Risks and Countermeasures Behind the Prosperity of the Encryption Asset Market

Recently, the prices of mainstream cryptocurrencies have surged significantly, sparking investors' expectations for a "spring of encryption assets" and a "super bull market." However, behind the opportunities often lurk risks. Criminals are setting their sights on cryptocurrency investors, and their methods are becoming increasingly brutal and rapid. This article will take a recent exchange exit scam as an example to discuss how to identify risks and protect one's rights during a prosperous bull market.

The Beginning and End of a Certain Exchange's Runaway Incident

On February 23, 2024, a cryptocurrency exchange claiming to be headquartered in Hong Kong shut down its website after withdrawing $57 million from its online encryption asset wallet at lightning speed, setting a new record for the "first run" in Hong Kong's encryption asset sector in 2024.

The exchange is actually a rebranded version of the previous "Bifu Network". As early as around 2019, the platform artificially inflated the liquidity of its exchange through frequent self-buying and selling with multiple accounts, cross-platform trading, and circulating funds in and out. In September 2023, it even claimed to be "one of the leading cryptocurrency exchanges in global market capitalization, with a daily trading volume of approximately $2.6 billion."

However, according to a research report from a certain third-party encryption asset crime platform, the real trading data of the exchange in 2019 was only about one-eighth of the publicly disclosed data. Despite this, due to a lack of strong regulatory measures, the exchange was still able to continue attracting retail investors by frequently launching various small coins and engaging in wash trading market making.

Two days before the exit scam, the trading data of the exchange began to plummet sharply, with the trading data on February 22 almost dropping to a "right angle" on the chart, indicating extremely abnormal trading data. On February 23, the exchange directly withdrew about 56.5 million USD from its online encryption asset wallet and closed the website, while customer service in the encryption community deleted accounts and disappeared.

How to Identify Risks in a Bull Market

1. Stay away from small-scale exchanges

For rational and smart investors, the reasons to stay away from small-scale exchanges are obvious. However, even advanced investors may overlook the nature of scams due to overconfidence in their investment level or being misled by short-term gains. Therefore, staying away from small-scale exchanges is essentially a way to avoid the superstition of "quick and easy" speculation and inappropriate greed.

2. Make good use of third-party data tools

The reasonable use of third-party data tools is crucial for investors. By referencing various data, investors can effectively identify abnormal behaviors of the platform and potential issues. For example, in this incident, if investors had utilized third-party tools to verify the standardized trading data from February 22 to 24, they would have discovered that the actual trading volume of the exchange was significantly inflated, with the real trading volume being approximately in the tens of millions of dollars, far less than the publicly stated $2 billion.

Some on-chain data monitoring and analysis tools are also important resources that investors can utilize. The virtual asset reports regularly published by these platforms not only have a wide range of data sources but also possess a certain degree of authenticity and objectivity, which can serve as investment references.

3. Pay attention to personnel changes in the exchange

For cryptocurrency trading platforms that lack effective regulation, investors especially need to pay attention to whether there have been significant personnel changes or shareholder changes on the platform recently. According to experience, large-scale or significantly abnormal personnel changes in cryptocurrency platforms often indicate that the platform may have "changed ownership" or altered its normal business strategy in preparation for a run, or is looking to achieve a disguised liquidation.

In this incident, according to preliminary investigations, the exchange's publicly known CEO suddenly resigned in January 2024, citing "a new leadership team will join to take the exchange to greater heights." Although no direct connection between his departure and the running away incident has been found at this time, such information is still worthy of close attention from investors.

Rights Protection Channels for Fraud Cases on Overseas Encryption Trading Platforms

For the cryptocurrency trading platform fraud cases that occurred in Hong Kong, mainland residents can protect their rights through the following channels:

1. Report or accuse to the Hong Kong police or institutions such as the Joint Financial Intelligence Unit (JFIU) and provide relevant account information, requesting the freezing of the related accounts of the suspects.

2. If the loss amount is significant and the related account has not yet been frozen by the police, you can authorize a lawyer to apply for an emergency freezing order from the Hong Kong court.

3. Engaging a lawyer to recover funds lost to fraud can involve various legal grounds, including fraud, unjust enrichment, statutory trust, or constructive trust.

4. If some evidence cannot be obtained independently, relevant information and documents can be obtained by applying for a disclosure order from the court through a lawyer.

It is important to note that there are significant differences between the asset recovery and loss mitigation systems in criminal cases in Hong Kong and those in the mainland. Hong Kong's judicial authorities do not have the responsibility to investigate and recover victims' assets, and victims need to initiate separate civil lawsuits to recover their losses.

Conclusion

For transactions related to offshore encryption trading platforms, investors must exercise caution and avoid damaging their assets due to short-term gains. Although there are still avenues for rights protection in fraud cases that occur in Hong Kong and Macau, if the case happens in other countries or jurisdictions, it may result in asset losses that cannot ultimately be recovered through judicial procedures. In the encryption asset market, rational investment and risk prevention are always the primary principles.