Operator of Fraudulent Bitcoin Platforms Faces Up to 20 Years in Prison

According to Bloomberg, Jon E. Montroll from Saginaw, Texas is facing up to 20 years in prison for stealing thousands of Bitcoins from customer funds, running an unregistered securities exchange, and lying to US security regulators after his cryptocurrency exchange, BitFunder, was hacked. Montroll pleaded guilty to securities fraud and obstruction of justice before US Magistrate Judge James L Cott on July 21, 2018, and now faces up to 20 years in prison.

“As alleged, the defendant repeatedly lied during sworn testimony and misled SEC staff to avoid taking personal responsibility for the loss of thousands of his customers’ Bitcoins,” said Geoffrey Berman, a Manhattan US Attorney in a statement.

Cryptocurrency Exchange Founder Defrauds Investors

According to the prosecutors, the 37-year-old operated two defunct cryptocurrency services. One of the services was WeExchange Australia Pty Ltd, a cryptocurrency exchange and Bitcoin depository, while the other was BitFunder, a service which facilitated the sale of virtual shares from business entities in exchange for cryptocurrencies like Bitcoin. The Metro reported in February 2018 that Montroll was arrested in his home state after a criminal complaint.

According to an SEC statement, Montroll also did not register his securities exchange. “Platforms that engage in the activity of a National securities exchange, regardless of whether that activity involves digital assets, tokens, or coins, must register with the SEC or operate pursuant to an exemption,” said Marc Berger, the director of the SEC’s New York Regional Office.

Throughout 2012 to 2013, Montroll had deceived investors by taking the Bitcoin deposits from WeExchange users’ and spending it on himself. Instead of providing the services required, he exchanged the cryptocurrencies for fiat currency and spent the money on personal expenses like travel and groceries.

Prosecutors also mentioned that in July 2013, Montroll took peoples’ investments in a security known as Ukyo.Loan. He lied to investors by promising them that, by handing over their cryptocurrency investments, they would earn interest every day and could reclaim their shares at any given time.

Montroll Lied About Cryptocurrency Exchange Being Hacked

In July 2013, Montroll’s cryptocurrency exchange BiFunder was hacked. The hackers managed to enter the system due to technical weaknesses and vulnerabilities present in the programming code. The hackers stole approximately 6,000 Bitcoins which at that time was worth approximately $775,075. It would be worth approximately $46 million today.

Montroll did not have enough to repay his investors from Ukyo.Loan and users from BitFunder and WeExchange. He therefore decided not to tell his users of the hack and continued to take their funds. Montroll also continued to promote BitFunder as a successful cryptocurrency exchange, which helped him raise an additional 978 Bitcoins.

The US Securities and Exchange Commission (SEC) investigated the matter further, however, because Montroll had lied to the investigators about the timing of the attack and the events that followed. In interviews in 2013 and 2015, Montroll provided the SEC with false screenshots which showed the number of Bitcoins available to the BiFunder users, but the SEC eventually caught on.

“We will continue to vigorously police conduct involving distributed ledger technology and ensure that bad actors who commit fraud in this space are held accountable,” said Lara S Mehraban, the Associate Regional Director of the SEC’s New York Regional Office.

Cryptocurrency Security and Lack of Clarity, A Big Problem for Retail Investors

Unfortunately, the Montroll case above illustrates the big risks of trading and investing in cryptocurrencies for everyday retail investors. Not only are security risks and loopholes in programming code an easy way for hackers to steal funds, many consumers and retail investors place their trust in actors that may be acting in bad faith.

Since the cryptocurrency sector remains highly unregulated, cryptocurrencies and naive investors are an easy target for criminals looking to profit quickly. Dorothy Flippov, a private investigator with McCann investigations who specializes in cryptocurrencies mentioned to CNBC that, there are still many vulnerabilities when someone decides to open up a cryptocurrency account. Not only are there bad actors, some investors forget their private key and are locked out. Others have even sent their coins to the wrong address.

Unfortunately, bad actors like Montroll often hurt the cryptocurrency industry. Flippov, therefore, recommends that all investors undergo rigorous due diligence and safety before they trust a team or an entity. Retail investors should also stick with well-known, reputable companies when purchasing cryptocurrencies.

It’s important to ask “how long have they been around?” said Flippov. “Who’s the team behind it? If they’ve been involved in a lawsuit don’t go with them.”

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