Two of the top stories in this issue involve fraudulent activities and scams which use Ethereum ERC20 backed tokens. Whilst there is no causal link between financial crime and the Ethereum network, the correlation due to its size when compared to other decentralized infrastructures, make it (and more specifically tokens created upon it) a prime target for legislative scrutiny and stigmatization.
Welcome to our series of bi-weekly news digests for Ethereum (ETH).
SEC Freezes Half of $14 Million ETH Funds From Veritaseum
The Securities and Exchange Commission (SEC) in the USA recently issued a press release detailing its decision to initiate fraud charges, and an ‘emergency action’ order for the freezing of assets, against Reginald “Reggie” Middleton and two entities under his control.
Reginald Middleton is behind a string of companies which have shared the name ‘Veritaseum’ in one form or another. They have collectively been charged with several counts of financial misconduct such as:
- Misappropriation of investor funds
- Operating an unregistered security offering
- Making false and intentionally misleading statements regarding private investor interest
- Manipulation of token prices using private accounts on exchanges
- Using investor funds to create a new (gold backed) investment token.
VERI is an ERC20 token on the Ethereum network and it’s what first attracted the ire of the SEC due to its ICO, as the commission has since classified it as a security offering / fund-raising event. Overall, direct token sales raised $14.8 million between 2017 and 2018. Reginald Middleton is additionally accused of having accepted investments beyond the purported ICO closing date in May 2018.
Veritaseum and Middleton launched VeGold shortly after this in August 2018, a token backed by precious metals which was reportedly propped up using investor funds taken from VERI. These funds are also said (by the SEC) to have been taken to fund personal expenses and staff salaries at Veritaseum.
The SEC alleges that its staff informed the council of the defendants of the high likelihood that it would be recommending for the filing of enforcement actions on July 30th, 2019, the day before a further $2 million in “remaining offering proceeds” was moved by defendants from one blockchain address associated with their identities – to multiple others. A portion of which was used to purchase additional gold supplies.
As a result of these violations, the SEC has issued an ‘emergency and preliminary relief’ order, freezing $8 million of the raised assets from a multitude of accounts owned by Middleton. Those listed on the documentation count:
- Cryptocurrency: 15 Ethereum Addresses, 2 Coinbase Addresses, One Gemini Account and One Kraken account
- FIAT: 4 Bank of America accounts, 7 Citibank accounts, 2 JPMC accounts
In addition to the freezing of funds, the order intends to bar the defendants from being able to offer any form of ‘digital securities’ in the future including an “officer-and-director bar”. It also seeks compensation from the defendants, through civil money penalties.
The defendants haven’t taken these heavy accusations lightly, with Reggie Middleton himself taking to Twitter to publish a copy of the the 423 page rebuttal / counterclaim submitted to the SEC on August 20th, 2019.
Marc P. Berger, Director of the SEC’s New York Regional Office
“After learning about Middleton’s transfer of funds, we took quick action to prevent the further dissipation of investor assets.“
“Whether in digital currency or plain cash, we will act to protect investor assets and to pursue fraud and manipulation in our securities markets.”
“Electric Capital Developer Report (H1 2019)”
Digital asset management firm Electric Capital has published a self-styled ‘developer report’ which contains a wealth of metrics covering the first half of 2019, which the company claims to have compiled after having
“fingerprinted 27,000+ code repositories and 22 million code commits”
Though the report is clearly an attempt at marketing the depth of the company’s research, the data presents some valuable insights worth mentioning.
Overall, Ethereum by far has the greatest number of developers compared to any other crypto ecosystem – with 1,243 (this is actually four times greater than that of the next largest ecosystem, Bitcoin). Ethereum also boasts the most full-time developers.
Top non-ethereum stats include:
- Less non full-time developer positions (80% of developer loss came from One Time per month and Part Time developers).
- Smart Contracts, Infrastructure, and DeFi ecosystems continue to gain Full Time developers over other areas.
- 19 of top 100 ecosystems averaged 40+ monthly developers
- Majority of 40+ developer ecosystems lost developers
- Less developer positions “outside of the top 100” projects by network value.
Regarding the activities of Electric Capital activities, the website states that it invests in “programmable money and blockchain applications”. Prior investments listed include: Cointelegraph, Oasis Labs, and CryptoKitties.
Alleged EtherDelta Scam Under Investigation From Chinese Authorities
A series of tweets posted by Dovey Wan (founding partner at Primitive Ventures) have brought to light the news that Chinese police have allegedly initiated an official investigation into EtherDelta, over what she describes as a “major scam”.
EtherDelta is a non-custodial exchange which exclusively deals in Ethereum ERC20 tokens, and has been subject to legislative scrutiny since at least November 2018 from the SEC in the United States, when it was charged for operating an “unregistered securities exchange”.
Details of the most recent scandal are vague, however it is known to involve the issuance and sale of a cryptocurrency entitled EtherDelta Token (EDT) – used as a means of draining funds by the owners from its own liquidity for an exit-scam payout.
The case fell into the hands of Chinese investigators after reports made to local police by affected investors had been escalated to a national level, and is under the jurisdiction of China due to the alleged changing of hands that took place in 2017 in which previous owner Zack Coburn sold the company to Chinese investors.
Wan continues to warn that Chinese police show “no mercy” the perpetrators of crypto scams where large amounts of “retail capital” are involved.
Lowest Gas Fees: Ethereum Supports TrustToken’s Claims
Ethereum shared a blog post from TrustToken in a recent edition of its weekly newsletter series.
In the article, TrustToken details claims of how its proprietary technology called ‘GasBoost’ has enabled its suite of FIAT backed stable-coins to achieve a 15+% reduction in the Ethereum gas fee costs associated with ERC20 transfers and transferForm.
This suite of stable-coins includes TrueUSD (TUSD), an Ethereum ERC20 token which launched in 2018 and describes itself as the first regulated stablecoin to be fully backed by the US dollar. It is registered with the U.S. Financial Crimes Enforcement Network (FinCEN).
Information correct as of 18:19 PM (GMT+1), 4th September 2019