Veritaseum: The Truth Behind the Promotion
The transformative nature of cryptocurrencies and the blockchain technology that underpins them has captured the fascination of the public, investors, and corporations. Yet it has also opened the door for certain individuals and projects to peddle unrealistic promises, package them as “offerings,” and raise vast sums far exceeding those raised by previous technology start-ups. We believe to be an extraordinary case of this phenomenon. In the report that follows, we aim to bring a dose of reality to the inflated and often contradictory narrative Veritaseum has spun. Because we anticipate that a certain few participants will blindly label any criticism as an attempt at manipulation, we would like to simply note that the report that follows is the product of hundreds of hours of research (both investigative and financial), interviews with a number of cryptocurrency experts, primary source evidence, and the conclusions we drew. We do not have, and never have had, a financial position of any sort in Veritaseum or its related tokens.
We believe in the enormous promise of the crypto-asset space. We believe in the paraphrased adage that a dollar saved is a dollar earned. And as crypto-asset investors, we understand that in a sea of exceptional investment opportunities, the cost of allocating capital to dubious projects is immense. We therefore choose to contribute to the development of the crypto-asset space by identifying and pruning the few projects which are devoid of substance and represent a material threat to investors’ long-term returns. We recommend reading this research to any holder of Veritas tokens, anyone considering purchasing Veritas tokens, and any crypto-asset investor interested in in-depth valuation analysis and due diligence.
In the report that follows, we deliver evidence to substantiate the following claims:
- ❖Veritaseum and Middleton have a history of failing to deliver on promises made to potential investors. The product on which the Veritaseum platform is based was scrapped due to regulatory issues.
- ❖Veritas tokens grant holders no legal rights or recourse. In effect, they are an unenforceable promise by Veritaseum to deliver nebulous consulting and software services at some point in the unspecified future. As such, they are a poor conduit of value.
- ❖The incredibly concentrated ownership of the Veritas tokens (with approximately 98% held by Middleton) represents a single point of failure and is antithetical to a pivotal advantage of other crypto-assets, decentralization.
- ❖Middleton has no technical background in cryptocurrencies or technological development. Key team members have left the project or are not employees at all but 3rd party contractors.
- ❖ Veritaseum’s research reports are of poor quality and have virtually no demand.
- ❖The company’s patent application has not been granted; instead, patent examiners have called into question whether its claims demonstrate novelty and inventive step.
In sum, our research leads us to the conclusion that the value of Veritas tokens is close to $0.
I. An Introduction to Veritaseum
Veritaseum, Inc. is a private company founded in May of 2014 by financial blogger Reggie Middleton.1 Since then, the company’s history is one of multiple attempted capital raises, broken promises, and abandoned projects. More broadly, Veritaseum represents a concerted approach of self-promotion in lieu of substantive product development. The story of Veritaseum is one in which a financial blogger has aroused a naïve exuberance surrounding a demonstrably deceptive project, magnified by a broader speculative mania surrounding the new capital-raising mechanism of Initial Coin Offerings. Middleton has struck a resonant chord with a certain subset of investors, fanning the flames of resentment towards Wall Street while simultaneously offering an “easy” road to cryptocurrency riches. This mixture, along with a long series of promises and aggressive self-promotion, has fueled the almost inexplicable arc of Veritaseum. Along the way, the project went from a scrapped peer-to-peer asset swap platform on the Bitcoin protocol to a high-flying Ethereum ICO. In our estimation, with a series of broken promises and without any viable product, Veritaseum reached a circulating network valuation of $471 million (total network value of $24.9 billion) in July before following suit with other Ethereum ICOs and collapsing to a circulating valuation of $162 million (total network valuation of $8.1 billion).
II. History, False Promises, and Failure to Deliver
A. The UltraCoin that Wasn’t The story of what came to be known as Veritaseum begins in mid-2014, when the company released UltraCoin, a Bitcoin wallet and peer-to-peer swap product which claimed to allow users to trade asset exposure to roughly 75,000 equity, bond, index, currency, and commodity tickers while collateralizing the positions with Bitcoin.2 Veritaseum claimed to offer an increased amount of investment products compared to those offered by investment banks, reduced trading fees, and decentralized custody of assets.
According to its website in June of 2015: “Veritaseum is the startup founded by Reggie Middleton, formed to hold the intellectual property behind what used to be called the UltraCoin project - now rebranded as Veriaseum [sic]. [...] Veritaseum [...] is the only bitcoin wallet system that can trade simple and complex value structures without using non-bitcoin tokens, alt coins, sidechain or alternative blockchains [...] It coordinates with an Oracle to gain access to conventional, physical and legacy financial data and information and uses it to price, value, trade and settle OTC, P2P financial instruments - all in BTC.”
A number of fanfare slogans, which have come to define Veritaseum’s promotional strategy, dressed the software:
- ❖“Loans without banks, Trades without brokers, Contracts without lawyers”
- ❖“No counterparty risk! [...] No Credit risk! [...] without KNOWING or TRUSTING the other party!”
