The Securities and Exchange Commission (SEC) has filed an action earlier this month against the masterminds behind the cryptocurrency lending platform and scam BitConnect.
As part of its ongoing crackdown, which dates back to 2018, the SEC announced new charges against BitConnect founder Satish Kumbhani, as well as its top U.S. promoter Glen Arcaro and his affiliated company.
Bitconnect went down in history as the biggest heist in the cryptocurrency world that ever took place. BitConnect, which had its registered office in London, is alleged to have collected nearly 325,000 BTC (worth more than $14.5 billion at today’s prices).
Little is known about BitConnect founders Satish Kumbhani and Divyesh Darji. The origins of the multi-billion scheme are also not completely clear, though the hoax that fooled thousands of victims worldwide is believed to have started in India.
What Was the BitConnect Scam?
The now-defunct cryptocurrency platform was a Ponzi scheme founded in 2016, which fraudulently lured investors with promises of exorbitantly high returns.
Between 2016 and 2018, the infamous pyramid scheme falsely promised an annual return of 365%, or 1% a day, using proprietary trading software. Scammers told a variety of lies to add credibility to their pitch, including fake testimonials on YouTube that advertised historical returns of up to 2% daily.
The company’s website also published a series of professional-looking documents to assure investors that their trading bot never incurred any loss and that the collective return amounted to 3,700%.
If that lure was not enough, Bitconnect had offered subscribers a four-tier investment system. Quite simply, the more you invested the higher rewards you could reap. What’s more — you could even earn a referral bonus alongside the investment income if you marketed the Bitconnect offering to your fellow friends and family.
BitConnect shut down its lending operation, which was the heart of the infamous platform, in 2018. However, the scam was notorious enough to warrant a regulatory action from the top U.S. watchdog and the FBI.
After three years of investigations, authorities identified that BitConnect sold its own cryptocurrency (BCC) in exchange for bitcoin. The startup claimed it had a “volatility software.” that would make money by trading with the clients’ money, in exchange for sharing profits with them.
Rather than investing clients’ bitcoins, the scam operatives transferred those funds to blockchain wallet addresses controlled by them. Their promoters in the U.S. and elsewhere were allegedly rewarded through commissions that were mostly “concealed from investors,” the SEC said.
SEC Hits U.S. Promoters
Expanding a civil case announced in May, the SEC charged BitConnect founder and five promoters with lying about the scheme’s ability to generate profits, selling securities to retail customers, and violating federal registration laws.
Their top affiliate Glenn Arcaro and his Hong Kong-incorporated firm, Future Money Ltd., allegedly earned $24 million in referral commissions.
Arcaro, who created a network of U.S. promoters, pleaded guilty in a federal court to one count of conspiracy to commit wire fraud. He will be sentenced for steering money to BitConnect on November 15, 2021.
If convicted, Arcaro faces a maximum penalty of 20 years in prison. He could also be fined up to $250,000 or two times the amount of his ill-gotten gains, whichever is greater.
According to prosecutors, the majority of BitConnect’s investors lost all or nearly all of their funds. Some earlier investors, however, were paid back using the newer investors’ money, the hallmark of a Ponzi scheme.
Like with all Ponzi schemes, the scam worked perfectly until victims started to become skeptical. Once they tried to withdraw their deposits or earnings, BitConnect could not sustain their operations and went bust.
Just before the scam broke out, regulators tried to catch up with the “get-rich-quick” scheme through cease-and-desist orders.
The SEC charged the defendants with violating the anti-fraud laws and registration provisions and is seeking to have them pay back the money they took from investors alongside civil fines and other relief.
This wasn’t the first action against BitConnect by the SEC, though. The watchdog has previously reached settlements – worth nearly $12 million – with two individuals charged with promoting the scam in the U.S.