Block Bits Capital co-founders Japneth Dillman and David Mata allegedly raised $960,000 from over 20 investors, offering misleading claims about a trading bot that would “automatically complete cryptocurrency arbitrage trades on different exchanges,” but was in fact never operational.
According to the SEC, Dillman told investors that Block Bits would invest their assets in low-risk offline “cold storage” deals with third parties. In reality, they pumped the assets into high-risk loans and the AML Bitcoin ICO, which the SEC declared fraudulent in a separate case back in 2020. According to the complaint, these investments failed, and Block Bits lost $508,000.
The scheme was active from June 2017 to July 2018. Accounting for inflation and purchasing power shifts, in today’s terms the losses would be closer to $580,000.
As a result of the investigation, Japneth Dillman was arrested in San Francisco earlier this week. Both he and David Mata are charged with wire fraud, among other other violations. If convicted, they could face 20 years in prison, $250,000 in fines and three years of supervised release.
Separately, the SEC complaints seek “permanent injunctions, disgorgement with prejudgment interest, and civil penalties.”
Knock knock, it’s the FBI
The SEC conducted the investigation in cooperation with the FBI, possibly via the newly formed Virtual Asset Exploitation Unit (VAXU). The VAXU, which joined the National Cryptocurrency Enforcement Team (NCET), is responsible for virtual asset seizure operations, providing equipment and delivering blockchain analysis and training to the rest of the FBI.
The decision to boost the FBI’s presence in crypto investigations came after the Justice Department seized over $3.6 billion in stolen Bitcoin earlier this year.
The Block Bits investigation was also aided by the United States Attorney's Office for the Northern District of California and the IRS Criminal Investigation team.
Sad day for crypto fraudsters
Although the defendants are presumed innocent until proven guilty, the case against them looks strong and might signal that the glory days of crypto securities fraud are over, particularly considering the involvement of the FBI.
The investigation comes weeks after Chainalysis published a crypto crime report, which estimates that in 2021 alone, cryptocurrency-based crime totaled $14 billion.
However, in the years the Block Bits fraud was underway, the scale of crypto crime was much lower, sitting at around $4.5 billion, which makes the losses incurred by Block Bits considerably more perceptible.