Executive Summary:
BitConnect is a lending platform that allowed users to trade their Bitcoins in exchange for the platform’s native token and earn interest in the process.
BitConnect was ultimately shut down because the platform turned out to be a Ponzi scheme and thus wasn’t able to repay its investors.
What Is BitConnect?
BitConnect is a lending platform that allowed users to trade their Bitcoins in exchange for the platform’s native token and earn interest in the process.
The platform had developed its own proprietary trading bot and volatility software that would automatically spot market opportunities.
In return, users would earn one percent in daily interest, which would be paid out in BitConnect Coin (BCC), the platform’s native token.
BitConnect utilized a tiered structure that promised varying returns that were dependent on the deposited amount:
For example, investing $1,000 would theoretically lead to $50 million in returns within a period of three years.
However, this also meant that the money a user deposited could not be retrieved throughout the duration of their investment.
BitConnect (as well as its native coin BCC) ultimately went under at the beginning of 2018 after multiple cease and desist letters. How the company came to be, who founded it, and what ultimately led to its demise will be covered in the next chapter.
What Happened To BitConnect?
BitConnect, formerly headquartered in the United Kingdom, was launched in 2016 by Satish Kumbhani.
Unfortunately, not much is known about BitConnect’s founder, which certainly was one of the major red flags that surrounded the company early on.
However, remaining in the dark is not a rare exception in the crypto industry. The identity of Satoshi Nakamoto, the man or group behind the Bitcoin whitepaper, remains a mystery to this date. The founder of CoinMarketCap, Brandon Chez, famously moved apartments after a Wall Street Journal article revealed his home address and identity.
To that extent, BitConnect was incorporated by a British man called Ken Fitzsimmons who owned around 75 percent of the company. Despite his large stake, his name was never mentioned on BitConnect’s website.
BitConnect was ultimately launched in February 2016. Throughout that year, the company largely remained in beta as it prepped for its Initial Coin Offering (ICO) that was slated to take place in November and December.
In order to attract people to its platform, BitConnect focused on publishing its own content, which allowed it to become more trustworthy in the eyes of Google – ultimately one of the site’s biggest traffic sources.
This certainly added an additional layer of trust in the still very nascent cryptocurrency community. Back then, consuming reputable and trustworthy content was hard to come by since news outlets like CoinDesk or Coin Telegraph were still in their early stage.
Moreover, BitConnect was made available to users across the globe and offered translations in a few dozen languages, including Vietnamese, Cambodian, and more. The company specifically targeted people whose financial literacy wasn’t likely to be high.
On November 15th, 2016, BitConnect launched its ICO which took place for a total of 46 days. The platform offered a total of 4.8 million BCC tokens of which 50 percent were presold on BitConnect’s website as well as the Bittrex exchange.
In retrospect, BitConnect did have amazing timing. 2017 would eventually be known as the year of the ICO, which resulted in the creation of companies like Binance. Even Ethereum, now the second-biggest cryptocurrency by market cap, came to life via an ICO in 2014.
Over the coming months, the price of BCC literally skyrocketed. It crossed the $100 mark by the summer after starting at a mere $0.17. The adoption of BCC and its underlying platform was further aided by the promotion of its first annual ceremony in Thailand. On BitConnect’s website, it read:
“Bitconnect is hosting annual ceremony in Thailand. Anyone that invests US$20,000 or more in Bitconnect lending between 1st of June to 31st of July will get the opportunity to join the Bitconnect annual ceremony event in Thailand.”
Lastly, dozens of influencers on YouTube and other platforms began heavily promoting BitConnect. In exchange, they would receive massive affiliate commissions through specifically set up development funds.
The best example of this likely came towards the end of the year during BitConnect’s annual event in Thailand, which took place on October 28th, 2017. There, you can see Carlos Matos frantically promoting the platform and even addressing some of the Ponzi scheme allegations that had begun to emerge.
Just a few weeks prior, BCC had managed to become the 8th largest cryptocurrency in the world by market cap. At its peak, one token was worth more than $460. However, things eventually got real in November.
First, Vitalik Buterin (founder of Ethereum) and Litecoin creator Charlie Lee began to publicly call out BitConnect on Twitter, alleging that the company is likely a scam. Around the same time, the U.K. Registrar of Companies threatened to shut down BitConnect and gave it two months to prove its legitimacy.
Meanwhile, BitConnect remained unfazed and even announced that it planned to issue a second token, dubbed BCCX (short for BitConnectX9, in January 2018. Fortunately for retail investors, those efforts soon came to a standstill as more news began to emerge.
On January 5th, 2018, the Texas State Securities Board (TSSB) ordered BitConnect to cancel its planned token sale that was slated to take place five days later. A mere week late, on January 11th, the North Carolina Securities Division became the second state to issue a cease-and-desist letter.
However, the biggest news of the month and year came on January 16th when BitConnect announced that it would shut down its lending platforms. Apart from the regulator scrutiny, BitConnect cited “continuous bad press” as well as multiple DDoS attacks as the reasons for its closure.
While BitConnect stated that users would be refunded at a rate of $363.62 (BCC’s average price over the previous 15 days), the token’s price had already plummeted by more than 80 percent.
