Analysis

Slaying the Dragonchain: A Story of Concern and Mania

Key Takeaways

  • As soon as one among crypto’s most hyped tasks, ICO-era startup Dragonchain and its founder had been charged at this time by the SEC for the sale of $16.5 million in unregistered securities.
  • The costs observe years of alleged mismanagement and reportedly tyrannical management below CEO Joe Roets, whom staff declare managed the corporate with “concern and intimidation.”
  • Dragonchain’s lavish spending and poor monetary administration shortly resulted within the venture’s deterioration and drew the eye of regulators within the U.S.

Dragonchain as soon as had massive ambitions to carry the “magic of blockchain expertise” to companies across the nation. In the present day, the Securities and Trade Fee is charging the venture and its founder, Joe Roets, with having offered $16.5 million in unregistered securities from 2017 to 2022. Crypto Briefing takes a deep dive into the startup’s rise and fall.

The Dragon Awakens

Dragonchain was initially developed in 2015 from one of many Walt Disney Firm’s incubators because the Disney Personal Blockchain Platform. That’s till the architect behind the venture, John Joseph Roets (who goes by “Joe” Roets), went rogue, in response to his early collaborators.

Roets spun the venture out as a non-profit, wresting management of the mental property and model from Disney and chopping ties together with his former collaborators completely. In August of 2017, Dragonchain Inc. was introduced, a for-profit startup eager on cashing in on the cryptocurrency mania. 

The startup aimed to construct a “turnkey blockchain platform for enterprise.” Like many rivals, it promised “safety and suppleness unseen out there,” positioning Dragonchain for “​​exponential​ ​development​.”

Dragonchain introduced it will increase cash by promoting its personal cryptocurrency, known as “Dragon tokens.” Moreover, past constructing its personal expertise to compete with different enterprise blockchains, like Hyperledger and R3, Dragonchain sought to kind an incubator to assist different startups increase their very own rounds on the Dragonchain platform. 

Shortly after asserting the launch of its for-profit company, Dragonchain held two preliminary coin choices, or ICOs. Enthusiasm across the sale was super, with buyers from Asia to Europe excited by Disney’s potential involvement, regardless of the venture not having any affiliation with the media large. 

Benefiting from the identify affiliation, Dragonchain was capable of increase over $15 million in Bitcoin and Ethereum over the course of 4 months. On the insistence of Roets, participation within the sale was obtainable to anybody on the earth with out restrictions.

On account of surging cryptocurrency costs, the startup’s hoard was price over $50 million by December. At its peak in January 2018, Dragon tokens had been price over $5 every, giving the corporate a valuation of over $1.2 billion.

Spending the Treasure Hoard

On the again of the profitable fundraising, Dragonchain was capable of extra than simply develop its workforce and open a brand new workplace. It generously sponsored lots of the newly sprouted blockchain conferences and occasions in Washington state, in addition to funding one among its personal⁠—Blockchain Seattle. The startup even helped fund the formation of the Washington Know-how Business Affiliation’s Cascadia Blockchain Council (WTIA), the place Joe Roets sits as a steering committee member.

Corey LaJoie’s No. 72 Sponsored by Dragonchain

Different expenditures had been just a little extra lavish. Dragonchain’s non-profit bought a penthouse price $2.2 million atop the Bellevue Pacific Tower to entertain purchasers and buyers. In July 2018, it sponsored NASCAR Cup Sequence driver Corey LaJoie in Daytona. In 2019, the startup commissioned a media firm to supply a documentary collection about Dragonchain.

Regardless of the spectacular spending, nevertheless, it wasn’t lengthy after Dragonchain’s token sale earlier than hassle started.

The Drawback with ICOs

After its profitable raises, Dragonchain wished to assist different blockchain tasks increase their very own multi-million greenback rounds. Inside months, it signed on tens of startups trying to increase cash. 

Not less than one firm was capable of increase cash on prime of the Dragonchain platform. Look Lateral, an organization attempting to promote shares of artwork by means of cryptocurrency, held a token sale facilitated by Dragonchain in 2018.

Nevertheless, round this time, regulators started scrutinizing the untamed ICO scene. Many of those token gross sales had been unregistered securities choices, in response to pointers from regulators.

