Other factors could explain the rapid successions of buying and selling EOS around the time of its initial offering. A May 2018 posting on the software collaboration site GitHub describes an arbitrage opportunity generated by price discrepancies in the crowdsale and on crypto exchanges like Binance. According to the writer, EOS coins distributed in the crowdsale chronically sold for less than coins trading simultaneously on the secondary market, and nimble traders who could buy and sell fast enough could sometimes lock in fast profits.
Griffin defended his work. Supply was fixed each day, so purchasing the tokens in the sale would buoy the price, he said in an interview. It was unprofitable to buy at the crowdsale and sell at the exchange almost twice as often as that same trade was profitable, he explained.
“Selling through the exchange could have minimal impact on the price, especially since it can be sold slowly and in a liquid market,” he said. He also disputed the idea that these trades were carried out simply to take advantage of price differences. “Market makers make a spread and make money on the spread,” he said. “These traders consistently lost money on their trades. Why would one engage in a losing strategy unless making money somewhere else?”
At Bloomberg’s request, Cornell Law School Professor Robert Hockett reviewed Griffin’s research and called the analysis “impeccable.”
“There’s enough smoke here to suggest there’s a fire,” said Hockett, who specializes in corporate law and financial regulation. Hockett said the actions described in Griffin’s report, if true, could violate the Securities Act of 1933 and the Exchange Act of 1934, which prohibit fraud and manipulative activities. “This is what the SEC would call classic fraud and pump and dump. This is taking advantage of retail investors who don’t know what’s going on underneath and could be easily fooled.” The SEC and Department of Justice “should definitely be investigating,” he said.
Bloomberg Intelligence analyst James Seyffart also examined Griffin’s research using Etherscan, a tool for searching the Ethereum blockchain, a digital ledger of cryptocurrency transactions, and reached similar conclusions.
“The only reason they would be doing this is because they’re pumping or have failed miserably at attempting an arbitrage trade,” Seyffart said. “This definitely deserves a closer look.”
The SEC and Justice Department declined to comment.
While the Clifford Chance report was extensive, it also admits to limitations. In a section entitled “assumptions and limitations,” the report said “Block.one shareholders, employees, equity holders, directors, officers, suppliers and consultants (past, present or future) were permitted to participate in the token sale on the same terms as all other purchasers,” using their own funds — meaning that any such activity was outside the scope of the review of accounts, or wallets. Also, the report only examined cryptocurrency wallets owned by Block.one with addresses provided by Block.one.
“Given the caveat that their analysis only applies to blockchain addresses that were provided by Block.one, the report seems to be unrelated to what we investigated,” Griffin said in an interview. “Due to the anonymous nature of the blockchain, it is very difficult to confirm whether the list of Block.one addresses analyzed by Clifford Chance and PwC is comprehensive.”
Clifford Chance explained its methodology in a statement, saying that while the review was limited to Block.one wallets, “our review of Block.one’s documents and information went much further.”
Wallet Withdrawals Registered in the Cayman Islands, with offices in Hong Kong and the Washington, D.C., area, Block.one was established in 2016 by Dan Larimer, a Virginia Tech-trained software engineer and entrepreneur, and Brendan Blumer, an entrepreneur whose previous ventures include selling in-game items and creating software for realtors in India. Brock Pierce, the former child actor who co-founded a coin that became Tether, was an early adviser. Block.one’s early investors included Bitmain Technologies, the Bitcoin mining giant co-founded by Chinese billionaire Jihan Wu, and billionaire Mike Novogratz’s Galaxy Digital, a cryptocurrency-focused financial services provider that plans to go public on a U.S. exchange later this year.
Block.one was birthed in the ICO heyday — when one obscure company after another unveiled plans to raise funds by issuing new virtual tokens, typically accompanied by a white paper outlining business plans. Few had any actual products, and many discussed plans in the vaguest terms. In its white paper, Block.one said it would treat the ICO proceeds as revenue and use it for a “consulting business focusing on helping businesses reimagine or build their businesses on the blockchain,” according to the SEC, citing a website touting the coin.