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China tech

China fitness scandal throws light on blockchain scams

Quickly built apps like Qubu draw users with promise of cash

Amid a top-down push in China to embrace blockchain technology, experts say it is being used as a buzzword to draw people into scams. (Nikkei illustration)

BEIJING -- Qubu is a Chinese fitness app that started users off with a simple task: walk 4,000 steps a day for 45 days. If they managed to stay active in that month and a half, they received 15 "candies" -- Qubu's in-app virtual currency.

Candies could be traded in to unlock more complex tasks that carried higher rewards or exchanged for real-world cash. In documents seen by KrASIA, Qubu's candies were marketed as wealth management instruments that carried up to 36.8% return on investment over 60 days. It was also strongly suggested that anyone who used the app should recruit a "downline" -- a network marketing term for someone you bring to the app, earning commission along the way. You could thus earn passive income without putting in any extra work, according to the logic.

But if something sounds too good to be true, then it probably is.

Signing up to the app was easy. Registration was practically free; the app only prompted you for your name, ID card number and Alipay account information. Qubu charged one yuan to verify the information you keyed in. There was no initial investment, it said. All you had to do was take regular walks.

But the hard selling came quickly.

Qubu's app had a trading center where anyone could buy bundles of its virtual currency from other users using actual cash. The app took 25-50% of the transaction value as a processing charge, with higher level users paying lower fees. By December this year, Qubu claimed to have 95 million registered users. If this somewhat unlikely claim is true, that would mean nearly one in 10 mobile users in China had registered on the app. Qubu said it had issued 1 billion candies, with a significant portion of its users pitching in to spend millions of yuan to buy candies.

"Yan", a Qubu user who spoke with KrASIA using a pseudonym, viewed the 15,000 yuan ($2,150) he spent in Qubu as an investment. He bought hundreds of candies not long after he was introduced to the walking app earlier this year. He liked the fact that candies could be exchanged for Qubu's own cryptocurrency, GHT, and he had faith that blockchain-based assets would yield a solid return.

That turns out to have been a gross miscalculation, he says. Yan is now in limbo after Qubu was placed under investigation for illegal fundraising practices and financial fraud by the market regulator in Changsha, capital of central China's Hunan province, where the company was based. Qubu has since claimed to have relocated to the southwest municipality of Chongqing.

Qubu's massive following underscores a dilemma faced by regulators in China -- the central government is actively promoting the blockchain, to the point that President Xi Jinping told his fellow politburo members that the digital ledger technology was an "important breakthrough" and that the country must be a global leader in its development and application. Yet blockchain is sometimes associated with Ponzi schemes, particularly via dubious initial coin offerings and cryptocurrencies.

"The Qubu scheme is very deceptive," said Martin, a tech blogger who has been writing about how to make money online since 2015. Qubu merged the concepts of "blockchain" and "fitness" to formulate its selling points. Many of its users were misled to believe that they were taking part in a cutting-edge health initiative that collected data from their smartphones to mine some sort of virtual coin, he observed.

The tasks, which Qubu assigned to new users, function as cryptocurrency mining machines (which process bitcoin transactions), he said. The higher the level of the task, the greater their processing power and the more candies they would then generate -- at least, that was what users were led to believe. Feeling that their pots of candies were not growing fast enough, users would click "buy" over and over again to unlock tasks with bigger payouts.

Like most Ponzi schemes, Qubu also relied on its users to bring new people on board. The platform heavily emphasized the importance of recruitment and divided its subscribers into five tiers. The more people you signed up, the more commission you earned (via a percentage of your downline's candy output) and the faster you moved up the pyramid.

In a video shared among Qubu users, a woman who appears to be a team leader tells other users that she can earn as much as 180,000 yuan a year by investing in the platform's candies and recruiting new users. It's a familiar sales pitch.

Du Xiang, who leads a grassroots team that exposes pyramid schemes across the country, said the danger of Qubu and similar online scams was that they tended to have low investment entry points and a large target population. "Plus, they've created an illusion that it's cutting-edge and following the social trend of [adopting blockchain technology]," he said.

Against the backdrop of Qubu's rapid rise is a top-down push to embrace blockchain technology.

China's most recent Five-Year Plan, the policy blueprint that sets out the government's vision for the country's social and economic development in half-decade blocks, was released in 2016. It listed blockchain as a critical "strategic frontier technology" and called for more research in the technology. Governments at all levels have rushed out policies covering how blockchain can be utilized in local and industrial developments.

The Changsha Economic and Technological Development Zone, where Qubu's former headquarters were located until the app ran into trouble this summer, had a 3 billion yuan fund to lure in blockchain companies. Eligible firms were also promised free rent for up to three years and 2 million yuan in subsidies.

Though Qubu billed itself as living on the blockchain, industry observers said it had little to do with the tamper-proof digital ledger. Kang Li, assistant director at the Blockchain Research Center of China at Chengdu's Southwestern University of Finance and Economics, said the company was likely only using the buzzword to attract people's attention without implementing the technology at all.

Scammers often tailored their pyramid schemes to ride the latest trends, said Du Xiang. In the past few years, he has noticed that it is increasingly common to see the blockchain appropriated in pyramid schemes.

Court records appear to back up Du's observations. In 2016, only one court judgment in China mentioned blockchain. That number shot up to 171 last year, with more than 400 entries so far this year.

Despite the removal of the now-disgraced Qubu app from Apple's App Store and various Android app stores in China, there were no fewer than two dozen similar blockchain-based fitness apps available for download in China as of the end of November.

"We have developed many similar systems. Some reward users for walking, others for answering questions or planting virtual trees," said a programmer in Guangzhou who has worked on several outsourced coding projects for Qubu copycats. It usually costs less than 100,000 yuan to develop such an app and its in-app trading system. The programmer wished to remain anonymous given the sensitivity of the topic.

Most of the Qubu users contacted in relation to this story would not speak to KrASIA on the record as they were still hoping to retrieve their investments after the scandal subsides.

Commenting on Qubu and its copycats, Zheng Xiaofei, an editor at Shenzhen-based anti-fraud consultancy Feifan Fenghuotai, said: "Blockchain is only the convenient concept that they use to scam money."

Echoing Zheng's point, tech blogger Martin said the fact that many people had only a vague comprehension of blockchain left scammers with opportunities to misrepresent their pyramid schemes as real, meaningful applications.

Kang Li, the blockchain expert, warned that scams dressed up as blockchain-powered operations could undermine the digital ledger's true development. "Some people might choose to stay away from the technology because they get spooked by it," he said.

KrASIA is a digital media company focused on technology-driven businesses and trends across the Asia-Pacific region. It is part of 36Kr, a tech news portal based in Beijing. Nikkei has a minority stake in 36Kr.

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