The cryptocurrency markets are often described as the wild west. But they do not exist in a vacuum, and as recent enforcement actions and suits against Bitconnect, a crypto-exchange and lending platform, show, regulators and plaintiff's side attorneys are increasingly willing to step in to protect investors that have been the victims of wrongdoing.  

On January 4, the Texas Securities Commissioner issued an Emergency Cease and Desist Order against Bitconnect. North Carolina followed suit on January 10, just days later.

These orders noted that investments in Bitconnect's Lending Program and Staking Program should have been registered as securities, but were not.  As a result, Bitconnect was selling unlicensed securities, and thereby violating Texas Securities Act and State Securities Board Rules and Regulations.

Bitconnect’s lending platform raised several additional red flags.

First, the company offered to deliver “annualized returns of 100% or more” from users’ investments.

Second, rumors of Bitconnect’s Ponzi Scheme had been flying around the crypto community for months. Bitconnect’s extensive advertising was targeted towards recruiting sales agents (“affiliates”) who received commissions based on referrals resulting in investments. Bitconnect sales agents targeted potential investors in Texas as well as in other states; however, these agents were not registered to sell securities in states such as Texas.

With Bitconnect being only five days away from its January 9 Initial Coin Offering (ICO) sale, the Order did not paint a pretty picture for prospective investors. In effect, the Cease and Desist Order was a death sentence for Bitconnect.

On January 16, Bitconnect announced that it was shutting down. Shortly after, the price of BCC collapsed from over $400 to around $15 per share.  Following this dramatic collapse, a class action lawsuit was filed against Bitconnect in Florida. 

The Bitconnect ordeal serves as a reminder that if something is too good to be true, it probably is. There are still many unknowns regarding the future of the crypto-lending space. And while investors in Bitconnect, and other fraudulent schemes, may be able to get some of their funds back through litigation, it is important to exercise common sense and remain vigilant in the market place.

A few things to look out for:

  • Limited information on cryptocurrency platforms (e.g., principals and financial condition not clear);
  • Non-transparent means and strategies for earning profits for investors;
  • Failing to reveal algorithms that supposedly churn investments;
  • Affiliate program that could point to a Ponzi Scheme;
  • Promising high rates of return for low risk;
  • Meet crypto lending platform with extra caution; and
  • Bad or questionable press