Browsing Tag



Crypto Capital Race 2.0

September 18, 2018 • By

TL, DR: Companies are looking for additional access to capital markets. Will we see a rise in reverse merger activity? When considering investments, read the disclosures or consult someone who does. Consider the speed at which a company is going to market, if taking shortcuts, are the elements in place for sustainability?

TL, PNR (prefer not to read): Watch “The China Hustle”

Initial Coin Offerings (ICOs) and unregulated capital raises are winding down. The crypto currency market is down considerably from record highs in early 2018. There is little movement in institutional, synthetic product approvals. Projects and companies are looking for access to additional capital.

Cryptocurrency mining companies and exchanges seem to be eyeing the traditional equity markets. First to market and dominance remain a coveted position. It is no surprise that companies are seeking shortcuts to the markets.

Coinbase, Robinhood, Binance, and Coinsquare all seem to be taking a more calculated, deliberate approach. Whether they confirm, deny, or remain silent, at a minimum, they are making appropriate acquisitions, hires, and decisions to position themselves for a traditional path to the capital markets. Namely, an initial public offering (IPO), where investors actually receive ownership in the company in exchange for their capital, with the expectation of a return on their investment.

There are others that may not have the patience or the desire to spend the capital required to take the conventional path: two-years of audited financial statements, legal and underwriting costs, registration with the SEC, etc.

One short cut is known as a reverse takeover or a reverse merger. Two current examples of these include Netcoins, Inc. (CSE: NETC) and Galaxy Digital (TSX-V).

We can look to the US markets between 2006 to 2012, to get a sense of how this process works, and what type of research one may consider before investing. While a reverse merger can happen with two domestic companies, during this period we saw an influx of Chinese companies gaining access to the US markets through reverse mergers, known as CRMs.

How a reverse merger works:

A private company finds a public company that is distressed or defunct but is publicly listed on a US exchange (a shell company). The shareholders of the private company exchange their shares for controlling interest (the outstanding, voting shares) of the public company. Once this merger occurs, the private company takes over management of the publicly traded company, alerts the SEC and investors through the Form 8-K filing, often accompanied by a name change.

As long as the newly formed merger maintains the listing requirements of the exchange, the stock will trade.

Sounds like a fairy tale, right? Smaller investors have the opportunity to become a part of deals traditionally reserved for the “whales” and institutional investors. Companies have access to a greater pool of capital, can increase their presence, and enjoy global credibility. All at a much faster and less expensive pace.

What could go wrong? Well, there are significant risks. These risks are to be detailed in the financial statement filings. I’ll highlight a few that should be included and why there is merit to their inclusion beyond: “our auditors, lawyers, and regulators require.”

If you read the disclosures, which public companies are required to include in their filings with the SEC, in a reverse merger you should see disclosures along the lines of:

  • Limited experience running a public company – being under public scrutiny involves significant compliance, costs, and experience. Much of the crypto twitter activity we see would be investigated for securities fraud and price manipulation.
  • Brokerage firms and analysts are not likely to recommend – this is due to lack of history and compliance. This could put a strain on liquidity and the ability to raise the desired capital.
  • The cost to comply with the SEC reporting requirements are significant and failure to do so could result in delisting.

It is worth going further back to read the prior filings and research the issues with the shell. It is likely that there were shareholder lawsuits or other outstanding concerns that may remain as a contingent liability.

Now add a few cryptocurrency disclosures and risks:

  • Lack of guidance – currently there is debate in the industry as to how to account for cryptocurrency. Best practices point to treatment as an intangible asset. This means that it is recorded at cost, subject to impairment. The outcome of this treatment is that only losses are reported, and any subsequent gains are not considered. This method further restricts the ability of miners to capitalize costs associated with mining cryptocurrency. Some companies are applying the fair value method and reporting gains. At the very least, one must read the disclosures to further understand how the company is reporting and recognize that this may vary significantly from a competitor.
  • Regulatory uncertainty – there remains regulatory uncertainty, particularly in the US with regard to digital assets. Pending regulation could affect a company’s operations, particularly if they do not have a diversified revenue stream.
  • Inexperience – despite many believing a conference attendance or an acronym makes them an expert, everyone in this industry is inexperienced in some area. Including the auditors. Many firms hire smaller audit firms that may not have the resources or experience, potentially leaving out some critical considerations.

Finally, let’s compound it with a global aspect:

  • These are not necessarily dual-listed companies. One company may actually remain private. Or at a minimum, one company is under SEC jurisdiction and the PCAOB, and one is not. The documentary, “The China Hustle” explains CRMs and short selling very well.
  • Opaque global reporting – global markets does not necessarily translate to information transparency
  • Differences in accounting treatment – While there is convergence in US generally accepted accounting principles (GAAP), China GAAP, and International Financial Reporting Standards (IFRS); we still have differences in each, particularly with regard to consolidations and mergers. And of course, Belarus, I believe may be the only one leading the accounting industry with cryptocurrency treatment.

