Ripping off grandma the hi-tech way

It’s been a while since Hong Kong had a big juicy financial rip-off scandal (as opposed to minor day-to-day ones). The last serious case was the Lehmans Minibonds saga of 2008 onwards, in which local retail banks sold derivatives designed for institutional investors to aging and illiterate customers. The investors lost everything when the US investment bank and issuer imploded. The Hong Kong authorities bullied the local banks into compensating the victims, who in the admirable manner of the city’s downtrodden elderly and frail, had embarked on a deafening campaign of moral blackmail, besieging bank branches and banging drums. Banks must now record conversations with clients and make them sign tons of paperwork before letting them near many investment products.

This time it’s Bitcoin. Investors (if that’s the right word) with MyCoin claim to have lost HK$3 billion. The Bitcoin-trading company looked well-organized at first in its marketing activities, but it now seems it was a multi-level, Ponzi-type scam from the start.

Bitcoin is outside the normal financial universe and is not subject to government regulation (our Monetary Authority warned people away and disclaimed any role in overseeing it). It is a virtual or quasi-currency, and the big deal is that it is supposed to be more secure or somehow superior to the paper stuff printed by nasty governments. It is issued following a process that sounds ludicrous: ‘mining’ by solving complex mathematical problems with computers. The problem-solving contributes to the system of authenticating Bitcoin for use in transactions, which take place only on-line.

Bitcoin is not created by any government or backed by anything. This seems to make it trendy and symbolically alluring for members of a sort of cyber-libertarian-chic sub-culture (think teenagers who hero-worship Julian Assange or Edward Snowden a bit too much, style themselves ‘anarcho-capitalist’, and perhaps read Neal Stephenson). Like gold, it also appeals to the skeptical/paranoid who live in fear of ‘fiat’ currency and see the US Dollar as doomed to fizzle away into nothing. In practical terms, Bitcoin is supposedly hidden from the SCMP-3bnBitcoinauthorities, which adds to the anti-state thrill, but also of course makes it a perfect means of exchange for drug dealers and other law-breakers.

The only time I recall seeing Bitcoin potentially in use up close was at Mr Bing, the purveyor of excellent Beijing-style crepes with outlets in Wanchai and Central. It had a Bitcoin ATM, and welcomed payment in the quasi-currency. Mr Bing’s outlets closed down a few months back. The sign in the old Central branch says it is undergoing renovation – as does the sign at MyCoin’s Tsimshatsui office, according to the Standard. This may mean nothing.

We will now see how Hong Kong’s grandmothers and property-mortgagers got roped into MyCoin. We will all be amazed to learn that, along with gullibility, real-estate and insurance agents seem to have played a role. And it is unlikely the government can do anything to arrange compensation. With Lehmans Minibonds, the vendors had broken no law yet still had to pay the penalty; this time, it looks like crooks were at work and have long vanished.

It would be interesting to know whether Bitcoin plays a part in the laundering of Mainland money. And to see what sort of too-late-now action the Hong Kong authorities take in response to the MyCoin affair. Meanwhile, more than ever, I will be waiting for a convincing reason why normal, well-adjusted non-criminals who are not part of the fashionable cyber-hipster milieu will need or want anything to with Bitcoin.



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15 Responses to Ripping off grandma the hi-tech way

  1. NIMBY says:

    The funny thing about many backers of Bitcoin is the morons think using it gives anonymity. If one is performing any transaction on a computer that goes through any internet router, then there is no anonymity from Uncle Sam. It’s just a matter of does Uncle Sam find it worth the effort to dig through all the data.

  2. Real SCMP Commenter says:

    More than that, NIMBY, a bitcoin is by definition a full record of every transaction it has ever been through; it is an algorithmic sum of its transactions (it is this attribute that makes it non-replicable). All you need to do is put a name to (some of) the ‘wallets’ it has touched and voila! It’s far, far more traceable than cash, in that sense.

    I’ve never fully understood why people got so excited about it as being ideal for naughtiness. It’s not. Its cleverness lies in solving the problem of forgery of otherwise easily-copied data, but pretty much ends there.

