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A Crypto Project That Raised $20 Million Is Caught Faking Its Founding Team

A cryptocurrency project that appears to have raised at least $20 million through a referral-based marketing scheme has been advertising false information about its team members, a CoinDesk investigation has found.

Launched on Dec. 2, BHB claims to offer an ethereum-based solution for peer-to-peer lending, but by Jan. 18, local media reports were already accusing the project of operating an illegal pyramid scheme. Now, CoinDesk is able to reveal inconsistencies in the information provided about its founding team that further suggest something may be amiss at the China-based project.

In particular, CoinDesk has found that images said to represent two BHB team members have been lifted from unaffiliated university professors, who are now publicly denying any association with the project.

According to web materials, alleged team members include a financial engineer named Bobby White, a blockchain expert named David Chen and a product designer named Gregory Moss. The respective images of each individual were featured on BHB’s website, bgepay.com. (The project appears to have taken down the website.)

However, the image of Bobby White used in BHB’s marketing materials is identical to that of an economics professor at China’s Tsinghua University named Alexander White. Meanwhile, the image of Gregory Moss is the same as one used by a philosophy professor at The Chinese University of Hong Kong, who is also named Gregory Moss.

In responses to CoinDesk inquiries, both professors denied any association with the scheme and both stated they had no prior knowledge of the BHB project.  

White said:

“Any use of my photo for such purposes, including attached to the name ‘Bobby White,’ is fraudulent.”

Professor Moss, too, said he is very “troubled” by the incident, claiming he never gave BHB permission to use his image or likeness in connection with marketing its products.

CoinDesk was not able to independently verify the image associated with a third alleged team member named David Chen.

Besides false information about its team members, the project listed invalid contact details on its website, including a disconnected phone number and a supposed headquarters at a New York City address that does not exist (“22/121 Apple Street”).

An unusual model

Adding to concerns is the mechanism for how BHB tokens are issued and promoted at a single exchange, XBTC.CX, whose business appears tied to the BHB project.

Investors are not able to mine or receive BHB tokens through programmatic means. They can only buy these tokens using the U.S. dollar-pegged cryptocurrency known as tether or USDT on XBTC or Chinese yuan through XBTC’s over-the-counter WeChat groups.

XBTC.CX, the only exchange that lists BHB tokens, began its offering on Dec. 2, explaining at the time that users who held at least 700 BHB for 24 hours were eligible to get a dividend issued in USDT that would equal 7 percent of their BHB holdings’ market value. On Dec. 5, the exchange announced it would reduce that reward rate to 1.3 percent.

(Some of XBTC’s web pages related to BHB block IP addresses in the U.S. and U.K.)

Further, the same announcement on Dec. 2 said BHB holders could get additional USDT if they recruited other users to the exchange and had them hold BHB in an account.

In this case, XBTC.CX said anyone who could sign up a user that held a balance of at least 700 BHB would be eligible to receive an additional 1.5 percent of the new account’s BHB value in the form of USDT. The offer suggested these USDT payments would then occur daily.  

If the same user managed to sign up yet another account to the exchange, then they could receive an additional 1 percent of the second account’s BHB holdings every day.

Although users do not have to pay a membership fee to their referrers, the project appears to rely on raising capital from new participants so that promised dividends and commissions for existing accounts can be continuously paid out.

This element of the scheme is notable, as it has attracted comparisons to multi-level marketing (MLM) and pyramid schemes, the latter of which is illegal in China.

Dozens of users on Chinese social media Weibo have been posting threads and raising doubts on the legality of the project, alleging it’s just a disguised pyramid scheme because it’s using latecomers’ money to pay for what early participants were promised.

China’s central government enacted a regulation in 2005 strictly prohibiting what it calls Chuanxiao, or “pyramid selling,” in the country. Based on an English translation provided by the law school at Peking University, the regulation defines pyramid selling as follows:

“An organizer or operator seeks for unlawful interests by recruiting persons to participate in pyramid selling, asking the recruiters to persuade others to participate in pyramid selling so as to form a multi-level relationship, and calculating and paying the remuneration (including material awards and other economic interests) to an upper-level promoter on the basis of the sales performance of the promoters below.”

