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  1. The Big Electroneum Heist of 2017
  2.  
  3. Electroneum is a cryptocurrency launched (so to speak) on the 1st of November by Electroneum Ltd., a UK company headed by CEO Richard Ells, a multilevel marketing (MLM) personality. During its ICO starting on September 14th, the company raised in excess of 40 million dollars in Ethereum and Bitcoin, in exchange promising investors 1 future Electroneum coin, known as ETN, per cent of value invested. Through referral and reward schemes, investors received further bonuses. It should be pointed out while this was called "*the crowdsale token sale*" in company PR materials, the investors were *not* granted Ethereum tokens or ETN coins, they were just shown a number on a web page - a fact that will become important shortly.
  4.  
  5. Disclaimer: I am one of these investors. I will do my best to separate statements of fact from personal opinions, but take this essay with a grain of salt and do your own research.
  6.  
  7. ## What Happened?
  8. The Electroneum blockchain, which is the distributed accounting ledger designed to hold and transact the currency, went live shortly before the announced November 1st launch date. In doing so, the technological platform was activated as planned, and miners - people who invest computing resources to run the blockchain in exchange for a cut of the market - began mining.
  9.  
  10. In many other cryptocurrencies, the entire supply of coins is generated through mining. In Electroneum's case a part of the blockchain had been pre-mined, in order to provide the coins already sold to investors (in addition to coins reserved for Electroneum staff). However, investors never actually received any of these coins. The so-called dashboard where investors could see their personal amount of promised coins was also taken offline a day after launch.
  11.  
  12. On launch day Electroneum applied, and in at least one case paid for, getting listed on cryptocurrency exchanges, to facilitate global trading of the ETN currency. A large amount of ETN was subsequently traded on exchanges, and it is currently a matter of debate whether the volume of those trades could have originated solely from mining rewards gathered during the two days preceding the launch or not. There is speculation that Electroneum staff coins or coins originally promised to investors were part of the mix, but nothing conclusive has been shown so far.
  13.  
  14. At the time of writing this, there is no plan announced to give investors access to any of the promised coins.
  15.  
  16. ### Security Concerns
  17. Electroneum Ltd. has repeatedly cited security reasons for freezing investors out. Currently, the investor login page remains disabled, and the company's social media accounts insist this is to protect investors. The reasons for doing this cited by the company are somewhat variable and fuzzy, with the two most-used ones being that a) Electroneum is the victim of a distributed denial of service attack (DDoS) or that b) some investor email accounts are compromised.
  18.  
  19. In the meantime, ETN is being actively traded on exchanges, and a massive social media campaign is touting Electroneum as the "most successful ICO ever".
  20.  
  21. ### How much did investors lose?
  22. As the situation is still developing, the ultimate fate of the ICO investments is undecided. In the worst case, investors will simply never receive their shares. In the best case, they may receive parts or all of their coins after a protracted waiting period, at which point the value of the currency will have substantially and permanently have been diluted by mining and damage to Electroneum's public image.
  23.  
  24. ## Can They Get Away with Freezing Investors Out Completely?
  25. The simple answer is yes, for a yet-to-be-determined definition of "getting away". Electroneum staff have put their real names and identities out in the open, so whatever the plan is, they are confident they cannot be touched.
  26.  
  27. Let's assume for the sake of argument that there will never be an investor payout, for whatever reason. Any investors going to court over this will likely have to prove that a) they are legally owed the promised shares and b) that Electroneum staff are *personally* responsible for this loss. Both of these would be exceedingly difficult to show in court.
  28.  
  29. ### Was the ICO Legally Binding?
  30. I'm not a lawyer, and I think even legal experts are divided on this. In an unrelated case regarding the live-streaming of video games, a leading legal expert has recently asserted that contractual (in that case it was about licensing) information displayed on a company's website is *not* binding for the company engaging in these contracts with users. It may well be the case a court would not agree that ICO investors are owed any ETN currency, or any other compensation, because the implied contract is not considered binding on Electroneum's part.
  31.  
  32. There may also be additional wriggle room should Electroneum Ltd. decide to assert that no coins were in fact ever promised in the first place. I am not sure whether the website's interface and information texts used during the sale communicated a definite promise or merely implied it.
  33.  
  34. ### Are They Personally Liable?
  35. Even if the investments are ruled valid *and in addition* are viewed by the court unduly withheld or lost, which is a big if, the next hurdle is showing personal liability. This is important, because Electroneum Ltd. is not likely to be in a position of paying back the investors: since they raised all their money in the form of Ethereum and Bitcoin, those funds would already be gone by the point a court case could even begin.