I raise these risks in an effort to create awareness, learn from history, and forward the discussion on the consistency of reporting. I very much want to see this space evolve and grow, hopefully without repeating some prior mistakes along the way.

In the days ahead, my attention is on the miners and Hong Kong. Bitmain, Caanan Creative and Ebang are all openly talking IPO. The Hong Kong Exchange is likely to be the home court for these offerings. Additionally, Hong Kong is entertaining methods to make it easier for companies to go public. Similar to Canada with the Ventures Exchange (TSE-V).

Bitmain – The success to date of this company is undeniable. It is fascinating to watch their positioning, placement, responses, and activity. I’ve talked at length (yes, great length, another thank you to my gracious hosts and anyone willing to listen) on the Henry Raines Show and with Sasha Hodder on the HodlCast of the figures and ideas currently circulating. Next up is a mining summit in Tbilisi, Georgia, with Jihan Wu of Bitmain and Roger Ver of at the end of this week. The location is interesting as, this is also home to Bitfury’s mining operation.

Additional Resources:

SEC investor guide
The China Hustle
Journal of Forensic and Investigative Reporting – GAAP Difference or Accounting Fraud?

Disclaimer: This article was intended for informational and educational purposes. Nothing herein should be taken as investment, tax, or legal advice. I do not own positions, nor do I intend to take positions in any of the mentioned companies. I hold bitcoin and other cryptocurrencies but do not engage in short-term trading. Some are here for speculation, others for the memes, I’m in it for the disclosures.

ICOs, Token

What is Trans-Fee Mining?

June 27, 2018 • By

The “Trans-Fee Mining” model seems to be growing in the smaller, exchanges as evidenced by a couple of recent news stories on FCoin and Bit-Z, CoinBene, and BigOne. Liquidity challenged, smaller, cryptocurrency exchanges compete for users and funds. Exchanges adopting this model seem to be enjoying record volume.

FCoin, based out of China, led by former Huobi CTO, Zhang Jian, (according to this paid press release) is perhaps considered the pioneer of this model with Bit-Z and CoinBene implementing similar models.

Using the FCoin whitepaper, here’s a brief look at how this proposed model will work. It is important to add forward looking emphasis, as the project is only a little over a month old with most of the concepts still waiting to be tested in the months ahead.

FCoin (FT) is an issued token, it is not mined.

FT provides transaction free mining. The platform charges fees, payable in BTC or ETH and then issues FT to reimburse 100% of the fees. It functions similar to a reward token, giving the trader FT as a reward for utilizing the platform.

Total Supply = 10 billion

Token Distribution

Private Sale = 5%
Strategic Partners = 9%
Founding Team = 12%
FCoin Fund = 23%
Community Rewards = 51%

The FT tokens in the Community Rewards serve as the reimbursements.

What may be some of the potential benefits and uses of this model? For the exchange, this certainly would increase the supply of BTC and ETH. Additionally, with ICO fatigue, and projects looking for innovative methods to increase user adoption, this will serve to distribute the token and increase network effects. Finally, the exchange will see increased volume.

For the FT token holder, the rights and interests are:

  • Revenue distribution – 80% of the revenue will be distributed to token holders and the remaining 20% will be used for operations and future growth
  • Voting – FT holders will be able to vote using smart contracts on operational decisions and governance

So far, transaction free trading and participation in an autonomous organization sounds ideal. What could possibly go wrong? Let’s have a look at some of the criticisms raised to date, mainly by Binance Co-founders:

  • Is it an ICO? The user is paying BTC or ETH for the token. Albeit, there is the utility of a trade in the mix, substantively it resembles an ICO.
  • With “no fee” trading, it is possible to “create” fictitious volume. Traders may trade with themselves or a bot., an exchange aggregator, will not include trades from “no fee” exchanges in the price and total trading volume because it is not possible to verify the true volume.
  • Token price manipulation. Even if the platform is transparent, the team and project control a significant amount of the circulating supply. It does not seem difficult to imagine a bot or a small number of individuals could quickly earn a majority of the community.
  • Is it sustainable? After distribution of the tokens, how will the tokens re-enter the ecosystem?

The screen shot below of CoinBene on CoinMarketCap demonstrates some of these potential concerns. You will see the significant volume and “**” indicate that it cannot be counted toward total volume for the trading pair. To give reference, I’ve included Poloniex volume also. If you are following “Tethers,” you know that a recent study found limited “Tethers” returning or burning. Perhaps they’re all stuck on CoinBene?

