Barry Silbert invested early in ethereum classic and enthuses in public
about the virtual currency, which has recently risen in price even more
than bitcoin. Some securities lawyers say his posts on social media
could raise red flags for regulators.
Seventeen months ago, a
former Wall Street investment banker who specialized in distressed
assets took to Twitter to announce he had bought a cryptocurrency for 50
cents per coin. “At $0.50, risk/return felt right,” tweeted Barry
Silbert, founder and chief executive of a private New York-based company
called Digital Currency Group, or DCG.
It
has turned out to be a great bet. The digital coin, ethereum classic,
was trading this week at as much as $47 – more than 90 times higher –
before falling back. That’s an even bigger rise than that of bitcoin, a
far better known cryptocurrency, over the same period.
Silbert
continues to be a big backer. In April, a DCG subsidiary launched a
private investment fund that tracks ethereum classic’s price and donates
part of its fees to developing the technology behind the currency. He
still posts bullish comments about the digital coin on social media,
including a “pro tip” last month advising an investor to “close out” his
short position before an “Ethereum Classic Summit” organized by DCG was
held in Hong Kong.
On
Dec. 12, Silbert tweeted that three cryptocurrency funds the DCG
subsidiary offers now had more than $3 billion of assets under
management – up from $164 million at the start of the year.
Silbert’s cheerleading for
ethereum classic and other digital coins he or his company own has led
some critics on Twitter to nickname him “Barry Shillbert.” Silbert
declined to comment on that barb.
The
story of Silbert and his role in ethereum classic’s rise illustrates
the current hype over cryptocurrencies - strings of computer code that
aren’t backed by governments, face little regulation and have become
magnets for speculators.
Social
media platforms are now filled with predictions by cryptocurrency
enthusiasts about the price of bitcoin and other digital coins, many of
which have soared in value this year.
But
two securities lawyers told Reuters they believed that some of
Silbert’s social media postings about the price of ethereum classic
could draw the attention of U.S. regulators. Although the digital coins
are not considered securities, Silbert is chief executive of Grayscale, a
DCG subsidiary that offers an ethereum-classic investment fund whose
shares are securities, according to Grayscale’s website. The attorneys
said his postings on price and the “pro tip” he gave to one investor
could raise red flags with regulators who enforce federal securities and
commodities laws and rules that prohibit price manipulation.
A spokeswoman for the U.S. Securities and Exchange Commission declined to comment on Silbert.
In
an interview with Reuters last month, Silbert said he was “highly,
highly sensitive” to the rules that govern financial markets and that he
and his company are “subject to anti-fraud provisions and insider
trading and … all those types of things.”
“I would never make a recommendation,” he said. “I’ve never given price predictions.”
Silbert
later told Reuters that DCG, its subsidiaries and employees “take pride
in our strict compliance policies and adherence to all applicable
regulations, including company-wide rules and restrictions concerning
the trading of digital assets.”
Regulators
are grappling with how to deal with a new category of investment that
this year has spurred billions of dollars worth of daily trades and
seized Wall Street’s imagination. This month, two major derivatives
exchanges began offering bitcoin futures contracts. But the mania for
cryptocurrencies is outpacing regulators’ ability to keep up.
“SO FAR, SO GOOD”
Outside
cryptocurrency circles, the boyish-looking Silbert, 41, is hardly a
household name. He aims to change that. He told Reuters he aspires to
build DCG into a publicly traded conglomerate like Berkshire Hathaway
Inc, run by legendary investor Warren Buffett.
After
beginning his financial career at an investment bank, Silbert set up a
marketplace for difficult-to-trade assets called SecondMarket, which
he sold to a subsidiary of Nasdaq in 2015 for an undisclosed sum. He
launched DCG that same year, devoting it to bitcoin and its underlying
technology known as blockchain - a shared public database maintained by a
network of computers. The company is backed by large corporations,
including MasterCard, Western Union and Bain Capital Ventures.
Silbert
was an early buyer of bitcoin. He said he made his first purchase in
2012, and bought about $175,000 worth, paying about $11 for each digital
coin. He said he was initially a skeptic but came to believe it could
provide a better way to transmit funds around the world.
“I started buying
bitcoin, you know, at probably around seven bucks and my average price
of bitcoin was $11. So when it went from 11 to 13, I thought I was a
genius. When it fell to 8, I thought I was not,” he said. “But so far,
so good.” At one point this week, a single bitcoin was trading for more
than $19,600.