Links to MoCapital

But while the veracity of the advertised team may be in question, WeChat groups have linked both BHB and XBTC.CX to at least one real person – Renbing Li, the 24-year-old founder of the Hangzhou-based venture firm MoCapital.

In a WeChat response to CoinDesk, Li denied allegations BHB is a pyramid scheme and said it’s rather a project to “liberalize communities.” He did not respond to further questions.

The XBTC exchange did not reply to CoinDesk’s email request for comment.

According to photos and video clips from a BHB project gala held on Jan. 25, obtained by BHB users and reviewed by CoinDesk, Li appeared onstage at the Azure Qiantang luxury hotel in Hangzhou where he referred to himself as the founder of BHB.

The gala featured lucky draws meant to reward winners with Rolls-Royce and Bentley luxury cars, as well as 3 million yuan (about $450,000) in cash. Only XBTC.CX users with more than 10,000 BHB and who signed up more than 10 other users to the exchange – each holding more than 700 BHB – were eligible to attend.

And Li’s association with XBTC.CX and BHB is traceable in other ways not tied to the event.

The MoCapital domain is registered by a firm called Moha Technology based in the city of Jinan in China’s Shandong province. According to China’s business registration database, Renbing Li owns Moha Technology. 

The Jan. 25 event at the Hangzhou hotel was also registered under the name of Moha Technology, according to a customer representative of the hotel.

Further investigation shows that Moha has a fully-owned subsidiary in China called Bihang Blockchain based in Hangzhou, which invested in XBTC, according to a verified job post by Bihang on a third-party recruiting agency. 

$20 million raised

However, while some are raising the alarm about the project, others have been cashing in – data from XBTC shows $21 million in BHB is now changing hands daily for USDT.

Following the initial listing, XBTC had been publishing daily updates on dividend payouts, touting how many users had received a dividend each day. On Jan 24, the exchange claimed a total of 25,732 users on the platform received dividends.

With a minimum reward threshold of 700 BHB, the project’s exchange-based referral program would have attracted those 25,000 investors to purchase at least 18 million of the tokens. 

And data from XBTC showed the initial listing price for BHB was about $1.10 on Dec. 2, which later doubled within just a month. Even assuming all the investors bought in during early December, that would put the proceeds at around $20 million.

However, signs suggest that enthusiasm may be slowing.

On Jan. 27, two days after the gala, a major sell-off took place on the exchange, which resulted in BHB dropping from $1.70 to as low as $0.60 within an hour. It then further plunged to $0.20 in the next two days. 

Following that, XBTC said on Jan 28 and Jan 29 that the number of users who received payouts dropped to 19,873 and 17,358, respectively.

To prevent a run on the proverbial bank, the exchange abruptly announced on Jan. 31 it would suspend paying out dividends and freeze all BHB withdrawals during the Chinese new year in early February, and would only reopen withdrawal gradually afterward. 

That note apparently calmed investors, as afterward the price of BHB rose to $2 within just two days. But the exchange has made no updates on the status ever since, regarding further dividends or withdrawal.

Further, while trading for BHB against USDT is still enabled on XBTC, users in BHB’s WeChat groups have been complaining that since early February the project has also frozen BHB investors’ withdrawal requests for USDT.

The project has made no announcements on the issue. Representatives of the project told investors in the WeChat groups that it’s working to resolve the matter by March 6, but did not give further details.

Renbing Li addresses the BHB gala on Jan. 25, image via BHB Wechat group.

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Funds Were Moving From QuadrigaCX Right Before Its Collapse

Nearly $1 million worth of ether (ETH) left QuadrigaCX and went to other cryptocurrency exchanges in December, the same month its CEO died, a CoinDesk review of public blockchain data shows.

