Financial Ethics Issue: An Examination of Bitconnect and Future Scams

If an opportunity seems to good to be true, it probably is. With the boom of cryptocurrency in 2017, there were good (viable projects) and bad (scams) actors that sprung forth. The good actors have the real opportunity to create a new layer of the Internet. As the Web was for information, Blockchain will be for finance. However, with any unregulated or regulated market, there exists scams, such as pyramid or ponzi schemes, along with new names, like “initial coin offerings” and “pump and dump” coins.

Bitconnect was at the forefront of crypto scams in 2017, with it later collapsing in January 2018 due to a combination of an impending bear market, and cease and desist orders from several governmental entities. Bitconnect claimed itself as a revolutionary decentralized lending platform with ridiculously high guaranteed returns. Bitconnect’s website even used a pyramid to describe their referral system for investors to make more money. The new investors would repay the earlier investors, and hope that some dumb fool would invest after them to continue the unsustainable path. Noteworthily, a lot of Bitconnect investors somehow sincerely believed that this platform was legitimate. At the end of December 2017, Bitconnect reached it’s all time high market capitalization of 2.7 billion dollars. 65 million dollars was recorded as the 24-hour volume. Fewer than three weeks later, Bitconnect had lost more than 98% of it’s value. Some people mistakenly invested their life savings in this “too good to be true” scam.

Based on history, we are informed that scams like these are not going away anytime soon, so it would behoove us as citizens of the world to perform due diligence for future investments, discuss scams openly, and have a strong self-regulating community. Here, I will now discuss the six key concepts of General Ethics: Welfare, Duty, Rights, Justice, Honesty, and Dignity.

In relation to Welfare, thousands of Bitconnect users in dozens of countries were either knowingly, or perhaps unwittingly, swindled out of their investment. Though the Bitconnect creators and early investors profited enormously (January 2017, Market Cap: 500,000; December 2017, Market Cap: 2,700,000,000), most were not so lucky. Most investors never received their initial investment back or even a small percentage. This substantial type of harm can usually never be justified, however, these investors were overtaken by greed. Thus, in the end, investors must be responsible for their own actions and decision making if we are to live in a free society.

Bitconnect investors and the crypto community as a whole both have respective Duties or obligations. Investors must perform due diligence on any crypto asset, and that inclusively involves researching the team, analyzing the white paper and/or business plan, and ensuring that there is a minimum viable product. In this case, analysis of the business structure would reveal an unsustainable pyramid that would eventually run out of new investors to pay back the older investors. The crypto community should more strongly call out scams like these. Unfortunately, Bitconnect has to be a real-life example where everyone else can learn what a modern scam looks like. Mostly everyone not involved in Bitconnect knew that it was a scam, but the majority was too afraid to say something due to the possible repercussions of the Bitconnect base (cyber fights, lawsuits, etc.). Crypto leaders, Ethereum Founder Vitalik Buterin and Litecoin Founder Charlie Lee, did label Bitconnect as a scam in early December. I am not suggesting that there is an obligatory duty to ensure that someone else does not make a stupid decision, but if the community does not want government regulators swooping in which stifles innovation, then we must take responsibility for self-regulating this emerging digital economy.

The discussion of Rights through an ethical lens poses an important question. Do individuals have the right not to be taken advantage of? If in this process of deciding whether or not to invest, is there a metaphorical gun to their head demanding that they must invest? If the answer is no, then individuals must be responsible for their own actions. In a free society, there is no such thing as rights that include material possessions or protection from oneself.

For the situation of Bitconnect, Justice has not and probably will never be served. Though some of the purported leaders and promoters have been sued in various courts, having all of the funds returned back to investors is unlikely. This international debacle involves unclear laws and various parties. This pyramid scheme is similar to multi-level marketing (MLM), which is not exactly illegal.

Honesty is definitely an ethical concept worth considering. There were Youtube promoters with over one hundred thousand subscribers that were promoting this “get rich quick” scheme. These individuals did become rich quickly through their referral links, and advertisements regarding Bitconnect were regularly promoted on the Youtube platform. Either Youtube promoters were brain-dead individuals who neither understand history nor economics, or they were knowledgeably complicit in being deceitful to vulnerable viewers. These Youtube promoters, who have since gone with the wind, were either dishonest to themselves or to their viewers.

For Dignity, I believe that there were not any entirely innocent parties involved, so respect should hardly be shown. Though investors were vulnerable, greed and lack of due diligence, led to their downfall. Even when the crypto community would call out Bitconnect as a pyramid scheme, Bitconnect members would be quick to not listen and be braggadocios about all the moolah that was growing in their Bitconnect account.

Overall, this cryptocurrency scam dealt us as a community with difficult ethical questions. What has been written is my analysis on this issue. Undoubtedly, there are and will be future scams. Having rules and laws established this early for an emerging technology where the potential has not been fully realized is a bad idea. The best near-term solution is to be a steadfast, self-regulating community in order to preserve the future of the new Digital Economy.