A brand-new vehicle for fraud?
Last week’s massive bitcoin scandal may not be endemic to cryptocurrencies, even as the worldwide digital asset market continues to prove itself an unreliable haven, write Nuntawun Polkuamdee, Tamm Yingcharoen and Pathom Sangwongwanich
The recent arrest of Jiratpisit “Boom” Jaravijit over allegations of a bitcoin fraud worth 979 million baht has fuelled misunderstandings about cryptocurrencies as Thailand deploys one of the most advanced legal frameworks in the world for utilisation. The ongoing investigation has revealed that a Finnish man, Aarni Otava Saarimaa, was allegedly tricked by Mr Jaravijit into transferring 5,564 bitcoins with a market value of 979 million baht, with the ultimate goal of investing in something called Dragon Coins.
The crime itself was not a result of the threats posed by the use and exchange of cryptocurrencies, but was rather a fairly classic case of tricking an individual into investment, then running off with the money.
The news broke even as Thailand was making significant strides in regulating cryptocurrencies domestically, aiming to create a safer ecosystem in which Thais can begin to invest and trade in the new technology with state provisions.
“This is not a cybercrime, but rather outright fraud or a white-collar crime that happened to use blockchain technology and bitcoin as the mediums,” said Prinya Hom-anek, secretary of the Thailand Information Security Association.
“Criminals might see digital currencies as safe havens to sugar-coat their crimes, but IT experts and law enforcement officers are keeping up with them,” Mr Prinya said.
SKETCHY SCHEME
The scam is one of the most challenging cases that the Crime Suppression Division (CSD) has investigated, as it involves financial crime in relation to digital assets that have recently gained immense popularity as a tool for exchange and trade.
According to the Anti-Money Laundering Office, bitcoin is increasingly being exploited in sophisticated fraud schemes because crypto transactions are difficult to trace until the money is actually withdrawn.
The CSD learned of the scam in late January, when officers received a complaint from businessman Chonnikan Kaeosali, who is Mr Saarimaa’s business partner.
According to the complaint, the pair were lured into buying shares in three companies and investing in a casino and in a new cryptocurrency known as Dragon Coins, but they had seen no returns from the money they put in.
The gang members allegedly lured Mr Chonnikan and Mr Saarimaa into buying shares in Expay Group, NX Chain Inc and DNA 2002 Plc. They also purportedly talked the victims into believing that the Dragon Coins would be used at a casino in Macao, where they had arranged a visit, further adding weight to their claims.
After receiving the bitcoins from the victims, the gang allegedly sold the cryptocurrencies, converted the proceeds into baht and transferred the money into various bank accounts.
It was not until Aug 8 that the scam came to public attention.
Along with Mr Jiratpisit, others wanted by the authorities include his siblings: Prinya Jaravijit, who has left the country, and Suphitcha Jaravijit, who handed herself in to police last week.
The Jaravijit siblings are being charged with collusion to launder money.
GOOD CASE STUDY
Bitcoin’s meteoric rise last year had many observers calling it one of the biggest speculative manias in history. The cryptocurrency’s 2018 crash may have helped cement its place in the books of bubble records.
“This a good case study to learn how [digital asset] fraud can turn out,” said Sakolkorn Sakavee, founder and chief executive of Bitkub.com, a local digital asset exchange. “The police were able to apprehend the fraudsters because there was evidence of bitcoins being transferred into baht and then to other persons.
“If these fraudsters had not changed bitcoins into fiat money and had not transferred it to other persons, then there could be no trace of evidence of fraud because the police would not have been able to identify the transferring address.”
In digital asset fraud cases, evidence is the most important factor. There should be a signed agreement between partners, the exchange and any persons connected to money transfers, Mr Sakolkorn said.
A notable loophole of unlicensed digital asset exchanges is that they essentially have no regulator supervising digital asset transactions.
This is a problem when investors experience difficulties, as evidence cannot easily be gathered, Mr Sakolkorn said, noting that this is the reason why the Thai government wants to regulate digital asset businesses through the Securities and Exchange Commission (SEC).
The SEC has the authority to approve operating licences for digital asset exchanges, traders and dealers, as well as initial coin offerings through assessment by ICO portals.
A key regulation is that all trading transactions will be recorded by digital asset exchanges, so in cases of fraud, the market regulator can examine transactions and transfer addresses.
