South Korean Tech CEO Arrested by Seoul Police in $366 Million Crypto Ponzi Case

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As a seasoned analyst with over two decades of experience in financial markets and fraud investigation, I’ve seen my fair share of scams. The MainEthernet pyramid scheme is a stark reminder that no matter how sophisticated or innovative an industry becomes, there will always be unscrupulous individuals looking to exploit it for their own gain.

The growing popularity of cryptocurrency within our community is enticing due to its suggested increase in user adoption. Digital assets enable transactions, investments, and even gambling experiences at crypto casinos, where users can play thrilling casino games with Bitcoin (BTC), Ether (ETH), USDC, BNB, Solana (SOL), and numerous other cryptocurrencies. Yet, some individuals such as Young-oh have taken advantage of the expanding number of applications and usage over time.

The ‘MainEthernet’ Pyramid Scam

As per the latest information, individuals named Young-oh and Yeom allegedly carried out a Ponzi scheme using a service called MainEtherum. On this platform, they enticed investors to deposit Ethereum (ETH) in exchange for returns ranging from 45% to 50%. The company predominantly attracted older investors with the lure of high returns. Some media reports suggest that as many as 12,000 people invested their funds through MainEtherum, with a significant number being aged 60 and above.

Previously, MainEthernet was receiving substantial investments from unsuspecting backers. But suspicions arose among investors when they encountered difficulties withdrawing their funds around the middle of last year. In November, Young-oh met with investors and pledged refunds, stating that he would resolve the issue within four months. However, the promised refunds did not materialize, and investors also observed that the company’s Seoul office no longer displayed its signage.

Young-oh has since denied accusations that he was operating a Ponzi scheme. He said:

” frankly, I’m clueless about Ponzi schemes; similarly, I have no understanding of the structure of multilevel marketing systems.”

As a researcher delving into this case, I’ve come across an interesting development: The Seoul Central District Prosecutors’ Office’s Fifth Criminal Division is planning to bring charges of fraud against both individuals involved.

According to one report, Wacon asserted they would generate these profits via casinos and artificial intelligence (AI). Moreover, the company assured that all deposits would be guaranteed, with 30% of the deposit due on the 40th day. Interestingly, the company employed a multi-level marketing scheme, where investors could potentially earn unlimited referral fees for recruiting new members. However, since June 2023, Wacon has failed to make any capital or interest payments. The report suggests that Wacon continued enlisting new investors until early this year.

Law enforcement in Seoul is also examining SAK-3, the parent company of Wacon, to determine if there’s any link to the alleged fraud. Notably, the chairman of SAK-3, Kim Dae-cheon, is currently detained by police due to a separate fraud case. Similar to Wacon, SAK-3 attracted new subscribers but has failed to deliver interest or principal payments since February last year.

South Korea Crypto Regulation Protecting Users

The Wacon case underscores South Korea’s stance against financial deceit, emphasizing their proactive involvement in regulating the cryptocurrency market. In July, the Protection of Virtual Asset Users (PVAU) was activated, imposing several measures designed to safeguard users within the crypto industry. The PVAU defines virtual assets as digital tokens that hold economic value and can be exchanged or transferred electronically. Notably, this definition does not encompass non-fungible tokens (NFTs), central bank digital currencies (CBDC), or deposit tokens tied to CBDC.

The legislation mandates certain conditions for Virtual Asset Service Providers (VASPs). Among these conditions, they must maintain customer funds in reliable financial institutions such as banks, ensuring a distinction between these deposits and company assets. Additionally, the VASP and bank should enter an agreement for custody services, where the deposited funds are invested in low-risk securities like government bonds. In case of bankruptcy or loss of registration status by the VASP, the bank will directly refund the deposits to customers. To secure customer funds, VASPs must store more than 80% of user deposits in offline wallets (cold storage).

Additionally, Virtual Asset Service Providers (VASPs) should keep a close eye on user transactions to detect any unusual activity or red flags. This is particularly important when prices are volatile or if reports emerge that could potentially influence price movements. If such situations arise, VASPs have the responsibility to halt deposit or withdrawal operations based on “justifiable reasons.” This preventive measure may not only apply to trading platforms but also extend to other services like digital asset-based gambling.

Spot Bitcoin ETFs

In July, Kim Byoung-hwan, nominee for the Financial Services Commission (FSC), expressed caution about corporate cryptocurrency transactions during a parliamentary session. He emphasized that any policy allowing bank accounts for these transactions should prioritize investor protection above all else. Regarding the potential of spot Bitcoin exchange-traded funds (ETFs), Byoung-hwan showed no enthusiasm or interest in the product during this session.

Nonetheless, the Financial Supervisory Service (FSS) governor, Lee Bok-hyun, has said there are ongoing discussions about spot Bitcoin ETF trading in South Korea. The governor suggested he was in favor of the products but specified that opinions from other authorities would be taken into account. The Democratic Party of Korea also indicated its interest in spot BTC ETFs, stating that it will ask the FSC to consider the product. 

South Korea’s Financial Services Commission (FSS) has proposed a 24-hour monitoring system for local cryptocurrency exchanges that keeps an eye on the crypto market for unusual transactions. According to a statement from the FSS, they have integrated the criteria used by the Korea Exchange to detect abnormal transactions with other models and metric indicators. The FSS believes this will help to thoroughly weed out suspicious transactions.

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2024-08-14 19:14