The founders of Puercoin, a cryptocurrency that claims to be backed by Pu’er Tibetan tea, have been arrested by Chinese authorities. They have been charged with defrauding 3,000 Chinese investors out of $47 million.

Shenzhen Pu Yin Blockchain Group Company Ltd. claimed to have billions of dollars of tea in stock to back Puercoin. Chinese police raided their offices and found very little tea and barely anyone working there, the boss and most of the employees had abandoned ship.

Roughly one month ago the State Market Supervision Administration announced that the company was engaging in illegal advertising by seducing investors with false promises. 1.2 million yuan of fines were imposed by the Shenzhen Market Inspection Bureau in 2017 when it was discovered that the company was making false claims in its advertising that its cryptocurrency was backed by tea.

Each Puercoin was supposed to represent a contract giving ownership of a certain amount of Pu’er Tibetan tea. If this were true it would provide an easy way for investors to buy and sell the tea with a digital asset, which has potential to enhance the marketplace by streamlining the trading process.

It is possible to tie a digital asset to physical goods, perhaps by labeling each unit of tea and storing the hash of that label in a blockchain, but this requires fully trusting the company that is storing physical goods. There is no way to guarantee that a company is telling the truth in this situation, it is easy to mislead investors that the physical goods are in storage and that they can redeem their digital assets for the physical asset. In this case the company was found to have a relatively small amount of tea, and was lying about their massive reserves.

Puercoin could be traded on the exchange According to police the founders of the company massively manipulated the price of their coin by using funds invested to drive the price up 2000%, from 0.5 to 10 yuan. This manipulation of the market attracted more investors and is considered illegal in China.

Investors also had the option of locking up their Puercoin for up to 12 months in exchange for a return of 1% per month. While it is feasible that a 1% return could be made per month, especially since cryptocurrency markets have been rising long term, it is illegal in China to make claims of guaranteed returns like this. It is considered false advertising.

The actions against Puercoin are part of a broader effort by Chinese law enforcement to bring fraudulent cryptocurrency activity to an end.

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