Introduction to the case
US$2.4 billion scam believed to be the largest cryptocurrency fraud ever charged
Satish Kumbhani, the founder of cryptocurrency investment platform BitConnect, and Glenn Arcaro, BitConnect’s director and main promoter, are accused of orchestrating what the U.S. Department of Justice (DOJ) calls a “textbook” Ponzi scheme that fraudulently obtained US$2.4 billion* from investors.
*All amounts expressed in U.S. dollars unless otherwise stated.
Details of the fraud
Between February 2016 and January 2018, BitConnect misled investors by claiming its platform could generate significant profits and guaranteed monthly returns of up to 40% by trading on volatile cryptocurrency exchange markets.
Kumbhani, a citizen of India, Arcaro, a U.S. citizen, and other co-conspirators conducted a fraudulent and unregistered offering and sale of securities in the form of investments using BitConnect’s Lending Program.
In effect, investors would send bitcoins to BitConnect to purchase an equivalent value of the BitConnect Coin (BCC), the trading coin on the BitConnect platform, in return for interest payments.
BCC was a proof-of-stake cryptocurrency token whereby investors commit a stake—their private capital—to the enterprise in the form of the network’s native tokens.
Later investigations revealed that BitConnect was not operating as a trading platform, but using money from new investors to pay prior investors in a classic Ponzi operation.
Instead of market trading, investment funds were transferred to digital wallets controlled by Kumbhani and his co-conspirators and international cryptocurrency exchanges for their own benefit.
Additionally, Kumbhani and his co-conspirators manipulated the price of BCC tokens, creating a false image of legitimate high-market demand for investors.
Kumbhani shut down the Lending Program in 2017 and closed BitConnect in 2018 after several regulatory investigations and orders.
How did the fraudsters commit the crime?
Through the BitConnect Lending Program, users could exchange Bitcoin for BCC. BCC’s daily market value and daily interest were determined by the company’s proprietary BitConnect Trading Bot and Volatility Software.
To participate in the Lending Program, an investor was first required to create an account and transfer bitcoin to a wallet controlled by BitConnect. The investor’s account page on the BitConnect website would reflect their bitcoin investment. The investor could then remit the bitcoin to BitConnect to purchase BCC tokens on the BitConnect Exchange and “lend” the BCC tokens to BitConnect. BitConnect would allegedly invest these proceeds, leveraging the volatility of bitcoin via the Trading Bot. The promised returns approached 1% daily or around 40% per month (compounded daily). As advertised by BitConnect, the larger the initial deposit, the larger and faster profits could be earned.
Marketing videos were uploaded on YouTube promoting the platform and included testimonials of supposed successful investors. Instagram influencers and other high-profile investors also promoted the new cryptocurrency. This attracted many new investors, and the value of BCC rose from $0.17 to $463 within months, allowing BitConnect to grow exponentially. At its peak, the company had a market cap of $3.4 billion.
What was the outcome?
Leading up to its demise, prominent members of the cryptocurrency community had publicly accused BitConnect of leading a Ponzi scheme, including Ethereum founder Vitalik Buterin. In November 2017, BitConnect was handed a strike-off notice from the British Registrar of Companies and in January 2018, U.S. states North Carolina and Texas issued cease-and-desist orders for the company’s unregistered securities, lack of transparency, and misleading statements.
In September 2021, Arcaro pleaded guilty for his role in the massive conspiracy. He is admitted to having earned more than $24 million in commissions and other payments, all of which will now be repaid to investors in restitution or forfeited to the government, according to court documents. On Sept. 16, 2022, Arcaro was sentenced to 38 months in prison for his participation in the scheme.
In February 2022, the U.S. Securities and Exchange Commission (SEC) indicted Kumbhani on multiple fraud and conspiracy charges. He is charged with wire fraud, conspiracy to commit wire fraud, conspiracy to commit commodity price manipulation, operation of an unlicensed money transmitting business, and conspiracy to commit international money laundering. If all charges hold, Kumbhani would face a maximum of 70 years of prison. The fraudster vanished a week after being indicted and his whereabouts remain unknown.
As a partial remedy for the $2.4 billion, the DOJ will sell $56 million worth of cryptocurrency it seized from Arcaro. Though this recovery is minor compared to the funds received by the fraudsters, the $56 million is believed to be the largest recovery of cryptocurrency for victims to date.
How could this have been prevented?
Cryptocurrency and securities fraud is becoming increasingly prevalent in today’s pressurized economic environment, fuelled by meteoric rises (or collapses) in coin values. Whether investors are lured by the promise of high returns or simply the fear of missing out, these conditions create opportunities for bad actors.
Watch for these red flags of investment fraud:
Having to exchange bitcoin for the BitConnect Coin—an unproven and unknown medium of exchange—should have stood out as a warning sign. Why was it necessary? Wasn’t BitConnect trading on the volatility of the open cryptocurrency market, including bitcoin? Investors should question the structure of investments and be alert to unusual or unnecessary intermediary transactions.
The platform used social media influencers to promote misleading information to investors. With investigations, the promoters were found to have received benefits from the platform for their promotions and were not licensed or qualified to provide financial advice.
While cryptocurrencies typically publish a whitepaper to help investors understand the purpose and technology behind them, BitConnect hadn’t issued one throughout its operating period, which should have raised suspicion.
Unlike other major cryptocurrencies, BitConnect was anonymously run and unregistered with securities regulators in the U.S. and Canada. Potential investors should conduct due diligence into whether their potential investment has been duly registered with appropriate regulatory bodies.
How BDO can help
BDO’s forensics team can help you conduct background checks and investigative due diligence on cryptocurrency exchanges and the individuals behind these entities. Our professionals are experienced in civil and criminal litigation, investigating suspected frauds, and quantifying economic losses as a result of fraudulent activities.
Contact our team to minimize your fraud exposure:
*All amounts expressed in U.S. dollars unless otherwise stated.