Geneva - All is not well in
One of the highest profile digital-currency projects in Switzerland, a
country that’s been among the most enthusiastic advocates for
cryptocurrencies, is under fire from both outsiders and insiders over
allegations of false marketing and mismanagement, prompting its
president to resign.
Now the Tezos Foundation, which raised $232m in an initial
coin offering, is engaged in the most American of pursuits: a round of
The non-profit’s fundraising touted an all-new model for the
blockchain technology that underpins cryptocurrencies. A group of
investors are claiming in a California court that the entrepreneurs
behind the offering misleadingly marketed the purchase of “Tezzie”
tokens as part of a charitable contribution, which would leave investors
with nothing if the project collapses.
Switzerland ranks second just behind the US in capital raised in
ICOs, with most of the transactions done by foreigners flocking to
Switzerland, according to a 2017 report by venture capital firm Atomico.
This case has broad implications for Switzerland’s future as a
launching pad for ICOs.
“Will the judge accept the narrative that this was just like
contributing to public radio and all you get is a tote bag, or was it an
investment where everyone expected a return,” says Stephen Palley, a
lawyer who runs the cryptocurrency practice at the firm of Anderson Kill
“The structure was misused and the age of token
entrepreneurs going to Switzerland to set up Swiss foundations is
Securities and Exchange Commission chairperson
Jay Clayton last month
said that ICOs will face fresh scrutiny as the market is probably full of fraud. The SEC has
issued a clutch of subpoenas to ICO operators as part of a broad crackdown.
The Tezos lawsuit “should give Swiss or other foreign entrepreneurs
and enthusiasts pause if they are thinking about trying to raise funds
for a US operation or from US investors using an ICO structure that
doesn’t comply with the registration requirements of the Securities
Act,” says Joel Fleming, a Boston lawyer who represents some of the
At a hearing on March 15 in San Francisco, the investors are expected
to consolidate their putative class-action lawsuits.
The legal action
comes on top of a separate dispute between Tezos’s co-founders, a
Franco-American couple named Kathleen and Arthur Breitman, and South
African Johann Gevers, one of the pioneers behind Zug’s push to make
itself a cryptocurrency hub. The Breitmans have accused Gevers of
mismanagement and conflicts of interest.
The stakes for the Tezos project have risen to more than $1bn,
the plaintiffs allege, as the value of the ether and Bitcoin tokens
which were used to invest in the ICO in July has surged.
little changed at $10 765 at midnight in New York, according to a
composite of prices compiled by Bloomberg. The leading cryptocurrency
has fallen 25% this year after climbing
more than 15-fold in 2017.
Late last year, the Swiss regulator that oversees foundations
examined Tezos and demanded it add a board member to reinforce the
foundation’s independence. On February 22, Gevers stepped down as president
of the Tezos Foundation and five days later, an entirely new board was
Oliver Bussmann, who worked with Gevers to establish Crypto Valley,
acknowledged that the Tezos dispute has had a negative impact. But he
said he’s glad that with a new board and Gevers’s resignation, Tezos
appears to have “solved their deadlocked situation and can move
Gevers acknowledged a LinkedIn request but didn’t respond to a
request for comment. On January 19, he sent a flurry of tweets on the
“After months of incapacitating interference, obstruction, and
attacks, the Tezos Foundation has regained the ability to act,” he
wrote. “In a high-trust environment, the impossible becomes possible. In
a low-trust environment, even the possible becomes impossible.”
US District Judge Richard Seeborg on February 1 stayed any action in
the planned class-action until the Supreme Court decides on whether
state courts can handle such a case.
Lawyer Brian Klein, who represents
the Breitmans’ investment firm Dynamic Ledger Solutions, declined to
comment to Bloomberg Law last month on the case against his client but
said “we are pleased the judge issued the stay and recognized that this
case belongs in federal court.”
The looming lawsuit comes as Swiss financial regulator Finma tries to
temper some of the government’s enthusiasm for cryptocurrencies. While
Swiss Economy Minister
Johann Schneider-Ammann has visited Zug to support Crypto Valley, Finma
issued guidelines in February to remind investors money-laundering rules
will be applied to Swiss ICOs.
The regulator has organized roundtable
discussions with investors on how these guidelines will affect ICOs in
Zug and Geneva on March 14 and 21 that are already fully booked.
Last September, Finma shut down cryptocurrency provider E-Coin for
accepting deposits without a banking license, and then began
investigations into several ICOs over possible fraud.
Bussmann, who now runs a cryptocurrency advisory firm in Zug, says
the guidelines will dissuade rogue entrepreneurs and also provide more
certainty for legitimate investors.
“They have to protect investors but they cannot shut out venture
capital,” Bussmann said. “Switzerland has not always had great access to
venture capital, and ICOs give them access to that.”
The plaintiffs in California have a blunter assessment of Zug. In
their lawsuit, they tar the city as a shady place to start a business.
“Zug is a notorious haven for white-collar miscreants,” reads the
complaint, citing the past example of Marc Rich, a commodities trader
eventually pardoned by Bill Clinton.
“The defendants admitted that they
chose to use a foundation in Zug to conduct the ICO and collect investor
funds because they perceived Switzerland’s regulatory oversight to be
weaker than that of the US.”
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