"Crypto Crooks" is sponsored by Chainalysis.

It takes a village to scam the world. Or at least some YouTube channels.

In the penultimate episode of “Crypto Crooks: BitConnect,” we talk to Scott Shaffer, who kept close tabs on the BitConnect team both before and after the collapse on his YouTube Channel, “Crypto Jedi.” He watched a series of charismatic, powerful YouTubers invite viewers into their pyramid scheme, getting richer with every fish they caught. And ultimately, he watched their greatest coup of all: turning their victims … into scammers themselves.

Clips:

• BitConnect Annual Ceremony 2017
• What happened to Carlos Matos and Bitconnect?
• TREVON JAMES: MY FINAL BITCONNECT RANT!
• THE TRUTH About BitConnect, CryptoNick, Trevon James, and Craig Grant

Chainalysis is the blockchain data platform. We provide data, software, services, and research to government agencies, Web3 companies, financial institutions, and insurance and cybersecurity companies. Our data powers investigation, compliance, and business intelligence software that has been used to solve some of the world’s most high-profile criminal cases. For more information, visit www.chainalysis.com.

“Crypto Crooks” is a CoinDesk Podcast Production. The executive producer is Jared Schwartz, with additional production by Eleanor Pahl, Rob Mitchell, Nora Battelle, Jonas Huck, and Moon Beast. Fact-checking is by Amber Von Schassen, and sound design and music are by Altus Noumena. This show is written and voiced by David Z. Morris.

Audio Transcript: This transcript has not been edited and may contain errors.

DAVID:

Like most true stories, and most scams, it’s hard to say exactly when Bitconnect’s $2 billion dollar fake crypto scheme began, or exactly when it ended. Maybe it started when Satish Kumbhani thought up a crypto-inspired ponzi scheme. Maybe it started with the invention of Bitcoin. Maybe it started all the way back with the rise of the modern financial system.

As for where it ended? Maybe when the Texas State Securities Board issued a cease and desist order against BitConnect. Or when BitConnect’s organizers disappeared with investors’ bitcoin. Or maybe, it won’t really end until authorities finally track down alleged founder Satish Khumbani and put him on trial.

But for at least one man, the BitConnect story is definitely still not over.

Once again, that’s Carlos Matos, giving his legendary cheer at the October 2017 BitConnect celebration in Thailand. Carlos provided the most indelible moment in a jam-packed evening, featuring not just dozens of upbeat pitchmakers, but also incredibly elaborate musical numbers and dance routines that bathed the BitConnect faithful in grand declarations, frenetic rhythms and hypnotically flashing lights.

Carlos Matos and his infectious cheer are the most lasting remnant of the BitConnect saga – aside, at least, from the damage done to victims. But that also means there are a lot of misconceptions about Carlos. Because he was on the same stage as now-indicted miscreants like Satish Kumbhani and John Biggaton, some may assume that Carlos Matos is also one of BitConnect’s masterminds.

But he isn’t, and he never was. He claims to have lost thousands of dollars on BitConnect, as well as other apparent scams or pyramid schemes – it seems he’s got a bit of a weakness for them. Despite his continuing public visibility, Carlos has never faced any charges in connection with BitConnect. There’s no evidence he had any connection to BitConnect leadership.

Aside from that big exception, things seem to have worked out okay for Carlos. As he told the hosts of the Bad Crypto podcast in 2021, he has become a therapist working with disabled children, and maintains a YouTube channel where he’s the same irrepressible guy as ever. He also, for better or worse, has tried to leverage his crypto notoriety with side-hustles like selling NFTs.

So it seems that the incredible enthusiasm that Carlos exuded onstage in Thailand was entirely sincere.

That’s not necessarily the case for the people he was standing next to.

We’re looking back with 20/20 hindsight, but on that tape from 2017, I think you can see the difference between Carlos Matos and BitConnect bigwigs like John Bigatton, Glenn Arcaro, and Satish Kumbhani himself. These top-level insiders are upbeat, but more polished, more professional, and certainly more restrained. Carlos’ manic energy was, for a little while, the greatest advertisement BitConnect could have imagined – because he believed every word of it.

Among all of its deceptions – the impossible returns, the worthless BCC token, the trading bot that never existed – this might be BitConnect’s most nefarious and damaging trick. By turning people far from the origins of the scam into its front-line promoters, the scammers both created layers of protection from law enforcement, and made their pitch even more convincing. This also makes it difficult, even today, to draw a clear line between victims and scammers.

