The Fintech Effect

Switzerland shuts up shop for providers of ‘fake cryptocurrency’ E-Coin in latest clampdown

Key Points
  • Swiss regulator FINMA has shut down providers of a fake cryptocurrency called E-Coin
  • Developers accrued at least $4.2 million from the sham
  • it is investigating 11 other suspected activities related to fake cryptocoins
Bitcoin on cables.
Chris Ratcliffe | Bloomberg | Getty Images

A Swiss financial watchdog has closed down providers of a "fake" cryptocurrency called E-Coin.

The latest regulatory step follows a series of moves from China to toughen up on bitcoin and other digital tokens, signaling frustration in the continent over the phenomenon.

According to the central European country's Financial Market Supervisory Authority (FINMA), at least 4 million Swiss francs ($4.2 million) were paid to the developers of the sham cryptocurrency, who didn't hold the required banking license.

FINMA said it has also taken action to bankrupt the accused parties, through legal proceedings.

"Generally, regarding Swiss regulation in the area of fintech/cryptocurrency, I can state that FINMA as supervisory authority applies the currently applicable financial market regulation and intervenes if regulations are breached," a spokesman for FINMA said in an emailed statement.

An organization called the QUID PRO QUO Association was accused of manufacturing the fake digital coins, and working with two other entities, DIGITAL TRADING AG and Marcelo Group AG.

CNBC was not able to contact the accused parties at the time of publication.

E-Coin: 'Not an actual cryptocurrency'

The regulator said that E-Coins bore no similarity to cryptocurrencies.

Whereas virtual coins such as bitcoin and Ethereum are stored on distributed ledgers (blockchains), the counterfeit tokens were stored via local servers.

Chamath Palihapitiya on bitcoin: The genie has been let out of the bottle

Investors were deceived into believing the digital cash would be 80 percent backed up by tangible assets.

"Moreover, substantial tranches of E-Coins were issued without sufficient asset backing, leading to a progressive dilution of the E-Coin system to the detriment of investors," the watchdog said in a press release.

FINMA has said it is investigating 11 other suspected activities related to fake cryptocoins.

The Swiss authority suggested investors visit its website to protect themselves from such hoaxes.

Concerns of bitcoin 'fraud' heighten

JP Morgan CEO Jamie Dimon last week referred to the original – and highest valued – cryptocurrency, bitcoin, as "a fraud" that will eventually "blow up".

Along with increased regulatory activity, Dimon's comments appeared to weigh on the asset heavily, as it fell 8.7 percent the following day.

Jamie Dimon: Governments look at bitcoin as a novelty

Chinese financial authorities have put increased pressure on bitcoin and other currencies in recent weeks.

Earlier this month, several government administrations including the People's Bank of China announced a ban on initial coin offerings (ICOs), due to concerns over fraudulent practices.

And last week the country said it would close down domestic bitcoin exchanges, dealing another blow to the cryptocurrency. One of China's biggest cryptocurrency exchanges, BTC China, said it would close following the announcement.

Bitcoin was trading at $3,984 Tuesday at 11:55am London time, down two percent.