Fraud and pyramid schemes are rampant? Blockchain is not to blame

The case involved 2 million people, with 3,000 pyramid schemes and a huge amount of 40 billion yuan. If calculated based on the current price of Bitcoin, it may reach hundreds of billions of yuan. Such a major case, because it involves Bitcoin and other virtual currencies, has not only attracted more attention, but also made many people doubt Bitcoin and blockchain, a new technology and industry.

I made a comment when the final judgment of PlusToken was announced in November last year. As this case has once again attracted attention from all walks of life, as a lawyer who has paid attention to the field of Bitcoin and blockchain early and handled and intervened in many related cases, I would like to talk about the development of Bitcoin and blockchain and why fraud and pyramid schemes are prevalent in this field.

Satoshi Nakamoto invented Bitcoin in 2008, and the technology used was named blockchain. Bitcoin is not issued by a specific monetary institution, but is generated through a large amount of calculation based on a specific algorithm, and uses cryptographic design to ensure the security of each link of production and circulation.

Bitcoin's "decentralization" and other characteristics quickly attracted a large number of supporters. "Believers" in Bitcoin and future decentralized finance hoard Bitcoin, create virtual currencies similar to Bitcoin, and trade them, forming the so-called "currency circle", including virtual currency trading platforms and virtual currency project parties, as well as investors and speculators. With the skyrocketing prices of virtual currencies such as Bitcoin, the production of virtual currencies such as Bitcoin through "computation" with special equipment is called "mining", and equipment manufacturers and "miners", "mines", etc., constitute the "mining circle". Blockchain technology itself has gradually revealed functions other than virtual currency. The application scenarios it has opened up, such as "value chain" and "credit chain", are considered to be revolutionary new technologies on the Internet. A large number of companies have devoted themselves to the research and development and promotion of blockchain technology, which is called the "chain circle". Because they all use blockchain technology, the above three "circles" have certain overlaps and intersections.

At present, the Chinese government, from the central government to the local governments, is vigorously promoting blockchain technology. On October 24, 2019, the Political Bureau of the CPC Central Committee held a collective study and explicitly required the acceleration of the promotion of blockchain technology and industrial innovation and development. On April 20, 2020, the National Development and Reform Commission officially included "blockchain" in the information infrastructure of the new infrastructure. Public data shows that as of the end of December 2020, there were more than 40 blockchain industrial parks of various types across the country. It can be seen that the "chain circle" represents an important direction for the development of new technologies and is an industry that the government strongly supports.

The Notice on Preventing Bitcoin Risks (Yinfa [2013] No. 289) issued by the People's Bank of China, the Ministry of Industry and Information Technology, the China Banking Regulatory Commission, the China Securities Regulatory Commission, and the China Insurance Regulatory Commission clearly stipulates that Bitcoin does not have the same legal status as currency and cannot and should not be circulated and used as currency in the market. In 2017, the People's Bank of China and seven other ministries and commissions jointly issued the Notice on Preventing Risks in Token Issuance and Financing, which reiterated the above provisions. At the same time, from the perspective of preventing financial risks, it is further proposed that any so-called token financing trading platform shall not engage in the exchange business between legal currency and tokens or "virtual currencies", shall not buy or sell tokens or "virtual currencies" or act as a central counterparty to buy or sell tokens or "virtual currencies", and shall not provide pricing, information intermediary and other services for tokens or "virtual currencies".

However, as a virtual asset, Chinese law shows signs of shifting from passive protection to active protection. Although the aforementioned provisions deny the legal status of "virtual currency" as currency, they do not deny its property attributes as a commodity, and Chinese laws and administrative regulations do not prohibit the holding of Bitcoin. Article 127 of the General Provisions of the Civil Law of the People's Republic of China stipulates: "Where the law has provisions on the protection of data and network virtual property, such provisions shall be followed."

A large number of effective judgments show that virtual currencies such as Bitcoin have the characteristics of value, scarcity, and disposableity, so they have the commodity attributes of virtual property. The law supports individuals to own the property attributes of virtual currencies such as Bitcoin.

This is also the legal basis for the "mining circle" to exist legally in China. In areas with abundant hydropower, Bitcoin mining has even become a pillar industry in some places.

It is not surprising that a large number of illegal fund-raising, financial fraud, pyramid schemes and other illegal and criminal activities have emerged around Bitcoin. On the one hand, blockchain is indeed a revolutionary technology and is developing rapidly. On the other hand, the price of Bitcoin has risen, and there is an obvious wealth effect. The industry is booming, and there is more money, so it is naturally targeted by illegal activities. Just like the early Internet, people used the Internet as a banner to commit fraud and pyramid schemes. Technology itself is neutral. It depends on who uses it and what they do.

In fact, pyramid schemes and other "capital" fraudulent operation modes have long formed a fairly large group. The reason why they are so persistent is that they can always innovate and deceive people in a different way. For example, the central government supports financial innovation, and investment guarantee companies are blooming all over the country. In fact, they are all "Ponzi schemes" that borrow new money to repay old debts. For another example, with the rise of Internet finance, a large number of fictitious projects' "capital" have become the main reason for the collapse of "P2P".

Now that the blockchain and Bitcoin industries are booming, the "capital" model has shifted its position and entered this field. For example, I previously exposed the "Light Cone LCC Coin" which attracts investors with multiple concepts such as film and television shooting, jewelry, and African investment, and uses MLM-style multi-level incentives.

Another example is the PlusToken case. The PlusToken platform claims to have the "smart dog arbitrage" function, that is, to conduct arbitrage transactions on different exchanges at the same time to earn the price difference. But in fact, PlusToken does not actually have this function, and has no actual business activities. It is just another "Ponzi scheme" under the banner of Bitcoin, and is a cancer attached to the emerging industry of blockchain.

As the mainstream of blockchain, the "chain circle" and "coin circle" are gradually breaking the ice and merging with each other. Some companies that make chains are involved in virtual currencies, and some companies that make coins are also involved in blockchain technology. However, mainstream blockchain companies are collectively resisting the "circle" of capital and pyramid schemes.

Now it is clear that blockchain is an industry strongly supported by the state, and it is legal for individuals to own Bitcoin. As for "capital" fraud and pyramid schemes, they are the targets of severe crackdowns under the criminal law. With the strict improvement of the proof standard of the new criminal procedure law, the way of collecting evidence for similar crimes will also be gradually improved.

In general, we believe that we should seize the global opportunities of blockchain technology, catch up with the pace of development of the global blockchain industry, lead the development of this global industry, eliminate the false and retain the true, and contribute positive value to the economy and society.