Crypto42 Watchdog №2

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Crypto42com

10 min readJun 25, 2018

#Regulation

The ICO troubles around #TEZOS and #ENVION

With TEZOS building a decentralized application and smart contract platform and ENVION being more or less a mining company, these companies evidently do not have a lot of things in common. Except that their headquarters are located in Switzerland, and, of course, both founder teams decided to take the ICO path to raise funds for their projects.

Both ventures tried eagerly to be avoided to be classified as investment tokens and to undergo the massive cost burden of financial and legal due diligence work. So TEZOS appreciated the idea of a Swiss donation-foundation model proposed to them by Johann Gevers and popular Swiss lawyers. ENVION, on the other hand, liked the idea of a Swiss AG issuing a Swiss law prospectus (nor audited or reviewed by FINMA) for the issue of tokens representing subordinated profit participation rights (Genussrecht) under German law.

While

TEZOS promised the delivery of future Tokens (Tezzies) against donations,
ENVION issued the EVN Token enabling token holders to participate in future mining profits.

Both founder teams engaged outside people to support their ambitious plans and to leverage their marketing efforts of the Token Sales. TEZOS engaged Johann Gevers, a Swiss guy who acquired quite a reputation in the Swiss and European crypto-scene over the last couple of years. ENVION engaged Matthias Woestmann, a well-known former German TV-presenter. Both are experienced and middle-aged people and highly eloquent speakers capable to sell their stuff.

Both ICOs were quite successful. TEZOS raised USD 232m, ENVION raised some USD 100m from more than quite a lot investors within just a short period of time. ENVION has been listed in the Top 5 ICOs in 2018.

Despite their success in raising funds from thousands of investors, both Token Sales ended in a DISASTER within just months after the Token Sale ended, with lots of pending lawsuits and lots of disappointed investors.

Gevers and Woestmann, who were supposed to mainly act as frontmen only, started to develop their own plans: Johannes Gevers, president of the board of the TEZOS Foundation, evidently came to the conclusion that the development of the technology can also be done without the founders. Woestmann, CEO of the ENVION AG, evidently also realized that a war chest of USD 100m should enable him to either build the business without the founders or the sell the shares of ENVION AG with a decent profit for himself. Hence, the stage was set with a quite similar script for both ICOs: a fight between the founder teams and their frontmen with the ICO investors at risk.

It got evident soon, that the fund raising entities TEZOS Foundation and ENVION AG were just shell entities with the intellectual property rights (IPR) and knowledge being still with the founder teams in different legal entities, sitting and working in their relevant home countries (ENVION: Germany, TEZOS: US).

The check on the ownership of the IPRs is one of the first and basic legal due diligence steps in the due diligence process for investment transactions. Another one is to check on the contracts of the people involved to get an understanding about their roles in a startup venture and to ensure that they know their roles. Basic due diligence work for VC-financed startups but obviously this basic work was not done in these Token Sale projects.

By now the web is full with allegations of the founders against their formerly well appreciated front men and vice versa, with the Token holders being the obvious victims of the wars going on.

Our take on it:

We guess by now the legal expenses incurred with the ongoing litigation are much higher than the expenses would had been for a properly done and maybe more burdensome set up in the respective home countries from the start. (Here we are anyway neglecting the fact that for tax purposes the substance over form principle could result in an economic transfer of the Token Sale proceeds to those countries where the founder teams are actually operating with possibly quite negative cash effects for the projects).

But the biggest issue here is the lost trust of the investors. ENVION has more than 30.000 investors, TEZOS also has quite a lot. Some of these investors for sure are fed up and do not intend to participate in any further Token Sales resp. will spread the message of fraud and scams for the blockchain ecosphere. Like after the mania of the late-1990s internet bubble investors were skittish for years afterwards slowing down the entire sector for years.

Hence, the damage to the further development of the whole blockchain industry goes far beyond TEZOS and ENVION. The main purpose of investors protection is not only to protect the investors but also to protect the still young and promising blockchain economy. These lawsuits could be hugely destructive to one of the most promising technologies of the 21st century

For more information on TEZOS please read

the Wired report Inside the Crypto World´s Biggest Scandal: or
listen to the lasted Unconfirmed Podcast from Laura Shin: Behind the Tezo´s Scandal; Conflict of Interest, Self-Dealing and Bullying.