- ❖“Through the use of UltraCoin’s ‘Zero Trust Smart Contracts’ embedded in ‘Programmable Money’ entities of any size can trade value as if they were a global bank!”3
- ❖“Imagine Having the Keys to the Internet in 1994”
With UltraCoin, Reggie claimed to have “patented the future of Global Finance!”3 and further claimed that UltraCoin could be valued at $20 billion:
The wallet appears to have been downloaded only 2,690 times while it was publicly available (although Veritaseum has publicly claimed a much higher figure of 70,000 times), and has since been removed from the website entirely:5
During the course of our research, we were able to obtain a copy of the wallet software through a download link that had not been removed. Functionality was disabled, but having the software itself was enough to see how little there was to Veritaseum’s flagship product, something that was meant to revolutionize the finance industry and instead amounted to little more than a faulty Java client.
The technology behind Veritaseum’s product was described in the following way in an investment slideshow by the company (redactions are from the original source):
After the software’s release, Veritaseum cited regulatory concerns, and the UltraCoin platform was taken down. Earlier this year, Middleton explained:7
“Right now the value trading platform that I explained, we started on Bitcoin, that’s still sitting on the Bitcoin network. We pulled it for regulatory concerns, because when the CFTC [the United States Commodity Futures Trading Commission] decided that they were to regulate Bitcoin, it could be interpreted that we were a swap execution facility. I didn’t want to have that discussion. So I just pulled it and we’re gonna [sic] rewrite it to, you know, comply.”
We find it concerning that, having pulled its product from the market, Veritaseum continued to promote it in order to raise money during its ICO, with images from the defunct software plastered across investor material. Given Veritaseum’s own claim to be “a Software Provider, Not a Financial Entity,”6 the question must be asked: what is Veritaseum worth after its proprietary software was removed due to regulatory concerns? It is unclear as to how Middleton can justify statements like, “We make money and land large clients” as recently as July of this year. Interestingly, Middleton himself foresaw the regulatory problems that would shutter UltraCoin:8
“Regulation in the financial services industry (both on the state and federal levels) is aimed primarily at the protection of the consumer. This is a good thing, both for the consumer and the industry in general, for a consumer that can't trust its vendors is a consumer that won't use it's[sic] vendors. This is the reason why the big(ger) bitcoin exchanges, money tranmsitters[sic], etc. are getting regulated - so as to comply with the laws and appear more acceptable to the financial mainstream.”
B. Capital Raises and More Capital Raises Few Veritas token holders are aware that Veritaseum had unsuccessfully attempted to raise capital multiple times since its inception using similar inflated promises. The first instance we have discovered dates back to June of 2014 on the since-removed www.ultra-coin.com domain, when Veritaseum attempted to raise money by traditional venture capital means. We leave it to the reader to consider how the nowdefunct UltraCoin fared when compared to BitPay, Coinbase, and Circle.
Middleton then made a second appeal to Wall Street:
We believe that Veritaseum was unsuccessful in its efforts to raise capital from traditional sources given the lack of any indication by the company or the media to the contrary. In November of 2014, Middleton claimed to have been ignored by the venture capital and Bitcoin communities, and instead claimed to have secured $12 million in financing from private English millionaires:9
“Alas, I have received practically no attention from the traditional VC community and even less from the Bitcoin communityy, and this is despite a sterling track record of calling paradigm shifts such as this one, patents pending and the first functional product in the industry.
So, what is a middle-aged nascent entrepenuer[sic] to do? There actually is a meaningful pool of potential investors who do see value in what I described above. My ex-client and subscriber base. Many of my followers have taken it upon themselves to autonomously approach me for investment, including prominent UHNW families (globally known), technology entrepreneurs with recent liquidity events ($600M+), and long time[sic] readers who have connections. I'll share the story of one such long time (since 2009) reader below.
Of the early seed investors, this British chap was actually the first to send in money. He called and said he heard me say i[sic] was starting a bitcoin-based company and said he wanted to invest. I told him I have another seed investment coming and I was closing the valuation in this round. He wired the money from overseas in less than 48 hours. I was impressed. He used to run a fund-of-funds marketing company and told me that he had many powerful contacts in the UK. I was reluctant at first, and uber-busy. I had just secured verbal commitments for $12 million (on a $4M round) when this chap finally convinced me to swin[sic] across the pond. I'll be honest, I was reluctant. So, there I was, arriving at Picadilly[sic] Circus going down to the Royal Automotive Club where he arranged for me to stay and have my first introductory meeting with him and his associate. [...] Between Europe and the US, I plan on raising the largest investment to ever go into a distributed trust (the core tech behind bitcoin) ever!”
After these multi-million-dollar commitments fell through, Middleton went on to claim (in a sincedeleted blog post in March of 2015) that he was “in negotiation with several sovereign wealth funds (SWFs) who have shown interest in the Veritaseum venture along several levels.”10 Again, it appears that these claims did not pan out.
Veritaseum then pivoted its capital-raising strategy towards retail crowdfunding. In March of 2015, the company announced that it was issuing up to 21 million Veritas in exchange for Bitcoin, although only a small fraction was eventually sold.11 These colored coins were originally offered at prices of approximately $0.87 - $1.00 through the company CoinPrism (the original transactions and subsequent conversions can be seen in CoinPrism’s block explorer; the asset ID is ATWpAbfaRr3yvQDuGVGp 5rA1NoXTwv9Siu). Veritaseum’s promotional material claimed, “We have not only put our existing and prospective software up for pre-sale, but our actual brains and labor as well.” We will address this valuation claim in the Employees section of this report.
