Indian State Loses $3B in Bitcoin to Fraudulent Schemes, Corruption

Allegations of corruption involving crooked police officers and politicians, tax evasion, and a kidnapped kidnapper form the backbone of an investigation into how India’s Gujarat state lost more than $3 billion worth of Bitcoin, Bloomberg reports.

It all started in February, when Shailesh Bhatt, a property developer, accused a group of policemen of kidnapping him and demanding 200 Bitcoins in ransom, or some $1.8 million at the time. Gujarat’s Criminal Investigation Department (CID) launched an inquiry that has led to startling revelations.

The abduction is believed to have been masterminded by Bhatt’s uncle Nalin Kotadiya, a former lawmaker in Prime Minister Narendra Modi's ruling Bharatiya Janata Party, while Bhatt’s associate Kirit Paladiya allegedly carried out the kidnapping. However, CID lead investigator Ashish Bhatia also filed charges against Bhatt as the probe progressed.

Paladiya is currently behind bars, while Bhatt and Kotadiya have gone into hiding. Denying any wrongdoing, Kotadiya posted a video on social media, accusing Bhatt of orchestrating a massive crypto scam that involves other politicians as well.

According to Bloomberg’s report, Bhatt invested in cryptocurrency venture BitConnect from late 2016 to early 2017. Bhatia told the news agency a Gujarati resident called Satish Kumbhani was promoting BitConnect in his capacity as a co-founder.

The scandal has spread to the US, where six investors acting under the name Crypto Watchdogs have filed a federal lawsuit against BitConnect, accusing the company of defrauding people across the globe. It allegedly enticed investors to deposit Bitcoins in exchange for BitConnect coins and then earn monthly interest of more than 40% by lending those coins. There was also the promise of higher returns if they recruited others to invest.

BitConnect’s value shot up as Bitcoin prices soared from $1,000 to over $19,700 late in 2017. By that point, Gujarati investors, Bhatt included, had pumped $3.2 billion worth of Bitcoin into BitConnect, according to Bhatia.

The report said India’s interest in Bitcoin and Bitconnect was fueled by Modi’s decision in November 2016 to demonetize 15 trillion rupees worth of banknotes in a move to stop tax evasion. This decision resulted in 45 billion rupees (some $650 million) diverted to Gujarat’s port city of Surat to be stashed in investments, including cryptocurrencies, according to an accountant who spoke to Bloomberg on condition of anonymity. 

Kiran Vaidya, product manager at Canadian-based U.Cash, told Bloomberg:

“After demonetization, we were watching India. We'd seen how Bitcoin rose after the Greece economic crisis and similarly after things went south in Venezuela. The volumes were so high that it was people who could move markets."

Things went south for BitConnect investors after the state of Texas issued a cease-and-desist order against the company in January this year, and North Carolina did the same within days. Aggravating the situation was the decision by the Bank of India to ban virtual currency transactions.  Crypto exchanges have hit back with a lawsuit, and India’s Supreme Court has scheduled a new hearing for September.