These guidelines, enforced by the Securities and Trade Fee (SEC), make sure that buyers obtain constant and correct monetary details about the businesses they spend money on. The regulator is especially vigilant about securities investments provided to most people.

Round 2017, the SEC began ramping up its cryptocurrency choices enforcement. In December 2017, the Fee issued its first cease-and-desist proceedings towards an organization promoting tokens issued on a blockchain. 

By 2018, the regulator continued to tighten enforcement. That yr, it halted a number of fraudulent choices, shut down an unregistered cryptocurrency trade, and even charged boxer Floyd Mayweather Jr. and music producer DJ Khaled for unlawfully selling ICOs.

However, Joe Roets was voracious when it got here to fundraising, pushing corporations to boost cash by means of Dragonchain whereas the market was nonetheless scorching, mentioned Brandon Kite, the previous software program improvement lead at Dragonchain. “However there’s no means anyone may use Dragonchain for that stuff legally, that’s why they don’t have any clients,” Kite mentioned. Two former executives on the firm have gone so far as to say that Roets and two different staff had been instantly subpoenaed by the SEC in 2019. Crypto Briefing confirmed this date after one supply shared the subpoena they acquired from the SEC.

The scrutiny had an impression on enterprise. For instance, blockchain identification startup LifeID was one of many startups that thought-about becoming a member of Dragonchain’s incubator. The founding father of the corporate, Chris Boscolo, advised Crypto Briefing that his firm had been in negotiations to conduct an ICO by means of Dragonchain in late 2017. However, based mostly on steering from his authorized counsel, he was advised to restrict the providing to accredited buyers in an effort to stay in compliance with securities legal guidelines.

That’s when the deal broke down with Dragonchain. In keeping with Boscolo, the corporate knowledgeable him that they had been solely involved in supporting his token sale if there have been no restrictions on who may take part⁠—identical to Dragonchain’s personal ICO.

The insistence would show to be a dealbreaker. “LifeID has determined to observe the steering of their authorized workforce and due diligence for his or her ICO. Upcoming presale has been canceled,” mentioned Dragonchain on social media.

Ruling By Concern

Crypto Briefing interviewed greater than 10 staff on the firm and reached out to greater than 30 folks linked to the corporate in complete. Many declined to remark, desirous to keep away from litigation or harassment. Those who did converse mentioned that the Roets’ managed the corporate by means of “ concern and intimidation,” with some describing the expertise as “traumatic.”

In conversations with former staff, many cited the identical purpose for leaving⁠—their poor remedy by Joe Roets and his spouse, Shirly Roets, who was second in command.

Chin-One Chan, Dragonchain’s Advertising Supervisor for Asia throughout its ICO, spoke with Crypto Briefing about her work at Dragonchain. Three months into her engagement, she claimed that Dragonchain tried to coerce her into signing a non-disclosure settlement after she raised issues about guarantees made to her previous to the ICO. When she refused, Dragonchain fired her and withheld her wages together with Dragon tokens she was purported to obtain for the work she performed, in response to Chan.

One other worker alleged that after they had been fired, the corporate tampered with their W-2 filings with the IRS and three colleagues in an alleged try to extend their tax invoice as punishment.

A number of staff additionally mentioned they’d Dragon tokens promised to them for his or her work that was “clawed again.” A complete of 20% of Dragon tokens issued had been allotted to founders and early staff, much like inventory choices. One among these staff confirmed Crypto Briefing an employment settlement detailing their allocation of tokens.

Workers mentioned they had been requested to return these tokens for tax functions and that they’d be returned at a later date. They declare to have by no means acquired them, and after they pressed Dragonchain in regards to the tokens, the corporate used it as negotiating leverage or just didn’t distribute them in any respect. Transactions on the blockchain line up with tales from these staff.

Not solely would the corporate try to intimidate folks financially, however Dragonchain would additionally achieve this legally. “Joe Roets is litigious, to say the least,” mentioned one former worker. Greater than two staff concerned with the corporate mentioned that Joe Roets initiated “frivolous lawsuits” towards them after they left.

