India’s Gujarat state ‘loses $3.2bn in Bitcoin scam’

August 10, 2018
Graham Buck

India’s Gujarat state is reported to have lost more than $3bn worth of Bitcoin in a saga involving allegations of corruption involving crooked police officers and politicians, tax evasion and a kidnapped kidnapper.

Gujarat

Gujarat is Indian prime minister Narendra Modi’s home state: Shutterstock

Bloomberg reports that the ingredients form part of an investigation in prime minister Narendra Modi’s home state where investors allegedly poured money into a Ponzi scheme based on the cryptocurrency.

A tangled tale

The story first came to light in February, when Shailesh Bhatt, a property developer, accused a group of policemen of kidnapping him and demanding 200 Bitcoins (then around $1.8m) in ransom. Gujarat’s Criminal Investigation Department (CID) launched an inquiry that uncovered startling allegations.

The abduction is believed to have been masterminded by Bhatt’s uncle Nalin Kotadiya, a former lawmaker in 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 investigation progressed.

Paladiya was subsequently jailed, while Bhatt and Kotadiya went into hiding. Denying any wrongdoing, Kotadiya posted a video on social media, accusing Bhatt of orchestrating a massive crypto scam that implicated other politicians.

According to Bloomberg, 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.

US involvement

The saga extends to the US, where six investors acting under the name Crypto Watchdogs have filed a federal lawsuit against BitConnect, accusing the company of fraud.

BitConnect coins

BitConnect coins: Shutterstock

Investors were allegedly encouraged to deposit Bitcoins in exchange for BitConnect coins and then earn monthly interest of more than 40% by lending those coins, while higher returns were promised if they recruited new investors.

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

According to the report, India’s interest in Bitcoin and Bitconnect was fueled by Modi’s decision in November 2016 to demonetise 15tn rupees (INR) worth of banknotes in a move to stop tax evasion. As a result, INR 45bn ($650m) was 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 peer-to-peer (P2P) financial services platform U.Cash, told Bloomberg:“After demonetisation, 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.”

However,BitConnect investors were hit in January when the state of Texas issued a cease-and-desist order against the company and North Carolina swiftly followed suit as the Bitcoin price retreated from its record high.

Investigators across Gujarat and in India’s capital of New Delhi say complaints about crypto frauds have flodded in since the US cease-and-desist letters.The situation has since been further aggravated by Bank of India’s decision in April to ban virtual crypto transactions, which is currently being appealed against.

 

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