The founders of Centra Tech, a company that raised a $32 million ICO, have been indicted for wire fraud and securities fraud, charges that could lead to a minimum of five years in jail.
The founders, Raymond Trapani, Sohrab Sharma, and Robert Farkas, were found guilty of trying to defraud investors with their ICO. The primary fraudulent statement concerned Centra Tech’s fake partnerships with Visa and MasterCard to help sell tokens. The team, wrote Robert Khuzami, Attorney for the United States in the Southern District of New York, “purported to offer cryptocurrency-related financial products, with conspiring to commit, and the commission of, securities and wire fraud in connection with a scheme to induce victims to invest millions of dollars’ worth of digital funds for the purchase of unregistered securities, in the form of digital currency tokens issued by Centra Tech, through material misrepresentations and omissions.”
Floyd Mayweather and DJ Khaled posted support for Centra Tech on Instagram during the run-up to the token sale, writing that they were excited to use Centra Tech’s card to pay for thing using Bitcoin, Ethereum, and “other coins.” Mayweather’s post appeared here but is now gone.
What the three partners allegedly did was especially egregious which is why the SEC was able to attack so forcefully. Khuzami alleges that the team made up a fake CEO to look more credible as well as a laundry list of other claims.
After SHARMA and TRAPANI worked together at a luxury car rental company in Florida called “Miami Exotics,” they and FARKAS co-founded a startup company called Centra Tech that claimed to offer cryptocurrency-related financial productions, including a purported debit card, the “Centra Card,” that supposedly allowed users to spend various types of cryptocurrency to make purchases at any establishment that accepts Visa or Mastercard payment cards. In approximately July 2017, SHARMA, TRAPANI, and FARKAS began soliciting investors to purchase unregistered securities, in the form of digital tokens issued by Centra Tech, through a so-called “initial coin offering” or “ICO.” As part of this effort, SHARMA, TRAPANI, and FARKAS, in oral and written offering materials that were disseminated via the internet, represented: (a) that Centra Tech had an experienced executive team with impressive credentials, including a purported CEO named “Michael Edwards” with more than 20 years of banking industry experience and a master’s degree in business administration from Harvard University; (b) that Centra Tech had formed partnerships with Bancorp, Visa, and Mastercard to issue Centra Cards licensed by Visa or Mastercard; and (c) that Centra Tech had money transmitter and other licenses in 38 states, among other claims. Based in part on these claims, victims provided millions of dollars’ worth of digital funds in investments for the purchase of Centra Tech tokens. In or about October 2017, at the end of Centra Tech’s ICO, those digital funds raised from victims were worth more than $25 million. Due to appreciation in the value of those digital funds raised from victims, those digital funds are presently worth more than $60 million.
The FBI seized 91,000 Ether worth $90 million from the team. The team is facing “one count of conspiracy to commit securities fraud, which carries a maximum potential sentence of five years in prison; one count of conspiracy to commit wire fraud, which carries a maximum potential sentence of 20 years in prison; one count of securities fraud, which carries a maximum potential sentence of 20 years in prison; and one count of wire fraud, which carries a maximum potential sentence of 20 years in prison.”
News Source = techcrunch.com
With at least $1.3 billion invested globally in 2018, VC funding for blockchain blows past 2017 totals
Although bitcoin and blockchain technology may not take up quite as much mental bandwidth for the general public as it did just a few months ago, companies in the space continue to rake in capital from investors.
One of the latest to do so is Circle, which recently announced a $110 million Series E round led by bitcoin mining hardware manufacturer Bitmain. Other participating investors include Tusk Ventures, Pantera Capital, IDG Capital Partners, General Catalyst, Accel Partners, Digital Currency Group, Blockchain Capital and Breyer Capital.
