South Korean Tech CEO Arrested by Seoul Police in $366 Million Crypto Ponzi Case

The CEO of Wacon, a South Korean tech firm, has been arrested for his role in a large crypto fraud scheme. Local news media report that authorities have taken Byun Young-oh into custody for helping to defraud over 500 people of more than $366 million.

The increasing use of crypto is attractive to members of the community, as it signifies a desired rise in adoption levels. Digital assets facilitate payments, investments, and even crypto casinos, where players can enjoy exciting casino games using Bitcoin (BTC), Ether (ETH), USDC, BNB, Solana (SOL), and several other cryptocurrencies. However, several individuals like Young-oh have exploited the rise in applications and usage over time.

The ‘MainEthernet’ Pyramid Scam

According to reports, Young-oh and an accomplice known as Yeom perpetrated their Ponzi-style scam through a service called MainEthernet. Through the platform, Young-oh and Yeom promised investors between 45% and 50% returns on ETH deposits. The company primarily targeted elderly investors, promising them high returns. Some news stories claim that up to 12,000 people invested funds with MainEthernet, with most of them aged 60 or above.

MainEthernet had been receiving millions from these investors, who did not suspect any foul play. However, investors began to suspect something was amiss when they were unable to withdraw their funds sometime in mid-last year. In November, Young-oh met with investors and promised refunds, adding that he would solve the problem within four months. However, customers did not receive refunds and noticed that the company’s Seoul office no longer had its signage.

Young-oh has since denied accusations that he was operating a Ponzi scheme. He said:

“I don’t even know what a Ponzi is…And I don’t know how multi-level marketing schemes are structured.” 

Nonetheless, the Fifth Criminal Division of the Seoul Central District Prosecutors’ Office intends to charge both of them with fraud.

One report specified that Wacon promised to earn these profits through casinos and artificial intelligence (AI), adding that the company promised 100% of deposits, with 30% on the 40th day. The company then used a method of multi-level marketing (MLM), where investors earn unlimited referral fees for new registrants. However, Wacon has paid no capital or interest since June 2023. The report says Wacon continued onboarding new investors until early this year.

Seoul police are also investigating Wacon’s parent company, SAK-3, for any connection to the fraud. SAK-3 Chairman Kim Dae-cheon is already in police custody for a different fraud case. Like Wacon, SAK-3 recruited new subscribers but has not paid any interest or principal since last February.

South Korea Crypto Regulation Protecting Users

The Wacon case reflects South Korea’s position against fraud, including its commitment to regulatory action in the crypto sector. The country’s Protection of Virtual Asset Users (PVAU) went live in July, with several requirements that help to protect users in the crypto industry. The PVAU describes virtual assets as “electronic tokens with economic value, which can be traded or transferred electronically.” However, its definition excludes non-fungible tokens (NFTs), central bank digital currency (CBDC), and deposit tokens linked to CBDC.

The law includes stipulations for virtual asset service providers (VASPs), including a requirement to keep customer funds at credible financial institutions like banks, and to separate these deposits from company funds. Furthermore, the banks and VASPs must enter a custody service agreement to invest deposits in government bonds and other risk-free assets. If the VASP collapses or loses registration status, the bank will return deposits directly to customers. To ensure the safety of funds, VASPs must keep over 80% of user deposits in cold wallets.

Furthermore, VASPs must monitor user transactions to identify any suspicion or abnormality, especially when prices become volatile or reports may affect price action. Where necessary, VASPs are required to block deposit or withdrawal action on “reasonable grounds.” This action could extend beyond exchanges to other services like crypto gambling that hold user funds in digital assets.

Spot Bitcoin ETFs

In July, the Financial Services Commission (FSC) nominee Kim Byoung-hwan noted caution regarding corporate crypto transactions. During a parliamentary session, Byoung-hwan said any policy that allows bank accounts for these transactions must prioritize investor protection. At the session, Byoung-hwan’s response to a question about the possibility of spot BTC exchange-traded funds (ETFs) did not indicate any interest in the products.

Nonetheless, the Financial Supervisory Service (FSS) governor, Lee Bok-hyun, has said there are ongoing discussions about spot Bitcoin ETF trading in South Korea. The governor suggested he was in favor of the products but specified that opinions from other authorities would be taken into account. The Democratic Party of Korea also indicated its interest in spot BTC ETFs, stating that it will ask the FSC to consider the product. 

South Korea’s FSS has floated a 24-hour surveillance system with local crypto exchanges that monitors the crypto market for suspicious transactions. In a press release, the FSS said it combined the Korea Exchange’s criteria used to identify abnormal transactions, with other models and metric indicators. The Service believes this should “filter out abnormal transactions meticulously.”