The offering came with the following promotional material:
We are unsure how “Hording[sic] Veritas for Value Appreciation” is in line with something that is “intellectual capital” and not a “security or similar offering” or “financial investment” but we leave these details to the reader. Additionally, Middleton presented the following “illustrative price chart:”
Apart from characterizing a purchase of Veritas as a lucrative investment, this sort of marketing smacks of putting the cart before the horse.
C. A Chameleon Business Model
At its onset in 2014, UltraCoin was promoted by Middleton as a payment method that would disintermediate PayPal and Western Union:1
Then in 2015, Veritaseum claimed to be “the first company to produce web pages that act as fully autonomous wallets:”
This is a dubious claim to make in light of the fact that Blockchain.info offered this feature in 2011.13 In 2016, Middleton reiterated this claim and stated, “We are putting the finishing touches on a browser-based version of our client that allows a user’s web page to serve as a fully functional, fully secure personal financial system that interfaces with our server and the public bitcoin blockchain to replicate nearly every single function of a bank, broker or exchange.”14 Our interpretation of the timeframe that “finishing touches” implies differs from Middleton’s. The HTML client is yet to be delivered.
A separate product offering, Veritaseum University, has also seemingly been abandoned, and mention of it has been scrubbed from the Veritaseum website. We have obtained the following archived webpage:
After Veritaseum claimed to the second coming of Bitcoin, the story morphed again, as the company became a “Generation 3 bitcoin tech investment.” It claimed to be “the first entity to create a working smart contract-driven capital markets platform.”14 Later, Veritaseum’s claims to be a “smart contract” platform evaporated.It is difficult to ignore the frantic character of Middleton's claims during 2014- 2016 with regard to the ever-changing definition of the Veritaseum project. It is also suspect that such claims were made in tandem with Middleton's various fundraising efforts, without anything resembling a plausible roadmap or working product without onerous regulatory concerns.
D. Veritaseum in Ethereum’s Clothes
Fast forward to March of 2017, when Middleton announced Veritaseum’s “official ICO,” with the swaps platform being ported from Bitcoin to the Ethereum blockchain. Veritaseum claimed it would offer “synthetic ETFs” to the public. It is worth noting that this product raises the same regulatory problems that led to the scrapping of UltraCoin’s original P2P swap product (see section V. Future Promises).15
A new legal entity by the name of Veritaseum, LLC, was registered in the state of Delaware in April of 201716 and served as the vehicle for Veritaseum’s (ticker: VERI) ERC20 ICO. To anyone paying attention, this move would have been particularly ironic. Back in 2015, Veritaseum claimed to have a first-mover advantage as “[t]he only one to have a functional, commercial smart contract driven[sic], pure Bitcoin blockchain-based trading desk, originator, and exchange,”17 and yet, Veritaseum then proceeded to abandon its “smart-contract” project in favor of Ethereum. It is our belief that this move was motivated by the speculative boom in ERC20 token capital raises that began in 2017.
When marketing the ICO, Middleton claimed,“We will try very, very hard to have an alpha version by the end of the actual crowdsale. We’re working. As it is right now, most tokens [...] are basically are a request for funding to deliver something in the future. We came a little differently. We have an extant beta code base that’s been running for years. Available right now. We pulled it from public access due to potential regulatory issues. We have several patents pending, and we’re gonna have the next product service hopefully available by the end of the year. Can’t promise, you know how software development goes.” It is our belief that any comprehensive alpha has yet to be delivered.
III. An Unsound Token Distribution and Governance Structure
Veritaseum’s ICO on the Ethereum network began on April 25th, 2017, and ran for one month. 51 million tokens were available for purchase out of a total supply of 100 million. Tokens were priced at 0.033 ETH per VERI, and a discount was offered to early purchasers. Although a public figure was never provided by Veritaseum, we believe, depending on discounts and the ETH price used, that the ICO raised anywhere from $4 million to $8.5 million. We find it concerning that the company made no public statement with respect to the total funds raised as is the industry norm.
The ownership of the 100 million VERI tokens is extraordinarily concentrated. Only 2% of the VERI tokens created by the Ethereum smart contract were sold/distributed during the ICO or redeemed from the colored coin “pre-sale” in 2015 (the remaining gap represents tokens which were hacked from Middleton’s address). The other 98 million tokens are in an account controlled by Middleton/Veritaseum for use and sale at his own discretion.18
The concentrated nature of ownership of the tokens represents a centralized point of failure. Veritaseum is, in effect, Reggie Middleton. It is Reggie Coin. If Middleton quits, or moves on, or fails to deliver, Veritaseum, for all intents and purposes, fails. This sort of ownership and governance structure is the antithesis to the decentralization promised by other crypto-assets.
Combined with this centralized ownership structure, the Terms and Conditions of Veritaseum’s ICO afford token holders no rights whatsoever:19
“Ownership of Veritas carries no rights, express or implied. Veritas are solely intended for redemption to Veritaseum LLC for various products and services offered by Veritaseum LLC, or to access various features or aspects of the Veritaseum Platform or other Veritaseum LLC software products. Purchases of Veritas are nonrefundable. Purchasers should have no expectation of influence over governance of the platform or its development. Nor should Purchasers expect income, profits, or economic cash flows to be derived from the ownership of Veritas.”