In essence, BitConnect figured out a way to get their victims to rip each other off.

So now it’s time to look, not at BitConnect’s masterminds, but at its victims. Because this was a pyramid scheme, many of those victims were turned into con artists themselves.

And the very best kind of con artist is one who thinks they’re telling the truth.

Welcome to “Crypto Crooks,” Season 1, BitConnect. Episode 3: Technically, you kind of lost your money.

Hello and welcome to Crypto Crooks, a new podcast from CoinDesk. Our first season focuses on BitConnect, a Ponzi and pyramid scheme that collapsed in early 2018. It’s a tale with a lot of lessons to teach – lessons that the most recent crypto collapses suggest we still haven’t quite learned, nearly five years later.

I’m your host, David Z. Morris, CoinDesk’s Chief Insights Columnist. I’ve been reporting on cryptocurrency since 2013, and I’ve followed it because I believe it will profoundly transform how we live. But I’ve also watched as the promise of crypto has been repeatedly threatened by a constant stream of con-men and hucksters preying on the uninformed, the naïve, and the desperate. Over the years, I’ve seen the same shady tactics, bad ideas, and deceptive rhetoric again and again.

We’re launching Crypto Crooks to share historical insights, in hopes of protecting crypto investors from getting taken in. Each short season of the show will focus on a different major fraud, crime, or bad idea that fleeced investors and the industry. Because while cryptocurrency is a radical new technology, fraudsters aren’t quite so innovative.

Part 1: I drink your milkshake

For a time, promotional videos for BitConnect were spreading across YouTube and other corners of the internet like wildfire. Mostly these were created not by BitConnect itself, but by a class of cryptocurrency influencers who have arisen over the past half-decade in response to rising curiosity about crypto – though some would argue these figures exist to exploit the curious rather than enlighten them.

We’ll be talking about some of the biggest promoters of the scam – people like Trevon James, who we’ve already crossed paths with. But they were just the tip of a much scarier iceberg – BitConnect’s pyramid incentive structure led thousands of people around the world to create their own promotional videos or events. Many of those videos have effectively disappeared, but a YouTuber going by Jabroney has preserved a few.

Take this woman, who turned to BitConnect out of seeming desperation.

The user shows her BitConnect home screen, revealing three important numbers. From her initial investment of $11,000, BitConnect tells her she earned more than $43,000 in lending profit – an absurd rate of return that is in itself a red flag. But this user also earned $13,097 in what the system calls “affiliate bonuses.” These bonuses were arguably a much more dangerous element of the fraud.

The affiliate system was the single most important ingredient in BitConnect’s viral spread around the world. Big YouTube influencers and average users alike would share affiliate links or codes when they promoted BitConnect. If a new user signed up through their affiliate link, they became part of that influencer’s so-called “downline.”

This meant that the influencer got paid based on that new user’s activity.

SHAFFER:

I do believe a lot of people who signed up were very desperate. People who saw their friends sign up earlier, and get their returns on their money and now getting daily interest on the money they invested… these people are like, that looks like a great deal, I’m not doing too well financially, I want to make a bunch of money, I’m going to get involved in this. And because those people are desperate, they’ll often not do any research to realize that this is a scam.

DAVID:

That’s Scott Shaffer, who kept close tabs on the BitConnect team both before and after the collapse on his YouTube Channel, Crypto Jedi.

The desperate people he’s talking about, like the woman who couldn’t get by on social security, make convincing evangelists to other people who are frantic for a lifeline. Give them a little encouragement in the form of referral commissions, and they can become very persuasive con artists – without ever realizing that’s what they’re doing.

Of course, that ultimately just leaves desperate people even more desperate. Here’s another video preserved by the YouTuber Jabroney.

JABRONEY CLIP:

Hey, this is John. I made a video earlier, it may have had a little foul language in it and I apologize. I try not to talk like that, but by god, I’m hurt. And there’s a million others hurt out there. I got into BitConnect, just like a lot of you, with hopes and dreams. I have a son with Autism, I thought, this is something I can do besides this daily grind that doesn’t get me anywhere, and just have some money for him, some money for stem cell therapy, and just money money when I die that somebody will be able to take out of the wallet and help him along.

