People’s Daily, the most circulated newspaper in China, published a story on cracking down a virtual currency pyramid scheme under the name of EGD, which involved over 500 thousand members and 10.9 billion RMB. Another EGD clone named “Wanfubi” was also cracked down with 120,000 registered accounts and 1.2 billion RMB involved. A total of 77 suspects were captured and 840 million RMB (121 million USD) was frozen with these two cases.

People’s Daily: EGD pyramid scheme cracked down with 500,000 members and 10.9 billion yuan involved

The pyramid scheme was first detected by Xuzhou Department of Public Security (DPS) in March 2016. Then they tracked down the multi-layer scheme and its operation models.

The EGD Scheme

In August 2014, Pei and Wang, the couple, registered a number of companies in Guangdong and Shenzhen to cover their pyramid schemes with legality. They conjured 3 platforms to form the basic structure of the organization: 12 platforms to recruit registered members, an online exchange for EGD-Super (ES) trading and a global e-commerce site where members can swap their “Future Vouchers” for commodities.

Pei self-proclaimed to be the “King” of the Future World, in which the twelve members-recruiting sites were “Cities” and the leader of each “City” was “Mayor”. The core concept for promotion was to create a world with mutual benefits, to create a new business model and make a free world.

Once the infrastructure was established, the “King” and the 12 “Mayors” started spamming the internet, QQ group, Wechat group with the following information:” Through the 12 official member-recruitment site, every netizen could purchase coupons at the price of 10,000 RMB, which would be lifted to 12,000 RMB later. Free EGD-Super loyalty points will be distributed as bonus. Members may exchange all kinds of commodities with coupons on the E-commerce platform.

Under the fancy camouflage and complicated participation model, members are actually classified into 4 levels and 20 layers. “Static appreciation and Dynamic referral” are the foundation of the pyramid scheme structure. To incentivize the potential members to wire the money, an “instant refund” via third party payment processor was adopted to refund the newly-added member a portion of their money on the same day when the money comes in. By the time when the organization was cracked down, over 500,000 members have been recruited with 10.9 billion RMB capital involved.

To avoid being caught by local police, the leading group switched the headquarter to Hongkong in July 2015. By setting up company in Hongkong and deploying server in USA, the EGD group managed to control the 3 aforementioned platforms remotely.

On the internal operation, training course and auditing session were applied to the core enthusiasts to

By monitoring and controlling of the money flow, the heads managed to transfer around 1.5 billion RMB to overseas accounts.

The minimum investment is 10,000 RMB or its multipliers. For every 10,000 RMB, investors will be given 10,000 Future Vouchers, which could be used to purchase commodities in the online shop, In addition, 10,000 EGD-super loyalty points were credited to the account for free. The ES loyalty points are tradable on the exchange with 2% daily volatility limits.

It sounds legit at first glance. The tradeable ES was a tricky move as the there was no regulatory policy in China for loyalty points transaction. The adoption of loyalty points has already been very common in China. Usually these loyalty points are not fungible and cannot be converted to fiats.

Chen Lei, official of Xuzhou Department of Public Security, said:

The online shop feature is quite deceiving; people were convinced that they were funding some sort of e-commerce project.” Many victims were unable to tell the difference and still believed that they were participants of a new business model instead of a pyramid scheme.

Victims were promised to get their capital paid back in 20 weeks or so and net gains to follow if they recruited more members.The report didn’t disclose more details on the recruitment hierarchy. But most of the time, members found themselves trapped in the circle and they had to find more members to join in.

(to be continued)

In fact, the “investors” would never be able to get the capital back, let alone the high interest that lures them into the scam. As confessed by Dong, the head of EGD Beijing Branch, the fluctuation of ES was under Pei’s total control. Meanwhile, the platforms could be shut down any time they want.

While the EGD “business” flourished, Pei’s old partner,Liu, departed from the organization due to “unfair distribution of interests”. In August 2015, Liu started an EGD clone project named “Tianhe Loyalty” along with Ran, who based in Chongqing. The project claimed to be backed by “the Future City of the United States”.

On 5th March 2016, Liu suddenly abandoned the “Tianhe Loyalty” and started another project named “Wanfubi” with the business model and structure much the same with EGD. On the official site of “Wanfubi”, Liu was crowned with a number of bright titles, like the President of United States Yinzhaoji Fund, the President of Global Future Group, former Deputy Secretary of the State of California, special adviser to two USA presidents, plus some group photos taken with political elites, celebrities.

The camouflage was quite convincing. One month after the launch of “Wanfubi”, the project soon spread to dozens of provinces in China like Jiangsu, Zhejiang and other provinces and cities, involving up to 120,000 members and 1.2 billion RMB.

After investigation, the EGD scam managed to amass a total of 10.9 billion yuan, of which about 8 billion was returned as yields to the early participants, 550 million yuan to exchange goods on the e-commerce platform and the rest, 1.5 billion yuan, was squandered by Pei and other high-level heads.

Since 2015, the Ministry of Public Security has cracked down 2,826 pyramid schemes, many of which took advantage of the blockchain-based cryptocurrency.

On 8btc there is a dedicated subforum for exposing scams adopting the form of blockchain-based cryptocurrencies. One of the EGD post has received over 70,000 views since 2015. Bitcoin fans have a complicated feeling for the pyramid schemes like MMM, EGD etc. On the one hand, such organization did promote the awareness of Bitcoin among the general public. As disclosed by the brochure of EGD, they developed a mobile wallet compatible with BTC. On the other hand, the pyramid schemes crash also bring unexpected volatility to the market, which often incites mainstream criticism.

BTC wallet developed by EGD