This round vaults Circle into an exclusive club of crypto companies that are valued, in U.S. dollars, at $1 billion or more in their most recent venture capital round. According to Crunchbase data, Circle was valued at $2.9 billion pre-money, up from a $420 million pre-money valuation in its Series D round, which closed in May 2016. According to Crunchbase data, only Coinbase and Robinhood — a mobile-first stock-trading platform which recently made a big push into cryptocurrency trading — were in the crypto-unicorn club, which Circle has now joined.
But that’s not the only milestone for the world of venture-backed cryptocurrency and blockchain startups.
Back in February, Crunchbase News predicted that the amount of money raised in old-school venture capital rounds by blockchain and blockchain-adjacent startups in 2018 would surpass the amount raised in 2017. Well, it’s only May, and it looks like the prediction panned out.
In the chart below, you’ll find worldwide venture deal and dollar volume for blockchain and blockchain-adjacent companies. We purposely excluded ICOs, including those that had traditional VCs participate, and instead focused on venture deals: angel, seed, convertible notes, Series A, Series B and so on. The data displayed below is based on reported data in Crunchbase, which may be subject to reporting delays, and is, in some cases, incomplete.
A little more than five months into 2018, reported dollar volume invested in VC rounds raised by blockchain companies surpassed 2017’s totals. Not just that, the nearly $1.3 billion in global dollar volume is greater than the reported funding totals for the 18 months between July 1, 2016 and New Year’s Eve in 2017.
And although Circle’s Series E round certainly helped to bump up funding totals year-to-date, there were many other large funding rounds throughout 2018:
- $118 million raised by Orbs, a purported “consumer-ready blockchain” service set to launch in June.
- $75 million closed in a Series B round for Paris-based secure hardware wallet-maker Ledger.
- $32 million raised by Project Shivom, which claims to use two hyped technologies — blockchain and artificial intelligence — to analyze and protect genomic data.
- $16 million in a Benchmark-led Series A round for Chainalysis, a blockchain analysis platform.
There were, of course, many other large rounds over the past five months. After all, we had to get to $1.3 billion somehow.
All of this is to say that investor interest in the blockchain space shows no immediate signs of slowing down, even as the price of bitcoin, ethereum and other cryptocurrencies hover at less than half of their all-time highs. Considering that regulators are still figuring out how to treat most crypto assets, massive price volatility and dubious real-world utility of the technology, it may surprise some that investors at the riskiest end of the risk capital pool invest as much as they do in blockchain.
Notes on methodology
Like in our February analysis, we first created a list of companies in Crunchbase’s bitcoin, ethereum, blockchain, cryptocurrency and virtual currency categories. We added to this list any companies that use those keywords, as well as “digital currency,” “utility token” and “security token” that weren’t previously included in the above categories. After de-duplicating this list, we merged this set of companies with funding rounds data in Crunchbase.
Please note that for some entries in Crunchbase’s round data, the amount of capital raised isn’t known. And, as previously noted, Crunchbase’s data is subject to reporting delays, especially for seed-stage companies. Accordingly, actual funding totals are likely higher than reported here.
News Source = techcrunch.com
The SEC creates an educational “token” to stop scammers
“Travel is expensive, but we are at the cusp of a revolution that will democratize travel and leisure for everyone,” reads the breathless white paper for HoweyCoins. “The Internet was the first part of the revolution. The other part is blockchain technology and cryptocurrencies.”
“I’m all about HoweyCoins – this thing is going to pop at the top!” writes @boxingchamp1934, an official celebrity backer of the token. The website is full of beautiful beaches features a handsome team of international men and women and the technology is nowhere to be seen, buried under a sea of excitement. The white paper is complete and well-written, focusing on the upside that is to come. Riches await if you invest in HoweyCoin, the latest ICO opportunity from trusted folks.
Or do they?
They don’t. All that breathless optimism is a site created by US Securities Exchange Commission to warn investors of scams and issues associated with token sales. The site features all the trademarks of a scammy security token including tiered pre-sale pricing and an urgent countdown clock.