“This is how Thailand’s cryptocurrency trading and ICOs will become more secure and transparent compared with external markets, where there are no regulators to supervise and offer protections for investors,” Mr Sakolkorn said.
Bitcoin itself is not liable for inviting this type of fraud, as it was simply used as the medium to invest in other assets, he said.
“The signed agreement and bitcointo-baht conversions are solid evidence for a criminal fraud case,” Mr Sakolkorn said. “It should be remembered that the signed agreement is an important piece of evidence. Transparency and transaction records are needed when investors engage in cryptocurrency trading or investment in other assets.”
In effect since May 14, the royal decree on digital assets is intended to provide a licensed framework to regulate digital token issuers and digital asset business operators in order to minimise risks from fraud, said SEC secretary-general Rapee Sucharitakul.
For those being encouraged to invest in digital tokens and initial coin offerings (ICOs), they should be aware that there are no licensed ICO issuers and ICO portals at present, Mr Rapee said.
Investors can check the names of dealers, traders or digital asset exchanges with the market regulator.
“The SEC is cooperating with the police to find the facts and will consider which actions are wrongdoings under the Securities Act and the digital asset royal decree,” Mr Rapee said. “The SEC will proceed strictly in line with legal procedures if any wrongdoing is found.”
MORE CONVERSIONS EXPECTED
Poramin Insom, founder and chief executive of the Thai Digital Asset Exchange, said bitcoin fraud in Thailand dampens sentiment concerning the cryptocurrency trading market, especially among people who are not well-informed about the case.
In this case, bitcoin was merely the money or asset that Mr Saarimaa and his partner used to make a payment to what apparently turned out to be a group of fraudsters, Mr Poramin said.
He said digital currencies fluctuate constantly, therefore cryptocurrency investors sometimes want to transfer their cryptocurrencies into physical assets such as property and stocks.
Upon converting cryptocurrencies into other assets, they would have to start with converting cryptocurrency into fiat money to buy houses, land, cars, stocks or other asset classes.
“The transfer of cryptocurrencies into stocks trading on the Stock Exchange of Thailand or the Market for Alternative Investment is expected to increase,” Mr Poramin said. “This is because stock trading on the SET is free of capital gains tax, while cryptocurrency trading is liable to be taxed 15%.”
Avoiding tax payment when investing in digital assets on a digital asset exchange is also not difficult, he said, because the Revenue Department cannot examine the buying cost from an overseas market.
If investors record an expensive price and sell in Thailand at a low price, they will record a loss and the digital asset exchange will not be liable for a capital gains tax made on digital asset investments.
“But cryptocurrencies can be converted into fiat money and other assets, so it is possible that money laundering or fraud will occur,” Mr Poramin said. “We have to be cautious about this.
“Some investors want to convert cryptocurrencies into fiat money in order to purchase physical assets, since property developers and other physical asset classes still do not accept payment in cryptocurrencies. So converting cryptocurrencies into fiat money will increase in the future.
“But money laundering is not done easily in Thailand’s capital market, because the SEC supervises investment transactions and monitors the situation, as mandated in the digital asset royal decree.”
The world of cryptocurrencies is, however, still facing significant regulatory challenges as loopholes persist worldwide.
“Indeed, we have regulations and we have a 15% tax on profits from ICO investments, but actual enforcement is still arbitrary,” said a source working in the digital asset industry who requested anonymity. “Up until this point, it has been up to the Revenue Department’s discretion to push people to pay taxes in each region. Information on profits from these investments are still difficult to track, and professionals already know ways to avoid declaring digital assets.”
The SEC can, however, cooperate and exchange information with the Revenue Department to forward tax collection efforts in the future.
An example of what could be in store for the future comes from recent reports that some people were forced by the Revenue Department to pay taxes after they posted publicly on social media about their earnings, which the department used to collect the tax.
Mr Prinya’s view is that the existing data economy will transform into a crypto economy within the next 3-5 years and that blockchain will be used widely in mobile applications.
Despite much optimism about the future, he strikes a wary final note about cryptocurrency investment, saying cryptocurrencies don’t have fundamentals, unlike stocks, and investors should have a loss limit on their mind at all times.
“Do not borrow to invest in cryptocurrencies” is Mr Prinya’s advice.
The signed agreement is an important piece of evidence. SAKOLKORN SAKAVEE Chief executive, Bitkub.com