  3. Knownot says:

    Thank you for the explanation
    Which gave a partial illumination,
    And for the link to CoinDesk, whose incomprehensible guff
    Was well-written, and so persuasive enough.
    I suppose people can more easily be deceived
    If something is too abstract and crazy to be believed.
    If Grandma trusts in ghosts and God,
    A belief in Bitcoin is not so odd.

  4. regislea says:

    There’s a book out in Hong Kong at the moment about the Carrian scandal – The Joker’s Downfall.

    The last chapter summarises what to look out for in a company as signals of a possible fraud – and mentions Bitcoin as a prime candidate on page 277!

  5. pie-chucker says:

    Talking of books, the sentence (27th Feb) of Erwiana’s slave owner currently has
    8 years as 5-2 favourite.

  6. Monkey Reborn says:

    Command hierarchies versus complex adaptive systems with emergent properties people…

    At the risk of sounding like a “cyber-libertarian-chic” anarcho-capitalist, the main advantages of bitcoin (and crypto-currencies) are:

    – no transaction costs for transfer to anywhere with an internet connection, and no intermediaries (which require trust). Learn to code or study the bitcoin protocol, and you can understand the decentralized network method of transaction confirmation (i.e. the block-chain), where transactions are recorded by the entire system – all computers on the network. This is a digital method to prevent counterfeiting or duplication of transactions, and yes it does make every coin ever created traceable through personally non-identifiable “encryption keys” and “addresses”.
    – encryption built-in to the protocol: it doesn’t matter if “Uncle Sam” is watching, it takes around 1-2 months for networks of (non-quantum) computers to break 256 bit encryption (and both the encrypted key string and the encrypted address string is needed). That means that if you put your “coins” into a cold (offline) wallet, and memorize the encryption key, no-one can touch it without your consent, and the coins remain available for the lifetime of the network. This is the main difference vs. traditional digital money systems which are based on hierarchical command networks (e.g. electronic SWIFT + banks + digital local bank accounts) – without your personal consent no-one can touch your digital store of value.

    As for govt monopoly on issuance of fiat currency, backed by the debts of insolvent governments (250%+ vs. GDP in US, Japan, etc), or by “guns” to quote the Nobel Krugmeister, as well as the insanity of fractional reserve money creation etc … I suspect any thoughtful criticism would not be well received on this page.

    Suffice to say the insanity of negative yield curves where you have to pay the state to lend it money (Denmark, Switzerland, Germany short-yields) in nominal terms, or in real terms (almost all US/EU states) … the insanity of monetary keynesianism, where govs digitally print money which is used to indirectly monetize their own debt and support equity market prices, and bail out insolvent banks which deliberately promote market distortions that they directly benefit from (hello US taxpayers now on the hook for 12 trillion (est.) of net exposure to credit derivative risk, thank you obama and dimon – see recent 2014/15 US budget omnibus bill defanging Dodd-Frank not even 7 years after synthetic CDOs wrought havoc … hello Deutsche Bank with leverage ratio of 50:1) … why should i, as a citizen, be responsible for downside risk of derivative bets by banks, while the banks enjoy the entire potential upside benefit (and bank executives enjoy bonuses based on upside)?

    Students of human history can look back and study civilizational collapse, which is *always* preceded by debasement of currency and abuse of the state monopoly on producing currency (roman coin clipping, Weimar Germany, KMT post 1945)… In 20-30 years, global human society will look back on the last 100 years as an insane, ludicrous period of experimentation with unsound debt-based money … the idea of a polis giving away a monopoly on the right to create money to a small group of unelected people without any mechanism of accountability, will seem to us, and our children, to be as insane as the exceptionalism of Nazism, or of the “divine right to rule” of absolute, hereditary monarchy.

    rant over, anyone interested in alternative perspectives I recommend, populated by disaffected investment bankers and economists lol…

  7. Peter says:

    “It’s just a matter of does Uncle Sam find it worth the effort to dig through all the data.”