  36.  
  37. In many countries, company staff are only liable for fuck-ups that were caused intentionally or fraudulently. As far as I know, gross incompetence may be seen as a compounding factor, but it's unclear whether that is enough for legal liability.
  38.  
  39. This is where the "security concerns" point above comes into play again, because it was a smart move on Electroneum's part. The pieces are already in place to lay blame on an external attacker who not only prevented investors from accessing their accounts, but who potentially could also be blamed for absconding with the funds (in ETN, ETH, and BTC currencies). In such a case, it seems Electroneum's staff is unlikely to be found liable personally.
  40.  
  41. ## Can Electroneum Continue without Paying Investors?
  42. Yes. Even if the company closed up shop today, the blockchain was already launched and will continue to create its own value through mining. The question is if people will keep buying ETN in the face of what happened. The most likely answer is also: yes. Trading activity and social media behavior of the past few days have already shown that the failure to pay investors is of no concern to traders as far as the value perception of the coin is concerned.
  43.  
  44. Whether ETN continues to be of broader interest after the company seizes their massive social media campaigns and stops paying their Twitter bots remains to be seen. Beyond the electricity invested in mining the coins, there is nothing of value behind the coin: Since the company did not write their own software there are no technological assets to speak of, and since the ICO money now does *not* serve as the foundational value of the currency, what remains may well be nothing at all.
  45.  
  46. ### Where Are the $40 Million?
  47. It depends on whether Ells plans on granting investors their tokens or not. If Electroneum should decide to eventually give ICO investors all or part of their coins, then it still means a significant fraction of that ICO value has effectively been transferred to miners and traders, and has already left the ETN ecosystem.
  48.  
  49. And if it turns out there will be no investor payout altogether, the total value of the investment is now owned by Electroneum Ltd, who still hold the ETH and BTC coins they originally raised and are in a position to transfer that money literally anywhere on a moment's notice without accountability. In that case, the value being traded in ETN on exchanges is (from) a totally separate market.
  50.  
  51. #Why Did They Do It?
  52. Ultimately, only Richard Ells knows his own motivations, but we can certainly speculate. Not giving investors their tokens on launch day allowed Electroneum to double dip by selling their own tokens on exchange sites. It would also allow them to surreptitiously engage in additional mining while the price of ETN was still determined by marketing instead of markets. The short-term benefits of denying investors access to their coins are considerable.
  53.  
  54. Why they would freeze investors out *permanently* is a harder question to answer. The most profit-maximizing cause of action would be to dump the tokens on the investors literally hours before closing down the company. If they do plan on keeping the company running, the gains from continuing to refuse payout would likely be related to keeping ETN prices high.
  55.  
  56. All in all, I do not believe they will choose to keep the company in business.
  57.  
  58. ## What I Personally Think Is Likely to Happen
  59. To quote South Park: "aaaand it's gone!", the open question is just how much of it. The two most likely outcomes are in my opinion either investors will not get a single coin, or they will receive their ETN piecemeal in form of a leisurely paced "vesting" scheme. In both cases, both the company and the currency would continue to operate normally for some time, even making lots of positive press while doing so. The judgement of the public seems to be "you took the risk, now take the loss and shut up" as far as investors are concerned.
  60.  
  61. ### The Ultimate Fate of Electroneum Ltd
  62. If either of these scenarios plays out, the company will continue to operate and continue to profit, at least for a while. If they decide to implement the vesting scheme, the company will eventually stop making vesting payments after sufficient time has passed, potentially folding in the process.
  63.  
  64. In case neither of these possibilities happens, and they do decide to pay their investors, the future looks more uncertain. The product of this company is pure marketing, that's in fact what we invested in. If marketing and PR continue to churn, ETN will gain popularity and may even rise in value.
  65.  
  66. There is a big skeleton in the closet though: they call it (misleadingly) "mobile mining". As an incentive to install the Electroneum mobile app, it was planned to pay users in ETN over time. This may turn out to be a huge liability if Electroneum indeed becomes popular.
  67.  
  68. A second stumbling block, if not as critical, is the complete absence of any technological competency in the team, as the product itself consists of several re-packaged pieces of existing software. This may very well turn out not to be a problem at all, but it does mean Electroneum will not be able to execute on any technological ideas and opportunities that may come up.
  69.  
