BitConnect Fraud Indictment Highlights the ICO Era Driving Crypto Enforcement Today

A federal grand jury in San Diego indicted the founder of the BitConnect crypto investment platform on a variety of fraud, unlicensed money transmitting and money laundering charges on Friday, almost four years after HBO’s “Last Week Tonight” host John Oliver highlighted it on a show about the then-burgeoning cryptocurrency industry.

The Department of Justice alleges that BitConnect founder Satish Kumbhani orchestrated a $2.4 billion “global Ponzi scheme.”

Calling BitConnect an “alleged fraudulent cryptocurrency investment platform that reached a peak market capitalization of $3.4 billion,” the DoJ said that the Indian citizen and his “co-conspirators touted BitConnect’s purported proprietary technology … as being able to generate substantial profits and guaranteed returns by using investors’ money to trade on the volatility of cryptocurrency exchange markets.”

After shutting down the Lending Program at the heart of BitConnect, Kumbhani “directed his network of promoters to fraudulently manipulate and prop up the price of BitConnect’s digital currency, a commodity known as BitConnect Coin, to create the false appearance of legitimate market demand,” the DoJ alleged in a Feb. 25 statement.

Crypto’s Reputation

It’s worth noting that BitConnect, which promoted itself aggressively on social media, had plenty of skeptics before Oliver took it on.

On Nov. 30, 2017, Mike Novogratz — a former president of $54 billion hedge fund Fortress Investment Group who became a leading cryptocurrency investor as CEO of crypto merchant bank Galaxy Digital — tweeted: “BitConnect really seems like a scam.  an old school ponzi …   bad actors hurt the community.  period.”

That was retweeted by Ethereum creator Vitalik Buterin a month later, shortly after the BitConnect Coin cryptocurrency reached an all-time high of more than $450.

Which is, roughly, what Oliver alleged in his March 12, 2018, episode on cryptocurrencies, which took a very dim, and high profile, view of the industry.

“There are dodgy companies everywhere, some just look like old-school frauds with some crypto sauce poured on top,” Oliver said. “Take BitConnect. At one point, it was worth about $3 billion. Now, BitConnect told investors if they handed over the money, they would immediately get returns as high as 40% per month. Now, a rate of return as high as that may seem suspicious to you, but the market was soaring and BitConnect had investors like this guy who spoke at one of the conferences.”

That’s when Oliver showed a clip of a man identified as BitConnect investor Carlos Matos — who has not been charged or accused of any wrongdoing — on stage at a company event in  Thailand in 2017, a performance that turned into a internet meme so popular that it is thought to have drawn the DoJ’s attention in the first place.

It’s worth a look, not so much because of the allegations of fraud against BitConnect, but to get an understanding of the hype that surrounded even some of the most legitimate and successful companies in the cryptocurrency industry during the first “Crypto summer” of 2017 — before the Securities and Exchange Commission came down on the initial coin offering (ICO) market like a ton of bricks starting in 2018.

See also: SEC Stays Focused on Cryptocurrency Enforcement, Imposes $2B in Fines in 2021

It’s also worth a look for Oliver’s decision to turn to comedian Keegan-Michael Key for a parody of Matos in which Key warned that “the cryptocurrency market is extremely volatile and insufficiently regulated” and advised “never invest more than you are willing to lose.”

Sullying Crypto

“Crime, particularly crime involving digital currencies, continues to transcend international boundaries,” said Assistant Attorney General Kenneth Polite Jr. of the DoJ’s Criminal Division. “The department is committed to protecting victims, preserving market integrity, and strengthening its global partnerships to hold accountable criminals engaging in cryptocurrency fraud.”

The indictment also accused Kumbhani operating a money transmitting business through its digital currency exchange, BitConnect, without registering with the Treasury Department’s Financial Crimes Enforcement Network (FinCEN), as required under the terms of the Bank Secrecy Act.

It’s not the first criminal case brought against BitConnect promoters. On Sept. 1 last year, the DoJ announced that Glenn Arcaro had pleaded guilty to fraud charges as a result of his involvement with BitConnect.

Read more: BitConnect Exec Admits to Role in Alleged $2B Crypto Fraud

The SEC announced that same day that it was suing Arcaro, Kumbhani and BitConnect, saying that “from early 2017 through January 2018, Defendants conducted a fraudulent and unregistered offering and sale of securities in the form of investments in a ‘Lending Program’ offered by BitConnect.”

On Feb. 25, the DoJ charged Kumbhani with “conspiracy to commit wire fraud, wire fraud, conspiracy to commit commodity price manipulation, operation of an unlicensed money transmitting business, and conspiracy to commit international money laundering.”

Kumbhani, who remains at large, faces up to 70 years in prison if convicted on all counts.

In announcing the indictment, Eric Smith, special agent in charge of the FBI’s Cleveland office, noted that schemes like the one Kumbhani allegedly committed have the effect of “sullying the ability of legitimate entrepreneurs to innovate within the emergent cryptocurrency space.”