Authorities in the eastern Chinese province of Fujian raided the headquarters of a smart contracts scam that are accused of stealing RMB 100 million ($14 million) since 2019, according to Chinese media reports.

Why it matters: China has been promoting blockchain development since President Xi Jinping’s speech on the significance of the technology in October, but cryptocurrencies are still on uncertain legal ground. Concerns about fraud could discourage moves toward legalization.

  • Incidents like this recall a wave of cryptocurrency scams and scandals, leading regulators to ban cryptocurrency trading.

Details: Chinese media reported that the perpetrators claimed to run a smart contracts business on Telegram which exchanged cryptocurrencies Ethereum, Bitcoin, and Tether for Huobi Tokens (HT). But the HT they returned to their customers were worthless counterfeits.

  • Police were first notified after a customer sent the group RMB 12,000 worth of Ethereum. He realized the exchange was bogus when he tried to use his HT in a different market.
  • The victim reported the Telegram group to local authorities. After a month of investigation, the police tracked down the fraudsters.
  • The authorities discovered that the criminal ring managed several Telegram groups. A total of 13,000 users were in the groups, 10,000 of whom were fake. The scammers had programmed bots to praise the smart contracts service in order to lure victims.
  • Ten people were arrested. The three people police identified as masterminds were recently graduated university classmates.
  • Police seized luxury cars and real estate worth RMB 13 million, including a MacLaren and a Ferrari.
  • Police estimated that the fraudsters scammed 1,300 people.

Context: Scams and Ponzi schemes have plagued the Chinese cryptocurrency sector, and authorities have been tough on the technology as a whole.

  • In 2017, the government banned cryptocurrency exchanges, chasing out homegrown giants Huobi, Binance, and Tron, which set up shop in Hong Kong and Singapore.
  • But thanks to private over-the-counter exchanges, cryptocurrency trading did not die.
  • A July 2019 decision by a Hangzhou Court affirmed the right to own cryptocurrencies.
  • With state-backed ventures like the Blockchain Services Network and the Shenzhen Blockchain Index as well as clearer regulations in blockchain implementation and encryption standards, the industry in China is booming. There are 45,000 blockchain-related companies in China, according to a recent report.

Eliza was TechNode's blockchain and fintech reporter until July 2021, when she moved to CoinDesk to cover crypto in Asia. Get in touch with her via email or Twitter.