Guess What Cryptocurrency is Being Sued Today

The Record-Breaking $152 Million Battle Over Blockchain Betting Tool Augur

What's the story?

  • Former Augur employee, Matthew Liston, is suing the four founders of Augur
  • The lawsuit alleges, "committed fraud, breach of contract, and trade theft in connection with conflicts that arose out of Liston's termination from the company and his stake in Augur's token distribution, leaving him empty-handed."
  • It seems the lawsuit stems from the fact that the Augur founders aren't honoring Liston's co-founder status

Why Does This Matter?

Augur is being sued for an employment dispute. Plain and simple. I read the complaint, and it seems petty on behalf of the Augur founders. (Mind you, we have yet to hear their side.) Matthew Liston agreed to a severance deal with the Augur founders which included him being listed as a co-founder. The Augur founders then went to great length to prevent him from being listed as a founder of Augur after the agreement was signed. Paul Sztorc, an early advisor of Augur, wrote that Matt was an integral part of Augur while the Augur founders describe him as a "random internet guy." The case will most likely get settled before it even reaches court let alone a trial date.

The most important thing this lawsuit shows is the "centralized" nature of cryptocurrency at the moment. Augur is described as a decentralized prediction market yet it's founders, and the company itself is being sued. How can something decentralized be sued? Well, because it's not decentralized. Many things in cryptocurrency that describe themselves as decentralized are anything but. If a lawsuit can threaten the existence of a token, I can ensure you it's anything but decentralized.


DOJ Investigating Bitcoin Trading

U.S. Launches Criminal Probe into Bitcoin Price Manipulation

What's the story?

  • The DOJ has opened an investigation into Bitcoin trading manipulation
  • The creation of a Bitcoin futures market means that manipulating the spot market (spot markets are the underlying markets) is a criminal offense
  • The investigation is focused on practices such as spoofing or flooding the market with fake orders to trick other traders into buying or selling

Why Does This Matter?

Most criminal and civil investigations have focused on ICOs or Ponzi schemes associated with Bitcoin. This is the first criminal investigation focused on Bitcoin trading itself. It's unclear who is targeted in this probe. I'd assume the most likely targets are people trading futures and the spot market. These targets are low hanging fruits for prosecutors as there will be more trading information to support collusion claims. My opinion is pure speculation. Exchanges could also be a likely focus of the investigation. Many institutional investors should view this as a positive move and give them another reason to enter the market. If these investors believe the markets will be policied appropriately, then it will garner confidence in the markets. 


One of the Biggest Crypto Exchanges Is Heading to the Caribbean

What's the story?

  • Bitfinex has secured a banking relationship with Noble Bank in Puerto Rico
  • Noble Bank took over last year after Wells-Fargo severed the relationship
  • Bitfinex is the company behind Tether, which many have accused of manipulating BTC prices

Why Does This Matter?

I would venture that the story above is not related to Bitfinex even though the connection makes sense. While many people have accused Bitfinex of impropriety, there is still no hard evidence, and because Bitfinex isn't US-based, the investigation might be focused on bad actors that the DOJ has clear jurisdiction over. Back to Noble Bank. Noble Bank doesn't have to report certain off-shore assets and thus, I assume, must believe there is less reputation risk for banking Bitfinex. Also, banking cryptocurrency companies is a new niche and while Bitfinex might be shady, it's a massive player in the space. The rise of Silvergate Bank is an excellent example of how cryptocurrency can transform a bank from a community bank to a more well-known bank. Tether was a constant target for cryptocurrency skeptics. Consistently accusing it of being a manipulative vehicle, but the criticism has seemed to die down in recent months. I would speculate that Tether doesn't utilize 1:1 USD backing, but as long as a collapse of the Bitcoin market doesn't occur, Tether will continue to exist. 


Regulators Crack Down

I just published Cryptocurrency Investor Survey. Also, apologies for not sending the newsletter yesterday, I was ill. I am still pretty ill so only one column today.