DAVID:

The role of financial desperation in the psychology of fraud victims helps explain why fraud is so widespread, and seemingly so successful. America’s economy, to pick one key example, has become increasingly challenging for working people: thanks to a mix of globalization, automation, and the anti-labor policies of both the Reaganite new right and the Clintonite neoliberal Democrats, wage growth has stagnated since the late 1970s.

According to pre-pandemic surveys, one-quarter of Americans have effectively no savings. In a 2019 Gallup poll, 40% of Americans reported living paycheck to paycheck, or even going into debt to stay afloat. Consumer debt levels have doubled since 2004.

That pushes many people into the arms of fraudsters who promise an easy way out. A survey published in 2017 by the Financial Industry Regulatory Authority, or FINRA, found that just over half of respondents reported being victims of fraud. The most common sort of fraud was consumer fraud like unauthorized billing. But investment fraud came in second. 16.5% of the U.S. residents surveyed reported falling for an investment scheme like BitConnect.

That adds up. In 2017, the Department of Justice reported levying $6.8 billion in total enforcement fines against financial fraudsters – and that only includes cases where perpetrators were prosecuted and convicted.

Fraud has not abated in the pandemic era – in fact, quite the opposite. According to the Federal Trade Commission, fraud reports surged 70% in 2021 during pandemic lockdowns, which might suggest that people are more likely to be victimized when they’re isolated and spending more time online. Victims of investment fraud who reported to the FTC lost a median of $3,000 that year.

Much of this growth seems to have come from cryptocurrency-inspired scams following in BitConnect’s footsteps. According to a report from Chainalysis (the sponsors of this program), cryptocurrency investment fraud rose a staggering 82% in 2021, to an estimated total of $7.8 billion in losses.

Those numbers do not include the recent collapses of various crypto lending and exchange platforms that may have been fraudulently operated, including Celsius, FTX, and Luna’s Anchor protocol.

Part 2: Bad Math

So why wasn’t there any money at the end of the rainbow for people like John and his son? In part, because of the same affiliate fees that helped rope them in.

BCCPONZI:

So, if I referred someone, that someone would be level one for me. So if he deposited $1k, 7% of that $1k would be my referral fee. So as soon as he deposited $1k, I would have $70 in my account. And if that guy referred someone else, he would get 7% from the next guy, and I would get 3% from the next guy. Every X amount of money, you have to pay 13% as a sort of referral fee, that’s a lot of money. You need to make a lot of money to actually make up those amounts of money.

DAVID:

That’s BCCPonzi, the anonymous critic who helped bring down BitConnect in 2017. He’s also sometimes referred to as Bernie – not because that’s his real name, but because for years, his Twitter avatar was a picture of Bernie Madoff, who ran a huge and infamous investment Ponzi scheme. BCCPonzi remains anonymous to this day, in part because he’s worried that BitConnect’s masterminds might still come after him.

BCCPONZI:

I do have a finance background … I’m a bit skeptical by nature, I believe. Whenever I see something that looks too good to be true, that raises red flags for me immediately.

The more I looked into it, the more obvious it was to me that it was a Ponzi scheme … it also says something about people who invested in BitConnect, I think, that they had no idea about financials or Bernie Madoff, they never heard of him.

DAVID:

Those many levels of referral fees are what made BitConnect a pyramid scheme. The people who spread the word first and fastest wound up in a small group at the top, with streams of money rising to them from every layer underneath. Pyramid schemes always collapse because eventually, there are no more people to join the bottom layers, so latecomers don’t get the same results as those early promoters.

But while many pyramid schemes promise to share revenue from sales, BitConnect was also promising returns on a financial investment – the loans that users were supposedly making to the magical bitcoin trading bot. This makes the math of its sales commission structure even less sustainable than an average pyramid scheme’s.

Think about it – out of every bit of cash that came in via a referral, BitConnect immediately sent between 7% and 13% of the amount to the promoter who had referred the new investor, and to people even higher in the pyramid. That money came from what was known as the “development fund.” But that fund, according to the U.S. Justice Department, was “essentially a slush fund of investors' money.” This, of course, amounts to the definition of a Ponzi scheme.

To add insult to injury, DOJ also alleged “National promoters for BitConnect, like Arcaro, could also use Development Fund payments for their own personal use.”

