Two South Korean individuals, whose names remain anonymous, were arrested this week for running a $30 million cryptocurrency Ponzi scheme in Busan, the second largest city in South Korea behind Seoul.
Ponzi Schemes Have Become a Major Issue
Over the past nine months, the two individuals established an office in Busan without the approval of local authorities and received more than $30 million from 3,787 investors. Local police disclosed that the criminal group was able to coax investors by promising a daily gain of over $4,000 and told existing investors that they could double their profit if more investors can be recruited in the short-term.
The group also told investors that it will launch three cryptocurrency trading platforms in South Korea, the US, and China and that they were searching for 10,000 angel investors to fund their operations. It claimed that investors who have allocated more than $1,300 to the exchanges would receive 70 percent of the revenues generated by the three non-existent exchanges.
The two individuals were sentenced to two years in prison for committing financial fraud and deceiving investors with a company that was not authorized by the government of Busan.
Previously, in an interview with Nathaniel Popper of the New York Times, South Korea’s third-biggest exchange Korbit CEO Tony Lyu stated that the finance and cryptocurrency markets of South Korea primarily move by word of mouth.
“Word just spreads really fast in Korea. Once people are invested, they want everyone else to join the party. There’s been this huge, almost a community movement around this,” Lyu said.
Consequently, the vast majority of investors in the country rely on their connections and people around them to introduce assets, currencies, commodities, and stocks to invest in. The word of mouth-based market of South Korea has made local investors more prone to Ponzi schemes and financial scams.
Since early 2017, local financial authorities and investigators from the Korean Financial Intelligence Unit (KIU) have been investigating into cryptocurrency Ponzi schemes, and the country’s most influential banks including Shinhan Bank have also continued to crack down on Ponzi schemes by analyzing suspicious activities and transactions.
$150 Million Ponzi
In April 2018, South Korean authorities cracked down on a $100 million Ponzi scheme which expanded from South Korea into the Philippines. From 2015 to 2016, the Ponzi scheme generated more than $150 million in profit from 35,000 investors. It deceived investors by selling an untradeable digital asset as bitcoin.
One of the group’s leaders, a 50-year old developer, was sentenced to five years in prison on April 3, by Judge Park Seong-gu.
“The defendant held an executive position within the Ponzi scheme, and the entire organization relied on the software developed by the defendant to defraud investors. As such, the nature of the crime is harmful and immoral, given that the defendant stole large sums of money from a wide range of investors,” the statement of the Judge translated by BTCManager read.
Recently, the Financial Supervisory Service (FSS) of South Korea stated that it had created a task force dedicated to investigate possible scams, ponzi schemes, and suspicious activities within the cryptocurrency market to ensure investors in the public market are protected.