5 February 2015

Twisted History of Ripple and Stellar Aired in Tell-All Report



In what can only be described as a bombshell report, The Observer has published a near 15,000-word story that takes a detailed look at the allegedly sordid history of decentralized payment network startups Ripple Labs and Stellar, and the impact of this relationship on events in the wider bitcoin ecosystem.

“The interpersonal story of Stellar and Ripple Labs is emblematic of the turmoil roiling the entire industry,” the article, penned by Michael Craig, reads. “It has everything: sex, huge money, fraud, genius, betrayal, international intrigue and government raids.”

Of particular note are the stories main participants Jed McCaleb, the founder of now-defunct bitcoin exchange Mt Gox, Ripple Labs and Stellar, and Stellar executive director Joyce Kim who bear the brunt of the article's barbs.

The Observer reports that McCaleb and Kim have long had a personal relationship that complicated McCaleb’s relationship with other senior executives and board members at Ripple Labs, and ultimately lead McCaleb to leave that company and found competitor Stellar.

Also included in the report are allegations that hit home far beyond the companies themselves, as it suggests the feud at the two companies has had implications for mobile payments startup Stripe and banking giant Wells Fargo, among others.

Wells Fargo bitcoin unit collapses

Of all the details included in the report, however, none perhaps has greater relevance than the revelation that US banking giant Wells Fargo had assembled a task force compromising 20 of its “top executives and advisors” that was aimed at finding ways it could become the first bank to embrace cryptocurrency.

The report argues that due to a combination of the Mt Gox collapse, the closure of Silk Road and McCaleb’s personal track record, the unit was disbanded in 2014.

“Predictably, Wells got cold feet,” Craig writes. “At the bank, the crypto blackout was so severe that it extended not only to shutting the accounts that cleared funds for crypto companies, but even those companies’ operating accounts … were shut down.”

This includes the account held by Ripple Labs, whose CEO Chris Larsen, the paper said, had a more than 20-year relationship with the bank prior to the decision.

“The problem is your connection to Mr McCaleb,” Larsen was told, according to the report. “The guy founded Mt Gox. You’ve got to get that guy out of there or we won’t bank you.”

At the time, McCaleb was no longer with the company, but the report suggests even his association as a board member was “enough to make Wells Fargo skittish” and move ahead with the dismantling of its nascent cryptocurrency initiative.

Turbulent times at Ripple

Speaking to the Observer, Kraken CEO and Ripple Labs investor Jesse Powell indicated that he first introduced McCaleb and Kim, and that before long, Ripple had purchased Kim’s company SimpleHoney and brought her into the team.

The Observer described her tenure as one that was not only rocky, but saw her attempting to play up her importance and that of McCaleb. Eventually, the report argues that Larsen needed to intervene.

“Chris sat her down and was like, ‘Joyce you’re a CEO. It’s going to be hard fitting in. You’re obviously reporting to me. Two cultures coming together is always a hard thing. Let’s talk about everything before we do it just to make sure everything is good.’ And Joyce just of course wouldn’t hear of it,” an insider said.

Kim is alleged as having a “Yoko Ono” role at the company, according to those who spoke to the report.

“This is Jed’s thing, when you’re in a private conversation with him all of a sudden Joyce is CC’d on this private conversation, even when the conversation includes the person saying, ‘I don’t want you to share this with Joyce.’ So not only does he disregard that request but he’s letting you know she knows you don’t like her,” another source said.

Kim’s tenure lasted only six weeks. McCaleb, the report contends, soon “lost interest” in the project.

Stripe deal squashed

The end result of the ensuing turmoil is that a deal that would have seen Ripple Labs be purchased by Stripe for $13m in cash never came to pass. The Observer indicated it was unable to uncover an exact reason for the deal’s demise.

Yet, another sticking point however, was that most of the leadership team at Ripple Labs held significant holdings of XRP. McCaleb and Larsen, for example, both owned 9bn XRP, a factor that discouraged many in the wider bitcoin market from trusting the company.

At the time, Powell also sought to intervene to fix what he described as the company’s ongoing PR problem.

All of the problems came together, the report said, in a meeting in which McCaleb attempted to have Larsen removed from the company for reasons not disclosed.

Larsen kept his role, however, by a 5-1 vote, with McCaleb providing the dissenting voice.

“Every single person begged Jed not to make us choose between him and Chris,” said Roger Ver, a VC investor in Ripple Labs. “In the end, the vote was unanimous that Chris should stay. The only person who disagreed was Jed.”

Attacks on Stellar

McCaleb would go on to found Stellar, taking a $3m investment from Stripe, though the article questions the nature of the relationship between the companies.

For example, Stellar’s former head of community told the publication that the two companies are quite close, with everything Stellar does having to go through Stripe.

Still, Stripe’s relationship with Wells Fargo, the report suggested, has put limits on how close the two companies can publicly appear.