Purchasing Veritas tokens is the equivalent of pre-paying for future consulting services and transaction fees of a platform that is currently unavailable
“These aspects of operation have been symbolically encapsulated in Bitcoin-based and Ethereum-based software tokens called Veritas (Ve, VER, VERI) which are essentially tiny portions of the Vertiaseum[sic] Platform software. These software tokens represent: Pre-paid transaction fees for use and operation of the Veriaseum[sic] Platform. This value trading system is currently operational as a beta. These pre-paid fees and access to and use of the system tokens will be redeemable once the system is out of beta, and are transferrable; and Prepaid advisory or consulting services provided by Veritaserum[sic], Inc. regarding application of the Veritaseum platform or other Veritaseum LLC software products.”
However, Veritaseum itself admits that these pre-paid services and platform may never be realized:19
“Purchaser further agrees to accept sole risk for the purchase of Veritas. The Purchaser recognizes that the Veritaseum Platform is presently being developed and may undergo significant changes before its final release, or may not undergo a final release at all. [...] Purchaser understands, that while Veritaseum LLC will make reasonable efforts to continue developing features of the Veritaseum Platform software, it is possible that a desired version of the Veritaseum Platform may not be released and there may never be an operational Veritaseum Platform with the desired features. It is also possible that even if Veritaseum LLC releases a desired version of the Veritaseum Platform, due to a lack of public interest in decentralized applications or the Veritaseum Platform itself, the Veritaseum Platform could potentially be abandoned or shut down for lack of interest. [...] Purchaser also recognizes that the Veritaseum Platform may be operational for a short or extended period of time, and may subsequently be abandoned by Veritaseum LLC for a number of reasons, including a lack of interest from the public, a lack of funding, competing platforms that seek to develop decentralized applications, and competing non-affiliated services built on the same or similar underlying technologies.”
We believe that any of the above outcomes are highly likely given our due diligence of Middleton’s and Veritaseum’s previous track record. In such an event, Veritas token holders have absolutely no legal recourse:19
“THE PURCHASER ACKNOWLEDGES AND AGREES THAT, TO THE FULLEST EXTENT PERMITTED BY ANY APPLICABLE LAW, THE PURCHASER WILL NOT HOLD ANY OF THE VERITASEUM PARTIES LIABLE FOR ANY AND ALL DAMAGES OR INJURY WHATSOEVER CAUSED BY OR RELATED TO USE OF, OR INABILITY TO USE, VERITAS OR THE VERITASEUM PLATFORM UNDER ANY CAUSE OR ACTION WHATSOEVER OF ANY KIND IN ANY JURISDICTION, INCLUDING, WITHOUT LIMITATION, ACTIONS FOR BREACH OF WARRANTY, BREACH OF CONTRACT OR TORT (INCLUDING NEGLIGENCE) AND THAT NONE OF THE VERITASEUM PARTIES SHALL BE LIABLE FOR ANY INDIRECT, INCIDENTAL, SPECIAL, EXEMPLARY OR CONSEQUENTIAL DAMAGES, INCLUDING FOR LOSS OF PROFITS, GOODWILL OR DATA, IN ANY WAY WHATSOEVER ARISING OUT OF THE USE OF, OR INABILITY TO USE, OR PURCHASE OF, OR INABILITY TO PURCHASE, VERITAS.”
The reader may raise the point that many ICOs have similar disclaimers and also lack a developed product – that the tokens are in effect a pre-purchase of rights to a network that has not yet been developed. This is a fundamental issue that causes us concern with regard to investment in a variety of tokens. However, we believe that the case of Veritaseum is egregious for the reasons that we delve into below.
A. No compelling justification for creation Veritas offers no advantage to Ether. At a technological level, any transaction that can be completed with Veritas can be completed with Ether. Scarcity exists neither for the Veritas token (100 million tokens were created simultaneously and at no cost, with 98% allocated to Middleton) nor for the underlying undetermined software or consulting services the tokens theoretically grant the holder access to.
In addition, the Veritas token would serve as a poor conduit for transferring any value Veritaseum may create to the token holders themselves. This is because the tokens do not represent equity ownership or revenue share. Because Veritas provide no say in Veritaseum’s governance as a private company, the terms that dictate token holders’ redemption of tokens are and always will be determined solely by Veritaseum. All this leads to the conclusion that the only function the Veritas token fulfilled was that of a capital raise from ICO participants. In effect, it was a transfer of assets from participants to the private company Veritaseum and Reggie Middleton. In return, purchasers received an ERC20 token with no legal rights and no equity stake, whose function could already be entirely accomplished by Ether.
Middleton has compared Veritas to a Walmart gift card. We think a more fitting metaphor would be that of a gift card for a Walmart that does not exist, that does not have the majority of products the customer would like to buy, and that has, on a number of previous occasions, promised to open and then not done so.
B. Manufactured Scarcity Because there is no inherent reason for Veritas tokens to exist, Veritaseum had to create one. As Middleton states,20
“The only way to get access to this research is through the tokens, our tokens. I don’t want to talk to anybody if you’re not a token holder. [...] Everything that’s done can only be done with Veritas. That’s the key. Any interaction with us if you don’t have the Veritas in your hand, we don’t speak your language. Just part of the business model.”
A business model built on an artificial constraint is not a sustainable or rational business model. What artificial scarcity does afford, however, is certain advantages in controlling price. As Reggie Middleton himself explained in May of this year during an “intimate fireside chat with fund managers, legal practitioners and cryptocurrency enthusiasts at Citco Fund Services global headquarters:”20
“It’s a fixed amount. We have a hundred million. There’s a smart contract that creates it, created one hundred million. We sell up to a certain amount. There’s a game that is played in the market, and the game is basically controlling supply to manipulate price. They put a very small float out, they get a big pop. You know who did that? [...] SNAP. [...] They released a very small amount of their issued shares. They created a pop. These shares were practically tokens - you had no voting rights, no dividend, you had nothing. All you had was a SNAP, digital blip. So basically a token.”
