Former Bitcoin Insurance Broker Accused of Security Fraud

A year ago, the Bitcoin industry was still in its infancy and the platform was unable to provide sound protection for user funds. However, it also showed the huge business opportunities for insurance products of Bitcoin startups.

Several companies, including security startup BitGO and wallet service Xapo, have tried to enter the market by acquiring insurance companies, but at least one company admits that Bitcoin theft insurance has never really been realized.

Just recently, the former general manager and founder of a company that was once committed to promoting the commercialization of Bitcoin insurance received formal fraud charges.

According to the lawsuit, Joseph Donnelly, the founder of Bitcoin Financial Group, borrowed $300,000 from Raymond and Suzanne Debiasa in New Jersey in 2008 for investment, but defaulted on the repayment. In addition, Donnelly also worked with another natural person, Ahuby Donnelly, to transfer the loan for personal use, and privately used the funds to provide early investment for his startup Bitcoin Financial Group.

Court Statement

The lawsuit names four defendants, including Bitcoin Financial Group, Donnelly and Dovetail Capital. However, Innovation Insurance Group, founded by Ty Sagalow, has denied any involvement in the fraud.

Sagalow said that Joseph Donnelly left the company in December last year to start other business projects because he believed that the company's development was hindered. He also mentioned that Donnelly never invested any funds in the Bitcoin insurance business and believed that the accusations against Bitcoin Financial Group were completely unfounded.

Jason Spiro, the plaintiff’s legal agent in the New Jersey District Court, reiterated that the defendant did promise the plaintiff that he could benefit from the business income of Bitcoin Financial Group, but this promise was not fulfilled.

"Bitcoin Financial once appointed Joe Donnelly as its general manager and co-founder, which means he has the authority to make business commitments on behalf of the company; Donnelly clearly told investors that the funds they lent would be compensated through the company's revenue. However, Bitcoin Financial has now eliminated all ties between Joe Donnelly and it, which obviously has no legal basis." Donnelly denied this statement.

Payment issues

In addition, the appeal documents also detailed Donnelly's illegal operations in the investment fraud case.

According to the loan agreement, Donnelly needs to pay interest to his lender DeBiases on a monthly basis, with a principal of US$300,000 and an annual interest rate of 12%. However, since the fall of 2013, Donnelly has stopped paying the monthly interest, unilaterally breaching the contract. The dispute between the lender and the borrower has never been resolved. Until last spring, Joseph Donnelly notified the plaintiff that Dovetail was insolvent and liquidated, and proposed a solution: repayment could be made through the proceeds of Bitcoin Financial Group. According to the document, Donnelly informed the plaintiff that he was the legal representative of BitCoin Company, and as long as the company could successfully implement the project, all debts could be repaid.

Non-compliance issues

In addition to being accused of fraud, the plaintiffs also accused Donnelly of violating regulations in his claims to be an insurance broker.

Donnelly's disciplinary action for lack of a license is a legacy issue. The person's LinkedIn profile shows that Donnelly was already operating in violation of regulations when he worked as a broker for his previous employer, LincoIn Group, from 2001 to 2010.

The document states:

DeBiasa learned during interviews with Donnelly's colleagues that Donnelly had never obtained a license from FINRA; in addition, LincoIn Group had investigated the compliance issues of Donnelly's unlicensed insurance business and subsequently revoked Donnelly's permission to write insurance policies.

Donnelly’s personal information has been removed from Bitcoin Financial Group’s website, but it can still be found through the Internet Archive Wayback Machine. It clearly states that it has obtained a life and health insurance business license and has completed the regulatory requirements of FINRA Series 6, 7, 63 and 65.

Sagalow said Donnelly had hinted that he had obtained a license to operate life insurance.