SPECIAL REPORT-Ex-banker cheerleads his way to cryptocurrency riches

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By Anna Irrera and Steve Stecklow

HONG KONG/NEW YORK/LONDON, Dec 23 (Reuters) – 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.

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.”

(Reporting by Anna Irrera in Hong Kong and New York and Steve
Stecklow in London and New York. Additional reporting by
Alexandra Harney in Shanghai. Editing By Richard Woods)