SUMMARY
A confusing regulatory scenario for cryptocurrencies has prevailed for years now, leading to the emergence of nefarious use cases for crypto
From Ponzi schemes that lure investors by promoting cryptocurrency to fake coins and promises of higher returns on investment, the Indian market has seen all kinds of scams lately
The Bitcoin bull run has brought many enthusiasts to the cryptocurrency fold lately
Temporary blips and price corrections aside, the Bitcoin bull run has endured this year, with the price of the leading cryptocurrency hovering above the $19,000 mark, as of December 15, 2020. That’s a gain of 60% from late-August when Bitcoin was trading at around $11,767.
Indian crypto stakeholders have been raving about the emergence of Bitcoin as a new asset class since it has fetched returns of nearly 160% since April, as opposed to 30% for gold, the latter also proving an expensive investment for young working professionals in India. Some of the country’s leading crypto exchanges such as WazirX and CoinDCX are reporting buoyant market sentiment, resulting in an enhanced user base.
However, a confusing regulatory scenario for cryptocurrencies has prevailed for years now, leading to the emergence of nefarious use cases for crypto. A lot of these are Ponzi schemes, luring investors by talking up a new cryptocurrency that could fetch higher returns on investment than mutual funds or the more conventional investment instruments. Eventually, these schemes go bust, robbing investors of their hard-earned money.
Other types of crypto scams range from fake crypto wallets to fake altcoins. In the latter, cryptocurrencies other than Bitcoin are made available at certain exchanges at attractive prices.
Those who find bitcoin and the popular cryptocurrencies expensive are drawn to these altcoins, only to find that the new coin isn’t a genuine cryptocurrency, something that’s sooner than later discovered by the relevant authorities. Such fake coins are routinely removed from circulation. However, by the time that happens, millions of dollars worth such fake coins have already been sold to users.
The easiest way to identify a crypto scam is to realise when “offers” and “assured interest returns” on an unheard-of cryptocurrency sound too good to be true.
An overview of the modus operandi of the various types of crypto scams was given in an Inc42 article, Crypto Ban In The Air, Crypto Scams Everywhere.
With the recent case of a Gujarat cryptocurrency trader arrested in connection to a money-laundering probe related to an online betting racket, we look at the most notable crypto scams to have emerged out of India in the last few years.
Crypto Used In Online Betting Racket With Chinese Operators
The arrested person, a resident of Bhavnagar in Gujarat, was found to have purchased Tether or USDT cryptocurrency on behalf of one of the accused companies and transferred them to unknown wallets on foreign exchanges. The police allege that the accused person had knowingly involved himself in layering the proceeds of crime.
The ED’s case is based on a Telangana police FIR that was filed against Dokypay Technology Private Limited, Linkyun Technolgy Private Limited and others and the police had also arrested three people including a Chinese national.
This particular case saw the accused person, leverage crypto’s potential as a decentralised form of currency, away from the clutches of the Reserve Bank of India (RBI) and investigating authorities.
The Morris Coin Scam
This year, the Bengaluru police have been investigating three companies — Long Reach Global, Long Reach Technologies and Morris Trading Solutions. According to the police, these companies collected at least INR 15K each from over 11 lakh people from across the country to invest in a new cryptocurrency called Morris coin. The police have also arrested a 36-year-old man from the Malappuram district of Kerala who is the CEO of all the three entities.
Pluto Exchange Disappears With Crypto
In September, Delhi Police was investigating an alleged cryptocurrency exchange scam, believed to have been operated by one Pluto Exchange, which marketed itself as a cryptocurrency investment firm and had its office in Connaught Place. One of the complainants was asked by one of Pluto Exchange’s founders to invest in a new cryptocurrency that the firm had supposedly launched. The complainant was assured that he would receive 20-30% returns on his investment.
After investing about INR 5 Lakh in the scheme but not receiving any payout, the complainant tried to approach the company’s officials, only to find that the exchange’s office had shifted from India to Dubai. In the preliminary investigation, it was found that 43 complainants had invested close to INR 2 Cr in the scheme.
Amit Bhardwaj Pulls Of $300 Mn Crypto Scam
Once a known industry leader who convinced investors about the potential of Bitcoin, the world’s leading cryptocurrency by market value, Bhardwaj, over 2017-18, convinced close to 8,000 investors to invest in a multi-level marketing scheme (MLM) or pyramid scheme, promising them 10% returns for 18 months on every investment. Being an MLM business, there were incentives for everyone provided they add more investors to the scheme. But as the pyramid gained in length, people soon realised that it was a ponzi scheme.
Having established a slew of crypto companies, namely AmazeMiners, GB Miners, GainBitcoin and CoinBank under the parent company Amaze Mining And Blockchain Research Ltd, registered in Hong Kong, Bhardwaj had a measure of credibility in the market. This was, also owing to the fact that he was a coder and had published a couple of books on cryptocurrency-related stuff. So people assumed that he knew what he was talking about. However, his scamster face soon unravelled. You can read more about the court cases against Bhardwaj here.
Divyesh Darji Of Bitconnect’s Extortion Racket
Darji, a Gujarat-based ‘teacher’, as once mentioned on his LinkedIn profile, was the Asia head of UK-based crypto company Bitconnect. Like Bhardwaj’s MLM scheme, Darji also promised huge returns to crypto investors. Bitconnect even launched its cryptocurrency called Bitconnect Coin. As earlier mentioned, altcoins or alternative cryptocurrencies are a known method of frauds by crypto scamsters.
Bitconnect was launched in India November-December 2016, just after demonetisation had been announced. The company was promoted on social media and by holding gala functions in cities across the world. Darji lured Indian investors with promises of 60% monthly interest and incentives in the form of ‘referral interest’, again very similar to Bhardwaj’s modus operandi.
However, complaints against Bitconnect and Darji started piling up with Gujarat Police in February 2018. Months later, Darji was arrested at the Delhi Airport. Further investigations revealed that Bitconnect in India was being used as a channel for funnelling money from extortion rackets. Darji is estimated to have duped investors of $12.7 Bn worth value in cryptocurrencies.
These crypto scams aren’t outliers but just the notable examples of crypto scams to have emerged from India. Founders of Indian crypto exchanges and industry stakeholders have repeatedly told Inc42 that scams in the domain will continue to proliferate until the Indian government comes up with concrete regulations around cryptocurrencies and blockchain technology in India.