One putting instance of the circumstances at Dragonchain is from a former government, who spoke with Crypto Briefing on situation of anonymity. They mentioned that after elevating issues about “inconsistencies” in Dragonchain’s funds, Joe Roets “pulled a gun out in entrance of me, pointed it at me, after which pointed it at himself,” saying “possibly I ought to finish all of it.” Shortly after the incident, Joe and Shirly Roets fired the chief, they mentioned.

Proof of Monetary Misery

Since its inception, there was little proof that Dragonchain has generated significant income from corporations utilizing its platform. 

Although this isn’t uncommon for a high-risk startup, the corporate seemingly sabotaged offers with potential clients. “Joe Roets went out of his solution to scare off Starbucks,” mentioned August Harper, previously Roets’ government assistant.  

One other former government corroborated the 2 incidents, saying that “once we had been near signing new clients, together with Starbucks, Joe would drive them away.” Brandon Kite added that, “Joe was extra involved in sustaining the worth of his Dragon [tokens] than he was in working a enterprise.” With out dependable income, the corporate turned towards dependence on the cash it raised by means of its ICO. 

Nevertheless, these funds are solely price a fraction of what they had been throughout 2017. Since then, the worth of the Dragon token has collapsed. Beforehand, one among these tokens commanded as a lot as $5. By the tip of 2018 they traded beneath $0.10; now, they go for lower than $0.02. 

There have been different indicators that the corporate was experiencing monetary issue as nicely. In Could of 2019, the corporate offered its penthouse at a $242,000 loss. Across the identical time, the corporate was delinquent on over $119,000 in taxes. 

Lawrence Lerner, the corporate’s former President of Consulting Companies and a former bigwig at now defunct blockchain venture RChain, advised Crypto Briefing he left as a result of “they didn’t have any cash to pay me.” Different service suppliers additionally reported that they may not acquire funds from Dragonchain.

In the meantime, Joe and Shirly Roets had been gathering salaries of $200,000 and $180,000, in response to one former government. Even with these excellent payments, Dragonchain made a $500,000 funding in Coinme, a Seattle-based Bitcoin ATM firm, in the beginning of 2020.

On situation of anonymity, one of many firm’s former controllers advised Crypto Briefing that, whereas they had been organizing the corporate’s books, they discovered “issues lacking.” Some transactions performed in cryptocurrency “didn’t make its means again to the corporate,” they mentioned. They tried to trace down these transactions, and after they pressed the problem, the previous controller mentioned they had been fired.

The Aftermath of Mania

On August 16, 2022, years after first subpoenaing Dragonchain executives and staff, the SEC formally charged Joe Roets and Dragonchain for promoting unregistered securities. The company claims Dragonchain raised $14 million from about 5,000 buyers worldwide throughout its ICO, and cashed in one other $2.5 million within the interval from 2019 to 2022. 

The SEC is looking for everlasting injunctions, disgorgement with prejudgement curiosity, civil penalties, and conduct-based injunctions towards Roets and Dragonchain’s company entities.

Joe Roets said in an open letter that he was assured he had a “very robust case” towards the costs. He moreover took the chance to extol the virtues of blockchain expertise, calling it “liberty encapsulated in software program,” and ended his letter with a quote from the revolutionary author Thomas Paine: “Tyranny, like hell, will not be simply conquered; but we have now this comfort with us, that the tougher the battle, the extra superb the triumph.”

Many of those points weren’t distinctive to Dragonchain. There have been a whole bunch of startups from 2017 by means of 2018 that raised hundreds of thousands on the promise of blockchain expertise. A few of these corporations disappeared completely. Others had been proven to be fraudulent. Some are nonetheless ready to see what occurs. 

Dragonchain was one among many corporations swept up within the mania of 2017. It wasn’t the one venture that acted rashly—and even fraudulently—with the cash it raised from buyers. Like lots of these startups trying to faucet into the “transformative energy of blockchain,” they left former staff and buyers with little to point out for his or her work and the cash entrusted to them.

Issues occur shortly and impulsively within the cryptocurrency area, however accountability strikes slowly and intentionally. What looks like historical historical past to crypto natives remains to be contemporary within the minds of regulators, authorities, and regulation enforcement, and the SEC’s actions towards Dragonchain years after the very fact show that its reminiscence is lengthy and its endurance plentiful. 

Disclosure: On the time of writing, the writer of this piece owned BTC, ETH, and different cryptocurrencies.

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