Regarding Envion please read the articles here :

#Self-Regulation

Global Digital Finance Launches the first draft for Global Code of Conduct For Cryptoassets

As of March 19, 2018, a new not-for-profit industry body — Global Digital Finance (GDF) — was launched by key players in the crypto & fintech industry with the purpose to develop a globally accepted code of conduct for cryptoassets.

Simon Taylor, a distributed ledger and cryptocurrency specialist, who leads the GDF initiative summarized the purpose of the initiative as follows.

There have been a number of positive initiatives to bring standards to the cryptocurrency sector around token sales (also known as ICOs) and tokens, and GDF has brought together some of the biggest industry players and influencers to move this agenda forward with global policy makers and regulators.

By now GDF already acquired key organisations such as Circle, Consensys, Hyperledger, R3, Coinshares, Indiegogo and many more as supporters and contributors.

As of June 21, 2018, GDF published a first draft of its cryptoassets’ Code of Conduct for public review and consultation as well as a first draft of a taxonomy for cryptoassets V2.3 for public consultation.

The public consultation will run for two months, closing on 30th August 2018, during which industry, policymakers and other interested stakeholders will submit their comments.

Our take on it:

We like the global approach which we miss in most other self-regulation initiatives and we like that global key stakeholders are driving this initiative.

Introducing the Circle Asset Framework

Last week Circle (the company acquired Poloniex in February 2018) has revealed details on its approach to choose new cryptocurrencies for its trading and investment platforms.

Circle published a Circle Asset Framework and Asset Listing Form. For any coin listing the developed Asset Framework V1.0 which requires detailed information to questionnaires across five broad categories — fundamentals, technology, people, business model, and market dynamics is relevant. Circle scores projects in each category based on publicly available data points and information submitted through the Asset Listing Form.

Circle’s paradigms for the listing of new cryptoassets are:

building trust by prioritizing security of funds above all else and protecting customers from harm.
remaining neutral in the market as a whole and welcome all legitimate assets.
defaulting to open protocols and transfer of value.
embracing rational market participation, arming users with data to make informed decisions.

The five broad categories of the Asset Framework V1.0 are as follows :

Are there indicators of sufficient liquidity and interest in the market?
Does this project create real value for a meaningful number of end users? Is it set up to succeed?
Does this project have a strong, committed, and experienced team behind it?
Does this project employ robust underlying technology in the realization of its goals?
Does this project align with the core tenets of the cryptocurrency community?

Circle makes clear that this framework is not intended to be a comprehensive checklist of requirements that projects must meet and that they understand that projects may be at different points in the development cycle, and each brings something different to the table.

Moreover, Circle revealed that it might delist a coin if it does not follow the exchange’s standard.

Regarding the legal qualification of the cryptoassets Circle states as follows:

In addition …. all assets we list must pass a legal review in the jurisdictions in which they are listed. Please note: we will not accept any kind of payment to list an asset.

Our take on that:

Right now Token exchanges are largely unregulated and may therefore be more exposed to fraud and failure than traditional regulated exchanges/markets. A lack of stability in the token exchanges and the closure or temporary shutdown of token exchanges due to fraud, business failure, hackers or malware, or government-mandated regulation may result in greater volatility in the price of any relevant tokens, therefore we highly welcome this self-regulation approach by a popular crypto- exchange.

#Crypto M&A

Already since beginning 2018 quite a lot M&A activity has been going on in the cryptosphere and as we think more are coming up, we decided to include this topic in our Newsletter.

