In what may be one of the largest cryptocurrency scams ever, BitConnect and its founder have been charged with defrauding investors of $2 billion in funds they said would be used to trade Bitcoin.
According to the U.S. Securities and Exchange Commission, BitConnect conducted a fraudulent and unregistered offering and sale of securities between January 2017 and January 2018 in the form of investments in a “Lending Program” that would trade Bitcoin contributed by investors using a “volatility software trading bot.”
But rather than deploy investor funds for trading with its purported bot, the SEC said in a civil complaint, BitConnect founder Satish Kumbhani diverted funds for the benefit of himself and associates he hired to promote the Lending Program to investors.
One of those promoters, Glenn Arcaro, pleaded guilty on Wednesday to related criminal charges.
“We allege that these defendants stole billions of dollars from retail investors around the world by exploiting their interest in digital assets,” Lara Shalov Mehraban, associate regional director of the SEC’s New York regional office, said in a news release.
Founded by Kumbhani, an Indian citizen, in 2016, BitConnect created a digital token called BitConnect Coin (BCC) that could be exchanged for Bitcoin. Under the Lending Program, investors could transfer Bitcoin to BitConnect to purportedly purchase BCC tokens and then “lend” the tokens to BitConnect, which, in turn, would trade them via its proprietary bot.
The BitConnect website advertised profits for investors as high as 40% interest per month “with no risk,” and the program ultimately succeeded in obtaining more than 325,000 bitcoin, or approximately $2 billion, from investors worldwide.
“To mask the fact that they were not deploying investor funds to be traded with the purported trading bot they described to investors, BitConnect and Kumbhani conducted a Ponzi-like scheme in which they at times used funds deposited by newer investors in order to satisfy withdrawal demands made by earlier investors,” the SEC said.
According to the commission, Arcaro received more than $24 million in “referral commissions” and “development funds” from the program and Kumbhani transferred more than $12.4 million to wallet addresses known to be controlled by him.