Within a week of shutting down its operations pursuant to cease-and-desist letters from securities regulators, BitConnect, a cryptocurrency lending and exchange platform, also received service of a class action lawsuit filed by some of its investors. The lawsuit also included its U.S.-based directors and promoters.1 The plaintiffs are represented by the same law firm that filed the recent class action lawsuits against the promotors of the Initial Coin Offerings by Tezos and Giga Watt.
The BitConnect complaint contains a dozen allegations, and claims losses exceed $770,000. Among the allegations are violations of state and federal securities laws covering fraud, the offering of unregistered securities, deceptive and unfair trade practices, fraudulent inducement, fraudulent and negligent misrepresentation, conversion, and civil conspiracy. One remedy the complaint seeks is to rescind the contractual arrangement between plaintiffs and BitConnect, which would entail ordering BitConnect to return the currency in the form provided to BitConnect (i.e., the actual bitcoin(s)). Not surprisingly, the plaintiffs want the bitcoin or other currency, not the dollar equivalent.
BitConnect's Alleged Ponzi Scheme
Launched in February 2016, BitConnect introduced its own cryptocurrency, the "BitConnect coin" (BCC). In December 2017, BCC's market capitalization purportedly hit approximately $2.7 billion.
The plaintiffs allege that BitConnect operated a Ponzi scheme by taking in or borrowing money from investors for trading, with a guaranteed return between 1% and 40% daily, "regardless of market performance." According to BitConnect, it could do this because it had its "own proprietary trading bot and volatility software." The plaintiffs contend that, in reality, BitConnect achieved these very high rates of return by paying new BitConnect investors with money from previous investors—a classic Ponzi scheme.
To undertake its operations, BitConnect would convert fiat or bitcoin into the platform's native cryptocurrency, BCC, for trading. As investor demand for BCC increased, so did its value. In January 2018, securities regulators in Texas and North Carolina demanded that BitConnect cease and desist its activity. On January 17, 2018, BitConnect closed its exchange, making its BCC tokens or coins essentially worthless.
Legal Implications and Takeaway
- If you are offering a token or investment type of cryptocurrency, it is crucial to ensure that such an offering is compliant with the law. The U.S. Securities and Exchange Commission and the Commodities Futures Trading Commission, as well as various states, have issued guidance on initial coin offerings and newly created cryptocurrencies used for investing. The law in this area is in a nascent state and is developing rapidly.
- If you are promoting or offering a product for public use, such as a cryptocurrency or token, there is a wide array of both state and federal consumer protection laws that apply to such advertising. This law is more developed and is more easily managed by experienced counsel.
 Wildes v. BitConnect Intl. PLC et al., Case No. 9:18-cv-80086-DMM (S.D. Fla, January 24, 2018). The complaint lists BitConnect's three corporate entities in the UK and fourteen individuals, including California-based Glenn Arcaro, the director of and shareholder at BitConnect International PLC, and prominent affiliates and recruiters, such as 17-year-old YouTube and social media personality "CryptoNick," who promote BitConnect on social media platforms.