Satish Kumbhani seems to have been well aware of all this: According to DOJ, Kumbhani reprimanded Arcaro for revealing the existence of the fund, demanding that he delete videos that mentioned it.

Despite those huge payouts to promoters, BitConnect was still promising to send the new investor profits based on the size of their initial investment, and those profits began accruing immediately. Doing some math, that means the magical trading bot had to generate between 8 and 15% returns on the investor’s remaining money just to fill the gap left by commissions. BitConnect was acting as if it could generate those returns almost instantly.

That’s absolutely impossible. But while this particular outsized claim was hidden under layers of pyramid payouts, BitConnect was making even crazier promises right out in the open…

BCCPONZI:

On top of the referral scheme, there was the daily interest that was paid out, that was around 1% per day. If you have any background in investing, you know that that’s impossible … So that’s a huge red flag. That’s the biggest red flag of all.

DAVID:

Part 3 – Influenza

DAVID:

You wouldn’t have heard about any red flags from most of the people talking about BitConnect in 2017, when it was growing at a massive rate. The affiliate program incentivized a lot of people to get the word out, and to say nice things. There was no similar incentive for people like BCCPonzi or Scott Shaffer who saw problems with BitConnect.

So positive messaging dominated. And a few people were particularly effective at spreading the good news.

SHAFFER:

Craig Grant … If you were in cryptocurrency in 2017, and on YouTube, you saw ads from him. He was running ads promoting BItconnect all the time, like ‘this is my wallet, I have 20 bitcoin in here, and I did it all from affiliate marketing from BitConnect.’ But Craig Grant spent thousands of dollars promoting BitConnect.

DAVID:

Craig Grant was one of three huge American BitConnect influencers who were all over YouTube during this period. We’ve already met the second one, Trayvon James.

Finally, there was the oddest of the three, who went by the name Crypto Nick.

SHAFFER:

Crypto Nick was I think one of the first people I started watching on YouTube … At the time, I believe he was about 16 years old when I first started watching him. As I continued to watch him, I realized he didn’t know all that much about what he was talking about with cryptocurrency.

DAVID:

While every BitConnect victim could promote the con by sharing their referral code, these three influencers were a microcosm of a worldwide network of more professional promoters. According to Scott Shafer, Craig Grant was the highest-ranking of the three. Grant may have reported directly to Glenn Arcaro, the head of the American region for BitConnect, who appeared onstage in Thailand standing next to Australian lead promoter John Bigatton.

Shaffer, who monitored the trio for years, says Craig Grant recruited Trevon James to promote BitConnect, and that Trevon James in turn recruited Crypto Nick. All three of them constantly promoted their affiliate codes.

That would have meant, remember, that everyone who signed up using Crypto Nick’s affiliate code was sending a part of their initial investment to Nick – but another slice also went to Trevon James. And some also went to Craig Grant. And, last but far from least, another portion went to Glen Arcaro, way up there at the top of the pyramid.

This structure is extremely powerful for people at the top. Glen Arcaro admitted to making $24 million dollars from his high-ranking role in BitConnect in less than a year. The amounts collected by Trevon James and other influencers are less clear, but it’s possible they also earned millions off the backs of innocent investors.

This is just an extreme example of the much broader phenomenon of finance and cryptocurrency influencers on platforms like YouTube and, more recently, TikTok. There have been repeated instances of these influencers taking advantage of their viewers, including by accepting payments to promote scams. Celebrities, too, have often used their visibility to promote crypto scams to their followers – Boxer Floyd Mayweather, producer DJ Khaled, and generically famous person Kim Kardashian have all faced actions from the Securities and Exchange Commission for promoting fraudulent cryptocurrencies.

It can be very difficult to tell such unethical influencers from qualified financial commentators. But here’s an easy place to start: Don’t take investment advice from 16-year-olds on YouTube. Especially if they’re being paid to sell you something.

Another good way to figure out whether someone is trustworthy is whether they’ve committed fraud before. In this case, Craig Grant ticks that box in a big, big way.

That’s tape from a YouTuber named Brian Phobos. He and others have collected strong evidence that Grant was the man behind a high-profile catfishing scam in the early 2010s. A woman going by the name Yuliana Avalos sued Match.com for $1.5 billion in 2013, claiming that her photos were fraudulently used to entice men on the site – including a 70 year old New York man named Al Circelli, who was entrapped by an account using images of Avalos.

