One of Griffin’s findings dovetails with an allegation outlined in the 2020 token holder lawsuit. This concerns multiple withdrawals from what’s known as a crowdsale wallet, where coin investors deposit their payments to Block.one. Typically, these funds would remain in the wallet until completion of the ICO. But in the EOS sale, 2.895 million Ether ($1.72 billion) were withdrawn during the sale and sent to one exchange in particular, Bitfinex, Griffin found.
That accounted for 39% of all Ether raised and made Bitfinex the biggest destination of funds, he said. Griffin also raised flags over how the funds made their way to Bitfinex, saying they were done in a way that made them hard to track.
“These transactions took place over a series of four hops to overlapping Bitfinex deposit addresses, the design of which is consistent with obfuscating deposits to common accounts at Bitfinex,” he wrote.
The token holder lawsuit explored other ways these withdrawals might be problematic. Block.one executives “permitted the funds to be withdrawn nearly a hundred times, accounting for close to 90% of the total funds raised throughout the ICO period and averaging one withdrawal every three to four days,” the lawsuit alleged.
“While withdrawal of funds during an ICO is not expressly prohibited, there are significant concerns about how the withdrawn funds might be used, e.g., to buy tokens on cryptocurrency exchanges, resulting in artificially inflated demand for EOS, increasing market price, and fueling speculation and interest in the sale,” the lawsuit said. Block.one disclosed in June that it paid $27.5 million to settle the lawsuit, saying that it was “without merit and filled with numerous inaccuracies.”
The company didn’t specify what it believes those inaccuracies were. Clifford Chance’s report addressed withdrawals, saying that Block.one withdrew funds, in the form of Ether, from wallets related to the coin sale, including the funding wallet. Block.one said it made the withdrawals to prevent theft and to hedge against fluctuations in the value of Ether, according to Clifford Chance. Another reason was to avoid selling a large Ether holding in one fell swoop, the report said.
If that had happened, it “would have been far more likely to negatively impact Ether prices than sales in smaller tranches over a long period of time,” Clifford Chance wrote.
Griffin has unearthed irregularities in cryptocurrency trading before. He alleged that Bitcoin’s surge in 2017 was triggered by manipulation and that a single participant, or whale, was likely behind the misconduct. He contended that a single entity on Bitfinex, using Tether, was seemingly capable of supporting the price of Bitcoin when it fell below a certain threshold. A lawyer representing Tether disputed Griffin’s research at the time, saying it was based on an insufficient data set. The findings nevertheless roiled digital asset markets and contributed to investor skepticism.
Block.one said in May it would bankroll Bullish with $10 billion, funding that includes 20 million EOS coins and 164,000 Bitcoin. Investors, including Thiel’s Founders Fund, Thiel Capital, Howard, Bacon, Angermayer, Li, investment bank Nomura and Galaxy Digital, put in an additional $300 million in Bullish. Thiel, Howard, Li and Angermayer will also serve as board advisers. The exchange’s directors are Blumer as well as Kokuei Yuan and Andrew Bliss, all of them Block.one executives.
Li and Nomura didn’t respond to requests for comment. Galaxy declined to comment.
Block.one has faced concerns over the effectiveness of the technology it helped create and the vitality of its related developer network. Many software developers have abandoned the EOS effort. Electric Capital, which analyzes the crypto developer community, found that the number of monthly active EOS developers fell to about 70 in July from 130 at the beginning of 2020.
“I think its technology is now outmoded,” said Aaron Brown, a crypto investor who writes for Bloomberg Opinion. “It’s not surprising to find it revitalizing when crypto came back, and also taking advantage of the boom in SPACs. But it has yet to demonstrate any technical successes.”
To be sure, Block.one’s technology has gained some traction. Accounting firm Grant Thornton said last year it would let clients handle intercompany transactions using what it later confirmed was blockchain technology based on EOS. Grant Thornton declined to comment on the progress of the initiative.
While it prepares for the Bullish market debut, Block.one may have trouble luring crypto investors who believe they got burned in the ICO, said Katie Talati of Arca, a digital-asset manager. In a March 19, 2019, email to shareholders, Block.one said its assets, including cash and investments, totaled $3 billion at the end of the preceding February. About $2.2 billion of those holdings were in liquid fiat assets, such as U.S. government bonds.
“They are going to have bad PR associated with the project that’s going to follow them,” she added. “Crypto is very community driven — if you are going to burn your community, it’s hard to rebuild that.”
--With assistance from Dave Merrill.
This article was provided by Bloomberg News.