Credibility of ICOs faces its first big test

San Francisco © Getty images
Tezos is facing a San Francisco-based legal challenge

In the first half of this year, Tezos was trumpeted as the next big thing in cryptocurrencies. It was to be a “decentralised blockchain that governs itself by establishing a true digital Commonwealth”; a smart-contract platform to rival Ethereum. What would make it different would be the founding principle that decisions about the development of the platform would be taken by stakeholders – those who held “tezzies”, the platform’s crypto-tokens (digital currency) – rather than by miners, developers or any other centralised authority.

The project was conceived by husband and wife team Arthur and Kathleen Breitman, co-founders of California-based Dynamic Ledger Solutions (DLS), which began working on it in 2014. An independent non-profit organisation, the Tezos Foundation, was set up in Switzerland to run the project, with Johann Gevers as president. In July, an initial coin offering (ICO) was held, generating a great deal of publicity.

It attracted investment from hedge funds and high-profile individuals including Tim Draper, billionaire backer of Skype and Baidu, and took $232m in bitcoin and ether, making it the world’s biggest ICO held to date. Its value has risen to more than $400m since, thanks to the rising prices of bitcoin and ether.

Everything was proceeding nicely; work could begin on creating the blockchain, and everyone who’d bought into the ICO could look forward six months or so to when they’d receive their tezzies and then sit back and watch the value rise with the rest of the crypto-bubble. But that’s not happened. And the way things are going, the only people who look likely to make much money from Tezos are lawyers.

Ironically, having set great store by “practicality, integrity, sound governance, and preservation of the interests of the community”, the Breitmans and Gevers have fallen out in a big way over the running of the project. The Breitmans accuse Gevers of “mismanaging resources for his own personal benefit”, reports the International Business Times, and have lobbied to have him removed from the Tezos Foundation’s council – he is currently suspended.

Gevers in turn claims that the Breitmans are trying to take over the foundation for their own purposes. They want the foundation to create a subsidiary, Tezos AG, in which they will take a role, to conduct most of the operations related to the development of the smart-contracts platform.

Investors are becoming ever more impatient. Separately from the legal tussle between the Breitmans and Gevers, some US investors have filed a class-action lawsuit in San Francisco, which alleges that the Tezos organisers “violated US securities laws and defrauded participants in the online fundraiser”, reports Reuters. Defendants include the Breitmans and their company, Gevers and the Tezos Foundation. It alleges the organisers sold unregistered securities, and seeks both a refund of investors’ stakes, plus damages.

Nobody has received any tezzies as yet (it was always going to be at least six months until anyone did, even in the best of circumstances). But a futures market did spring up soon after the ICO closed, and the governance woes have caused their value to slide by 75%. Whether anyone will ever receive any tezzies, nobody yet knows. In an open letter to the Tezos community in October, the Breitmans said: “Our current best estimate for shipping the main net is now February of 2018, though the firm date remains ‘when it’s ready’.”

How Tezos deals with these challenges is key to its survival – and could well affect the credibility of ICOs as a whole. If one of the biggest, highest-profile ICOs fails so spectacularly amid internal wrangling and fraud claims, how are other, less well-scrutinised ICOs to be trusted? As it is, if the legal issues drag on, Tezos will become just one more in a long line of cautionary tales for investors.

In the news this week…

• In 2014, Japanese bitcoin exchange Mt Gox was the world’s biggest, handling up to 70% of global transactions. Then it “lost” up to a million bitcoins, worth (at the time) around $400m, and went bankrupt. Its CEO, Mark Karpelès, was arrested on fraud charges. The 25,000-odd people who owned the missing bitcoins were assured they would be compensated – based on the value of bitcoin in yen at the time of the bankruptcy.

Anything left over would go to Mt Gox shareholders. As luck would have it, 88% of Mt Gox is owned by a company controlled by Karpelès. Since then, some 200,000 bitcoins have been recovered. But with bitcoin currently swinging wildly around $6,500, Karpelès could conceivably end up with more than $800m after paying off his creditors, says Kosaku Narioka in The Wall Street Journal.

• Facebook is muscling in on the ever-expanding payments scene by launching its Messenger payments service in the UK. Facebook has signed up all the major UK banks and credit-card firms, says Rory Cellan-Jones on BBC.co.uk. The UK is only the second country to get the service, which has been running in the US since 2015. Users will have to register their debit cards with Facebook, and can then make and receive payments of up to £2,500. Interestingly, users will not need a Facebook account to use the service – the Messenger app is now available to anyone regardless of whether they are on the social media platform.

• Revolut, the London-based fintech startup that allows users to transfer money abroad much more cheaply than via a traditional bank, has applied for a European banking licence. It hopes to receive it in the first half of 2018. A banking licence would allow Revolut to offer “fully functional current accounts” with direct debits, overdrafts and personal loans, and would mean protection of up to €100,000 for customers under the European Deposit Protection Scheme.

Revolut is not alone in applying for a licence to operate in the EU ahead of Brexit – 20 global banks have also applied, says Danièle Nouy, a senior member of the European Central Bank, quoted in the Financial Times.