Block.one wash trading? New report puts EOS developer in more jeopardy over controversial ICO

EOS developer Block.one is in more regulatory jeopardy after a report detailed suspected wash trading during the token’s controversial initial coin offering (ICO).

Last week, forensic financial analysis firm Integra FEC issued a report authored by University of Texas professor John M. Griffin featuring the provocative title, “Were ETH and EOS Repeatedly Recycled during the EOS Initial Coin Offering?,” EOS’s ICO ranks as the biggest ever, raising $4.36 billion during the unusually long 12-month period in which Block.one held its EOS crowdsale.

It’s been anything but smooth sailing for Block.one since. Less than a year after the ICO concluded in July 2018, Block.one agreed to pay a $24 million civil penalty to satisfy charges brought by the U.S. Securities and Exchange Commission (SEC), which accused the company of failing to register its token as a securities offering.

Last year, token holders launched a class action suit against Block.one, accusing the company of “making materially false and misleading statements about EOS, which artificially inflated the prices for the EOS securities and damaged unsuspecting investors.” Block.one settled the suit this summer by paying out $27.5 million, despite claiming that the plaintiffs’ allegations were “without merit.”

Griffin’s new report pours further fuel on the Block.one dumpster fire, just as the company is preparing to launch a new cryptocurrency exchange called Bullish. The exchange, which plans to go public this year via a special purpose acquisition company, will be funded in part with some of the billions Block.one generated via its problematic ICO.

The old in-out

Griffin claims to have identified 21 suspicious investor wallet addresses, each of which conducted a minimum of $15 million worth of crypto trading during the EOS ICO. By the tail end of the ICO, these suspect accounts were accounting for 23.4% of all EOS purchases.

Griffin alleges that these accounts “created legitimacy and the perception of widescale interest in EOS,” which in turn helped pump the token’s price to unwarranted heights. By April 2018, EOS was worth $21.54, only to fall below $8 by the end of June before sinking below $2 that December.

The alleged subterfuge went something like this: the wallets spotlighted in Griffin’s report received millions’ worth of Ether (ETH) tokens sent from digital currency exchanges (primarily those paragons of crypto virtue Bitfinex and Binance). A total of 1.2m ETH tokens—worth around $815 million at the time—passed through these wallets to buy EOS from Block.one (although Griffin suspects the actual volume involved in the apparent scheme could be much higher).

From the start, these wallets appeared to operate on a distinctly different pattern from others involved in the ICO. For instance, they did very little transacting that didn’t involve the ICO and they tended to buy and sell similar amounts of ETH on a daily and weekly basis. The purchased EOS—occasionally acquired in $15 million chunks—was sent to an exchange generally within 40 minutes of purchase from Block.one.

After arriving at Bitfinex and Binance, the EOS would be sold for ETH, despite the price paid for this EOS from Block.one being higher than what EOS was worth on the exchanges. Griffin says the net result was that the owners of these wallets were generally operating at a -1.4% loss, apparently disinterested in the 126% profit they could have garnered if they simply held onto their EOS as the token’s value bubbled upward.

Based on the sheer scale of the investment made by these 21 accounts—five of which used common deposit addresses at Bitfinex and Binance—Griffin says it’s “unlikely” that these accounts didn’t share some connection. Griffin adds that the patterns of odd trading behavior offers “clear evidence of a sophisticated and extended recycling scheme perpetuated by potential EOS-connected associates.”

Griffin also found that Block.one took the unusual step of transferring nearly 3 million ETH worth over $1.7 billion from its crowdsale wallet—representing over 39% of the ICO’s overall proceeds—while the ICO was ongoing. This vast sum of ETH was transferred to (surprise!) Bitfinex.

Even more suspect, the EOS sent from the crowdsale wallet appeared to take a needlessly circuitous route on its way to Bitfinex, making four ‘hops’ to overlapping deposit addresses. Griffin calls this pattern “consistent with obfuscating deposits to common accounts at Bitfinex.”

Our mom says we’re innocent

Block.one attempted to blunt the force of Griffin’s report by reminding everyone of a report the company commissioned in 2019 from the law firm of Clifford Chance LLP, which was tasked with digging into the growing allegations of insider dealing during the ICO.

However, while Clifford Chance says it found “no evidence” of dodgy activity, the lawyers cautioned that the only Block.one-owned wallets they examined were those provided to the firm by Block.one itself. Clifford Chance also didn’t investigate whether individuals associated with Block.one may have bought and sold EOS via personal wallets. 

An alternative theory behind the sketchy trading patterns is that these wallets were engaged in arbitrage, but Griffin told Bloomberg that the wallets cited in his report “consistently lost money on their trades,” a questionable long-term strategy unless those doing the trading “have an offsetting profit source or motive.”

Piercing the corporate veil

Block.one never really did much with its EOS.IO protocol post-IPO, undermining the technology’s original selling point: eliminating blockchain transaction fees based on massive volume. EOS-based DApps did earn the dubious distinction of being the primary targets of crypto hackers, so, um, huzzah?

Block.one was co-founded by none other than Brock Pierce, who bailed on the company a couple months before the ICO’s conclusion in order to focus more attention on ‘independent community building’ and plotting his bid to become president of the United States. (Spoiler alert: he didn’t win.)

Pierce previously co-founded the coin that became the Tether stablecoin. Tether is owned by iFinex, the parent company of Bitfinex. In 2018, Griffin co-authored a report on Tether’s role in suspected wash trading—primarily via Bitfinex and other Tether-reliant exchanges—intended to artificially pump up the price of the BTC token.

I suppose there’s a small chance that Pierce is Griffin’s next-door neighbor and Pierce has a habit of dumping his leaves over Griffin’s fence, leading Griffin to launch an analytic vendetta. That, or maybe the likes of Pierce, Tether, Bitfinex and Binance just happen to be routinely found at the intersection of most crypto-related pileups.

Betonjail

This year has witnessed a ‘great awakening’ of financial regulators finally deciding to rein in digital currency excesses and impose some badly needed adult supervision on the regulatory-averse sector. These efforts have so far consisted primarily of jurisdictions restricting market access and warning the general public, shots across the bow that some exchanges and token-issuers have chosen to ignore.

But law enforcement agencies are also taking a greater interest in the legions of crypto scofflaws who believe they can continue to lie, cheat and steal with impunity. At some point, these authorities will choose to make an example of someone in this space to intimidate the rest into knocking off the truly egregious antics.

I have some experience in the online gambling sector, and the story of BetOnSports CEO David Carruthers may prove illustrative for crypto crooks who believe they’re above the law. It’s one thing to pay a few million in penalties for flouting financial regulations; being deprived of one’s liberty for five years or more is something else entirely.

If there’s some online gambling site willing to put up a prop betting market on which unlucky fool will earn themselves a lengthy stint behind bars and thus earn a place in history as a crypto cautionary tale, my wallet is at the ready. Can I pay in EOS?

Follow CoinGeek’s Crypto Crime Cartel series, which delves into the stream of groups—a from BitMEX to Binance, Bitcoin.com, Blockstream, ShapeShift, Coinbase, Ripple and Ethereum—who have co-opted the digital asset revolution and turned the industry into a minefield for naïve (and even experienced) players in the market.