In a series of transactions sent from QuadrigaCX’s hot wallet (meaning one connected to the internet), more than 9,000 ETH moved from the embattled Canadian exchange to accounts at Binance, Bitfinex, Kraken and Poloniex (owned by Circle).

The lion’s share – 5,000 ETH – was transferred from Dec. 2 to Dec. 8 – the day before the recorded death in India of QuadrigaCX founder and CEO Gerald Cotten. Most of the ether sent that week (4,550) ended up at Binance.

It is unclear whether it was the exchange itself that initiated these transactions, its customers, or some combination. But the flows of funds have come under scrutiny in the crypto community because of the company’s growing troubles.

Last week, QuadrigaCX went offline and subsequently filed for creditor protection in the Supreme Court of Nova Scotia, saying it owes customers $190 million but cannot find its late founder’s private keys to retrieve crypto held in cold storage.

That followed months of customer complaints about withdrawal delays, both for fiat and crypto. But looking at the ethereum blockchain, it is clear that someone was able to move significant amounts of QuadrigaCX as recently as December. (The company did not respond to a request for comment by press time.)

Besides ether, QuadrigaCX also held several other currencies on behalf of customers and users have been trying to identify its wallets on the bitcoin and litecoin blockchains. But ethereum is perhaps the easiest blockchain to follow the money in this case.

That’s because there is an obvious starting point: address 0x027BEEFcBaD782faF69FAD12DeE97Ed894c68549, labeled as QuadrigaCX’s on the block explorer site Etherscan. (It identifies wallets as belonging to specific companies when they request it, subject to verification.)

The money trail

The trail starts in June 2017, the last time the publicly identified QuadrigaCX wallet was used. It was emptied into two other addresses.

One of the two wallets received 3,000 ETH (around $825,000 at that time) on June 2, 2017. According to Taylor Monahan, founder and CEO of the wallet startup MyCrypto, this wallet is probably a certain user’s deposit account for another exchange, Bitfinex, since funds were regularly put into this wallet from QuadrigaCX addresses and then sent to Bitfinex.

“When you deposit to an exchange, you are given a unique address that is linked to your exchange account,” Monahan explained. “In most exchanges, you send funds to this account, it is automatically recorded in the exchange’s database, that amount shows up on the balances/dashboard of your exchange account, and the funds are moved from your ‘personal deposit address’ to the exchange’s ‘main’ or ‘hot’ wallet.”

The last transaction from this wallet was made on December 3 of last year, sending 1,099 ETH to Bitfinex.

The other wallet that received funds from the original QuadrigaCX address is identified as the exchange’s hot wallet in the court filings (0xB6AaC3b56FF818496B747EA57fCBe42A9aae6218).

Even before that, this address was widely believed to belong to the exchange. It was mentioned in a discussion about long withdrawal waits in a subreddit dedicated to the exchange and in Twitter thread about the problem.

And it is the source of the large transfers that took place in December 2018.

The December transfers

From Dec. 2-7, this wallet sent 4,550 ETH in several large transactions to another wallet which mostly interacted with QuadrigaCX’s addresses. During the same period, the latter wallet sent 4,550 ETH to a now-empty wallet, which most likely is a deposit address for Binance, based on the pattern of usage (funds come in, mostly from the QuadrigaCX-linked address, and then go out to Binance).

However, it’s hard to tell if the wallet sending ETH to the Binance deposit address was controlled by QuadrigaCX or belonged to a client who would send ETH from one exchange to the other. In several instances, funds were sent from this wallet to other addresses.

During the same time, through deposit addresses 177 ETH went to Bitfinex on December 6  and 386 ETH were sent to Kraken on December 8. Overall, during the entire month of December, more than 4,550 ETH were sent from QuadrigaCX to Binance, 2,400 ETH to Poloniex, 1,609 ETH to Bitfinex and 883 ETH to Kraken.

