This week, the US Department of Justice and the FBI announced the arrest of Nadar Al-Naji, the founder and promoter of the “BitClout” token. Al-Naji was charged with defrauding a “BitClout” purchaser by making false and misleading representations disclaiming control over the use of the investment funds.
According to the criminal complaint filed by DOJ, Al-Naji founded BitClout, a social media and cryptocurrency trading platform that purportedly allowed users to purchase BitClout tokens using bitcoin, ostensibly through a decentralized protocol without any centralized issuer, for the purpose of trading BitClout tokens in connection with the social media profiles of other BitClout users.
BitClout described itself as, “The First Crypto Social Network,” - a “cross between a financial app and a social app.” Specifically, BitClout was touted as “a social network built from the ground up as its own custom blockchain. It’s not a company, it has no employees—it’s just code and coins . . . . [W]e refer to BitClout as a ‘protocol’—it is ultimately nothing more than an open-source piece of code running on machines all over the world. No company, just code and coins.” The interface, which remained accessible as of August 1, 2024, has the look and feel of a social media platform like X.
According to authorities, in January 2021, Al-Naji contacted representatives of a prospective investor (“Investor-1”) to discuss the BitClout project and provided Investor-1 with BitClout’s marketing material. Al-Naji represented to Investor-1 that he intended to use the bitcoin raised from selling BitClout to develop the Bitclout protocol and that the role played by his entity was merely to purchase BitClout tokens from the protocol, and that he did not have any control over the funds after the purchase was complete.
In fact, after inducing Investor-1 to invest approximately $3 million, Al-Naji routed the funds through multiple accounts for the ultimate benefit of himself and family members.
In addition to the criminal action, the US Securities and Exchange Commission also took action against Al-Naji alleging in a complaint, also filed this week, that starting in November 2020, Al-Naji raised more than $257 million from unregistered offers and sales of the Bitclout token BTCLT, while falsely telling investors that proceeds would not be used to compensate him or other BitClout employees. In reality, the complaint alleges, Al-Naji spent more than $7 million of investor funds on personal expenditures like rental payments for a Beverly Hills mansion and extravagant cash gifts to family members
According to the complaint, Al-Naji maintained control over the BitClout “Treasury Wallet” which received over USD 260 million worth of bitcoin (depending on price calculation); though almost USD 80 million was moved out of the wallet (and around USD 170 million still remains based on current valuations).
While a majority of that USD 80 million worth of bitcoin was sent to a Hong Kong-based trading platform, according to TRM, over USD 1.6 million was sent to a US-based crypto exchange and over USD 1.5 million was sent to unhosted bitcoin wallets as visualized in the TRM graph below.
There are a number of key takeaways from this case, but one stands out – that is, anyone can be the victim of fraud no matter how sophisticated an investor. In addition to individual investors in the BLTC token, Al-Naji, according to reports, also fooled some of the most sophisticated venture capitalists in Silicon Valley with his decentralized social platform pitch.
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