The Henry Raines Show

Why is Bitcoin?

May 29, 2018 • By

Last week started with an article where the president and CEO of the American Institute of CPAs, Barry Melancon, called for accountants to embrace emerging technology, particularly the blockchain. Sadly, his choice of words may not have been the best in mobilizing the profession. I trust his intention was to not allow the fear of technology to be the reason we ignore it.

“We don’t need to really understand the underlying software,” he said. “It’s the implications and power of blockchain that are more important that (sic) the actual software.”

I disagree. I believe that we do need to understand the underlying software. Not to the degree of being able to program or develop, but we need a clear understanding of the terminology, applications, and how certain platforms differ from others; particularly as it relates to our respective disciplines. For example, my work with retail clients. I cannot write code for a point-of-sale system, but by learning the underlying systems, I know where to look for vulnerabilities and determine if an area requires additional controls.

The first questions I am asked by my peers interested in learning about blockchain is generally one of the following: “How do you know all of this?” “Where do I start?” “What is Bitcoin?” or “When should I buy bitcoin?”

I had the pleasure of being in studio for The Henry Raines Show this week where we had, Bitcoin pioneer, Charlie Shrem, of Crypto.IQ as a guest. A powerful reminder that what you read and hear  is not always a complete story or worthy of developing an informed opinion. Charlie left us with a final thought, the one question we fail to ask, should be our starting point.


“When it comes to Bitcoin, don’t ask ‘What is it?” ask “Why is it?”


Start with “Why?” And if you think that our current processes and systems are working, if you cannot recall some accounting scandals, failed regulation, or even relate to an example of occupational fraud, I have a primer for you: this presentation by Caitlin Long. Regardless, I urge everyone to watch. She does a remarkable job of explaining the overleveraged nature of our current economy and highlights a couple of accounting examples where “we” could never arrive at the same number twice.

For those who revert to asking “What?” and remain comfortable with stopping at the uniformed answers of a Ponzi scheme or “Tulip Mania,” I ask that you refrain from draining the limited US resources in convincing you otherwise at this time. “Why?” As you will hear from both Shrem and Long, the US is so far behind in this space.

We need to leverage the resources of the accounting professionals and local leaders like Joel Greenberg, the Seminole County Tax Collector (and another great interview) interested in moving our community and country forward.

Both interviews and the presentation have downloadable audio. No excuses. Find the “why.”

This post and the contents included are provided for informational purposes and shall not be considered legal advice.

Photo by Ken Treloar on Unsplash

The Henry Raines Show

Traveling the world to find digital assets next door

May 6, 2018 • By
Headset on the microphone with the "On The Air" light on.

For the past few years, I have been floating my interest with blockchain technology and cryptocurrencies to peers, family, and friends. Generally, I failed to elicit the necessary enthusiasm to yield more than a one or two minute exchange.

One or two minute exchanges grew logarithmically with the price of bitcoin and introduction of alt coins and tokens last fall.

The possibility of access to transparent, immutable, real-time data to make financial decisions is what attracted me to this space. With the surge of Initial Coin Offerings (ICOs) in 2017, visions of consuming financial statements danced in my head the first quarter of 2018. Needless to say, I am starving.

After reading several white papers, I routinely searched for financials looking to see how people were accounting for minted or pre-mined tokens. Would the liability be mark to market?  Would the offset of 1 million token inventory plague balance sheets as “Opening Balance Equity?”

After attending a couple of local events, I was thrilled to find genuine interest and people willing to tolerate my curiosity beyond a placating smile. I had the opportunity to be introduced to some incredible talent spanning multiple industries and disciplines. You can hear many of these voices on The Henry Raines Show discussing the current developments and news related to bitcoin and cryptocurrency each week.

In my short time of being acquainted with participants on and off of the air, I have already been overwhelmed by the depth. While the show should not be taken as investment advice, and exists to inform and entertain; it has proven to be a catalyst of many thought provoking questions that I look forward to exploring in the days ahead.

Last week, Andy explains the concept of Over-the-Counter (OTC) trading and how it could bring more stability to the cryptocurrency market. I introduce a segment called “Token Troubles.” 

This week, we discuss Goldman Sachs’ formal entry to the space, continue following the debate as to whether bitcoin and other cryptocurrencies are a commodity or a security, and consider implications from the recent class action lawsuit against Ripple.

In the second half of the show, we welcome Terry L. Brock, MBA, CSP, CPAE, a prominent speaker, syndicated columnist and video blogger to the show as he inspires author Sabine Priestley and me to explore some of the dApps available for content creation.

You can listen live every Saturday to The Henry Raines Show on WWPR AM 1490 from 12-1:30 PM Eastern or catch it in your favorite podcast platform.