BitConnect, a cryptocurrency trader, ordered to stop operating in NC

The NC Secretary of State’s office has ordered BitConnect, a cryptocurrency trader, to halt its operations in North Carolina.
The NC Secretary of State’s office has ordered BitConnect, a cryptocurrency trader, to halt its operations in North Carolina. TNS

Cryptocurrency traders in North Carolina have hit their first major roadblock: BitConnect’s investment operations are being prohibited in North Carolina.

BitConnect is a foreign technology organization that offers trading in its own digital currency, BitConnect Coin.

The North Carolina Secretary of State’s office issued a temporary cease and desist order against BitConnect on Thursday, for selling securities in North Carolina without being registered to do so in the state. That is a violation of the State Securities Act.

BitConnect requires users to buy Bitcoin and then exchange the Bitcoin for a BitConnect Coin. Investors then “lend” their Bitconnect Coins back to the company to fund “the trading activities of the proprietary, secret trading system that it calls ‘volatility software,’ ” according to the Secretary of State’s office.

According to BitcConnect’s website investors profit from BitConnect’s trading bot and volatility software. The site says those who buy BitConnect coins “will receive daily profit based on your investment option.” BitConnect is incorporated as a private company in the United Kingdom, according to the Secretary of State’s cease and desist order.

“It’s not entirely clear what they are selling but they certainly use terms that would raise the eyebrows of any securities regulator,” said Lee Reiners, a professor of law at Duke University and head of its Global Financial Markets Center. “At the end of the day, if Bitconnect claims to be offering you an opportunity to invest money with the potential of a return, then that functionally qualifies as a security.”

In announcing the cease and desist order, N.C. Secretary of State Elaine F. Marshall said in a statement: “These specific BitConnect investment programs are very concerning from a regulatory standpoint. BitConnect offers investment programs whose returns are derived from a secret trading system about which BitConnect has failed to provide material information to investors, including evidence of its very existence.”

The order says BitConnect’s solicitations “pose an immediate and significant danger to the public welfare.” Among the reasons given:

▪ “the current speculative activity associated with cryptocurrencies makes investors particularly susceptible to investing without performing their normal due diligence. Further, most cryptocurrency exchanges are unregulated markets and therefore vulnerable for manipulative trading, fraud and deception;

▪ “BitConnect has omitted material facts in its offerings and has made misrepresentations which make the BitConnect investments particularly dangerous for the investing public. Further, BitConnect is encouraging members of the investing public to become its affiliates and therefore to act as unregistered dealers and/salesmen in violation of the Securities Act; and

▪ “BitConnect’s marketing materials are disproportionally targeted towards children, young adults, persons of limited financial means, and unsophisticated investors who may not be able to sustain a complete loss of their investment without enduring significant financial hardship.”

The order requires BitConnect to “stop trying to sell these investment products or trying to try to get others to sell the investment products,” said George Jeter, a spokesperson for the Secretary of State. The temporary order will become permanent after 30 days unless BitConnect challenges the order before an administrative law judge.

Marshall made a point of saying in her statement that her office was “not condemning cryptocurrencies as a whole,” but added, “We are aware that there appear to be other cryptocurrency investment schemes offered to North Carolina citizens as well. The purported returns from some of these investments appear to be ‘too good to be true.’ 

Jeter acknowledged that the Secretary of State’s office is looking at other cryptocurrency traders in the state.

“The fact that it’s new packaging doesn't change the law,” Jeter said.

To check the registration status of a company offering investments, call the NC Investor Hotline, 800-688-4507.