Take a moment to consider what was just said by the holder of 98% of Veritaseum tokens.
C. Threat of 98% Dilution Selling 2% of a token’s total supply to investors (while simultaneously allocating 98% to yourself to do with as you please) is harmful to token purchasers. This concern has been raised by multiple commentators in the past. Middleton has sought to reply, claiming that the ~98 million tokens that Veritaseum controls are reserved for sale “in large blocks to buyside institutions such as hedge funds, pension funds, family offices and high net worth individuals.”21 To our knowledge, material sales of this nature have not occurred yet. In our estimation, they are highly unlikely to occur in the future on any meaningful scale. Virtually no institutional investor would buy an asset that affords them no equity/rights and which is exposed to 98% dilution subject to no constraints whatsoever. Veritaseum and Middleton are under no obligation to sell these tokens to institutions. They could just as easily simply sell them into the open market.
Even though the tokens have no equity ownership and no rights, whatever value they do have as a pre-payment for future services and transaction fees is diluted every time Middleton sells some of the ~98 million tokens he controls. Scarcity is integral to a network token’s value. And the 98 million Veritas tokens not yet in the open market demonstrate that Veritas is not scarce intrinsically but rather artificially. The tokens held by Veritaseum do not even need to be mined. They were already created out of thin air.
As cryptocurrency investor and AngelList founder Naval Ravikant notes, “When the inflation of a cryptocurrency is a mathematical certainty [...] of course the market takes it into account. Just like any stock investor knows to look at the ‘fully diluted’ cap table. [...] If you believe the current supply is the correct measure, then here’s a thought exercise: Imagine that there were 1 Trillion Bitcoin left to be issued by the protocol. Should the price change?”22
At a price of approximately $81 per token and 100 million tokens outstanding, the Veritaseum network is valued at a staggering $8.1 billion, not the approximately $162 million listed as its “market cap” on information providers like CoinMarketCap.
D. Risks due to Concentrated Ownership A number of Ethereum ICOs have been hacked in the past year. On July 23, Veritaseum claimed it was the victim of a “fairly sophisticated” hack in which 36,000 VERI (reported in the media as valued at approximately $8 million) were syphoned from an address controlled by Middleton. He stated,
“Physical computers and devices are being stolen, even from other countires[sic]. These guys are determined, bu[sic] we are not by ourselves. We have a very strong and supportive community, and we are in the process of investigating bigger help, ie.[sic] state and federal prosecutors.”23
Veritaseum has offered no further information in over 2 months. Allegations were made that Veritaseum staged the “hack” to cash in on some of the 98 million tokens the company allocated to itself. In response, Middleton wrote,
“Now, as for this hacking conspiracy nonsense, the stolen tokens belonged to Veritaseum. We do not have to steal our own stuff, If I was going to sell tokens that already belonged to us, I would just sell them... and I wouldn't sell the[sic] at half price, either.”
In addition to what this event demonstrated with regard to Veritaseum’s internal security policies (it appears that tokens were held without escrow and in a single non-multi-signature wallet), the hack showed what token holders can expect if Middleton unloads tokens into the market or sells them to institutional buyers who in turn dump them. A low circulating amount has artificially inflated the price. In turn, any sharp rise in the quantity of circulating tokens can only do one thing, and it does so at the cost of existing token holders and buyers. VERI’s USD price plunged more than 46% on the decentralized exchange EtherDelta, from $227 to a low of $122, as the hacker dumped the tokens taken from Middleton’s address in the hours after the hack. The price went on to recover slightly, only to continue hemorrhaging over the next months.
The hack also flies in the face of a claim made previously by Veritaseum that “[t]hese smart contracts are decentralized, meaning there are no authoritative 3rd parties and no central servers to shut down, confiscate or hack.” In our view, Middleton is that central party, with VERI owners exposed to extraordinarily high dilution risk and all of the consequences that stem from centralization.
At the conclusion of the ICO, Middleton claimed, “To those of you who did not get a chance participate, we are now starting to discuss listing VERI with the various exchanges. Although we can't guarantee any listings, we feel that we not only have a very unique value proposition, but we can offer exchanges unique research on the other tokens that they trade (referenceThe[sic] Gnosis (GNO) Forensic Analysis and Valuation Report).”24
To date, VERI continues to trade almost exclusively on EtherDelta, with low five-figure trading volume on Mercatox and HitBTC. However, it has failed to list on any other notable exchanges. What’s more, Veritaseum trades a very small percentage of its float when compared to other cryptoassets. We believe this lack of liquidity is the primary cause of the elevated valuation of Veritaseum and also makes Veritaseum’s “market cap” and network valuation figures much less reliable.
IV. Veritaseum’s Intellectual Capital
A. The Team
Intellectual capital is pivotal to any technology start-up. It is especially so in a cutting-edge field like the cryptocurrency space. In addition to the removed P2P swap platform, Veritaseum itself identified its intellectual capital as integral to its valuation in one of its pitch decks:
Although we disagree with valuing tokens that have no recourse or equity based on a private company’s promises to deliver its expertise and labor (and especially in the light of the departure of employees), even at face value Veritaseum’s own valuation is irreconcilable with the market’s current network valuation.