One possible explanation for the large December transfers is that QuadrigaCX sent the funds itself as it needed to convert crypto to fiat to fund its operations. The bank account of the exchange’s payment processor was frozen last year, blocking access to $22 million.

“Whether that is server bills or contractors, at some point you need cash,” said Monahan. “If you have a strained relationship with your banking partners, you may choose to obtain fiat via another mechanism. So it wouldn’t surprise me if an exchange used an [over-the-counter] desk or another exchange in the space in order to move ETH or BTC into fiat and ultimately pay bills.”

However, this explanation only goes so far. Binance and Poloniex weren’t dealing with fiat money at the time of these transactions (Binance launched a fiat-to-crypto exchange in January). So sending to those two exchanges would not have helped with raising operational cash.

As such, the reason for the transfers remains unclear, along with their originators. Binance, Kraken, Poloniex and Bitfinex didn’t respond by press time to CoinDesk’s questions about the deposit addresses listed above.

Cold comfort

Another open question is the degree to which QuadrigaCX kept coins offline, in so-called cold storage, where the private key is not on any device connected to the internet.

In her affidavit filed with the Canadian court, Jennifer Robertson, identified as Cotten’s widow, wrote that the company kept “only a minimal amount of coins” in its hot wallet connected to the internet. In the normal course of business, Cotten “would move the majority of the coins to cold storage,” she wrote, adding that he held “sole responsibility for handling the funds and coins,” and the remaining team members have had no luck accessing the exchange’s cold wallets since.

Observers have been trying unsuccessfully to identify the cold wallets on the blockchain. Monahan said she suspects that the exchange had no cold wallet at all, at least for ether.

“Unless they enacted remarkably different practices in the last year, I would be very surprised to learn of a cold storage ether address based on what I’ve seen so far,” Monahan told CoinDesk. “Almost all of the largest transactions are either sent to exchanges or amongst three ‘primary’ addresses (1, 2, 3). I haven’t seen anything indicating a large reserve or cold storage mechanism being used on the Ethereum chain.”

All told, the analysis of QuadrigaCX’s ether wallets doesn’t look optimistic for the users who have their funds stuck on the exchange, with cryptos bleeding in the direction of other exchanges. 

Kraken CEO Jesse Powell commented on the situation in Twitter, writing that his company has “thousands of wallet addresses known to belong to QuadrigaCX” and the team is now investigating “the bizarre and, frankly, unbelievable story of the founder’s death and lost keys.” He also offered assistance to Canadian police in case they are investigating the situation.

Additional reporting from Nik De.

Ether token image via Shutterstock

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Two Thirds of Korean Crypto Exchanges Fail Government Security Check

Only a third of cryptocurrency exchanges inspected got a full pass in a recent government security audit.

The Ministry of Science and ICT, the Korea Internet & Security Agency and the Ministry of Economy and Finance inspected a total of 21 crypto exchanges from September to December 2018, examining 85 different security aspects.

Notably, only 7 of them – Upbit, Bithumb, Gopax, Korbit, Coinone, Hanbitco, and Huobi Korea – cleared all the tests, CoinDesk Korea reported Thursday.

The remaining 14 exchanges are “vulnerable to hacking attacks at all times because of poor security,” the Ministry of Economy and Finance said, though it didn’t name the platforms. The agencies put down the security failures to “insufficient establishment and management of security system such as basic PC and network security.”

The exchanges were inspected in a review that looked different aspects of administrative, network, system and operational security, as well as database backup and wallet management.

South Korea has lost many millions of dollars in cryptocurrencies through hacks at exchanges such as Coinrail (over $40 million) and Bithumb (over $30 million).

Back in February, the country’s officials said that they believed North Korean hackers were behind the attacks. Indeed, North Korea’s infamous hacking group, Lazarus, has been reported to be behind the theft of $571 million in cryptocurrencies since January 2017, according to a report from cybersecurity vendor Group-IB.

