A scandal has come to light in China that reveals the biggest-ever case of a Ponzi-style fraud there, which has also engulfed the jurisdiction's largest peer-to-peer lender.

According to the South China Morning Post, Chinese authorities have disrupted a Ponzi scheme involving over 50 billion renminbi (US$7.6 billion). The case surrounds Ezubao, the P2P lender.

At least 21 suspects, including the scheme’s alleged boss, Ding Ning, were under arrest according to the newswire Xinhua. The suspects are accused of luring in investors with false offers of double-digit annual returns. Ding paid for his luxurious lifestyle with the fraud, according to reports.

Ezubao was launched in July 2014 and has conducted an aggressive advertising campaign. Instead of engaging in legitimate lending, the operators of the business reportedly invented most of the projects listed on the firm's website and used funds from new investors to repay older debts, according to classic Ponzi practice.

The largest-ever Ponzi fraud in history was that of Bernard Madoff, now serving a lifetime jail term in the US for a scheme estimated, according to some accounts, to have reached $65 billion. A number of wealth management firms were engulfed in the Madoff affair, leading to soul-searching in the industry about the rigour, or lack thereof, with which regulator scrutinised investments.

In the recent Chinese case, things came to light as President Xi Jinping was holding up financial risk management as one of the priorities for the country’s 'economic work' this year. It also came as China’s political and legal affairs commission was pledging to crack down on illegal financing deals and activities conducted on the Internet, according to the venerable SCMP.

Peer-to-peer platforms often do not have the kind of depositor-protection and other regulatory controls that one associates with traditional banks. This is the reason why 'shadow banking' is so much more inherently dangerous to the structure of financial markets than actual banking.