December 18th, 2018

The first crypto bank…

… I mean gang

The first crypto bank…

December 18th, 2018

… I mean gang

Last year was crazy. All of a sudden thousands of entrepreneurs from all around the globe got easy access to millions of dollars for their ideas (including the terrible ones).

Even headlines like “80% of ICOs Are Scams” (truth be told those were backed up by a very vague report with no methodology behind the numbers) and curated lists full of dead crypto coins like Deadcoins or Coinopsy didn’t prevent freshman crypto investors from “shutting up and giving their money” away. All because of excitement and anticipation of potential gains that clouded their reasoning abilities while founders’ appealing promises pushed all the right buttons.

The gold rush is over.

Someone’s hard-earned thousands of dollars turned into dozens. The industry is still lacking a precise definition of what’s a scam and what’s legit. If someone raised $1m, $10m, $20m, $50m or more and didn’t go to Hawaii, leaving only the word “penis” behind, but also didn’t deliver any promises from to the roadmap  – would you call it a scam, or rather consider it to be fair to the project’s supporters?

The line between fraud and lack of expertise or business ethics in crypto is still incredibly thin.

As long as there is no established legislation ruling what’s right and wrong, retail investors, community and the industry reputation will suffer the most. Until there is a place for cases, when a definite culpable, (e.g. Blockvest, who were making false claims about regulatory approval to promote its initial coin offering) still wins in court, the whole industry is doomed.

However, one of Future Times missions is to make sure that all the blockchain-involved people have access to as truthful and fact-based information as possible.

We might not be able to change the laws or make someone responsible for defrauding investors (because there’s no definition of defrauding crypto investors for now), but the least we can do is to shed some light on the course of events in some of the questionable projects, even if it all looks unruffled on the surface.

I had to contact more than 300 people to write this article. Not all of them were willing to talk: some because they are too polite, some because they were not advised to speak by their lawyers since they were in the middle of a lawsuit against the company I tried to question them about.

I ended up taking around 30 interviews, most of them off the record, but still obtained enough information to put this piece together.

Shall we begin?

The hot mess: SwissBorg ICO

The problems with the project’s token sale started back in autumn 2017, according to several former employees. It has been rescheduled several times: first from October to November, then from November to December, due to various reasons.

The issues were mostly of legal nature. The initial idea behind SwissBorg was to become a “very first Swiss cooperative bank owned entirely by the community.” There were supposed to be two different tokens fueling the project – CHSB token and CSB token (Cryptallion), a multi-strategy hedge fund asset, that supposed to pay out the dividends to all tokens holders.

The revenues were planned to be the payment source for the dividends (the full business plan is available here):

Some of the legal issues included FINMA concerns that SwissBorg was using the word “bank” in their promo materials. So, the team had to remake it and try to get rid of this word from the published articles. But the footprints are still traceable. Like this piece, mentioning the “bank” and the fact that token sale was about to start in November. You can also find the screenshots of the article here (part 1 and part 2).

Besides, it turned out that it’s impossible to promptly register a company as a société coopérative (cooperative). However, that is how it was initially advertised to early investors. The initial token purchasing agreement template, stating that SwissBorg is a Swiss Cooperative society (“Société Coopérative”) can be found here. So the company ended up as SA (Société Anonyme). A cooperative, known as a “jointly-owned and democratically controlled enterprise” is very different from SA, where the company is controlled by a limited number of shareholders (at the moment of writing it’s seven people).

All those circumstances made the management team quite anxious. So, from then on, the rule of thumb was always taking care of legal aspects. Plenty of lawyers including Michel Jaccard and Olivier Depierre were hired, tried, and changed. Some of the former SwissBorg employees were suing the company after the crowdsale for not being paid and were impressed with this neverending kaleidoscope of attorneys.

And yet, when initial coin offering was finally around the corner in December 2017, it still wasn’t clear what to advertise to the investors. It wasn’t a bank; it couldn’t be a cooperative, and no dividends could be paid as it was initially intended. So, the team had to be creative and foxy.

Putting all the right words in the token sales agreement (that is still available on the website or here), like “Your Contribution (as defined below) will help SwissBorg develop the SwissBorg Project (as defined below), but will not provide you with any equity, asset, bond, security, derivative or any other financial instrument.” (So, forget about the promised C-shares)

or “The content of the Whitepaper, … and any press release or article regarding SwissBorg or public statements, are nonbinding and are subject to change by SwissBorg at its sole discretion”, or, my favorite, “SwissBorg is not a bank, a private bank, a fund or a financial institution and does not provide financial advice or act in any way as a fund manager, an asset manager or an investment advisor.”