The central piece of Veritaseum is founder and CEO Reggie Middleton. He is a self-employed financial analyst and blogger (BoomBustBlog) who has made a number of appearances on financial television shows and a slew of sometimes-accurate market predictions.
Middleton discovered Bitcoin in late 2013. To our knowledge, he has no start-up and management expertise of note outside of his personal blog. His expertise lies in financial analysis and due diligence, primarily of publicly-traded equities. Of his skillset, he wrote, “I’m a finance guy. I’m a nerd. I’m a technologist, but I’m not a[sic] engineer, developer. I’m not a mathematician.”25 Over his career, Middleton’s analysis has focused almost exclusively on traditional finance. We fail to understand how this knowledge ports well to the cryptocurrency space. Since Veritaseum is a cryptoasset, we find it peculiar that Middleton made the following claim:2
“[H]e has no idea of what it takes to create and run a successful business. Here's a hint, it ain't code! Harping on developers shows a fundamental misunderstanding of what it takes to get the job done. Managefial[sic] capability is what everyone should be focused on, yet instead they discuss websife[sic] design, lines of code and white papers, as if any of that stuff will actually get you paid by a competitive market place or competent investors.”
We disagree. Both Bitcoin and Ethereum (through their development and success and adoption) strongly point in the opposite direction of Middleton’s view regarding the importance of code in the cryptocurrency space.
Combined with the above, we find it concerning that Veritaseum’s Chief Technology Officer and Lead Developer, Matt Bogosian, left the company in August 2016.27
Bogosian led the development of Veritaseum’s swap product, was listed as co-inventor of Veritaseum’s patent application, and acted as Veritaseum’s patent attorney.28 We are uncertain as to his reason for leaving and as to how Veritaseum replaced him. However, we did discover that Veritaseum’s ERC20 smart contract code was written by an outside consultant, Ryan Francois Venter,29 (who lists his employer as xiqt finance from February 2014 to the present35). The same is true for “Lead Analyst” Manish Kapoor, who does not list Veritaseum on his LinkedIn profile, 30 but rather claims to be the CEO of his own private consulting firm.
We find it hard to stomach that key members of Veritaseum’s team are no longer with the company, while other key employees are only consultants, especially given that VERI tokens represent pre-payment for the promise of this intellectual capital.
Veritaseum has no other listed employees, although Middleton has claimed to have a “strong” team of engineers and analysts.
B. Research Reports
To our knowledge, the only existing “product” that Veritas holders can redeem their tokens for are two financial valuation reports on Augur and Ripple (with the first report Veritaseum released on Gnosis being offered for free). As an aside, pigeon-holing potential customers into only being able to buy them using VERI tokens does not generate value; in fact, we believe it reduces it.
In our opinion, based on the freely available Gnosis report,31 the quality of Veritaseum’s research in the cryptocurrency space is mediocre at best. The reports are a patchwork of white paper summaries and theory-based financial valuation models – models created to value equities based on the right to future earnings, something that is not applicable in the context of almost any cryptoasset. For instance, the model below, based on arbitrary growth rates and without specified dates, is an extraordinarily inaccurate representation of the economics behind the Gnosis network:
As Fred Wilson of Union Square Ventures notes on valuing cryptoassets, “We cannot use EBITDA [Earnings Before Interest, Taxes, Depreciation, and Amortization] multiples to do this work. We need to turn to other tools.”32 Yet this is exactly what Veritaseum’s team tried to do. For a view of a more fundamentally sound valuation approach, we recommend beginning with Chris Burniske’s “Cryptoasset Valuations.”33 We believe this disconnect encapsulates a broader theme - Veritaseum’s research employs traditional finance valuation techniques for a new asset class that is fundamentally different. It therefore produces erroneous results.
We feel our assessment of the quality of these reports has been confirmed by the market’s virtually nonexistent demand for them. According to our inquiries, only 5-6 individuals have purchased reports from Veritaseum. Even in the most optimistic scenario, where each purchaser downloaded the report only once, the first paid report has been purchased a grand total of 26 times three months after its release.34
Veritaseum’s promise to “hit maybe 1 report every week” with its “2, possibly 3, analysts”35 has fallen by the wayside, with only two reports released in the four months since the initial free report. Finally, regardless of quality, we find Middleton’s characterization that Veritaseum is the only provider of research in the cryptoasset space to be misleading:
V. Veritaseum’s Intellectual Property Claims
At almost every turn of Veritaseum’s story, Middleton has claimed that he has “patented the future of Global Finance!”3 Back in 2014, Middleton wrote,
“[i]n discussing whether or not competing patents have been filed for smart contract transacion[sic] processes by those who seek to be in my space with my contract engineer (a very skilled software architect and IP attorney), I displayed what I considered a healthy level of paranoid concern. I found it hard to believe that no one bothered to patent the most innovative, disruptive and groundbreaking aspect of this new crop of digital currencies - the ability to program them.”36
The patent attorney in question was since-departed Matt Bogosian. Middleton continued,
“I actually found it highly unlikely that no one had come up with this idea before me. Matt (my contracts engineer) said, ‘You know, it actually takes an uncanny amount of vision to have seen the scope of this stuff and act upon it, not to mention to have done so 6 months ago. Not many people are like you.’ Right then and there, it hit me. People really do not see things the way I do!”