Silbert
said he contributed most of his bitcoin holdings to DCG, which still
holds “a significant amount” of his original digital coins. He said DCG
now has investments in more than 100 companies in 30 countries,
including 20 cryptocurrency trading exchanges. Besides the
asset-management business Grayscale, DCG’s subsidiaries include a
cryptocurrency broker-dealer and CoinDesk, a leading cryptocurrency news
website that reports on the industry and holds conferences.
“GREAT TIP”
Silbert
decided to invest in ethereum classic, he said, in part because he
believed it was undervalued. (For the origins of ethereum classic,
see “The blockchain that wouldn’t die” below).
On July 25, 2016, he announced on Twitter that he had bought the virtual currency. He has been enthusing about it ever since.
Reuters
reviewed more than 200 of Silbert’s tweets and retweets about the
virtual coin in the past 17 months that were captured by ExportTweet, a
Twitter analytics service.
On
the same day Silbert announced on Twitter that he had bought ethereum
classic, he made a prediction: there was a “25% chance” ethereum
classic’s value would increase fivefold “in next six months.”
In
April, Silbert’s involvement with ethereum classic expanded into the
more tangible world of securities. That month, his company launched the
Ethereum Classic Investment Trust, which Silbert told Reuters was seeded
by $10 million from him, DCG and a DCG board member.
Grayscale’s website says
the fund’s “shares are the first securities solely invested in and
deriving value from the price of” ethereum classic. It says the private
investment vehicle isn’t registered with the SEC, in accordance with a
regulatory exemption. The SEC has allowed the sale of such offerings,
which are still subject to federal securities laws.
Grayscale
manages three such funds, each investing in a different cryptocurrency:
ethereum classic, bitcoin and Zcash. The funds offer an alternative for
investors seeking to gain exposure to digital currencies without
actually holding them.
The
Ethereum Classic Investment Trust is open only to so-called “accredited
investors” with more than $200,000 of annual income or a net worth that
exceeds $1 million. Earlier this week, Grayscale’s website said its
shares had soared more than 800 percent in value since its inception.
The fund’s holdings this month surpassed $140 million at one point.
Silbert declined to say how much ethereum classic he personally owns.
Silbert
recently began using another messaging platform, called Discord, that
is popular with cryptocurrency enthusiasts. In a series of messages on
Discord on Nov. 7, Silbert texted a user who goes by the handle “Sinz”
and asked if he would be attending an ethereum classic “summit” DCG was
going to host in Hong Kong the following week.
“Sinz” replied that he had to attend a family funeral. Silbert responded:
oh man, sorry to hear my friend
pro tip: close out your ETC short before the Summit…
In
a short position, an investor is betting the price will go down;
Silbert appeared to be suggesting that ethereum classic’s price might
soon rise.
Another poster wrote in response on Discord: “Great tip”
Sinz
later said he ignored Silbert’s advice. Reuters could not determine
whether the other poster or anyone else took any action.
Ethereum classic was trading at about $14 on Nov. 7, the day Silbert gave the “pro tip,” according to
CoinMarketCap.com,
a website that provides cryptocurrency prices and other market data.
The two-day “summit” was scheduled to begin in Hong Kong on Monday, Nov.
13, and the digital coin surged during the weekend before, surpassing
$20 on Nov. 12. Daily trading volume that day reached a record $1
billion. Shares of Grayscale’s Ethereum Classic Investment Trust also
rose before the Hong Kong conference.
“We
have a lot of financial accomplishments over the last 24 hours,” Meltem
Demirors, DCG’s director of development, said on stage during the
conference’s opening day on Nov. 13. “We had over one billion dollars of
ETC traded for the first time ever. Wooo! Are we excited?”
The audience clapped. “That’s pretty phenomenal,” she said.
DCG’s
Grayscale subsidiary put out a press release on Nov. 12 that it had
begun the process to list shares of the Ethereum Classic Investment
Trust on an over-the-counter trading venue. The shares rose to $16.97 on
Nov. 14 from $14.29 on Nov. 10, according to Grayscale’s website.
Reuters could not determine if the announcement affected the share
price.
On Nov. 29,
Silbert tweeted that he had been invited to appear that week on the CNBC
business television show Squawk Box. “Looking forward to dropping some
Ethereum Classic and Zcash knowledge this time around...,” he wrote,
referencing two cryptocurrencies tracked by Grayscale investment funds.
On the show, Silbert was
asked about the price of bitcoin. In responding, he said he currently
liked two other cryptocurrencies: “Ethereum classic and Zcash … You’ve
got to move into the other digital assets.”
GREY AREA
Reuters asked several securities lawyers to review Silbert’s postings about ethereum classic on social media.
“It
is risky,” said Trace Schmeltz, a partner at the Barnes & Thornburg
law firm. “I think if I were advising Mr. Silbert, I would suggest that
he is better off as a cryptocurrency expert at large rather than making
specific comments on one particular cryptocurrency in which he has a
heavy concentration of holdings.”
