Xiao Za Team | From Hong Kong's cryptocurrency circle's first "run" in 24 years, how should ordinary people "focus on the truth" and "protect their rights" during a bull market in the cryptocurrency circle?

Author: Xiao Za lawyer With the recent surge of established cryptocurrencies like Bitcoin and Ethereum, most old friends believe that the long-awaited "spring of crypto assets" and "super bull market" have arrived, and they are eager to invest large amounts of money into the crypto asset market in search of opportunities for wealth. At the same time, Sister Za has noticed that due to the enormous halo of Bitcoin, the entire crypto circle, big and small, has also started to see price increases to varying degrees. For those who have been paying attention to crypto assets for a long time, this is originally a good thing, but unfortunately, opportunities are always accompanied by crises. Some criminals have once again turned their attention to the wallets of crypto investors, and their methods of operation are becoming increasingly brutal and swift. On February 23, 2024, a crypto exchange called BitForex, which publicly claimed to be headquartered in Hong Kong, withdrew $57 million from its online crypto asset wallet at lightning speed and directly fled, setting a new record for the "first run" in Hong Kong's crypto asset circle in 2024.

01

How did BitForex deceive and run?

Friends in the crypto circle may be unfamiliar with the name BitForex, but in fact, BitForex is just a rebranded version of the previous "Bifu Network" exchange. For Sister Za's team, which has long focused on and studied crypto asset crimes, BitForex can be considered an "old acquaintance." Even before the team realized BitForex was about to flee, they often used this exchange as a typical case to explain classic criminal methods in crypto asset crime cases, such as "false liquidity traps" and "wash trading." Since around 2019, BitForex has artificially inflated its exchange's liquidity through frequent self-buying and selling with multiple accounts, cross-platform trading, and the circulation of funds in and out. However, in September 2023, it even began to claim that it was "one of the leading cryptocurrency exchanges in terms of market capitalization, with a daily trading volume of approximately $2.6 billion." In reality, the trading data at the exchange level was astonishingly fake. According to a crime research report from the renowned third-party crypto asset crime platform Chainalysis, as early as 2019, BitForex's actual trading data was only about one-eighth of its publicly disclosed data. Even after the shocking 8000% falsification rate was exposed, due to the lack of strong regulatory measures, BitForex was still able to attract a large number of retail investors by frequently listing various small coins and engaging in wash trading. When Sister Za's team pulled the trading data from this exchange, they also noticed that there were clear signs of impending flight: just two days before the run, BitForex's trading data began to plummet sharply, with the trading data on February 22 almost dropping to a "right angle" on the chart, showing extremely abnormal trading data, as if a long-term patient on life support suddenly had their life support removed.

For small-scale exchanges like this, a sharp drop in trading volume usually indicates an imminent run, but what surprised everyone was how quickly this one fled. On February 23, 2024, BitForex withdrew $57 million from its online crypto asset wallet and closed its website, with customer service in the crypto community disappearing without a trace. According to a report by ZachXBT, specifically, BitForex's wallet drained a total of $56.5 million, including $54 million in TRB, $1 million in ETH, and $250,000 in USDC.

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How can ordinary retail investors spot the truth in a chaotic bull market? 1. Stay away from shady exchanges

Stay away from third-rate shady exchanges! This is a phrase Sister Za's team has repeated countless times in various occasions and legal articles, and they have tirelessly worked to spread this ironclad rule to all places related to educating crypto asset investors.

For rational and smart partners, the reasons for avoiding shady exchanges need not be elaborated further. However, as a professional criminal defense team, Sister Za's team still wants to remind everyone based on their case-handling experience: no matter how sophisticated the scam, it can be uncovered; no matter how simple the scam, there are still people who fall for it. Smart people falling into the trap of shady exchanges often stems from overconfidence in their investment skills or being deceived by short-term gains, thus ignoring the essence of the scam. In other words, staying away from shady exchanges also means avoiding the misguided belief in "quick and easy" speculation and inappropriate greed.

2. Learn to use third-party data tools to discern truth from falsehood

For investors, it is crucial to use third-party data tools reasonably and correctly. Properly referencing various data can effectively help investors identify abnormal behaviors of platforms and potential fraudulent trading situations. For example, in the BitForex case, if investors had used third-party tools to check standardized trading data from February 22 to 24, 2024 (incorporating actual traffic on the platform into the algorithm to identify statistical data on whether the platform was manipulating the market), they would have discovered that BitForex's actual trading volume was greatly inflated, with real transactions only amounting to tens of millions of dollars, far less than the publicly stated $2 billion.

