Chinese Authorities Target 3 Crypto Projects in Pyramid Scheme Probe

Chinese authorities are intensifying scrutiny of cryptocurrency projects suspected of functioning as pyramid schemes, signaling a renewed push against unregulated and potentially fraudulent financial activities in the digital asset space. The Market Supervision Administration of Shiyan City, Hubei Province, has launched an investigation into three projects—“Youke Chuang,” “Shiyi Hui,” and “Ronghui Capital”—allegedly operating through overseas platforms and multi-level referral models that mimic pyramid structures. These activities contravene China’s strict regulations prohibiting intermediary services for virtual currency trading [1].

The investigation highlights the government’s continued enforcement of a 2021 directive that banned domestic crypto transactions and services. Authorities have issued a public risk warning, emphasizing that participation in such projects cannot guarantee the safety of funds. A statement from the Shiyan City administration reiterated that “all forms of intermediary services for trading virtual currencies are strictly prohibited under Chinese law.” Similar warnings in the past have temporarily disrupted illegal operations but have not led to broader market instability [1].

The referral-based models under scrutiny involve promises of high returns to attract new members, a structure often associated with financial fraud. These projects are accused of exploiting the lack of transparency in decentralized finance (DeFi) ecosystems, leveraging overseas infrastructure to circumvent domestic regulatory constraints. Despite the ongoing probe, no public statements have been made by the leadership of the targeted projects [1].

This latest move is part of a broader regulatory crackdown that has intensified since 2022. Chinese authorities have arrested over 1,200 individuals for involvement in illegal crypto activities, significantly curbing regional operations. The Shidian County case, in which a group used online platforms to accumulate over RMB 210 million in alleged pyramid scheme funds, resulted in a four-year prison sentence for key participants, illustrating the legal risks for those involved in such schemes [1].

Analysts suggest that while these local actions may tighten domestic compliance, they are unlikely to have a significant impact on the global cryptocurrency market. The Coincu research team anticipates continued regulatory measures aimed at restricting unauthorized operations while allowing legal practices to persist. However, these actions primarily address domestic concerns rather than influencing global market dynamics [1].

Cross-border enforcement efforts are also gaining momentum, with Indian authorities recently tracing cryptocurrency transactions linked to fraudsters operating in China. These developments underscore the growing challenge of tracking illicit finance through digital assets, especially in cases involving decentralized platforms and jurisdictional complexities [3].

Regulators are increasingly employing digital forensics to dismantle such schemes. The Shidian County case relied on digital tracing to establish the fraudulent nature of the operations, reflecting a more sophisticated approach to enforcement. This method is particularly relevant in the absence of a comprehensive national legal framework for cryptocurrency regulation [1].

The regulatory stance in China remains firm against speculative and unregulated crypto activities. While this has led to the decline of major exchanges within the country, it has not fully eliminated the emergence of illicit operations. The latest investigations underscore a continued focus on protecting investors and maintaining financial stability amid the growing popularity of digital assets [1].

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[1] MEXC – Issuing a coin and withdrawing a pool = a 4-year prison sentence... https://www.mexc.com/news/issuing-a-coin-and-withdrawing-a-pool-a-4-year-prison-sentence-a-complete-analysis-of-the-minefield-of-crypto/64362

[3] The Economic Times – Five members of cyberfraud gang held, Rs 42-lakh money trail unearthed https://m.economictimes.com/news/india/five-members-of-cyberfraud-gang-held-rs-42-lakh-money-trail-unearthed/articleshow/123187964.cms