With all that the team scraped together an excellent video and decided to give the promo a full go. Some of the statements in this beautiful video, however, included

“highly qualified and personalized investment advice”

And some major ethical benefits, like this:

“Yes, transparency was advertised but never utilized, ” – revealed one of my sources.

Some people were paid, some not. There were no written agreements, and whatever was promised kept changing all the time. Cyrus Fazel, the company’s founder, and CEO kept hiring more people. The lion’s share of them was “mostly useless” and, most of the time, someone Cyrus knew personally, a friend or a family member.

“it was like, you go to the office one day, and you are like “who’s this guy?”

“We didn’t know how much money was raised, what the management was doing with it…”  Even when official Twitter announcements, like this one, were stating preliminary crowdsale results, the overall consensus was that the team wasn’t sure how those numbers came about. Nobody knew where to look up the fundraising wallets. And when some wallets would surface, the figures announced on social media and the amounts in those wallets wouldn’t match AT ALL.

When the token generation event was over on the 9th of January, more bobbles followed.

Two weeks after the sale investors were asked to go through the KYC procedures to receive their tokens. What a boo-boo from someone who cares about lawfulness.

I also talked to Maxime Gillot, super sharp guy, former SwissBorg CIO (Chief Investment Officer), who was overseeing investment schemes including lending, arbitrage, buy and hold strategies, trades optimization through derivatives including options and futures, and more. When asked about joining the company he told me the following: “I have known Cyrus for many years and went to many of their events early on. I had experience managing a lot of complex financial products such as derivatives, options, futures, etc. We discussed it, and I introduced them to seeders. Therefore, for the initial investors, I actually brought them in.”

I thought if he brought investors in he must know the address of the wallet where the funds should be wired, right?

“For the wallets, I have absolutely no idea. I was not on the tech side at the time.” – Max brought me down to earth. (Not that I found that very persuasive).

“There was no tech team until the initial coin offering, just a few developers were working, but they left afterward, ” – shared one of my sources.

“The team needed to go even more tech, this is the direction they took. I was not there anymore, so it is hard to comment. ” – Gillot’s comment confirmed that tech side wasn’t strong enough at the time of the token sale.

ICO is over. Let’s deliver the promise (pause)… or not!

It still isn’t clear how the whole “let’s hire some devs and actually build something” approach was working out. If to compare the company’s organizational charts from Q2 2018 (below) to people listed at as a part of the team, at the moment of writing (lower) you can see that only management (CTO) stayed the same in the Tech branch.

Four new people have been hired within the course of 1,5 months, mostly in November 2018. That can be tracked on a corporate blog. However, it’s inexcusably slow and clearly not enough. Fortunately, there are some openings for tech positions (six at the moment of writing), so I hope there will be at least a little bit of progress in actual product building.

SwissBorg organizational chart, mid 2018
SwissBorg organizational chart, December 2018

Roadmap? What roadmap?

Yes, the tiny team of developers was constantly changing. On top of that, the project’s roadmap would be unrecognizable every other couple of months.

We’ve made a comparison table to keep track of what’s left. It can be accessed here (the links to referred iterations of the roadmap are also available at the heading row of the table), or you can take a look at the following screenshot:

It’s pretty much self-explanatory. Not only does the technological stack shifted every several months but also the delivery dates are entirely different.

And, if we look at the recent poll on the most anticipated features started by the SwissBorg team (below), supposedly the most important thing for the initial project’s goal – wealth management powered by artificial intelligence and all that – is not even amongst the options.

Moreover, the most popular feature winning over the poll didn’t even make it to the latest version of the roadmap (or the app and ICO platform are the same? Is the internal communication within the company entirely out of whack?) What a shambles!

In a nutshell, it’s been almost a year since the initial coin offering and the only thing delivered were the concepts of crypto indexes (thank you, not sure why you need $52M or even $1 for that) and an ugly looking voting app that community didn’t quite appreciate. However, suggestions for improvements seemed to be ignored anyway.

Though there’s still some sense in the tokens, right?

Well, not really. When I addressed that question to a super friendly and helpful SwissBorg community back in September 2018, the only valuable mention was their participation in a referendum. Things didn’t change much since then.

