Backroom battle imperils US$230 million cryptocurrency venture
ZUG, Switzerland/NEW YORK: Just three months ago, a tech project called Tezos raised US$232 million online in a wildly successful ‘initial coin offering,’ in which new digital currency is parceled out to buyers. At the time, it was the most money ever raised from the public in the white-hot cryptocurrency sector.
But the venture is now in danger of falling apart because of a battle for control playing out behind the scenes, Reuters has learned.
The acrimonious dispute pits Tezos’ two young founders - Arthur and Kathleen Breitman - against Johann Gevers, the president of a Swiss foundation the couple helped establish to handle the coin offering and promote and develop the Tezos computer network.
Under Swiss law, the foundation is supposed to be independent. It holds all of the funds raised, which have mushroomed to more than US$400 million in value because the contributions were made in two cryptocurrencies - bitcoin and ether - that have appreciated sharply.
But the Breitmans, who still control the Tezos source code through a Delaware company, are seeking to oust the head of the foundation.
An attorney for the Breitmans sent a 46-page letter on Sunday to the two other members of the foundation’s three-person board, calling for Gevers’ prompt removal and seeking to give the couple a “substantial role” in a new structure that would limit the foundation’s responsibilities.
The document accuses Gevers of “self-dealing, self-promotion and conflicts of interest.” According to Gevers, the two board members later suggested via email that he step aside for a month while they investigate.
Gevers told Reuters he is not stepping down. “As Arthur has done to others before me,” Gevers said, “this is attempted character assassination.
It’s a long laundry list of misleading statements and outright lies.” He said the other two board members “are attempting an illegal coup.”
The Breitmans have been trying to control the foundation as if it were their own private entity, Gevers said, by bypassing the foundation’s legal structure and interfering with management and operations.
This has resulted in costly delays in developing and launching the Tezos network and new currency, he said.
“They’re unnecessarily putting the project at risk,” he said.
In a written statement sent to Reuters, the Breitmans reiterated their accusations against Gevers and said they acted “in accordance with all applicable laws and regulations.”
They said their priority “remains the successful launch of the Tezos network.”
Hundreds of millions of dollars are at stake: The Tezos digital coins, called “Tezzies,” are already priced at a hefty premium in futures trading even though they don’t yet exist. The launching of the Tezos network, which will trigger the coins’ release, has been delayed. Until the network launches - and no date is set - contributors to the fundraiser will receive nothing.
Under the terms of the Tezos coin offering, there’s no guarantee participants will ever receive a single Tez. Participants agreed to accept the risk that the project “may be abandoned.” Despite the feud, Gevers said he remains committed to resolving the feud so that “this project succeeds.”
The tale of how two young entrepreneurs raised a fortune for a project barely out of the starting blocks is reported here in detail for the first time. It highlights the risks inherent in the current frenzy for ICOs, in which tech startups issue new cryptocurrencies to raise capital.
Reuters reported last month that cryptocurrency exchanges - where virtual currencies are bought, sold and stored - have become magnets for fraud and deception. More than 980,000 bitcoins - the most popular virtual currency - have been stolen since 2011. Today they would be worth about US$5 billion.
Similar large sums are pouring into initial coin offerings. From January through September, ICOs generated US$2.2 billion, more than three times the amount invested in similar startups by traditional venture capital firms, according to Novum Insights, a data provider.
ICOs can be a way for technology projects to raise money online to finance the development of new, open-source computer networks that aren’t necessarily looking to make a profit.
Contributors receive new digital coins, or tokens, which they typically need to “pay” to access the new networks.
But the recent flurry of ICOs raising millions of dollars has attracted some dubious business propositions and outright scams, as well as speculators looking to trade the coins for swift gains.
Authorities in the United States, Switzerland, China, Singapore and other nations have begun scrutinizing the sector closely for potentially tougher regulation.
“Most ICOs are bought by people looking to ‘flip’ their tokens to a greater fool for a quick profit,” said Alistair Milne, a co-founder of the London-based Altana Digital Currency Fund, which so far has avoided ICOs. More than “90 percent will fall to have a near-zero value in time,” he predicted.
The new cryptocurrencies function through a technology called blockchain, essentially a public ledger maintained by a network of computers.
Blockchain applications are being tested by financial services firms, food suppliers, retailers and other businesses as a way to make record-keeping simpler and cheaper.
Tezos aims to be a blockchain that’s more reliable than the ones behind bitcoin and ether. Several entrepreneurs and investors in the blockchain industry said the Tezos technology has potential because it would be easier to upgrade and may be more secure than other blockchains. ANARCHO-CAPITALISM The son of Jean-Claude Deret, a French playwright and actor, Arthur Breitman studied applied mathematics, computer science and physics in France, before moving to the United States and studying financial mathematics at New York University. He went on to work for the investment banks Goldman Sachs and Morgan Stanley.
He is still listed as a co-organizer and “dear leader” for the New York Anarcho-Capitalist Meetup in New York, which describes its philosophy as “a type of radical libertarianism that favors the abundant wealth production, rapid technological development, and high standards of living produced by capitalism.” Its website adds, “We are also fairly lazy about fighting the state.”
It was at a crypto-anarchist lunch in 2010 that Breitman first met Kathleen McCaffrey, an American college student from New Jersey. She is described on a political blog called The Politicizer as a libertarian Republican who first became interested in politics after listening to the provocative radio personality Rush Limbaugh at the age of five. She married Breitman in 2013.