Investors lose millions as crypto schemes operate unchecked in Australia | Australia news

Thousands of investors have lost millions of dollars in crypto investment schemes that have escaped regulator warnings in Australia, despite financial authorities overseas warning two of the schemes were a possible “scam” and “suspected pyramid scheme”, a Guardian Australia investigation has found.

The schemes have operated under various names including HyperFund and HyperVerse.

They were established by Sam Lee – once dubbed “the crown prince of bitcoin” in Australia – and Zijing “Ryan” Xu, who has promoted himself as “one of China’s four bitcoin kings”. The pair are two of the founders of the collapsed Australian bitcoin company Blockchain Global.

Blockchain Global was put into administration in 2021 and owes creditors $58m.

In October the liquidator for Blockchain Global said in a publicly available report that last year he had referred Lee and Xu to the Australian Securities and Investments Commission (Asic) alleging that they “may have contravened” the Corporations Act.

The liquidator’s report makes a number of allegations about the running of the business by former directors and key personnel and states that he has been unable to progress his own examination of Lee and Xu as they now reside overseas and he “was unable to effect service of the summonses on them”. Asic said it does not intend to take any further action at this time.

Guardian Australia can reveal that, separately to Blockchain Global, Lee and Xu have promoted a series of crypto investment schemes since 2018, many of which appear to have since failed, leaving investors unable to withdraw funds.

The failure of the schemes – which has led to thousands of people globally losing their deposits – has raised concern in Australia about the regulator’s role in warning investors about high risk, unregulated investment schemes and possible scams.

The director of RMIT’s Blockchain Innovation Hub (unrelated to Lee and Xu’s blockchain ventures), Chris Berg, said there had been a proliferation of crypto-based schemes during the pandemic and the regulators often lacked the technical expertise to respond quickly.

“There’s a pretty substantial skill shortage in crypto knowledge in many of our regulators and that does create problems [around]… how to regulate them in due course and also, how can we identify … [possible] scams,” he told Guardian Australia.

“What’s needed is not necessarily greater education about crypto, it’s greater education about the nature of scams generally and what it would look like if someone was trying to scam you.”

Lee and Xu did not respond to questions from Guardian Australia but Lee has previously denied the HyperVerse scheme is a scam.

International warnings

The operation of a range of Lee and Xu’s investment platforms, mostly under the HyperTech group established in 2020, has prompted consumer warnings from financial watchdogs in the UK, New Zealand, Canada, Germany and Hungary, among others. Prior to HyperTech’s establishment, Lee and Xu ran HyperCapital, which was launched in 2018.

In August 2022 the Hungarian central bank released a public statement warning consumers to exercise due diligence before investing in the HyperVerse and (previously) HyperFund schemes, comparing the system underpinning them to a “suspected pyramid scheme”, “behind which there is no real economic activity, the only income of the system is the payments of new entrants”.

It further warned that “there is a significant chance that investors may permanently lose part or all of their invested capital.”

Asic has so far made no mention of the HyperTech group schemes.

In a statement to Guardian Australia, Asic said it discloses “general information on its website regarding the risks of engaging with unlicensed organisations offering unregulated products”.

“In relation to the issuing of warnings, actions by different regulators in different jurisdictions will depend on the evidence of activities occurring in that jurisdiction and the legislation available.”

A September 2021 public warning from New Zealand’s Financial Market Authority stated: “The FMA are concerned HyperFund may be operating a scam.”

“HyperFund operates on a Multi-Level Marketing (MLM) model and claims to offer passive investment opportunities. We have received reports of them recruiting affiliate investors in New Zealand. It is not registered or licensed to provide financial services/products in New Zealand.”

In addition to the HyperTech schemes, Lee has been involved in the promotion of further apparent investment platforms, including StableDao, VidiLook, VAV, V.E.N.D, and We Are All Satoshi. StableDao and We Are All Satoshi remain active, while as recently as August this year Lee was promoting a relaunch of the Hyper brand through a scheme called Hyper Ascension. It is unknown if Xu is involved in these other investment schemes promoted by Lee.

In September, California’s Commissioner of Financial Protection and Innovation issued a “desist and refrain order” to Lee for the operation of the We Are All Satoshi investment platform, alleging it was a “fraudulent pyramid and Ponzi scheme”.

The commissioner alleged the We Are All Satoshi scheme “does not sell or purport to sell any actual product and has no apparent source of revenue other than funds received from investors”.

It named Lee as the “founder, CEO and chairman” of We Are All Satoshi and alleged he was targeting investors in the state, breaching multiple provisions of the state’s corporations code and ordering him to stop “until the qualification requirements” under California law were met. Xu is not named in the order and there is no suggestion of wrongdoing by him in this regard.

Lee relocated to Dubai in 2021. The whereabouts of Xu is unknown.