Statement on NASAA’s Announcement of Enforcement Sweep Targeting Fraudulent ICOs and Crypto-asset Investment Products

What's the story?

  • NASAA is investigating 70 different cryptocurrency cases
  • Three companies in conjunction with the State of New Jersey were issued cease and desists: Bullcoin, Trident Crypto Index Fund, and Springcryptoinvest
  • The chosen companies blatantly violated securities law, and there is still no indication of future ICO regulations

Why Does This Matter?

This investigation is one of the biggest crackdowns on ICOs, if not the biggest one. The investigation comes on the heels of the SEC's fake ICO site called Howeycoin. One defendant, ShipChain, blatantly disregarded security laws by selling tokens in the United States and with no apparent value besides the purpose of holding the token for a profit. If it was a utility token (which isn't a legal word), it would be unclear if regulators still would've pursued them. I perused some of the cases and they, for the most part, blatantly disregard security laws. There were examples of token offerings that listed fake endorsements and/or phony team members. Others promised guaranteed returns such as 4% daily interest. None of these sweeps are groundbreaking. They aren't taking down ICO offerings that were in grey areas but rather were entirely in the black (illegal). 


An Island That Uses Its Own Cryptocurrency

PayPal Alum: How Blockchain Will Change Investing and Why Real Estate Will Be First
This Firm Just Turned a Company's Stock Into Cryptocurrency


What's the story?

  • Both stories talk about "security tokens"
  • David Sacks, former COO of PayPal, discusses how security tokens will change real estate investing
  • Morgan Creek is using security tokens for an equity offering

Why Does This Matter?

Security tokens are just regulatory arbitrage. I do agree that blockchain could be advantageous for equity offerings in the future, but at the moment raising money via a token is just taking advantage of antiquated regulations. If the SEC allowed an inexpensive way for someone to list a home, why would they need a security token? I could do an IPO of an apartment in Manhattan. 1000 people could invest and receive rental income from the ownership. At the moment, this is very difficult to do. There are real estate crowdfunding sites, but they still haven't achieved mainstream status, and many retail and institutional investors avoid them. I don't want to sound pessimistic because I am not. I think many of the publicly traded equities will move to blockchain. But at the moment, security tokens are nothing more than regulatory arbitrage taking advantage of vague US regulations around tokens and how they should be regulated. 


A floating Pacific island is in the works with its own government, cryptocurrency and 300 houses

What's the story?

  • French Polynesia is launching a new island that uses a cryptocurrency
  • The island is intended for people looking to live outside of government regulation
  • The goal is to have hundreds of floating countries

Why Does This Matter?

You don't need a cryptocurrency for this. You can create a fiat currency called "Island Coin," and it would achieve the same goals as the cryptocurrency Varyon (the name of the island's cryptocurrency). Unless the coin is being issued in a decentralized manner, then using the term cryptocurrency is just a buzzword. I looked up the token on Google, and they are doing an ICO on the Ethereum Blockchain backed by a company called, "Blue Frontiers." What if something happens to Blue Frontier? How does the island still run? Can the coin survive? It would make more sense if the coin was using a proof of work model and the mining revenue was used in place of "taxes." Every citizen would be required to run a GPU server. I'm sure there are other variants one could conjure up, but this token is just a marketing ploy. 


Consensus Thoughts

There was no notable news today so I thought I just would talk about Consensus. Many people were surprised that there was no rebound in cryptocurrency prices. A trend is a trend until it isn't. I didn't attend Consensus but walked by the Hilton, where it was held. There were a lot of people in suits. This is purely anecdotal, but I think we are seeing many "corporate" types get into cryptocurrency because it looks good for shareholders and customers. Many people complained about the lack of developers at the conference. The reality is that the people who are building the groundbreaking technologies aren't found at conferences but at a computer coding and finding customers. One conference is no indication of where the industry is going.