Referring
to Silbert’s message to the investor who was shorting ethereum classic,
Schmeltz added: “If you have a fund that is issuing a security and the
value of the security rises and falls with the price of a cryptocurrency
and you are telling people to close their shorts in that
cryptocurrency, that is a problem.” He warned it could be “market
manipulation.”
On its
website, the SEC defines manipulation as “intentional conduct designed
to deceive investors by controlling or artificially affecting the market
for a security.”
Robert
Long, a former senior attorney with the Securities and Exchange
Commission who is now a partner with the Dallas law firm Bell Nunnally,
noted that the U.S. Commodity Futures Trading Commission (CFTC) views
virtual currencies as commodities and can “police the virtual currency
markets for manipulation and other misconduct.” Long, who is also a
former federal prosecutor, said the commission “could take an interest
given the nature and timing of some of the statements.”
Silbert said he and DCG take pride in adhering to all applicable regulations. The SEC and CFTC declined to comment.
Silbert
has also tweeted about DCG’s investments in cryptocurrency exchanges,
which are used to buy, sell and store digital coins. Getting an exchange
to list a cryptocurrency is considered a coup and can spark a price
rise because a listing makes the currency easier to trade.
One
of the companies DCG holds a stake in is BTCC, a Cayman
Islands-registered cryptocurrency exchange company run by an American
executive, Bobby Lee. On Nov. 3, 2016, Silbert tweeted: “BTCC exchange
hints it is planning to add Ethereum Classic.”
BTCC
eventually launched a digital currency exchange called BTCC DAX in June
2017, with a single trading pair: ethereum classic and bitcoin.
In
an interview, a BTCC spokesman attributed the decision to list ethereum
classic to the coin’s popularity. He said that was measured by “market
cap, how much trading volume the coin has, and whether or not our
customers have demanded it.” Lee conducted a poll on Twitter in May to
determine which digital currencies BTCC should list. He later announced
that ethereum classic had finished first.
BTCC
did not reply to questions about the size of DCG’s investment or
whether that investment played a role in the decision to list ethereum
classic. Silbert told Reuters that the exchange’s decision was based on
its Twitter poll and that he had no advance knowledge of it.
The
price of ethereum classic spiked on the day it began trading on BTCC
DAX, trading as high as $23.86 from an earlier low of $19.45, according
to CoinMarketCap.com.
SOLVING THE WORLD’S PROBLEMS
During
the two-day Ethereum Classic Summit last month, Silbert addressed a
private dinner attended by cryptocurrency investors, programmers and
backers of the platform.
He said he was bullish on
the prospects for “this very important new technology, for this very
important currency.” He added: “I take such great pride in being a
really, really small part of hopefully what was the catalyst to build
something really special that’s going to solve problems of the world.”
Within
the cryptocurrency development community, however, ethereum classic
attracts mixed feelings. Fewer programmers are working with it compared
to another blockchain known simply as ethereum. Two websites that track
support for different cryptocurrencies -
CoinGecko.com and
CoinCheckUp.com -
both rank ethereum classic behind ethereum. Support for a
cryptocurrency project is critical: its success can largely depend on
whether there’s an active community both of software developers that
work on its underlying code and programmers that build applications for
it, such as for financial institutions.
Speaking
of ethereum classic, Demirors, DCG’s development director, said at the
conference: “There aren’t that many usable applications today that are
popular within the cryptocurrency ecosystem.”
Charles
Hoskinson, one of the founders of the ethereum project who is
now helping to develop ethereum classic, said his team has completely
rewritten ethereum classic’s software code and predicted many new
applications will come out in 2018. But he added that the challenge will
be funding future development. If that isn’t solved, he said, “then I
can’t see ETC (ethereum classic) as a viable currency and a viable
competitor for the long term.”
Others go further. A former supporter of ethereum classic expressed his disillusion in a long post this month on the website
ETCisComing.com, arguing that the rise in the price of ethereum classic has been largely caused by Silbert’s promotion.
“It’s
gone up because we have one big-shot investor, Barry Silbert, who’s
gone to Wall Street and sold some people on it,” wrote the former
supporter. “It’s gone up because of hype.”
In
an interview, the man, who requested anonymity, told Reuters that he
had spent a lot of time and money promoting ethereum classic through
ETCisComing.com and other social media. But he said that it had fallen
behind other blockchain projects. He became so disillusioned, he posted
that he was shutting down the website.
Silbert told Reuters: “As with any other investment, people will hold differing views. Digital Currency Group believes in ETC.”