For holding the CHSB tokens project supporters are rewarded with RSB tokens. Those are used to vote in referendums and for every RSB token spent to vote there’s a bonus of 0.01 CHSB.

But is this utility model that attractive?

First of all, the voting itself doesn’t seem to be that democratic.

Some of SwissBorg investors addressed this issue on Reddit: apparently, the decision-making authority is not the entire community but a few whales since their votes mean much more.

Second is how much you can make with this incentive. If voting itself doesn’t make any sense at least there’s a chance to earn some tokens, right?

Well, let’s crunch some numbers here. Reddit user poorguy18 shared his story: after purchasing 134000 CHSB during the token sale (investing around $10,000) he received a reward of 1340 CHSB. Calculating accordingly to today’s rates (2nd week of December 2018),

his investment turned into $670, and he received $6.7 on top of it. It took him 1 year.

SwissBorg community: angels or goslings?

I happened to have met community members during the meetup in London on the 4th of October, 2018. The company recently opened yet another office in one of the most expensive cities in the world. This one to host their marketing team.

So, to justify those ridiculous costs, probably it made sense to meet local hodlers.

People who were present were very welcoming, kind, and knowledgeable — fantastic crowd.

However, digging deeper I figured how these lovely people became a speechless army beaming with positivity for no reason with zero traces of critical reasoning.

First of all, any time someone got too curious about the flaws of the project, he or she, most likely, would simply be kicked out of the Telegram group.

And oftentimes moderators would turn into complete brutes.

And even though their primary mission is to stop spreading negativity, they would keep going on and on, complaining and justifying their inappropriate and rude behavior, overall just being a bad egg themselves.

Another smart trick on how to turn your community into zombies is the reward system that SwissBorg team came up with. They recently updated the communication rules (which can be found here). In a nutshell, if your comment on Reddit gets upvotes, you get paid in CHSB tokens. Although, of course, the team “reserves the right to change the rules or reward amounts and even to terminate the reward system at any point.” And (surprise! surprise!) critical comments are not appreciated that much. So, it’s quite predictable that even if the team didn’t deliver anything of substance (the product!), the community would flood the web with positive comments to snatch a couple of dollars worth of reward (for a month of excessive commenting).

SwissBorg Reddit reminds me of the Black Mirror “Nosedive” episode, just in real life. All smiles are fake here.

For instance, this post on November project’s update, if we ignore all the bells and whistles, features a couple of new employees, changes in the logo, and the time taken to deploy SwissBorg services in Malta within the next 12 months. During that period the team will try to request “the real VFA license.”  With no guarantee, of course.

Put it shortly, nothing of importance. Again.

The comments on Reddit, however, are full of excitement and appreciation.

Keeping a promise? Why bother.

Facts are useful, but hearing from the founders is even more important. That’s why I was very excited to see one of SwissBorg’s co-founders, Anthony Lesoismier-Geniaux, amongst the participants of the previously mentioned meetup in London.

We spent about an hour chatting, it was ok. What bugged me is that when I was about to use the voice recorder to document our conversation Anthony asked me not to do it.

He mentioned that we are having a friendly talk, so there’s no need for taping it. It was promised on the spot, that the real interview would be scheduled later, and I will be free to use all the devices I want.

Since journalists’ and business code of ethics are valuable to me, I agreed to put away the dictaphone. However, the promise about the real interview was never kept as well as the promise to share the token sale wallets addresses.

Anthony claimed that two of SwissBorg core values are transparency and openness. However, my experience proves the opposite.

During our conversation, I was mainly asking him about the roadmap and why was the product idea shifting from something great (wealth management, artificial intelligence, dividends, all that) to something so vague. Anthony kept going on and on about the super smart wallet and how it’s more secure than the Coinbase account. I didn’t get how it fits into the initial product idea and the current version of the roadmap (valid for the date of the meetup).

All in all, what’s left is the weirdest LinkedIn conversation (I am sharing parts of it below).

It first looked like a way to buy more time and then clearly turned into a search for an excuse to never talk to me again. I felt deceived.

The Dark Lord of SwissBorg

The minor hiccups on the way to scheduling those interviews with SwissBorg founders didn’t stop me, and I wanted to do things right.

Vince Howard, SwissBorg’s marketing director, who attended the London’s meetup along with Anthony, also made some promises to help with finding a time slot for those interviews. Never happened. So, my only hope was to contact Cyrus Fazel, the company’s CEO and founder, directly. Thankfully, he agreed to talk to me.

