Hong Kong authorities arrest five in suspected MyCoin bitcoin exchange Ponzi scheme

By Michael Carney , written on March 6, 2015

From The News Desk

Less than a month after Hong Kong bitcoin exchange MyCoin was exposed as a likely multi-million dollar Ponzi scheme, arrests are beginning to flow in.

Hong Kong police have yet to apprehend the masterminds behind this massive scam, but they have arrested five lower-level participants who allegedly did much of the street-level fundraising and fraud. The South China Morning Post writes:

“One of the women was picked up when officers boarded a casino ship anchored off North Point yesterday morning. Police caught the other four at their homes in Yuen Long, Tin Shui Wai, Wong Tai Sin and North Point."
Initial reports indicated that the fraud might have cost investors as much as $386 million, but it now seems that overinflated figure was based on the exchange’s own public statements about how much money it had raised. Hong Kong's Commercial Crime Bureau is now placing the figure at a still-terrible, but nevertheless more-modest $8.1 million, based on conversations with the several dozen victims identified to date.

Judging by the scale of the fundraising operation and the online chatter about the fraud, this loss figure seems low, unless many people managed to get their money out before the plug was pulled. For example, an earlier report in the Morning Post quotes a woman who claims to have lost $1.3 million, and says that the largest victim was out more than $6.5 million. How this reconciles with a seven figure loss total is unclear.

MyCoin wasn’t selling its backers on opening trading accounts, but rather offered a form of equity investment it described as “bitcoin contracts.” MyCoin promised these individuals it would double their money in just four months, as well as offering Mercedes and other prizes for successfully recruiting fellow participants, leading many victims to mortgage their homes to source funds. Those already in the scam were prohibited from liquidating their investment unless they brought in new investors to replace themselves.

All of this should have raised major red flags, and appears to adds up to a classic Ponzi scheme. Not surprisingly, the victims were everyday citizens, rather than sophisticated bitcoin or crypto enthusiasts.

Hong Kong authorities continue to look for other victims, while also searching for additional individuals responsible for this massive con. Law enforcement have specifically said they want to find former Rich Might Investment director William Dennis Atwood in connection with this case.

As we’ve reported previously, Hong Kong and has seen its share of bitcoin frauds in the past. The founders of the GBL exchange disappeared with $4.1 million in client funds in 2013, after which it was revealed that the so-called Hong Kong exchange was actually operating out of Beijing. Subsequently, Chinese consumers were among the largest group of Mt. Gox users at the time of its multi-hundred-million dollar collapse. Hong Kong has taken a more lax approach to virtual currency regulation than many jurisdictions.

As bitcoin has grown in public awareness, it’s disappointing -- although in no way surprising -- that scammers have viewed the new asset class as a fertile ground. The less investors know about a particular investment category, the more con artists can spin a tale about fantastic returns. This is less an indictment of bitcoin than it is a reflection of human nature. Nevertheless, Bitcoin as an ecosystem will continue to be branded with the mark of these scams. Achieving legitimacy despite these sideshows is certainly possible, but it’s anything but easy.