India Thrust into the Spotlight for $3.2 Billion in Bitcoin-Fueled Losses

India Prime Minister Narendra Modi has established a reputation of being tech-savvy, but the administration has taken a hard line on the cryptocurrency industry. Now a report has surfaced in Bloomberg that Gujarat, Prime Minister Modi’s home state, could be responsible for more than $3 billion in bitcoin-fueled investment losses. There are many moving parts to the scandal, at the center of which is alleged Ponzi scheme BitConnect, which has been under investigation by Indian authorities and which was banned from operating via cease-and-desist requests in Texas and North Carolina.

Anti-Fraud Efforts Backfire

Prime Minister Modi’s decision a couple of years ago to remove certain banknotes that were being used in fraud reportedly led these India-based investors to flock to BitConnect as an alternative to keep their assets under the radar. Mr. Modi’s platform is an anti-corruption theme, and he faces re-election next year. Meanwhile, an accountant source told Bloomberg that on the heels of banning the banknotes, some $650 million made its way into Surat, Gujarat’s port city, in clandestine dealings targeting cryptocurrencies.

Ultimately, Gujarat-based investors reportedly directed billions of dollars into the controversial BitConnect, $3.2 billion to be exact, in response to the bull-market run in the bitcoin price, which peaked at year-end 2017. BitConnect, which also had offices in the U.S., Hong Kong, Singapore and other jurisdictions, was promoted in the state by BitConnect Co-Founder Satish Kumbhani.

BitConnect’s business model was to accept bitcoin deposits in exchange for which investors received the company’s native coin, which clients were then able to lend with a 40%-plus interest rate attached, according to the Bloomberg report. There were incentives to earn an even higher rate that involved luring other investors to the platform.

The Beginning of the End

A series of events unfolded including the cease-and-desist letters to BitConnect in the U.S. in January 2018 which coincided with the beginning of the downturn in the bitcoin price, all of which was exacerbated by India’s decision to crack down on cryptocurrency exchanges, after which time Gujarat and New Delhi became inundated with reports of crypto-fueled frauds, according to Bloomberg.

The saga only intensifies from here, as evidenced by reports of kidnapping by authorities and former lawmakers no less of BitConnect officials with demands for payment in hundreds and even thousands of bitcoin. With no resolution in sight, Gujarat investors were seemingly the ones left holding the bag for $3.2 billion. One of those investors, property developer Shailesh Bhatt, who is at the center of the controversy, is among the individuals being charged for wrongdoing and appears to be on the run.

Meanwhile, as India’s central bank has banned banks from cooperating with cryptocurrency exchanges, questionable methods of transacting in cryptocurrencies are on the rise, most notably Dabba, which is an illegal way of trading digital currencies off the books, as previously reported.

Featured image courtesy of Shutterstock.

Gerelyn has been covering ICOs and the cryptocurrency market since mid-2017. She's also reported on fintech more broadly in addition to asset management, having previously specialized in institutional investing. She owns some BTC and ETH.

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