Legal Battle Derails Tezos $232 Million Cryptocurrency Project

The cryptocurrency project Tezos, which set a new record in July by raising $232 million in an initial coin offering, is currently embroiled in a legal battle that threatens to derail the technology. The project’s founders, Kathleen Breitman and her husband Arthur, have accused Johann Gevers, the head of the Swiss nonprofit foundation managing Tezos’s funds, of mismanaging resources for his own personal benefit.

“In September, Arthur and Kathleen Breitman learned that Johann attempted to pressure the other members of the foundation council to award him a contract that would, among other things, grant himself a bonus worth $1.5 million at then-current valuation of the Tezos token,” Kathleen Breitman told International Business Times in an email. “Johann consistently failed to meet deadlines, was unwilling to hold or attend council meetings, and failed to hire employees to help launch the network or pay people he committed to paying, and was constantly unavailable to handle foundation matters. As a result, the launch of the Tezos network has been delayed.”

Ironically, the Tezos project revolves around experimental governance for a blockchain community. The project launched without a clear business model or product. Instead, it popularized the idea of token holders voting on development decisions through the blockchain network. Now leadership conflicts are threatening the project itself.

Since the ICO, Tezos tokens have appreciated to be worth around $400 million, according to Reuters. Through this legal battle, the entrepreneurs aim to remove Gevers and restructure the foundation to guarantee they will have a “substantial role” moving forward.

“This is attempted character assassination. It’s a long laundry list of misleading statements and outright lies,” Gevers told Reuters. “They control the foundation’s domains, websites and email servers, so the foundation has no control or confidentiality in its own communications.”

This lawsuit raises new questions about a practice that has quickly become commonplace in the cryptocurrency community: teams dividing a project between a startup and a nonprofit foundation based in Switzerland, where the legal system has created a unique cryptocurrency haven.

Swiss regulators recently started taking a closer look at ICOs in the wake of several controversies. Riccardo 'Fluffypony' Spagni, co-founder of the privacy-centric cryptocurrency monero, told IBT he thinks the trend of combining a Swiss nonprofit foundation with a startup is better at circumnavigating regulation than ensuring accountability.

“The model is wholly ridiculous,” Spagni said. “Most of these projects aren't developing open-source protocols for general use, they're developing singular services.” The Brietmans currently hold the Tezos project’s proprietary source code through a company based in Delaware.

Spagni himself was involved with a community coup when Monero’s creator wanted to take the technology in a different direction than the majority of users wanted. Conflicting interests are an inevitable part of developing a blockchain network. Monero is now run entirely by volunteers. Although changing leadership isn’t necessarily a death knell for Tezos, Spagni said it’s impossible to run such a lucrative business project like a truly cypherpunk community.

“You're raising money in a centralized manner, as a company, and you have a responsibility to investors,” Spagni said. “They'd probably be better off if they were SEC registered and just acted as a company that raised money, tokens-be-damned.” He argued the project could have started with far less money, gathered from traditional investors, then sold tokens in the open market along the way to cover running costs.

Gevers told Reuters he already filed a complaint with Swiss regulators and started liquidating the foundation’s stash of Tezos tokens at a rate of around $10.2 million a week, to invest in a “diverse portfolio.” He was adamant the foundation remain independent.

In response, the founders wrote a blog post saying: “We maintain that an independent council is the right structure for our project, provided it adopts an effective approach to the work that needs to be done."

“The whole situation feels really...icky,” Spagni described the Tezos scandal. “I suspect Tezos investors are the ones that are going to get screwed over.”