In the wake of the security breaches, South Korea’s Financial Services Commission, in July of last year called on politicians to pass a bill regulating domestic cryptocurrency exchanges with urgency in order to counter lax security in the industry.

Test fail image via Shutterstock 

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Coinbase Gears Up for Biggest-Ever Expansion of Crypto Asset Listings

Coinbase has revamped its policy for listing new cryptocurrencies, replacing an ad hoc process with one the startup hopes will rapidly expand the range of assets traded on its exchange.

Announced Tuesday, the new system allows almost anyone to submit a cryptocurrency through an online form for evaluation under the company’s digital asset framework. Those that meet the criteria may be listed, although not necessarily available right away to all Coinbase customers.

That’s because listings will be added on a jurisdiction-by-jurisdiction basis, rather than supporting all assets globally as Coinbase has done up until now. As a result, some coins won’t be available for Coinbase customers to trade in places where local regulations either expressly forbid them or are unclear about their legality. It’s not unlike Netflix streaming certain movies in one country but not another for copyright reasons.

Previously, there was no formal mechanism to request a listing, and some organizations would reportedly lobby Coinbase to support their assets. As such, the change represents a welcome mat of sorts to crypto development teams from a company whose mainstream popularity potentially offers unparalleled exposure.

“We’re now actively reaching out to asset developers with this,” Coinbase CTO Balaji Srinivasan told CoinDesk. Referring to the creators of the first two digital currencies the company listed, bitcoin and ethereum, he added:

“Satoshi and Vitalik [Buterin] were not Coinbase customers. But all future and current asset creators and developers are. So it’s like we’re becoming a two-sided marketplace.”

In this marketplace, Coinbase will charge an application fee and an additional fee to list approved assets. Srinivasan would not say how much they will be but said they wouldn’t be prohibitive.

Further, the application fee is only meant to deter spam, he said, and the listing fee will cover the cost of due diligence. “We do not want that to be a burden that deters people from listing new assets with us,” Srinivasan said.

In the meantime, Srinivasan confirmed Coinbase is still evaluating cryptocurrencies such as ada, lumens, and zcash, which may be rolled out globally or selectively depending on specific regulatory requirements.

Yet aside from regulatory and technical considerations, the main listing criterion for Coinbase is market demand.

“We want to make sure that our customers are there,” Srinivasan said. The three big questions are “A) is it legally compliant? B) Is it technically secure and innovative? C) Do our customers want it?”

Worldwide compliance

Coinbase may be breaking ground here, as jurisdiction-by jurisdiction asset listings appear to be a rare practice among crypto exchanges.

“It’s actually an approach I’ve been advocating for a long time,” said Stephen Palley, a partner at the Washington, D.C.-based law firm Anderson Kill, who often pokes fun at crypto entrepreneurs’ naivete about legal requirements.

“If you’re Ford or you’re Apple or you’re Google and you want to sell your stuff worldwide, you actually do worldwide compliance,” he said, noting that such brands tend to customize their terms of service for specific countries.

While it’s “a smart play” that minimizes legal risks while allowing a company to engage in selective market testing, Palley added:

“It’s a pain in the ass and it’s expensive.”

Indeed, putting this policy into practice is likely to add a layer of complexity to Coinbase’s operations, as the company will have to make sure that customers are not trading assets that their local regulators don’t allow.

Crypto exchanges have already faced similar challenges in preventing their sites from being accessed in U.S. states where they aren’t licensed to do business.

“While geoblocking may help prevent crypto companies from inadvertently becoming subject to certain rules and regulators, even that precaution may not be enough,” said Justin Steffen, a litigation partner at Jenner & Block LLP. “The New York Attorney General’s recent report on crypto exchanges, for example, noted the lack of exchanges that limit VPN access.”

When asked about this, Srinivasan said Coinbase “will do whatever is necessary to remain compliant with local law. This may mean using [customer identification] details in addition to or as a supplement to IP address. (I.e., enforcing restrictions based on a customer’s country of residence/bank account).”

