan ($13 million) from more than 13,000 depositors.
The local edition of Huashang News reported that the fraudulent scheme started on March 28 in the city of Xi'an, and the main suspect is one of the founders of the Hong Kong company DTC Holding named Wives.
During the campaign, the organizers promised investors a return of 80,000 yuan ($13,000) per day with an initial investment of 3 million yuan ($480,000). To make the project look more convincing, a suspected person was hired by a man of supposedly Russian origin as chairman and general manager of the holding to create the image of an international blockchain startup.
The team also promised that the DTC token would be listed on many exchanges, including Shangya, U Coin, and ZB.com, and the chairman of a company named Yevgeny Subbotin described several real life token usage scenarios, including in the retail, hotel and educational sectors . The Xi'an police launched an investigation on April 5 in connection with complaints from project investors.
On April 19, two South Korean businessmen were arrested, attracting about 20 billion won ($20 million) during a fraudulent scheme that has been operating since 2015. The founders promised the participants big profits from Bitcoin investments. According to Yonhap, a judge at the Incheon District Court fined the founders of the pyramid for $15 and $8 million each.
Repeating The Main Things
There are many tips on how to recognize scams in the cryptocurrency market. To show trustworthy investors the possible dangers "in practice", the US Securities and Exchange Commission (SEC) launched its own "fraudulent ICO", the HoweyCoin in May, naming its token after the Howey test used in US securities law. The fact that the ICO is not real became clear only when users clicked the "buy coins" button. And, since this action already means that the investor has been “lured,” then the site shows signs of a fraudulent offer, which HoweyCoin also possesses.
Another lesson was given to the investors by the founder of the startup Savedroid, who raised $50 million on ICO, after which he reported on the website about the project’s closure and published photos from the airport and from the beach with the signature “Thanks guys! Over and out…”. But the very next day, a video appeared on the site, in which the team explained that the project was still working. And the event was only a warning that investors should be more attentive and beware of fraudsters.
All jokes aside, Savedroid is a project for “smart crypto savings” based on artificial intelligence, and progress has already been shown after the ICO. Thus, over the past year, a closed beta version of the application for Android and iOS was launched with an AI algorithm for accumulating Bitcoin, Ether, Bitcoin Cash and Litecoin, and account replenishment via Visa was also activated. The Savedroid Token (SVD) is already trading on HitBTC, IDEX, Tidex, Cobinhood and Bancor.