I wish Cyrus was in a rock band. In that case, he could definitely snatch some parts in the movies and maybe get on the cover of People’s magazine (one of the “Sexiest man alive!” issues). In fact, he used to be a breakdancer when he was younger. That might work too.

He sure has his charm and charisma.

Although, when the soft tone and the flow of compliments suddenly turned into threats letting all the true colors shine, it became pretty unpleasant and weird even if he apologized later for being aggressive. Though, I am still not sure if such splashes of rage are appropriate in business communications.

We began with the development. I showed Cyrus the roadmap comparison table and tried to figure out what’s going on. How is that, that the dates and the features of an actual product promised to investors keep changing?

How come there was a Cryptallion fund (the most interesting and exciting part – it’s the best-advanced trading that pays out dividends to the token holders ever), then it disappeared, and then it appeared again…  (December update of the plan didn’t exist at that time).

Funny enough, Cyrus ensured me that there would be no Cryptallion fund at all.

I asked why it was in the third, most recent at the time, edition of the roadmap, and he admitted that a proper information delivery was a bit of a struggle in the company: “The product and marketing are not communicating. We are working in a group that is scaling so fast: 35 people, 4 countries, 3 continents. Communication is something that we are improving right now.”

I still can’t believe how is it possible to not really know what you are working on.

35 people are not 35,000 people. Moreover, when putting together such an important document as a roadmap, how hard might it be to make sure that all the mentioned milestones are real?

I asked about weird revenue projections from the project’s initial business plan. Where did those come from, and where are the revenues that are marked as an achieved milestone in the latest versions of the roadmap?

“Regarding the costs, we are pretty much matching our projections. In terms of revenues, we are definitely not there. The fact that we have to postpone the Cryptallion fund, the fact that we have to, unfortunately, postpone the off-chain fund – that’s where the projects biggest revenue was coming from. Right now the only revenue we got is through the Initial Coin Offerings launch.”

When asked for the numbers he modestly admitted that they “haven’t been very active” with it yet.

Since Cryptallion fund and off-chain fund were both taken off the current roadmap versions, it’s hard to understand where Cyrus went with his answer in the revenue department. Is there any plan at all?

Well, let’s hope this very long anticipated ICO platform will generate at least some revenues. It wasn’t a major money maker according to the business plan, but maybe it’s better than nothing?

If there are any legitimate ICOs left, of course.

I once worked at the ICO platform. We struggled to find a decent project to support. And it was 2017 when the variety still existed.

We talked more about the roadmap. Cyrus began to make some sense:

“Legitimacy goes first. Then building a product,” – he said.

Though, nothing is still clear about the existence of licenses. According to Cyrus, when we spoke, the only license obtained was the Swiss “Money management and payment agents license” (which is a Financial Services Standards Association (VQF), one of the Swiss Self-Regulatory Organizations, membership acceptance, so it’s not entirely the same as getting a license allowing to do things). Some clarifications on what it means here on the SwissBorg’s corporate blog. Some progress, as mentioned earlier, has been achieved in Malta in November. But then again, it’s not the real thing.

Moving on from the legal mambo jumbo, as far as Cyrus was concerned, the main focus of product development is the SwissBorg app.

“Call it wherever you want, smart wallet for instance. I call it SwissBorg app,” – he clarifies.

Well, now it’s getting more clear what may be causing those communication gaps.

“We are going to have some version soon: a way for people to look at their portfolios in a smart and secure way” – he adds.

Wow, so is it like Delta or Blockfolio or maybe an Excel spreadsheet with some built-in macros?  I don’t get it. Why would someone want to look at their portfolio “in a smart way”? Where is the wealth management with artificial intelligence and other fancy things?

I wanted to get into his head. I wanted to understand how he thinks, to figure out if he knew that the SwissBorg ICO promise hadn’t quite matched the reality… (or future reality).

So I asked what he was grateful for.

He shared a sweet story about his family. How they lost everything during the Iranian revolution and how they would have been fine if only they had crypto at the time. And that was what inspired him to create SwissBorg. Now, this idea turned into a small community of almost 30,000 people. They trust in Cyrus and the team, and he is proud to deliver this excellent product, so, everyone can get access to the wealth management.

Very touching.

What concerns me that all those efforts are not producing what’s promised. Even remotely.