Unanswered questions

There are still many questions to be answered about how this switch will impact Coinbase users.

For instance, will moving from California to New York mean a customer loses access to assets she purchased on Coinbase? Also, if Coinbase does block VPNs, that could be a turn-off for privacy-conscious users, or, say, Americans traveling to countries like China or Iran with restricted internet service, where “tunneling” is the only way to access regularly visited sites.

Further, a handful of people at the company are responsible for evaluating these assets, and Srinivasan declined to specify what benchmarks they will be expected to hit or how internal policies will prevent insider trading. Accusations related to such alleged conflicts of interest plagued the company in the past when it came to assets such as bitcoin cash and litecoin, the latter of which was created by former Coinbase employee Charlie Lee.

Finally, it remains to be seen how the crypto community will react to the idea of Coinbase charging teams a fee for listing, given that high fees at some exchanges have sparked controversy in the past and charges of “pay to play” practices.

But Marshall Swatt, founder of the institutional crypto asset exchange Swatt Exchange, told CoinDesk that listing fees are a standard part of running an exchange.

“Every major exchange of financial instruments — such as the equities industry — charges listing fees. It is extremely costly for an exchange to onboard a new instrument, and there is no way to avoid that cost,” Swatt said, adding:

“Every new blockchain adds risk to an exchange’s operations. I’m wholly in favor of an exchange charging a listing fee, and I don’t see any ethical or other issues with doing so. Whether they let the market decide the fee, or set a flat fee, or some other reasonable arrangement is completely appropriate.”

Balaji Srinivasan image from Consensus 2018

The leader in blockchain news, CoinDesk is a media outlet that strives for the highest journalistic standards and abides by a strict set of editorial policies. CoinDesk is an independent operating subsidiary of Digital Currency Group, which invests in cryptocurrencies and blockchain startups.

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Binance Offers First Look At Planned Decentralized Crypto Exchange

Cryptocurrency exchange Binance unveiled the platform’s first look at its upcoming decentralized exchange (DEX) on Thursday.

Binance, one of the world’s largest cryptocurrency exchanges by trading volume, announced back in March that it plans to launch a new public blockchain for the purposes of developing the Binance Chain, a platform to transfer and trade different crypto assets without a centralized operator. This week, CEO Changpeng Zhao provided the first demonstration of the Binance Decentralized Exchange and the Binance Chain.

“Today, I have something really exciting to share with you guys. This will be the first demo for the Binance Decentralized Exchange, the Binance Chain,” Zhao told viewers.

Zhao explained that his team of developers is ahead of schedule, saying in the demonstration that “I thought this would happen one to two months later or more but again, the team delivered early.”

While the majority of the demo is footage of a command line terminal voiced over by one of the Binance Chain developers, the various activities depicted outline the basics of issuing, listing and trading crypto assets on the decentralized exchange.

Zhao insists the product remains in “early stage development,” adding that:

“There’s still a ton of work to be done to turn [it] into a final product. The team’s working on it very aggressively. Nevertheless, this is a major milestone for Binance Chain.”

Indeed, other competitors to Binance such as cryptocurrency exchange Huobi announced similar plans in June to fund the creation of an open-sourced blockchain protocol aimed at one day evolving into a standalone decentralized exchange.

And while there are decentralized exchanges currently in existence in the crypto markets, data by analytics firm Alethio reports that most have varying degrees of centralization built into their model.

In fact, sentiment as of late around the security of decentralized exchanges as a whole has taken a hit with one decentralized crypto exchange by the name of Waves being hacked of funds almost immediately after launching from a year-and-half-long beta period.

Changpeng Zhao image via YouTube

The leader in blockchain news, CoinDesk is a media outlet that strives for the highest journalistic standards and abides by a strict set of editorial policies. CoinDesk is an independent operating subsidiary of Digital Currency Group, which invests in cryptocurrencies and blockchain startups.