On Friday, May 28, the United States Securities and Exchange Commission announced securities fraud charges against five American promoters of Bitconnect, one suspected fraud which operated on the model of a pyramid scheme from around 2016 to 2018. New entrants to the cryptocurrency world might not recognize the name, but Bitconnect was a huge story and an important (negative) part of it. the evolution of crypto. The impending downfall of its supporters – including some who are still active in the cryptosphere today – has important points to remember.

What is most striking is that the SEC has targeted five Bitconnect promoters, not the real creator and mastermind of the scheme – allegedly an Indian, who appears in the Friday indictment documents but is neither named nor charged. This leads to a few important questions: First, do the accusations assume that these promoters knew Bitconnect was a scam? And if not, does the filing involve closer scrutiny of other people who regularly promote or endorse crypto projects – scam or not?

But first, a reminder. On paper, Bitconnect was a “lending platform”: you sent them bitcoin, and Bitconnect promised to use that Bitcoin with its “trading bot and volatility software”. This bot, according to Bitconnect, could produce immense returns whether Bitcoin goes up or down – up to 40% returns per month, according to promotional material. These “returns” were tracked only on the Bitconnect website and were paid in the Bitconnect token rather than in BTC. Even then, withdrawing funds from Bitconnect was a laborious and ultimately impossible process involving multiple conversions and long waits.

Even for those new to relative finance, there should be several red flags here. First of all, 40% monthly returns consist of an annual return of around 3,900% on your investment, a rate that would turn just $ 100 into $ 4,050 in a year. This can certainly be seen as a promise of “outsized returns”, which the SEC lists as a common theme of cryptographic frauds. (Crypto or not, be skeptical of any investment offering more than 10% or 20% annual returns without a clear idea of ​​the risk you are taking for these rewards.)

The premise of a “trading bot” is just as suspect. To even theoretically profit from volatility during a bear market, a bot would have to be able to short sell or bet against bitcoin at very high speed. This may have been possible to some extent (BitMEX had already launched bitcoin short options) but would have been a huge technical and infrastructural challenge. More importantly, even the best high-frequency trading strategies on Wall Street – the grown-up term for a “volatility bot” – are high volume, low margin trades, and even the top performers in their prime are turning around. 60-70. %% annually.

Of course, Bitconnect’s target audience was made up of people who didn’t know or understand these basics – small retail ‘investors’, not only in the US but in places like India and Africa where financial literacy is even lower.

The scale of the fraud was huge, bringing in around $ 2 billion to potential investors, according to the SEC. This success is due in large part to the fact that Bitconnect has emulated the multilevel marketing (MLM) strategies of companies like Avon and Herbalife. Most countries had a “national promoter” and many “regional promoters” who organized local events and promotional discussions.

They have also, especially in the United States, produced immense amounts of social media content promoting Bitconnect, and including affiliate codes that have helped promoters earn huge referral fees. According to the charges on Friday, Michael Noble, aka Michael Crypto, was paid $ 731,281 for allegedly recruiting 1,000 investors. These numbers were not known to the public at the time, but they are high enough to be another major sign of fraud.

(The MLM model was also used during the same period by OneCoin, a similar one however even coarser pyramid scheme that would have brought in up to $ 4 billion worldwide.)

The other defendants include Craig Grant, Ryan Maasen and Trevon Brown, aka Trevon James, all charged with acting as regional promoters of Bitconnect in the United States. SECOND.

Perhaps the best known of the accused is Trevon James. He was a massive presence on YouTube and social media at the height of the scam, and remarkably open in the aftermath of its collapse. (He has even tweeted on the charges last week.) Perhaps James’ most infamous moment was his confused statement, “You haven’t wasted your money!” Now you have your… technically you kind of lost your money.

What’s really important about James being named in the lawsuit is that he, at the very least, feels like an honest Bitconnect enthusiast, and there are no claims according to him. which he played a role in the creation of the program. For those commenting on or making videos on crypto projects, this can create some concern about legal risks. If you endorse something that ends up being a scam, are you risking the attention of the SEC?

First of all, the best way to stay safe is to not accept undisclosed payments in exchange for a promotion. According to the SEC, the four regional promoters (Brown / James, Grand, Maasen and Noble) earned between $ 475,000 and $ 1.3 million each for their promotional work. Jeppesen, the “continental promoter”, is said to have won more than $ 2.6 million. The SEC says this put them in breach of “bragging” laws, which I spoke about last week after Soulja Boy inadvertently revealed he was paid to promote SaferMars. The second set of accusations focused on lower level promoters is that none were a registered broker / trader, even though they received payment based on how many people they helped buy positions in. Bitconnect.

But the most interesting and illuminating element of the SEC’s accusations is that a completely different charge is made against Jeppesen, whom the SEC accuses of “aiding and abetting” securities violations. A charge of complicity, even in a civilian setting, involves an assessment of the accused’s “state of mind,” crypto and securities lawyer Anderson Kill, Stephen Palley, told CoinDesk. This includes whether the person actually knew they were promoting fraud.

While I haven’t seen anything clear from the prosecution documents, it could indicate that the SEC has evidence that Jeppesen knew Bitconnect was a scam from the start, but promoted it anyway. That the other four accused are do not being accused of aiding and abetting, on the other hand, may indicate that the SEC lacks proof that it was involved in the fraud.

This is a very important lesson for those in the cryptosphere: Even if you don’t know that something is a fraud, you can be exposed to legal action if you get paid to promote it. (Theoretically, you could face lawsuits for the undisclosed promotion of a project, even an honest one, but the SEC’s primary focus is on fraud.)

In multilevel marketing (MLM) programs in particular, the line between victim and abuser is often blurred – someone who truly believes in a bogus project or scam may enthusiastically sell it to their friends and family. family while getting ripped off. Some of OneCoin’s biggest promoters were themselves true believers and lost immense sums of money when he folded.

A seemingly important signal from the state of mind of the Bitconnect defendants would have been whether and how much the promoters themselves had invested in Bitconnect, but there is no information about that in the charges. Also noteworthy are two other prominent US Bitconnect promoters, Craig Grant and “Crypto Nick” have not been billed. It may mean that the SEC has determined that they are both victims and perpetrators.

But it can also mean that they are next on the list and that they will be billed separately later, and this is the last important point to remember: just because a few years go by that scammers financiers came out unscathed. Bitconnect collapsed in January 2018, almost three and a half years ago, an eternity in crypto time but not very long by SEC standards.

And the defendant may not have gained much for the accused: they may have to return everything they have won, and more. As the saying goes, the cogs of justice squeak extremely slowly, but they squeak extremely well.