Maybe it just so happens, when you put so much energy and work into a project, sometimes ego or something else is getting on the way of a strategic, helicopter’s view perspective.

I get it. It’s your baby. However, if the baby can’t run as expected maybe it makes sense to inform all the relatives who contributed to buying expensive running shoes?

Cyrus was losing his patience. I decided to wrap up the conversation.

I shared my experience with Anthony, stressing that he promised to share token sale wallets, but never did. “Can I still get it? – I ask.

“We won’t do that ever. I don’t know why he said that. We’ve checked with our lawyers, and it’s completely illegal. There are rules, that’s why we can’t do it.

We have two former FINMA employees and one former FSA worker on the team, so we know exactly what we’re doing in terms of legal.”

Cyrus was trying to justify the point with the privacy: “It’s fine for us to be transparent, but we can’t be transparent on behalf of our community. I don’t think 25,000 people would agree on that.”

However, a simple “swissborg smart contract” search will link anyone to all the token holders. So why hide the token sale wallet if token holders wallets are an issue? Those are very easy to find.

I asked if he could share those rules because I’ve never heard of them. He said: “I have shitloads to do, ” – and added. – “You can look for it and find it. I don’t have time to do it. However, if I find it, I’ll link you to it.”

Since he never did and I wasn’t able to google anything similar, I talked to the lawyers.

Gordon Einstein, a hybrid Crypto-Attorney, Technologist, Enterprise Strategist, and a Founder of CryptoLaw Partners said:

“I’m not aware of any law that would prevent them from revealing this wallet. $52 million is much money, and people trusted the project with the funds. So, if you have a qualified person responsible for the legal part working in your company, there’s no way you won’t provide a solid answer whether or not revealing this wallet is illegal.”

A partner in the Corporate Transactions practice group at Ashurst LLP, and a mentor in Barclays Techstars FinTech Accelerator programme, Tara Waters, agrees:

“I don’t believe there is necessarily any law against this. Ultimately, the bigger issue is the lack of transparency and accountability by many ICO issuers. Putting aside the question of whether the token sale itself was possibly an unregistered (and thus potentially non-compliant) security offering—which is a question hanging over most of the ICOs conducted to-date—by design of the issuers, ICO token purchasers have frequently been left out of pocket without sufficient recourse if the project fails to deliver in the promises in the white paper.”

The Wallet

SwissBorg token sale agreement states SwissBorg was accepting ETH, BTC, BCH, LTC, XRP as payment for CHSB Tokens. I was able to find one of the Ethereum addresses with the total incoming transactions of around 14,000 ETH.

And there was some pretty weird stuff going on.

For instance, one of the transactions was supposed to deliver 1000 ETH to Bitfinex.

First, those were sent  to the 0x7e… and then forwarded to this address, which forwarded it to the exchange. It all happened back in Spring. Though, have CHSB tokens ever been traded on Bitfinex?

What is even more interesting, on the 16th of October Cyrus himself shared a post on Facebook asking his network to connect him with someone from the mentioned exchange.

However, let’s forget about the awkwardly spent money. There’s more than that. I quickly analyzed some of the largest internal transactions associated with the wallet and found new loops.

For instance, this transaction happened, and ~ 1000 ETH were sent to address starting with 0xbd.

Several weeks after that 0xbd sent 1000 ETH to address starting with xedc…. And if to look up the internal transactions sent from xedc… you can spot that some of those were sent back to 0x9c1… token sale fundraising wallet.

Blockchain developers call it a “mixer.”

Robert Zaremba, Co-founder of Cerealia, and a founding member of The Swiss Blockchain Association: “Most of the initial coin offerings are doing it. Many mixing techniques are used, for instance, to hide the number of tokens distributed among the team members.”

Similarly, those can be used to confuse someone who would like to keep an eye on project’s spending.

I’ve also run a quick check through the Coinfirm software that allows determining unusual activities on the blockchain.

The report stated: “100% related to money laundering”. Well, we won’t judge, machines make mistakes too, right?

Our mission here, at Future Times, is to provide you with the most unbiased information possible in those cases when humans do the writing. Funny enough, even though the blockchain is supposed to bring more transparency and trust to our lives, it’s not entirely transparent in its ins and outs.

There’s still so much to say about SwissBorg, and we are happy to continue following and researching the project. After all, if it keeps the industry a bit cleaner, motivates someone to work harder or makes someone safer, it is all well worth it.