    Governments are incompetent as hell. If they weren’t, then stuff like the Snowden leaks wouldn’t have happened. Sure the US government is sucking up a ton of data, but sorting through that data is a massive problem and can be like finding a needle in a haystack. All of this data mining has not been very helpful with preventing terrorism nor crime.

    Bitcoin is a joke though, and I hate true believers who do not see any flaws with it.

  8. Scotty Dotty says:

    If Bitcoin is so brilliant why had it not been invented until now.

  9. Monkey Reborn says:

    @ Peter

    There are flaws in bitcoin, such as the exponential relationship between energy used to “mine” new coins and amount of computing power on the network. Some of the other crypto-currencies address this issue to create “energy-neutral” mining systems where computing power has a linear or a neutral relationship with energy usage.

    I believe the development of crypto-currency is really about a dialectic of different ideologies and worldviews, between statism/corporatism and individualism/libertarianism. Given the insanity of the world today (a WAR IS PEACE; IGNORANCE IS STRENGTH kind-of-world), in my opinion any reduction in centralized control and power is of benefit to human society.

    @ SD

    Throughout monetary history there are numerous examples of non-centralized fiat money systems; the US in the 19th century is a very good example where every bank and corporate entity was issuing their own “dollars”. What is different about bitcoin is that rather than a central command entity issuing its own stores of value, a bitcoin network is a self-organizing complex adaptive system (i.e. doesn’t have any leaders), where a wide array of actors interact and create commonly agreed rules and processes. Good metaphors for this kind of phenomenon in nature are eco-systems, the human body, flocks of birds etc, where no single agent has the capability to determine the rules or processes, yet co-operation and symbiosis emerge as natural properties of the system (i.e. emergent properties and behaviors).

    My main complaint with fiat/credit money systems isn’t necessarily the hidden inflation tax, or the rather disingenuous way that taxpayers are tapped to bailout over-leveraged financial entities in the name of “stability”, but more that fiat money facilitates the easy, systematic monetisation of government debt. There is quite a lot of research to substantiate the hypothesis that the main purpose of debt monetisation using a fiat money system is to wage war and practice violence against “enemies”, other human beings who do not share a skin color, an ideology, or a language and culture.

    It is very difficult – in consideration of the facts of our world today – to justify industrialized violence between peoples. No fiat/credit money = no militarized industrial infrastructure = no mass war. A good start for a peaceful planet.

  10. Real Lax Mayor says:

    This farce has about as much to do with Bitcoin as a Nigerian ‘Prince’ does with Royal inheritance. I’m afraid, in this case, the bitcoin story was just a tight-fitting skirt to sex up an otherwise tired and haggard ponzi. The numbers published came from the companies own PR as well so I doubt we’re looking at anywhere near the figures claimed. I do however, have a suspicion many of these jet-set party-goers
    were using it to dry-clean some RMB.

  11. Headache says:

    @pie-chucker, another scam? The maximum available sentence is 7 years, because that’s the extent of the sentencing power of the District Court. Apparently the DOJ is not aiming for anything more than that, despite a statutory maximum of life for GBH with intent, otherwise they’d have taken it to the High Court.

  12. Ricola says:

    Haven’t there been 5 or 6 scandals stemming from the assured security and anonymity of cryptocurrency in the last 18 months alone? Mt.Gox and Bitstamp seemed to me both predictable and hilarious.

    Aside from speculators and drug dealers, can someone explain to me who is still interested in plugging away with Bitcoin, Gliph, HyprKey given the looming storm of misfortune and uncertainty.

    Also – I agree, @regislea – Joker’s Downfall was a masters course in commercial fraud. Very good read


  13. Ultimately what makes money worth something is not gold or government reserves or anything else backing it up, but public confidence in it. So long as people believe in a currency it will continue to function. When they lose confidence and start refusing to accept it (for example because of rampant inflation destroying its value faster than they can spend it, as in Zimbabwe) it will die. As for the Bitcoin shenanigans, according to the TV news, the people claiming to have been cheated have no receipts for their investment. What sort of idiot puts as much as much as a million dollars into something without getting a receipt?

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