The owners of a cryptocurrency firm have pleaded guilty to tax evasion, Interim U.S. District Attorney for the North Texas District, Chad E. Meacham, said.

Bitqyck founders Bruce Bise, 60, and Samuel Mendez, 65, were charged with tax evasion in August. Mr. Bise pleaded guilty on September 9; Mr. Mendez pleaded guilty this morning.

According to advocacy documents, Mr. Bise and Mr. Mendez admitted that Bitqyck raised around $ 24 million from more than 13,000 investors. Instead of keeping their promises to these investors, the defendants used the Bitqyck funds for personal expenses, including trips to the casino, cars, luxury furniture, artwork, and rent.

“Virtual currency transactions do not exempt businessmen from paying income taxes,” Interim US Attorney Chad Meacham said. “These crypto-savvy defendants have exploited emerging technology, lying to their investors, pocketing the proceeds and hiding the revenue from the IRS. The Justice Department is committed to making sure every taxpayer pays their fair share – and protecting the crypto space from bad actors. “

“As digital currencies continue to emerge as an investment option for taxpayers, we must continue to increase the pressure on anyone trying to take advantage of their investors and taxpayers through tax fraud and evasion. The excellent work of the IRS-CI’s Dallas and Los Angeles field offices puts this pressure firmly on these two cybercriminals and serves as a warning to others, ”said Christopher J. Altemus Jr., Special Agent in Charge of IRS-CI field office in Dallas. .

“Mr. Bise and Mr. Mendez have exploited the growing appeal of digital currency and defrauded thousands of investors who fell victim to millions of dollars that they used to pay for personal expenses, rent, gambling activities and their purchases of vehicles and works of art, “said Ryan L. Korner, special agent in charge of the IRS-CI field office in Los Angeles.” These scammers forced investors to produce money , then converted the proceeds of fraud into cryptocurrency to deliberately circumvent financial reporting requirements. IRS Criminal Investigation is committed to protecting Americans and pursuing financial schemes even in the crypto world. “

In marketing materials, the duo promoted the company’s cryptocurrency, Bitqy, as a way for “those people who missed Bitcoin” to get rich. They organized their initial coin offering, or ICO, in 2016. (An ICO is a process in which a company tries to raise capital by selling a new cryptocurrency, which investors can buy in the hope that the value cryptocurrency will rise.) In a bid to legitimize Bitqy tokens – and avoid scrutiny of the sale of unregistered securities – the company called the cryptocurrency a ‘giveaway’ that rewarded consumers for some internet shopping.

A white paper posted on Bitqyck’s website promised investors that each Bitqy token comes with 1/10^e one common share of Bitqyck. Mr. Bise and Mr. Mendez, however, admitted that they never actually distributed shares to token holders or integrated the shares into the Ethereum smart contract. The only common shares issued by Bitqyck were to Bise and Mendez, who collectively owned 100% of the common shares of Bitqyck.

About nine months after the launch of Bitqy, Mr. Bise and Mr. Mendez began to market another token, BitqyM, at an arbitrary price of $ 1. They claimed that the purchase of the token allowed investors to join “Bitcoin mining operations”, paying to power a Bitqyck Bitcoin mining facility in Washington state. In fact, Mr. Bise and Mr. Mendez admitted in the plea documents that no such mining facility ever existed. Unbeknownst to the investors, the defendants contracted with a foreign third-party company to attempt to mine the Bitcoin they had promised investors.

(Bitcoin mining involves solving complex mathematical problems in order to verify transactions on a public ledger, known as the Blockchain. The problems require computing power, which in turn requires a significant amount of electricity. )

Mr. Bise and Mr. Mendez took advantage of Bitqyck by diverting the company’s income for personal use at the expense of their shareholders. From 2016 to 2018, Mr. Bise and Mr. Mendez made approximately $ 4.68 million and $ 4.48 million, respectively.

Taxpayers conducting virtual currency transactions are required by law to report these transactions on their tax returns. For 2016 and 2017, Mr. Bise under-reported his income to the IRS, resulting in a tax loss of $ 371,278. For that same period, Mr. Mendez also under-reported his income to the IRS, resulting in a tax loss of $ 311,155. In 2018, Bitqyck did not file any corporate tax returns despite raising more than $ 3.5 million from investors. The total tax loss sustained by the United States government between Mr. Bise and Mr. Mendez is over $ 1.6 million.

The two men now face up to five years in federal prison.

The defendants’ guilty pleas follow a civil settlement with the Securities & Exchange Commission (SEC), in which Bitqyck agreed to pay a fine of $ 8.3 million to resolve allegations that he defrauded investors and operated an unregistered digital asset exchange. As part of this settlement, Mr. Bise and Mr. Mendez agreed to pay restitution and penalties of $ 890,254 and $ 850,022, respectively.

The Criminal Investigation Divisions of the Internal Revenue Services in Dallas and Los Angeles conducted the investigation. Assistant US Attorney Sid Mody is pursuing the case.