Led by Barry Silbert, an investment banker turned cryptocurrency titan, Digital Currency Group controls vast swathes of the increasingly mainstream non-fiat cryptocurrency ecosystem. Posted online and freely available, DCG's extensive blockchain and cryptocurrency portfolio enumerates its subsidiaries and various ownership stakes.
In June 2017, DCG director Meltem Demirors commented on the company's impressive growth.
Over time, though, it has become clear that DCG's broad financial interests may have created some potential conflicts of interest.
In this article, I will examine DCG's positions in four subdivisions:
1) cryptocurrency exchanges and trading services,
2) cryptocurrency-based securities,
3) cryptocurrency derivatives, and
4) its media influence.
Cryptocurrency Exchanges and Trading Services
For starters, DCG holds at least some ownership stake in many exchanges and trading services. These include bitFlyer (Japan), BitOasis (Middle East and North Africa), Bitso (Mexico), Kraken (US), SurBTC (Chile), ShapeShift (based in Switzerland), and also, notably, Coinbase (parent company of GDAX), which bills itself as "the world's most popular way to buy and sell bitcoin, Ethereum, and Litecoin." While the extent of DCG's stake in each of these exchanges is unclear, the investments could potentially tempt an influential hand.
All told, a vast amount of purchasing, selling, and trading of cryptocurrency is conducted through exchanges that are connected to DCG. At the time of writing, GDAX possess a 24-hour volume of $299 million on its USD/BTC trading pair, which ranks second only to that of Bitfinex (excluding the BTC/USDT trading pair on OKEx).
Also significant is Kraken's $48 million 24-hour trading volume of USD/BTC, and BTC/JPY trading on bitFlyer accounts for $206 million worth of volume.
DCG is also the parent company of Grayscale, which sponsors the Bitcoin Investment Trust ("BIT," ticker: GBTC), the Ethereum Classic Investment Trust (the "ETC Trust"), and the Zcash Investment Trust (the "ZEC Trust").
On the Grayscale website, DCG fully discloses that these are "private investment vehicles, not registered with any regulatory agency of any jurisdiction, and are NOT subject to the same regulatory requirements as SEC-registered exchange traded funds or mutual funds, including the requirement to provide certain periodic and standardized pricing and valuation information to investors."
GBTC, in particular, seems a little odd since it trades at a massive premium relative to the underlying bitcoin that the trust owns. As explained by The Motley Fool, "The idea of Bitcoin Investment Trust is relatively simple: take investor money and buy bitcoin with it. For its trouble, Grayscale, the management company behind the trust, takes a 2% annual fee. Currently, the trust owns just under 172,000 bitcoin. That means that for each outstanding trust share, the trust owns roughly 0.092 bitcoin. That would imply that the share price should reflect the value of that proportional amount of bitcoin."
At the current global price of bitcoin ($14,922), one might expect that a share in GBTC would be equal to $1,372.82.
In reality, at the time of writing, one share in GBTC is trading at $2,214.47 – this equates to an approximately 61 percent premium.
Okay, so people are overpaying. What's the big deal? There's no actual wrongdoing here. Let's dig a little deeper.
Side note: To understand the Ethereum offshoot known as Ethereum Classic (ETC), readers should familiarize themselves with The DAO.
In a special report published on December 23, 2017, Reuters examined DCG – and Barry Silbert's – stake in Ethereum Classic (ETC).
Over a year ago, Silbert announced via Twitter that he had purchased his "first non-bitcoin digital currency … Ethereum Classic (ETC)." Taken alone, Silbert's decision to purchase the digital asset ETC seems acceptable.
Where things get messy is in his nearly-immediate promotion of ETC. Less than two hours later, Silbert anticipated the possibility that ETC would quintuple in value.
And, two days later, Silbert said that he "quadrupled down on [his] initial ETC investment."
But, it's unclear how well-thought-out Silbert's ETC position was in the first place, given that he posted this next tweet the day after "quadrupling down" on his investment in Ethereum Classic:
Not knowing the total supply of ETC when making a significant investment may be somewhat amateurish, but excusable. The real question is, at what point does vague commentary on price movement cross the line into something more heinous, like market manipulation or insider trading?