According to WABC, Circelli sent as much as $50,000 to the account, who told him she needed it so she could leave Ghana and meet him in the U.S. This sent Circelli into financial ruin, and when his online love never showed up, Circelli took his own life.

Avalos’ lawsuit depicts her as an innocent bystander, but strong evidence contradicts this. Avalos appears to have been close to Craig Grant, and in a Facebook post, Grant detailed his active role in sending photos of her to Nigerians who used them in romance swindles.

As Grant brags in the post, it was easy income. “Nigerian Scammers do all the work to get this ball of magic money rolling, using the pictures I took of Yuliana over the past 10 years … about $50,000 gets sent to Africa before we see $5000 and that’s great.”

Those numbers line up specifically with the $50,000 Al Circelli allegedly sent to a romance swindler before taking his own life.

For Craig Grant and people like him, a paltry $5,000 appears to be worth spending the rest of your life with a tragic death on your conscience.

This lack of remorse is the hallmark of a true sociopath – a person who feels no empathy for others. This type of scammer returns to their bad habits again and again – particularly in crypto, where they can more easily change their names and hide their identities.

Another notorious example is Gerald Cotten, putative CEO of the fraudulent Canadian crypto exchange QuadrigaCX. Cotten disappeared with nearly $200 million dollars’ worth of depositor funds in 2019. Investigators have subsequently found that the two major players in that catastrophe, Gerald Cotton and Michael Patryn, had met on message boards for professional financial scammers nearly a decade before founding a crypto exchange.

Certain people, it seems, feel no remorse about taking advantage of others – especially when the money is so easy.

But what about the people who try to stop the scammers? What motivates them? At least in part, BitConnect’s biggest critics, like Shaffer and BCCPonzi, saw it as an attack on the real promise of cryptocurrency.

BCCPONZI:

For crypto, I’m not totally against it, because I can see some benefits, for sure … So it’s not that I’m anti-crypto, not at all. I’m anti-scams, anti-frauds.

SHAFFER:

“The main reason that I was talking about people like Craig Grant and Trevon James is that I don’t want there to be scams in cryptocurrency … My hope for cryptocurrency is that 10 or 15 years from now, you can just like go to 7-11 and get a slice of pizza and buy it for some cryptocurrency … As long as there are things like BitConnect, where people put their money in, it’s a blatant scam, then they lose all their money, cryptocurrency will never go mainstream as long as things like that exist.”

DAVID:

But of course, this is where things can get very tricky, because BitConnect and its promoters also seemed like passionate believers in the promise of cryptocurrency. They exploited a human psychological weakness widespread in investing: what’s known as “FOMO,” or Fear of Missing Out.

While it may have started as a trap for would-be money launderers in India in 2016, BitConnect really went global during a crypto bull market that was covered widely in media around the world in 2017. Those audiences were eager to learn more about crypto, mostly because it seemed there was money to be made, and that speed was crucial. With its huge network of promoters, easily accessible on sites like YouTube, it was often BitConnect who was there to teach them - and to take their money.

This funneling of technological excitement into frauds is far from unique to cryptocurrency. Tech hype has played a central role in innumerable modern financial scams, stretching back at least as far as the Credit Mobilier fraud perpetrated by Union Pacific railroad executives in the 1860s. More recent examples include Enron, WeWork, Nikola, FTX, and Theranos.

In their time, these ideas seemed exciting, revolutionary, and poised for huge growth – but they were also complex and confusing. This combination is perfect for frauds, who can attract piles of investor cash today by making big, vague promises about the distant future.

Victims find themselves blinded by greed, willing to take the word of a charismatic leader who can rattle off dense jargon and paint an intoxicating portrait of some distant elysium. Even supposedly sharp-eyed professional investors aren’t immune – even the most respected Silicon Valley venture capitalists can be shockingly easy to trick.

The search for solutions can seem daunting. Some have even argued that investment fraud is inevitable in a capitalist economy. Maybe all we can hope for is to try not to become victims ourselves.

So whatever you’re investing in, whether you’re investing in crypto, medicine, or electric vehicles, learn the basics. Ask where the money is really coming from. Read reputable sources. And keep your eyes peeled. Then maybe you’ll be able to steer clear … of crypto crooks.