The report quoted those close to co-founder Patrick Collison as describing him as privately dismissive of banks, while highlighting the reliance the San Francisco-based payments company has on institutions like Wells Fargo.

The article went on to question Stripe’s designation as a non-profit, arguing that tax experts believe this claim won’t hold up under regulatory scrutiny.

“Once the IRS pieces together how Stellar benefits McCaleb, Patrick Collison and any other insiders receiving STRs or fattening up in the initial distribution, it will likely find the venture inconsistent with the charitable purpose of the 501(c)(3) exemption,” the report reads.

Article’s accuracy questioned

Following the publication of the article, CoinDesk reached out to the parties involved for their take on the report and its implications.

Perhaps unsurprisingly, McCaleb moved to denounce the article as one that failed to capture the facts of the story.

"Given the vast amount of inaccuracies and innuendo in the article, it is not worth commenting on. The bias in the article is so obvious no one can take it seriously,” he said.

CoinDesk reached out to Kim and Ripple Labs for comment, but has not received an immediate response.

Newspaper image via Shutterstock

Chris LarsenJed McCalebRipple LabsStellarStripe

February 05, 2015 at 11:22PM

4 February 2015

Central Bank of Italy Declares Virtual Currency Exchanges Are Not Subject to AML Requirements

The Central Bank of Italy (Banca d’Italia) is that country’s first governmental authority to issue a statement on virtual currencies. It recently published three directives:

  1. Warnings on use of virtual currencies (30 Jan 2015);

  2. Notice on virtual currencies (30 Jan 2015);

  3. Notice of Central Authority for Reporting on virtual currencies (2nd Feb 2015).

The “Notice About the use of virtual currencies” (published on the Supervisory Bulletin No. 1, January 2015) is a summary of guidance previously issued by the European Central Bank (ECB), the European Banking Authority (EBA), and the Financial Action Task Force. The Central Bank of Italy is the first to release any statements based on the ECB’s comments. The Notice clarifies the legal status of virtual currencies in Italy with this important statement:

In Italy the purchase, use and acceptance of virtual currency must be considered lawful activity: the parties are free to transact in amounts not expressed in legal tender.

The January 30 Notice on virtual currencies also contains an analysis of the guidance published by the EBA, and agrees with the EBA’s recommendation that financial institutions should avoid buying or investing in virtual currencies until a formal legal framework has been established. This means the Central Bank will not ban regulated institutions from dealing in Bitcoin and other virtual currencies, but advises them to wait until formal regulations are announced.

The Notice allows financial institutions regulated by the Bank of Italy to do business with any virtual currency companies, provided that they respect existing AML/KYC requirements for account holders and warn them about the risks involved.

The Notice of Central Authority for Reporting on virtual currencies of Financial Intelligence Unit (FIU) warns that using virtual currencies may enable money laundering and terrorist financing, as previously discussed by the ECB and other European authorities. The FIU states that businesses dealing in virtual currencies, including holding them and exchanging them for fiat currencies, are not required to comply with any AML/KYC regulations.

A reading of the documents released by both the Central Bank of Italy and the FIU indicates that a business that transacts in virtual currencies is not subject to any regulation at this time. However, the owners of such businesses would be subject to existing AML/KYC requirements when setting up a bank account or dealing with a regulated financial institution. In that case, virtual currency activities are not subject to any unique regulations; instead the activities are regulated where they intersect with the existing AML requirements of the Italian financial system.

Italy is the first country to declare that virtual currency exchanges are not subject to any AML requirements. This is in contrast to the United States, where exchanges are required to register with the Financial Crimes Enforcement Network (FinCEN) as Money Services Businesses.

The FIU concludes with a recommendation that regulated financial institutions evaluate their own clients to screen for suspicious transactions. It also recommends that financial institutions educate their staff about virtual currencies and how to identify suspicious transactions, with a particular focus on gaming operators.

February 04, 2015 at 06:28PM

2 February 2015

This week on Decentral Talk Live


Bitsquare is an open source, completely decentralized bitcoin exchange. Founder and developer, Manfred Karrer, discusses his project and his ideals with Ethan Wilding and guest host, Hai Nguyen. Bitsquare is based on the concept of “no single point of failure” and decentralization. Karrer also discusses the concept of peer-to-peer arbitration.

Andrew Lee of purse.io answers questions partially sourced from the bitcoin community. Purse.io’s model of selling Amazon giftcards for bitcoins is both controversial and exciting for people who want to buy bitcoins without going through the lengthy verification processes associated with exchanges. It also facilitates purchases through Amazon at a discount for people who want to shop with bitcoin. The DTL audience sent in some hard-hitting questions, and Andrew Lee has promised to answer them “head-on.”

Other guests this week will include Gerald Cotten of the Canadian exchange, QuadricaCX, as well as Mitchell Callahan, founder of Saucal, a marketing and brand development company that integrates bitcoin into its clients’ growth strategies.

Check out past videos at decentral.tv.

February 02, 2015 at 04:38PM