Crypto boiler rooms employ high-tech front running strategy

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Crypto boiler rooms employ high-tech front running strategy

Published: 29 Apr. 2021, 20:21

A passerby looks at prices of cryptocurrencies including bitcoin on a digital signboard operated by a local cryptocurrency exchange, Bithumb, in Gangnam District, southern Seoul, on Thursday. [YONHAP]

While the cryptocurrency market is booming, many punters are losing money after paying for advice from financial flimflam artists.

A 30-year-old office worker in Seoul recently joined an online chat room that offers tips on investment in alternative coins, cryptocurrencies other than bitcoin. He followed the tips and lost 500,000 won ($451) in just a few hours.

He complained to the chat room operators, but they shifted the blame to him saying that “actual decisions on buying or selling are all about the investor’s personal choice.”

“The losses were not that big, but I feel bad,” he said.

Some advisors, who are said to be competent investment experts, draw retail investors to join online chat rooms claiming that they can offer tips on cryptocurrencies they should buy. The strategies used by the advisors are said to be refined and highly targeted.

The advisors promote themselves through social media channels, such as Facebook, KakaoTalk and Telegram. They "guarantee retail investors 100 percent gains in a day” and “offer a full refund” if what they are doing is “illegal."

The advisors give retail investors a link connecting to online chat rooms. In the chatrooms, which are run for free, advisors offer a list of cryptocurrencies that they recommend investors to buy. They also offer hints as to the exact time when to buy or sell in order to maximize the gains. Thorough analysis about certain altcoins is also included.

But the information given to the investors in the free online chat rooms was already given to people in a private chat room, which requires a fee to enter. As soon as the prices of altcoins surge as lots of investors in the free chat rooms purchase them, that is the time when the advisors tell the paid customers to sell their coins.

Messages at an online chat room recommending investors to buy certain altcoins. [SCREEN CAPTURE]

Then the operators convince the investors who are still in the free chat rooms to pay money to be invited into the private chat room by telling them the information given to those rooms is more accurate and reliable that they can expect higher returns.

Regarding the losses of people in the free chat rooms, operators tell them to "wait longer" or shift blame to investors.

Investors have little recourse as these boiler rooms fall between the regulatory cracks.

Korea's Financial Investment Services and Capital Markets Act requires a person who intends to engage in the business of providing advice on investment in financial investment instruments or the value of financial investment instruments to file a document with Financial Services Commission (FSC). So anyone who wishes to run online chat rooms that offer investors tips on stock investment must register.

But in the case of cryptocurrencies, people are not required to file any documents. It’s impossible to know the exact number of the people who have been running these businesses or monitor their wrongdoings.

“Altcoins are currently not the subject to the Financial Investment Services and Capital Markets Act,” said Han Suh-hee, an attorney with Barunlaw. “The actions of rigging the market can possibly be considered as fraud, but it would be really difficult to prove the fact that investors have been damaged.”

Cryptocurrency exchanges are making some efforts.

Upbit, one of the largest cryptocurrency exchanges in Korea, on April 27 established a separate channel that allows customers to report about unscrupulous online chat rooms and market rigging. Customers can report their cases by visiting communication center section on the Upbit website or its app.

“As we have been receiving many tip-offs from customers about some people who have been taking advantage of investors by encouraging them to purchase certain cryptocurrencies, we have introduced a way for victims to report their cases,” said a spokesperson at Upbit. “We are planning to take immediate action against people as soon as their wrongdoings are confirmed such as banning them to use our service.”

But experts say some legal measures are urgently needed as the cryptocurrency market has been growing at a rapid pace.

“It’s nearly impossible for the financial authorities to catch all the wrongdoings and prevent the incidents in advance,” said Hong Ki-hoon, business professor at Hongik University. “The country should improve the related regulations so that the victims can make immediate reports about damages, as well as punish the wrongdoings.”

Han agrees.

“As the cryptocurrency market grew so quickly in a short time, regulations are imperfect at the moment,” said Han. “It’s essential to find a balance between imposing regulations to protect investors and preventing the regulations from killing the growing industry.”

BY YOUN SANG-UN, CHEA SARAH [chea.sarah@joongang.co.kr]