According to securities lawyers, Silbert is walking a very fine line – and in fact, he may have already tripped up. Silbert's tweets and social media activity may stoke the interest of regulators, because even though non-fiat cryptocurrencies are not considered securities in their own right, Grayscale offers investments in shares that function as securities.
Trace Schmeltz, a partner at the Barnes & Thornburg law firm called Silbert's social media posts "risky," adding, "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."
In particular, Schmeltz raised concerns about possible "market manipulation" since Silbert suggested via the Discord messaging service that an ETC investor close a short position prior to the Ethereum Classic Summit on November 13 – 14, 2017.
"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," explained Schmeltz.
The Reuters report, though, only touches the tip of the iceberg. Where else does DCG have a piece of the cryptocurrency pie?
Here's where things get a tad more complicated. While DCG functions as the vehicle to invest in other companies, it is also the recipient of funds from other companies, including CME Group. Let's just start with this: "CME Group is an investor in CoinDesk's parent company, Digital Currency Group."
Readers that have been following cryptocurrency financial developments might remember that the CME Group was the second traditional exchange (after CBOE) to offer bitcoin futures. DCG obviously has a vested interest in the success of the cryptocurrency derivatives market, given that one of its investors is the CME Group.
The vast holdings possessed by DCG through Coinbase and other companies might complicate its responsibilities to customers. In an area that is so lacking in guidance from regulators, it's not clear whether many of the financial protections that exist in the conventional markets apply to cryptocurrency markets.
Indeed, shortly after GDAX listed bitcoin cash (BCH) trading pairs, Coinbase faced allegations of misappropriating nonpublic information.
Later, Coinbase CEO Brian Armstrong even posted on Medium about the company's employee trading policy:
"We've had a trading policy in place for some time at Coinbase. The policy prohibits employees and contractors from trading on 'material non-public information', such as when a new asset will be added to our platform. In addition to trading restrictions, it prohibits communication of material non-public information outside the company. This includes to friends and family."
One of the questions that some struggle with is how – or if – there are protections against insider trading related to commodities, which is what bitcoin has been classified as by the Commodity Futures Trading Commission.
Significantly, the distinction between securities and commodities is becoming blurry, as was noted by CFTC commissioner Brian Quintenz in October 2017.
The final segment of DCG that I'd like to briefly explore is its media arm, CoinDesk. What's worrisome is that even with its disclosures, the website acts as a prominent and frequently referenced resource in the cryptocurrency ecosystem.
At the time of writing, CoinDesk has an Alexa ranking of 358 in the United States. The top keyword that sends traffic to the site? "Bitcoin price."
What's really concerning is that the DCG empire has this media tool at its disposal, which it could conceivably use to influence price movements or promote specific products rather than good technology. Even if commentators note similar connections in the conventional market (where a company like Berkshire Hathaway controls financial and media arms like Wells Fargo and Business Wire), the difference for DCG is the absence of financial protections in the cryptocurrency world.
In February 2017, Ethereum Foundation member Jeffrey Wilcke pointed to the ethical concerns in comments filed with the SEC:
"DCG operates funds that can have a market-moving impact on the digital currency industry while simultaneously operating one of the largest media organizations in the industry, which can be used to exploit investors."
He added, "For example, Grayscale, a subsidiary of DCG, operates an ethereum classic fund Ethereum Classic Investment Trust, a barely recognized alt-coin thats [sic] illegally infringing on a trademark of the Ethereum Foundation. Yet the currency has been written about more than 88 times on Coindesk.com, and DCG has become the most prominent and public supporter and investor in the token."
Wilcke went on to explain, "This represents a clear conflict of interest giving DCG the ability to 'pump-and-dump' worthless assets by offering publicity and easy-access to unsophisticated investors. DCG should be required to divest its ownership and control of this market-manipulating subsidiary before making a DCG controlled investment vehicle available to the public."