Shortly after, its once-devoted promoters began denouncing the platform and even deleted the majority of the videos they had made. Over the next two weeks, BitConnect was hit with multiple class-action lawsuits from previous investors who sometimes lost tens and even hundreds of thousands of dollars.
The month of January was capped off with a temporary restraining order, which led to all of the company’s assets in the United States being frozen. Throughout the next months, regulators across the world were keeping busy in mitigating the damage that BitConnect had caused.
In April 2018, the Ontario Securities Commission began looking for people that had been approached by representatives of BitConnect. In July, video streaming giant YouTube was named in a class-action lawsuit, accusing the platform of negligence.
The first indication of justice being served came in August when Divyesh Darji, the Indian head of BitConnect and one of its major promoters, was arrested by local authorities after landing at Dubai airport.
That same month, the BCC token was finally delisted from the last cryptocurrency exchange and effectively became a dead coin. Things got even wilder after U.S. authorities implored India’s Criminal Investigation Department (CID) to seize properties of BitConnect’s Indian promoters.
As it turned out, the BitConnect fraud had been initially reported by Shailesh Bhatt, an Indian businessman, who stated that the local police had kidnapped and robbed him of $1.2 million worth of Bitcoin.
The investigation then revealed that Bhatt himself had invested around $275,000 in BitConnect. After the platform went under, he himself decided to kidnap Dhaval Mavani, a former BitConnect employee, and steal cryptocurrencies worth $25 million.
In order to streamline all legal efforts, the plaintiffs that sued BitConnect filed new documents in October for a so-called ‘Amended Consolidated Class Action Complaint’. Meanwhile, on the other side of the world, courts were finally reigning down on participants of the scam.
In January 2019, the Federal Court of Australia imposed a travel ban and froze all assets of John Bigatton, BitConnect’s main promoter in the country. Despite the ongoing legal battles, BitConnect’s website instated a countdown clock in May and said it planned to launch BitConnect 2.0 in July.
While the new platform did end up launching, it wasn’t anything like the lending exchange offered before. Instead, it simply offered reviews about various cryptocurrency exchanges and other, similar offerings.
In September 2020, after a year of not much progress, the Australian Securities and Investments Commission (ASIC) banned John Bigatton from providing financial services in the country for the next seven years.
Nine months later, in June 2021, it was finally the United States’ turn to issue some penalties. The Securities and Exchange Commission (SEC) charged five members of BitConnect’s promoter network over their participation in the Ponzi scheme.
The complaint named Michael “Michael Crypto” Noble, Ryan Maasen, Trevon “James” Brown, Craig Grant, and Joshua Jeppesen who mediated between the four promoters and BitConnect. Brown, for example, made $480,000 from his promotion of the platform while Jeppesen obtained a whopping $2.6 million in referral fees.
While Grant, Brown, Noble, and Maasen were charged with failing to register as broker-dealers, Jeppesen was accused of “aiding and abetting BitConnect’s unregistered offer and sale of securities.”
Two months later, four of the five mentioned defendants (excluding Brown) settled with the SEC and collectively paid over $3.5 million in fines. Additionally, they were forced to hand over 190 Bitcoins to the SEC. Noble and Jeppesen were, furthermore, permanently barred from promoting digital asset securities.
In September, BitConnect’s lead promoter in the United States, Glenn Arcaro, also pleaded guilty to conspiracy to commit wire fraud. A statement by the DOJ read that Arcaro “sat atop a large network of promoters in North America, forming a pyramid scheme known as the BitConnect Referral Program.”
That same month, the SEC also sued the company itself as well as its nebulous founder Satish Kumbhan. In November, the DOJ was able to liquidate around $56 million in assets seized from Glenn Arcaro, which ended up becoming the most sizable recovery of proceeds associated with a crypto fraud by the DOJ to this date.
BitConnect, over its close to two years of existence, managed to defraud thousands of investors out of an estimated $2.2 billion. Many lawsuits against the company as well as its promoters are still pending final announcements.
Why Did BitConnect Shut Down?
BitConnect was ultimately shut down because the platform turned out to be a Ponzi scheme and thus wasn’t able to repay its investors.
In essence, the company took someone’s Bitcoin and allowed investors to retrieve their money in BCC, the platform’s native token.
However, due to the extensive returns investors were seeing, both in terms of the appreciation of BCC’s price as well as the interest they were earning, people decided to remain invested.
In the meantime, the people behind the scam were retrieving Bitcoins and cashing them out for actual fiat money.
The key to maintaining any Ponzi scheme is that investors keep their money inside the system. This is probably best exemplified by the Bernie Madoff scandal in which investors were defrauded of around $65 billion.
Cryptocurrencies (and more specifically ICOs) often act as the perfect breeding ground for such scams because new coins can be minted all the time. In the case of BitConnect, it only released 4.8 million tokens during its ICO out of a total of 28 million.
Depending on how fast new blocks would’ve been created (and thus new tokens minted), BitConnect could’ve kept the scheme going for a substantial amount of time.
What acted as the proverbial nail in the coffin was that first the public and then regulators began cracking down on the company. Once it wasn’t able to provide the necessary disclosures and prove the legitimacy of its trading bot, BitConnect’s founders quickly decided to shut down in hopes of getting away with their fraud.
