Chinese cryptocurrency mining firm charged with running pyramid scheme, as Beijing maintains tight grip on virtual assets

Four executives at Filecoin mining firm Shenzhen Shikongyun Technology were slapped with criminal charges in Guangxi for running a pyramid scheme
Enticed with high returns, nearly 100,000 people signed up with the firm’s scheme, which raked in more than US$83 million, local prosecutors said

Digital currencies

Xinmei Shen

Published: 8:00pm, 16 Aug 2023

Why you can trust SCMP

As Hong Kong steps up efforts to become a virtual-assets hub, mainland China remains steadfast in its crackdown on cryptocurrency-related activities, with local authorities recently prosecuting one of the country’s largest Filecoin miners for running a pyramid scheme.

Prosecutors in Pingnan country, in the southern autonomous region of Guangxi, have slapped four executives at Filecoin mining firm Shenzhen Shikongyun Technology with criminal charges that include organising and leading a pyramid scheme involving more than 600 million yuan (US$83 million).

Shikongyun had “exaggerated” the economic model and investment potential of the distributed storage technology for its Filecoin project, according to local prosecutors in a blog post published by Pingnan court after a recent hearing of the case.

The firm allegedly signed up nearly 100,000 members on its platform from February 2021 to May last year, raking in 606.9 million yuan and nearly 32 million Tether (USDT) tokens – a stablecoin pegged in a 1:1 ratio with the US dollar – in the process.

06:54

Is cryptocurrency too risky for China?

Prosecutors alleged that Shikongyun demanded members to either buy or lease its mining equipment. These members also received returns from developing new participants to the company’s scheme.

The firm defrauded people of money by enticing them with high returns, which prosecutors described as a serious criminal offence that disrupts the social and economic order.

The charges levelled against the four Shikongyun executives underscore mainland China’s continued regulatory hostility towards cryptocurrencies since the country banned financial transactions of bitcoin and other digital tokens in 2018.

Their prosecution comes years after the State Council, the Chinese government’s cabinet, announced a crackdown on cryptocurrency mining in May 2021.

China’s crackdown pushes cryptocurrency miner to flee for Singapore

Filecoin is a cryptocurrency running on a decentralised storage network that rewards storage providers with the token. It was launched in 2017 by Protocol Labs, creator of the decentralised file-sharing network Interplanetary File System (IPFS), a Web3 technology that has an active following in mainland China.

Some people in the country also use IPFS to share illicit files such as banned books.

Shikongyun was not the first Filecoin miner to run afoul of Chinese authorities amid Beijing’s intense scrutiny of cryptocurrency-related activities

In December 2021, executives of Filecoin mining and storage services provider RRMine were reportedly taken away for investigation by police in Chengdu, capital of southwestern Sichuan province. In September last year, the firm said that it had relocated its headquarters to Singapore owing to “tightened restrictions on cryptocurrency usage in the mainland”.

Scope of China’s crypto crimes exposes capital-control loopholes

Chinese authorities have also remained vigilant on crypto-related crime.

Police in northern Shanxi province last month arrested 21 people for laundering 380 million yuan using the USD stablecoin. In September last year, police in the northern Chinese region of Inner Mongolia arrested 63 people for laundering 12 billion yuan via USDT.

Those cases highlight how use of cryptocurrencies persists in the country, despite Beijing’s ban. Bankruptcy filings of the collapsed exchange FTX showed that 8 per cent of its customers were based in China. The mainland also ranked 10th in blockchain research firm Chainalysis’ 2022 Global Crypto Adoption Index, up from 13th place in 2021.

The People’s Bank of China, along with nine other government bureaus and regulators, in September 2021 jointly declared that all cryptocurrency trading in the country was illegal. They asserted that this trade disrupts economic and financial order and is a breeding ground for criminal activity.

Cryptocurrency is property in Hong Kong, court rules for the first time

Beijing, however, has given Hong Kong authorities the go-ahead to develop the city into a crypto hub.

After initiating a major push last October to embrace the virtual-assets sector, Hong Kong has subsequently laid out rules for retail trading on centralised crypto exchanges.

Earlier this month, local crypto firms HashKey Group and OSL received approval from regulators to operate Hong Kong’s first licensed cryptocurrency exchanges for retail investors.