  70. ### What Investors Can Learn
  71. Unsurprisingly, this was my first ICO. The biggest lesson remains of course "do not invest what you cannot afford to lose", but the underlying assumption still has to be that the team will not purposely scam investors. Try and fail they may, but outright fraud - even if it doesn't meet the legal definition - needs to be remembered in the social sphere.
  72.  
  73. The biggest technical lesson for me would be: "never give coins to any ICO without *immediately* getting tokens in return". Many people do not know this, but Ethereum provides a nifty way of converting ETH into arbitrary tokens (hence the name 'token sale' which was misleadingly used by Electroneum). Those tokens are then, from the start, valid and tradeable shares in that enterprise. Insist on those tokens right away!
  74.  
  75. Since Ethereum tokens can be set up as shares of the enterprise, they can still be used to fund the creation of other currencies. For example Electroneum could have issued these tokens as shares, *in addition* to the promise of some ETN currency. If they had *then* never given out the promised ETN, people would at least still have their shares. These tokens could also be set up to implement shareholder voting procedures and dividend schedules. Malfeasance is still possible with a token ICO, but at least then there are *some* barriers in place.
  76.  
  77. _________________________________
  78.  
  79. # Addendum: the Team
  80.  
  81. ### Richard Ells
  82. Richard has a history of building successful digital businesses. He co-founded the successful digital agency SiteWizard, now over 20 years old. More recently, he founded Retortal.com in 2013. As the CEO, Richard’s assembled a team of over 40 developers and created a social media management platform, used by global fortune 500 companies such as Herbalife and Avon. Retortal’s software is used by hundreds of thousands of people.
  83.  
  84. ### James Atkinson
  85. James heads up the Electroneum Development Team, making use of over 10 years experience of agile development. James is also one of the “hands on” developers, and the “go to guy” for the Electroneum App.
  86.  
  87. ### Dean Cole
  88. Dean is the member of the team with the least sleep. With giant quantities of caffeine and all night vigils, Dean is responsible for the Electroneum blockchain development and maintenance. He also maintains and develops the C++ based server daemons required for mining and transacting in Electroneum.
  89.  
  90. ### Adam Atkinson
  91. Adam has a First in Computer Science from the Univeristy of Kent. He leads the Javascript development of Electroneum, with a specific lead role in developing and maintaining the offline paper wallet system that allows 100% security of Electroneum stored funds.
  92.  
  93. ### Ben Whomsley
  94. Ben is head of UI/UX and is ultimately responsible for the development of the website, Electroneum app interface, PDFs and guides and Electroneum user experience.
  95.  
  96. ### Costin Cristoi
  97. Costin is part of the Electroneum App development team and is responsible for UI/UX integration and implementation. Costin graduated from Christchurch University with a degree in Computing & Digital Culture. He has a strong background in user interface design.
  98.  
  99. ### Robert Hopkins
  100. Rob graduated from the University of Kent after studying cryptography. Rob is now a general developer in the Electroneum team, with a focus on cryptography and security.
  101.  
  102. ### Terry Hunter
  103. Terry graduated from the University of Northampton with a BSc Honours in Computer Science. He works in the Electroneum development team, focussing on the back-end applications.
  104.  
  105. ### Imogen Dale
  106. Imogen’s degree is from Middlesex University where she studied illustration and graphic design. Imogen is now part of the social media and PR team at Electroneum.
  107.  
  108. ### Michael Wiltshire
  109. Michael’s experience is in viral marketing and social media. He is part of the Electroneum promotional team, creating campaigns and exposure for the brand.
  110.  
  111. ### Natalie Hayon
  112. Natalie heads up the social media team here at Electroneum and has extensive experience in social media campaigns. Natalie’s team will be responsible for creating and promoting material that drive brand exposure and app takeup.
  113.  
  114. ### Barbara Southwell
  115. Barbara has worked with Richard for over 15 years. She brings a wealth of marketing experience, organisation and management to the Electroneum project. Barbara has a degree in marketing and has chalked up a huge list of successes within the digital marketing arena.
  116.  
  117. ### Advisor Mark Robinson
  118. During the 20 years Mark served as a director on the boards of private businesses and companies listed on the London Stock Exchange, Mark was recognized for numerous awards for his entrepreneurial style and collegiate approach to leadership. His focus is on identifying opportunities and enabling dramatic corporate expansion.
  119.  
  120. ### Advisor Andy Denton
  121. Online gaming consultant with over 20 years experience in ecommerce, online gaming and Fintech businesses.