On the one hand some of the “older” cryptocurrency entities are on an acquisition spree to expand their business model. Like Circle, which acquired Poloniex, a cryptocurrency exchange for an estimated sum of USD 400m already in February 2015. Poloniex is evidently a perfect strategic fit to Circle Trade, the “over the counter Cryptocurrency trading desk, which supposedly brought in more than $60M in revenue from early November through January 2018. Or like Coinbase, the San Francisco-based cryptocurrency exchange, and brokerage platform, one of the leading companies in the blockchain ecosphere. Coinbase announced more than four acquisitions within a past few weeks. After acquiring the decentralized cipher browser in March 2018, Coinbase acquired Earn.com for rumored USD 120m end of April 2018, followed by the acquisition of Paradex, a platform that enables users to trade virtual coins directly with each other (decentralized exchange) in May 2018 and the purchase of Keystone Capital Corp, a California-based financial firm, in a move that will clear the path for Coinbase to operate as a registered broker-dealer beginning of June 2018.

The acquisitions performed by Coinbase are evidently not only strategic some are also centered around talent. As a lot of companies in the cryptosphere struggle to fill their vacancies with talent, so “acquiring”, a strategy whereby a firm buys out another company primarily for the staff and their expertise is and will become quite popular within the next months.

Interestingly, Coinbase is supposed to have paid its Earn.com deal with some cash, some stock, and interestingly, some cryptoassets.

Cryptoassets will probably be the preferable means of exchange of the “newer generation” of cryptocurrency companies which are up to an acquisition spree. In addition to boarding on good people, Cash-Flush Business-Light entities (CFBLs) *(a term coined by Spencer Bogart in his Medium-Article: A Crypto Acquisition Spree: The Rise of CFBLs for entities whose primary cash flow generation has been from the sale of an inventory of tokens ) will use the funds raised as well as their token inventory, to look out for cash-generating units to add revenue producing business lines and real-world use cases.

According to Spencer Bogart there are quite a few advantages to buy compared to build:

Cost is low: The actual economic cost of acquisitions to CFBLs can be astonishingly low due to their cash-rich treasury, token reserve inventory, and ability to use tokens as acquisition capital.
· Benefit is huge: acquisitions offer CFBLs a quick way to acquire manpower and revenue lines, and to drive strong community signaling.
· Organic growth is hard (“Buy vs. Build”).

The acquisition of Chain by Stellar reported this week is supposedly the first big deal only paid for by tokens: the sale price is said to be $500 million payable only in Stellar’s digital currency Lumens. Interestingly, the backers of Chain (the seller) are supposed to have no vesting period for the Lumens they receive in exchange for their investment in Chain. They should be able to hold or sell immediately after the transaction. Lumens were created by Stellar, a company founded in 2014 by Ripple co-founder Jed McCaleb. Stellar Lumens (XLM) is the seventh most valuable cryptocurrency with a market cap of more than $4.3 billion. Chain, develops enterprise blockchain solutions including Sequence, a ledger-as-a-service product that allows organizations to transfer balances in token format on private ledgers. Both companies have so far not commented on the way forward. had previously raised more than $43 million from a variety of financial institutions including Capital One, Citigroup, Nasdaq, and Visa, as well as tech-focused funds such as Khosla Ventures, Blockchain Capital, and Pantera Capital. More details on the valuation applied to arrive on the purchase price are unfortunately not available.

Another interesting M&A transaction was finally announced with a price tag of USD 140m, this is the amount paid to BitTorrent investors by Tron and its CEO. BitTorrent an early mover in decentralized computing architecture to distribute and store data most recently said it has about 170 million users of its products. BitTorrent claims that its protocols move as much as 40 percent of the world’s Internet traffic on a typical day, making it the largest decentralized application around at the moment.

Our take on it:

Equity against shares was a highly popular acquisition method back in the New Economy hype. Actually back then the same reasons were quoted: lack of knowledgeable people and lack of actual cash flows and revenue generating business units. Back then a lot of those integrations did not work out successfully, but maybe this time will be different!

#Recommended Readings

Adam Tache: State of Cryptocurrencies: Summer 2018

Crypto42 Watchdog №2

#Regulation

#Self-Regulation

Global Digital Finance Launches the first draft for Global Code of Conduct For Cryptoassets

Introducing the Circle Asset Framework

#Crypto M&A

#Recommended Readings

Written by Elfi Sixt