The site features a number of red flags that the SEC encourages users to watch out for including, most importantly, claims that tokens can only go up in value. They write:
Every investment carries some degree of risk, which is reflected in the rate of return you can expect to receive. High returns entail high risks, possibly including a total loss on the investments. Most fraudsters spend a lot of time trying to convince investors that extremely high returns are “guaranteed” or “can’t miss.”
The SEC also notes that “it is never a good idea to make an investment decision just because someone famous says a product or service is a good investment” and that it is never a good idea to invest with a credit card.
They also warn against pump and dump language found on many ICO pages. “Our past two pumps have doubled value for the period immediately after the pump for returns of over 225%,” wrote the HoweyCoin “creators,” a giant no-no in the world of investing.
You can read the rest of the red flags here.
While the site is fairly comical, it is sufficiently complete and would fool the casual observer. The SEC also posted a real-looking white paper which makes it clear that anyone can string together a few buzzwords can write a passable investment prospectus. That this is now a service available to anyone – for a price – makes things even scarier.
The site is part of the SEC’s outreach efforts to help investors understand ICOs.
“Strong investor protection is part of what makes American markets so strong…and striking the balance, [between innovation and investor protection] is very important,” said Chief of the SEC Cyber Unit Robert Cohen at Consensus this week. During the same panel the SEC claimed its doors were always open for questions.
Ultimately there is little separating the scams from the real token sales. This is a problem. The SEC is framing this problem in their own way based on decades of dealing with pink sheet pump and dumps and bogus get rich quick schemes. While HoweyCoins may not be real there are plenty of scammers out there and at least something like this bogus website makes it easier to spot the warning signs.
News Source = techcrunch.com
Coinbase’s first investment, Compound, earns you interest on crypto
Compound wants to let you borrow cryptocurrency, or lend it and earn an interest rate. Most cryptocurrency is shoved in a wallet or metaphorically hidden under a mattress, failing to generate interest the way traditionally banked assets do. But Compound wants to create liquid money markets for cryptocurrency by algorithmically setting interest rates, and letting you gamble by borrowing and then short-selling coins you think will sink. It plans to launch its first five for Ether, a stable coin, and a few others, by October.
Today, Compound is announcing some ridiculously powerful allies for that quest. It’s just become the first-ever investment by crypto exchange juggernaut Coinbase’s new venture fund. It’s part of an $8.2 million seed round led by top-tier VC Andreessen Horowitz, crypto hedge fund Polychain Capital and Bain Capital Ventures — the startup arm of the big investment bank.
While right now Compound deals in cryptocurrency through the Ethereum blockchain, co-founder and CEO Robert Leshner says that eventually he wants to carry tokenized versions of real-world assets like the dollar, yen, euro or Google stock. That’s because Leshner tells me “My thesis is that almost every crypto asset is bullshit and not worth anything.”
How to get Compound interest on your crypto
Here’s how Compound tells me it’s going to work. It’s an “overnight” market that permits super-short-term lending. While it’s not a bank, it is centralized, so you loan to and borrow from it directly instead of through peers, alleviating you from negotiation. If you loan, you can earn interest. If you borrow, you have to put up 100 percent of the value of your borrow in an asset Compound supports. If prices fluctuate and your borrow becomes worth more than your collateral, some of your collateral is liquidated through a repo agreement so they’re equal.
To set the interest rate, Compound acts kind of like the Fed. It analyzes supply and demand for a particular crypto asset to set a fluctuating interest rate that adjusts as market conditions change. You’ll earn that on what you lend constantly, and can pull out your assets at any time with just a 15-second lag. You’ll pay that rate when you borrow. And Compound takes a 10 percent cut of what lenders earn in interest. For crypto-haters, it offers a way to short coins you’re convinced are doomed.