Middleton and Bogosian filed a patent application titled “Devices, systems, and methods for facilitating low trust and zero trust value transfers” on May 5, 2015.37 Although Veritaseum has claimed to have an intellectual property “portfolio,” to our knowledge this is the only patent application made by the company (although it has been filed in multiple countries). Importantly, this is a patent application, not a patent. This application has not been granted; instead, it was extended and filed a second time on June 29, 2017.38
Middleton has advertised Veritaseum’s first mover advantage since 2015. It is plastered across Veritaseum’s fundraising materials, and Middleton claims to have “beat” all the investment banks and technology companies to the punch, “to our knowledge.”39
Middleton has advertised Veritaseum’s first mover advantage since 2015. It is plastered across Veritaseum’s fundraising materials, and Middleton claims to have “beat” all the investment banks and technology companies to the punch, “to our knowledge.”39
From our due diligence, we believe that Veritaseum’s claims are overblown and highly improbable. In addition, the exit of Veritaseum’s patent attorney and CTO also bodes poorly for the application’s chances. Finally, although the Bitcoin and Ethereum protocols are open-source, according to consulting firm Alix Partners, investment banks, banks, and technology companies embarked on a blockchain technology arms race before Veritaseum even got its start:40
In our eyes, it would be naive to believe that a financial blogger was the first to think of financial smart contracts and try to patent his “invention.”
Most problematically, Veritaseum’s claim has been beat to the punch. An application by Goldman Sachs for, in our view, a superior cryptoasset that facilitates asset swaps without counterparty risk was granted by the United States Patent and Trademark Office on July 11, 2017.41 This is ironic in light of Middleton’s statements that “Our patent apps predate the Goldman apps, [...] the Goldman apps cover less data,” and “it is our opinion that the GS patent shouldn’t, and probably wouldn’t be issued in full due to rampant examples of prior art.”42
The fact that Goldman Sachs’ application was granted while Veritaseum’s has not (even though it was filed 3 months before Goldman’s) is crucial. On a broader level, given the enormous amount of work done in the field of financial instruments and smart contracts prior to the existence of Veritaseum,43 including Ethereum’s own contributions to financial smart contracts, we find Middleton’s claims questionable at best.
Finally, it appears that Veritaseum’s patent application has run into problems with international patent examiners. Specifically, in August of 2015, an examiner for the International Preliminary Examining Authority issued the opinion that 10 of the application’s claims lack novelty and all 30 of the claims in Veritaseum’s patent application failed to demonstrate an “inventive step:”44
This may point to an explanation as to why Veritaseum’s application has not been granted to date. We believe that it is highly unlikely that the patent application will ever be granted.
VI. Future Promises
“Those who cannot remember the past are condemned to repeat it.” In our view, Veritaseum is a tokenized chameleon devoid of substance. The price of the VERI token is based on expectations of the future, recycled and repackaged, promises made but not delivered. We would like to briefly address some of the more recent promises Middleton has made.
A. The Jamaican Stock Exchange Letter
Over the past several months, Veritaseum has touted a potential Jamaican Stock Exchange partnership as proof of the company’s business traction. Middleton wrote on June 28th,
“I... no... We, succeeded... In a big way. We have a signed MOU with the Chairaman[sic] of the Board and the Managing Director of the Jamaica Stock Exchange to do a rapid buildout of a digital asset exchange via joint venture. This is the most significant anouncement[sic] the cryptocurrency space in years.”45
When the Memorandum of Understanding was announced, Middleton claimed “a launch date of approximately August 31st.” We are unaware of any new announcements or a launch. As far as the Jamaican Stock Exchange itself was concerned (an exchange that does around $1 million in total volume per day –for perspective the NYSE’s average daily traded volume in 2013 was $169 billion), the “most significant announcement in the cryptocurrency space in years” warranted a two-sentence post:46
It is important to understand that a Memorandum of Understanding is not a contract, nor is it a Joint Venture contract. Virtually all MoUs are not legally binding, and Veritaseum’s Memorandum with the JSE is no different:
“Nothing in this MOU shall be construed as creating a partnership, joint venture, agency or similar relationship between the parties [...] This document is non-binding, and does not represent an obligation to perform the actions listed above.”47
The piece of paper is simply a demonstration of good will between the two parties. Even if a deal is struck further down the line, the letter illustrates what form it might take. Veritaseum would not only “sell, lease, rent, or lend its Veritas tokens to the Jamaican Stock Exchange for the purposes of consulting on, advising on and building a digital asset exchange,” but also would “share [redacted] % of the net revenues stemming from the operation.”
We believe this to be a decidedly one-sided deal, even in the unlikely case that it becomes legally binding partnership. As for its role, the JSE will only “use its best endeavours” to “operate the Digital Access Exchange to the extent permitted by law.” It is possible that Veritaseum would liberally use the tokens it holds to incentivize such deals at the expense of current token holders.
