From what you have said in the way you relocated the configuration file, Joomla probably would make a new one, based on your setting. I use a Joomla Component,
Protect Configuration
which manages the configuration file very well, and the updating issue you mentioned doesn't happen.
I would try the following:
- Backup your site
- remove all instances of configuration file, except one in your root directory correctly configured
- uninstall Captcha
- reinstall captcha (make sure you install the correct, latest version. 2.0.1 CB1.0+ or 2.2 CB 1.2+)
- check the Captcha configuration (Community Builder Plugin: Edit (CB Captcha)) to see if it is producing the demo image
- if no demo image, check the setting Plugin Prerequisites (by the demo) to see that you have GD bundled and Freetype in green
- if you have 2 greens, check your System->System Info and see that everything on the server is correct (maybe your host updated something)
- finally, check that your temp location is writeable and configured
Hope that something here helps,
Ed