‘Give me 2%’

The model used by We Are All Satoshi appears to be similar to that used by the earlier investment offerings, with subscription packages sold to “members” with the promise of high daily returns.

HyperVerse claimed that because it was a membership-based product it did not qualify as an investment product requiring financial regulator oversight. However, this is not the view of the financial authorities where HyperVerse has been most active.

Investors in the Hyper group of investment schemes were asked to pay in cryptocurrency for subscription packages, with rewards accumulating in so-called “hyper units” at a daily rate of 0.5%. Similar to traditional pyramid schemes, members were also incentivised to recruit new members. Investors were trained to build their “trees” and build a “community”, with people moving up a ranking system based on the number of people they brought into the scheme.

While initial investors were able to cash out their hyper units, convert to other cryptocurrencies, or withdraw funds, many later investors say they have lost their money.

Zoom meetings run by Lee and online chat groups linked to HyperFund and HyperVerse are inundated with investors who say they have lost funds, demanding to know when they will be able to make withdrawals.

Those running the schemes have also attempted to “migrate” investors from one platform to another, requiring the injection of further funds into the new platform. This was called “bridging” and was used to reassure investors that they would still be able to access their funds.

In a Zoom meeting with Hyper community leaders who had risen up the ranks based on how many people they had recruited, Lee said that at its peak, the “Hyper community” numbered two million members globally. This number cannot be verified.

Lee told the August meeting that he wants to grow the next iteration of Hyper to “a billion people in three years”.

“And if you think, “Well, Sam, you’re just doing it for the money’ – yeah I’ll do it for the money, just give me 2% of whatever is built; you guys could have the other 98%.”

“And if you think 2% is too greedy then go find someone else that is less greedy that is ready to help move this community forward.”

In other Zoom meetings, Lee has blamed the inability to withdraw funds on a “corporate” team, saying he has been left to try to find a solution. He has also said he was responsible for providing the technology to run the schemes, and was involved in the “funds management” side of the business, but not the affiliate marketing side.

In a heated question-and-answer forum with community members held in January this year, Lee was asked how things had gone wrong with HyperVerse. There were repeated demands for people to be paid back their lost money.

Lee claimed that he had been “caught off guard” by people’s inability to withdraw funds, but said he was unable to explain what had happened because he was constrained by a non-disclosure agreement with “corporate”.

“I thought there was plenty of money to go around but that unfortunately for whatever reason that did not reach membership,” Lee said.

“I don’t understand why membership is not being paid out, you know that’s a big question mark for me.”

When asked why withdrawals had stopped, Lee said he “did not have visibility”.

“I’m here because something went wrong, and … just saying it’s wrong is an understatement, it’s gone terribly wrong, but you know I’m here to face the music, I’m here to deal with this.”

In the meeting, Lee encourages people to “rebuild your tree” in a new scheme, which he suggests he can then promote to other companies.

Guardian Australia has spoken to 10 investors who say they have lost funds in the various Hyper schemes, including two investors who say they lost more than $100,000.

Major losses to crypto-based schemes

Data from the ACCC shows that Australian investors have reported losing more than $350m to crypto-based investment schemes since 2020 across more than 7000 individual reports. The actual amount lost is likely far higher, with ACCC research suggesting just 13% of losses are reported to Scamwatch.

Danny De Hek, a New Zealand-based YouTuber who has been labelled the “crypto Ponzi scheme avenger” by the New York Times, has been tracking the investment schemes of Lee and Xu for the past two years.

De Hek said he believed that the schemes run by Lee, and other similar schemes, had run largely unchecked by regulators, and more needed to be done to hold them to account.

“I feel like I am fighting a losing battle … There needs to be a law change so that we can flag these people, that is what needs to happen.”

An Asic spokesperson said it had been “very active in warning consumers about the risks associated with crypto assets (as an investment product) and separately, crypto scams”, highlighting several media releases and reports. The spokesperson was speaking generally and did not cite examples.

If Lee’s claim that the community numbered as many as two million people is true, then the schemes’ value would amount to at least USD$450m, based on the minimum investment of USD$300.

However, based on investment numbers boasted by senior leaders of the HyperVerse team, the amount potentially lost could run into the billions.

A report from US-based blockchain analysts Chainalysis estimates consumer losses to HyperVerse in 2022 amounted to USD$1.3bn.

Lee has been directly asked if HyperVerse is a scam.

“No, because if it was a scam, the website would be offline and I wouldn’t be even wasting my time trying to get the information from the community in order to hold corporate accountable,” he said in a February 2023 meeting with investors.

He also tells people they need to be patient if they want to get their money back, and urges them to sign up to a new platform, known as StableDao.

According to the internet archive, the HyperVerse website became inactive sometime between April and November this year.

Guardian Australia put questions to Lee and Xu prior to publication but did not receive a response.