B. The Veritaseum “Machine” The last, and possibly most nebulous, product promise Veritaseum has touted is of a “machine,” “synthetic hedge fund,” or “synthetic ETF.” It would allow VERI holders to submit queries and receive a response from an algorithm based on input of simple discrete constraints as well as more in-depth research from Veritaseum’s employees. This appears to be a modification to the original UltraCoin P2P swap product, although the claims surrounding it have been fairly muddled. According to Middleton,48
“The machine is gonna do exactly what all other non-synthetic entities in this space do. The machine will be like a synthetic hedge fund, a synthetic private equity, but it’s gonna be software, it’s not gonna be an actual entity. If you go to a hedge fund, most hedge funds, most mutual funds, do not do their own analysis. They either buy it or they get it for free. [...] The biggest difference between this machine and a hedge fund is this machine is a robot. It doesn’t have an asset manager, it doesn’t have a hedge fund manager, it doesn’t need 20%, 25%, 30% promote fees. A promote fee is a success fee. Let’s suppose that a hedge fund and the machine invest in the same thing. They have a very good year. Their assets go up 100%. The hedge fund will take 30% of that gain and 2% of all the assets in the pool, which can be very expensive. The machine takes one flat rate, just enough for it to keep going, so basically it operates at break-even level, because there is nobody to pay, except for its contractors, and we’ll be the contractors. We have a development team and a research team. When you have a machine compete against humans at the same level, and the humans get paid a lot of money, the machine by supply and demand, should outperform significantly. [...] The machine will be approximately 90% cheaper at 2.5, 25. [...] This is interactive, dynamic research.”
We found no compelling reason as to why Veritaseum’s team would be in any way, shape, or form qualified to build such a model and system.
The most tangible description of a part of this system that has emerged is something named VeADIR, short for the Veritaseum Autonomous Distributed Interactive Research.49 The language is reminiscent of Veritaseum’s previous nonsensical buzzword phrase “ICODAO,” a “Reincarnation of the DAO, done correctly,” an “Autonomous robot [that] selects ICOs and startups without a fund manager or VC.”49 To our knowledge no further information or progress has been provided regarding the Veritaseum ICODAO. Veritaseum’s description of this would-be product is as follows:
“VeADIR is an interactive, digital research vehicle that offers exposures to its vetted research subjects. The research takes advantage of distributed ledger (blockchain) and smart contract technology in that it can be both dynamic and applied. This means the research can and will be actionable by this independent construct in real time. VeADIR is independent from Veritaseum in manner and action. As such, it makes decisions separate and apart from Veritaseum or other entities and it must be considered autonomous and sovereign in its actions and existence. Communication is performed in machine language to and from the VeADIR summarizing the token purchases, distributions, valuation forensics and market liquidity. The VeADIR will pay operating fees to Veritaseum (tokens, either USD-locked or other) for real world research. Veritaseum then feeds research results to VeADIR.”
The only concrete part of all of this that has been publicly announced is “the Veritaseum Rental Facility,” an app in “early beta”50 that allows VERI token holders to lend their tokens for interest. This feature is a miniscule part of the VeADIR project Veritaseum is promising. It is also a service that has been offered to token holders of a number of cryptoassets already on exchanges such as Bitfinex and Poloniex and will be offered for many more tokens other than just VERI by the ETHlend and SALT platforms.
We have struggled to find any tangible demonstration of any of these promises.
The currently undeveloped VeADIR product will almost assuredly take the form of a P2P swap (and we see no way around it taking that form). Because of this, Veritaseum is likely to encounter the same regulatory issues from the CFTC that led it to scrap its original swap product back in the UltraCoin days. It would be naive to assume that the CFTC’s intent was to regulate swap execution facilities solely on the Bitcoin blockchain and not ones operating on Ethereum. We believe further regulation is forthcoming in the future.
As an example of the “expert research” Veritaseum’s team of analysts would provide to the “machine,” the company published a 10-page PowerPoint slide deck titled “Distressed Assets in Jamaica.”51 In it, the company outlined its plan to sell 1 million of the approximately 98 million Veritas tokens it holds and use the proceeds to purchase “distressed assets” in Jamaica. In other words, Veritaseum is aiming to tokenize distressed Jamaican assets.
We will not touch on the monumental regulatory concerns we have, on our skepticism regarding the Veritaseum team’s ability to pick and manage distressed Jamaican banks, properties, and loans, or on our lack of understanding as to why distressed Jamaican assets ought to be tokenized and invested in. We will only say that this new “project” offers one more avenue through which Middleton and Veritaseum can sell more Veritas tokens to raise more money.
And so we arrive at the question that must inevitably be asked: what are Veritas tokens really worth? Given the fundamental issues we have identified with Veritaseum and its token, we believe a quantitative valuation model does not make logical sense. After months of ruminating on this question during our investigation of Veritaseum, the answer has become clear. There is virtually no price at which we would own Veritaseum’s tokens. We believe that it is a bankrupt project with infinitesimal odds of delivering any sort of value to its buyers and users. Veritaseum is, in our eyes, the bastard marriage of Middleton’s BoomBustBlog and an unnecessary ERC20 token no different from any other ERC20 token and with no equity and a ludicrous distribution and governance structure. Gun to head, we believe that the fair valuation of each circulating VERI token is close to $0.
In all, we believe that given the enormous opportunities in the cryptoassets space for intelligent and rewarding investing, the costs of sinking money into a project of this nature are untenable. We believe that cryptoassets are revolutionary. We also believe that some present immense opportunities for investment. However, we believe that a prudent investment approach in the space must include research on assets that represent a decidedly negative risk-reward profile and therefore ought to be avoided. We ask readers to do their own research and come to their own conclusions.
In future reports, this would be the point where we write a conclusion, but in Veritaseum’s case, we believe the end will write itself.