“Eventually our goal is to hand-off responsibility [for setting the interest rate] to the community. In the short-term we’re forced to be responsible. Long-term we want the community to elect the Fed,” says Leshner. If it gets the interest rate wrong, an influx of lenders or borrowers will drive it back to where it’s supposed to be. Compound already has a user interface prototyped internally, and it looked slick and solid to me.
“We think it’s a game changer. Ninety percent of assets are sitting in people’s cold storage, or wallets, or exchanges. They aren’t being used or traded,” says Leshner. Compound could let people interact with crypto in a whole new way.
The Compound creation story
Compound is actually the third company Leshner and his co-founder and CTO Geoff Hayes have started together. They’ve been teamed up for 11 years since going to college at UPenn. One of their last companies, Britches, created an index of CPG inventory at local stores and eventually got acquired by Postmates. But before that Leshner got into the banking and wealth management business, becoming a certified public accountant. A true economics nerd, he’s the chair of the SF bond oversight committee, and got into crypto five years ago.
Sitting on coins, Leshner wondered, “Why can’t I realize the time value of the cryptocurrency I possess?” Compound was born in mid-2017, and came out of stealth in January.
Now with $8.2 million in funding that also came from Transmedia Capital, Compound Ventures, Abstract Ventures and Danhua Capital, Compound is pushing to build out its product and partnerships, and “hire like crazy” beyond its seven current team members based in San Francisco’s Mission District. Partners will be crucial to solve the chicken-and-egg problem of getting its first lenders and borrowers. “We are planning to launch with great partners — token projects, hedge funds and dedicated users,” says Leshner. Having hedge funds like Polychain should help.
“We shunned an ICO. We said, ‘let’s raise venture capital.’ I’m a very skeptical person and I think most ICOs are illegal,” Leshner notes. The round was just about to close when Coinbase announced Coinbase Ventures. So Leshner fired off an email asking if it wanted to join. “In 12 hours they researched us, met our team, diligenced it and evaluated it more than almost any investor had to date,” Leshner recalls. Asked if there’s any conflict of interest given Coinbase’s grand ambitions, he said, “They’re probably our favorite company in the world. I hope they survive for 100 years. It’s too early to tell they overlap.”
Conquering the money markets
There are other crypto lending platforms, but none quite like Compound. Centralized exchanges like Bitfinex and Poloniex let people trade on margin and speculate more aggressively. But they’re off-chain, while Leshner says Compound is on-chain, transparent and can be built on top of. That could make it a more critical piece of the blockchain finance stack. There’s also a risk of these exchanges getting hacked and your coins getting stolen.
Meanwhile, there are plenty of peer-to-peer crypto lending protocols on the Ethereum blockchain, like ETHLend and Dharma. But interest rates, no need for slow matching, flexibility for withdrawing money and dealing with a centralized party could attract users to Compound.
Still, the biggest looming threat for Compound is regulation. But to date, the SEC and regulators have focused on ICOs and how people fundraise, not on what people are building. People aren’t filing lawsuits against actual products. “All the operations have flown beneath the radar and I think that’s going to change in the next 12 months,” Leshner predicts. How exactly they’ll treat Compound is up in the air.
One source in the crypto hedge fund space told me about forthcoming regulation: “You’re either going to get annihilated and have to disgorge profits or dissolve. Or you pay a fine and you’re among the first legal funds in the space. This is the gamble you take before asset classes get baptized.” As Leshner confirmed, “That’s the number one risk, period.”
Money markets are just one piece of the financial infrastructure puzzle that still needs to emerge around blockchain. Custodians, auditors, administrators and banks are still largely missing. When those get hammered out to make the space safer, the big money hedge funds and investment banks could join in. For Compound, getting the logistics right will require some serious legal ballet.
Yet Leshner is happy to dream big despite all of the crypto world’s volatility. He concludes, “We want to be like Black Rock with a trillion under management, and we want to have 25 employees when we do that. They probably have [tens of thousands] of employees. Our goal is to be like them with a skeleton team.”
News Source = techcrunch.com
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