Additionally, tools like Dune Analytics and Chainalysis are commonly used by Sister Za's team for on-chain data monitoring and analysis. The virtual asset reports published regularly by various platforms not only have a wide range of data sources but also possess a certain degree of authenticity and objectivity, serving as investment references.

3. Pay attention to personnel changes at exchanges

For crypto asset trading platforms lacking effective regulation, investors especially need to be alert to any significant personnel changes or shareholder changes at the platform in the near term. Based on Sister Za's team's case-handling experience, large-scale or significantly abnormal personnel changes at crypto asset platforms often indicate that the platform may have "changed hands" or altered its normal operating strategy in preparation for fleeing, or may be attempting to achieve a disguised liquidation.

In the case of BitForex, preliminary investigation results from ZachXBT revealed that in January 2024, BitForex's publicly listed CEO Jason Luo suddenly resigned, citing that "a new leadership team will join BitForex to take the exchange to greater heights." Currently, aside from the issue of Jason Luo's resume being fabricated, Sister Za's team has not yet found a causal relationship between his resignation and BitForex's flight with funds, but they still remind everyone to closely monitor such information.

03

How can mainland residents seek justice in Hong Kong after being scammed?

In the case of BitForex, on March 4, 2024, the Hong Kong Securities and Futures Commission (referred to as "Hong Kong SFC") issued a public announcement regarding the alleged fraudulent trading by the crypto exchange BitForex: although BitForex is headquartered in Hong Kong, it does not possess the licenses required by the country's digital asset operator regulatory framework. This indicates that Hong Kong's judicial authorities have jurisdiction over this fraud case. Therefore, if mainland residents suffer significant losses due to BitForex's fraudulent actions, they need to consider using the Hong Kong judicial system to protect their legitimate rights.

Sister Za's team has previously explained that the design of the asset recovery and loss mitigation system for criminal cases in Hong Kong is vastly different from that in mainland China. In short, the laws, judicial interpretations, and administrative regulations in mainland China, such as the Criminal Law and Criminal Procedure Law, require judicial authorities to recover stolen funds and mitigate losses for victims in the process of handling economic criminal cases. Parties involved in criminal cases in mainland China can supervise the asset recovery efforts of judicial authorities but cannot directly participate in related work. In contrast, the jurisdiction of Hong Kong's judicial authorities in handling economic criminal cases is limited to addressing the criminal cases themselves, i.e., determining the facts of the crime and convicting and punishing based on legal provisions, without the responsibility to trace or recover victims' funds. Even if the seized property of the suspect may belong to stolen funds, it cannot be directly returned to the victim without following legal procedures. Therefore, an important avenue for victims to recover stolen assets is to file a civil lawsuit against the suspect in a court with jurisdiction in Hong Kong.

Taking BitForex as an example, mainland residents can currently report the fraud case to the Hong Kong police or the Joint Financial Intelligence Unit (JFIU) through phone calls, online reporting, or physically going to Hong Kong, providing relevant account information and clearly requesting the police to freeze the suspect's relevant bank accounts and crypto asset accounts. Additionally, if the amount of loss is significant and the relevant accounts have not yet been frozen by the police, posing a risk of fund transfer, they can entrust a lawyer to apply for an emergency freezing order from the Hong Kong court to freeze the accounts involved. Of course, to protect their legitimate rights, victims of the BitForex case still need to deposit funds and hire a lawyer to recover the stolen money. From the perspective of the causes of action in such lawsuits (similar to causes of action in mainland China), the main causes of action available include: (1) Fraud; (2) Unjust Enrichment; (3) Constructive or Resulting Trust, etc. Undoubtedly, the possibility of fraud in the BitForex case is extremely high, and the plaintiffs have already been able to provide corresponding evidence to effectively prove BitForex's fraudulent actions. Furthermore, if mainland victims want to file a civil lawsuit against BitForex, some evidence may not be obtainable independently, such as the suspect's bank account, account holder information, bank transfer records, and details of crypto asset wallets. In practice, this part of the evidence is generally provided by the Hong Kong police or the involved banks and crypto asset platforms. If the aforementioned institutions do not provide relevant evidence, it can be obtained through a lawyer applying for a disclosure order from the court.

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In conclusion Sister Za's team reminds everyone to be cautious regarding transactions with offshore crypto trading platforms and not to let short-term interests lead to personal financial losses: remember, you may be eyeing the platform's interest, but the platform may be eyeing your principal. Sister Za's team particularly emphasizes: if related fraud cases occur in Hong Kong or Macau, although the relevant rights protection measures may be cumbersome, there are still avenues for rights protection. However, if the case occurs in other countries or jurisdictions, it may lead to financial losses that cannot ultimately be recovered through judicial procedures. This concludes today's sharing, and we are grateful to our readers!