US regulator SEC sues five Bitconnect promoters in a $2 billion crypto trading Ponzi scheme

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US regulator SEC sues five Bitconnect promoters in a $2 billion crypto trading Ponzi scheme
  • After three years of investigations, the US SEC has sued five individuals for helping BitConnect, a fake cryptocurrency exchange.
  • The promoter allegedly created fake testimonials on YouTube to advertise a "lending program" that investors would invest in.
  • The scam was truly international as the token was hosted by the company and pretended to be a genuine cryptocurrency.
Often dubbed as the biggest heist in the cryptocurrency world, the BitConnect scam rocked the industry in 2018 as it siphoned off $2 billion by duping investors. The alleged blockchain was nothing but a multi-level Ponzi scheme that promised too good to be true returns quickly.

After three years of investigations, the US Securities and Exchange Commission (SEC) has sued five individuals for helping BitConnect, a fake cryptocurrency exchange. The SEC has filed a civil lawsuit against these five promoters, alleging misleading advertisements. They are accused of selling securities to retail customers without registering with the regulator.

"We allege that these defendants unlawfully sold unregistered digital asset securities by actively promoting the BitConnect lending program to retail investors," Lara Shalov Mehraban, Associate Regional Director of the SEC's New York Regional Office, said in a statement. Even though the FBI was also investigating for three years, no criminal complaints have been filed.

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The promoter is said to have created fake testimonials on YouTube to advertise a "lending program" that investors would invest in. For each investment, they received a commission. One of the promoters was able to amass a whopping $2.6 million in just commission. The SEC has long asked investors to be wary of schemes that promise extraordinarily high returns in a short period. Still, the added mix of cryptocurrency made the deal more believable.

What is the BitConnect scam?


The rise of Bitcoin in 2016 played a pivotal role in convincing investors that Bitconnect (BCC) was a legitimate currency that could have immense potential. BitConnect also employed a system of invites and referrals, where users could invite their friends and fellow crypto enthusiasts in exchange for financial bonuses.

A simple pyramid structure asked users to invest some money, refer and sign-up more users to create a vast pool. The scheme works as long as newer people join and pour in fresh capital. The moment the outflow of the fund exceeds the inflow, the plan fails. If you exit the scheme on time, you’re safe. But if you’re holding the asset when the structure collapses, there’s little hope of recovery, as we’ve seen with a plethora of other similar scams.
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The alleged crypto exchange became a sensation and was among the top 20 in the world. And, this is where regulators started to take notice. It received a strike-off notice at the end of November 2017 in the UK, threatening a shutdown and dissolution. The last bullet was a cease and desist letter from the Texas Securities Board, ordering the company to close down its operation and cut BCC distribution.

The scam was truly international as the token was hosted by the company and pretended to be a genuine cryptocurrency. For most of BCC's existence, the only place to purchase, trade, or sell the cryptocurrency was through the proprietary exchange hosted by Bitconnect. Its ripple waves were also felt in India, where Divyesh Darji, the India head of the company, was arrested by the Gujarat CID (Crime Investigation Department) in August 2018.

The law is almost helpless...


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Authorities globally are confused since cryptocurrency isn't regulated. The SEC can only charge the promoters with a civil case for the misselling of financial instruments that weren't registered. US authorities were also having trouble tracing the victims as they were spread across the globe and unaccounted for. The FBI asked victims of the Ponzi scheme to come forward and help in tracing all the scammers.

Even Indian authorities aren't equipped enough to deal with decentralized platforms that call themselves an exchange. Although, regulators worldwide have synonymously said that initial coin offerings (ICOs) are widespread, and users should be careful of what they're investing in. Cryptocurrency continues to be a grey market, providing close to zero law enforcement or redressal.


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