[Update 2: The "smoking gun" refered to a later chat log, after the ICO, the writer regrets the mistake]
[Update: We are being told that the 1:1 exchange idea was shot down by the BitBay community, deciding instead to rebrand]
Note: The currency mentioned in this article is called BitBay and should not be confused with the Poland-based Litecoin and Bitcoin exchange that shares the same name.
Art by: Jing Jin
Chinese-based cryptocurrency exchange Bter.com was allegedly involved in a scheme to artificially sell out BitBay’s ICO (initial coin offering) a coin they appear to help create. Chat logs posted by a pump group, which appears to have been contracted to push the coin, revealed the plan.
BitBay was designed to bring over many of the features found in BlackCoin. It was primarily developed by Dave Zimbeck, who sits on the BlackCoin Foundation Board and is responsible for the creation of Black/BitHalo and the often-delayed NightTrader decentralized market. BlackHalo and BitHalo were designed to use a double-deposit system to bring workable smart contracts to the cryptocurrency world and decentralized markets.
Bter hyped BitBay and was the primary exchange used for its ICO, although some coins were also sold on Bittrex. The ICO for 3,000 BTC appeared to sell out, which would have been extremely impressive for a new coin in the current market.
Allegedly, the plan was to “buy up” 1,500 BTC worth of the ICO through Bter's system, including a few hundred BTC orders that had no actual BTC to back them, in order to establish a certain price point before slowly dropping at least some of the coins. Chat logs Cointelegraph have been shown seem to indicate that the agreed upon plan was to sell the coins slowly, to avoid crashing the coin.
As regularly happens during these kind of situations, the participants argued about money. Eventually, the pump group— run by a man known as “BobSurplus” on the Bitcoin Talk Forums, and his partner who goes by the name “Gekko” in the chat logs — eventually decided to blow up the plan. They sold their coins and posted the chat logs in order to discredit both Zimbeck and Bter.
[2014-11-03 1:38:58 PM] *** International Rob has shared contact details with linhan.ee. ***
[2014-11-05 11:06:03 AM] *** Call to linhan.ee, duration 13:43. ***
[2014-11-11 9:36:33 AM] linhan.ee: Hi bob, would you please let me know your deposit account?
[2014-11-11 9:37:14 AM] International Rob: 13h3WoCnqYAP8cSF4J8bRke59EKNXKCGoK
[2014-11-11 9:37:48 AM] International Rob: Is that what you mean?
[2014-11-11 9:38:01 AM] International Rob: my btc address
[2014-11-11 9:39:31 AM] linhan.ee: got it thanks
[2014-11-11 9:41:10 AM] linhan.ee: one thing concerns me. We promise people to release funds after ICO. If you expose this address with transactions later to people, they will know we release the funds early
[2014-11-11 9:41:29 AM] International Rob: no the address is new and no one will know it
[2014-11-11 9:41:35 AM] linhan.ee: great
[2014-11-11 9:41:48 AM] International Rob: the btc are being used to help pumop the price.. buy more coins and set support as well
[2014-11-11 9:41:58 AM] linhan.ee: so don't expose it
[2014-11-11 9:41:59 AM] International Rob: Its not my first ICO or coin eh
Unconfirmed complaints from users claiming to be a part of BobSurplus's group have surfaced. They say the deal caused them to lose significant amounts of money. The pump group that bobsurplus runs has a 2.5 BTC monthly membership fee. The idea is that eager investors will pay him to give them information on which coin will be rising in value shortly. The group then invests in the coin together, greatly increasing its price before the groups hop out.
These kinds of market manipulation tactics would likely be illegal in most traditional financial markets, but cryptocurrencies have no such official regulation. The plan is often used by penny-stock investors. As in that market, the investors who are a part of the group have to trust that bobsurplus won't sell his coins early, or they could find themselves on the wrong side of the pump.
This allegedly is what happened with BitBay. The dump started as soon as the ICO went live, and the members of BobSurplus' pump group, who had been told to buy the ICO, ended up holding a bunch of coins few actually wanted. BobSurplus received his group’s BTC investment back from Bter, saying he had to return it to them. The unconfirmed complaints state that he never returned it to them.
For its part, Bter is once again involved in a scandal. The exchange was the subject of a hack a few months back, losing over 50 million NXT in the process. The exchange managed to negotiate the return of most of the NXT, but at a cost of 300 to 400 BTC according to our sources. It is unclear where exactly those funds came from (again, Bter did not respond to requests for comment). It has been suggested that the BitBay “plan” may have been an attempt to refill their coffers after such a significant loss, but this cannot be confirmed without Bter's cooperation.
It is possible that Bter initially just wanted PR for their coin, but it is clear from the chat logs provided to Cointelegraph that they did have knowledge of the plan and actively participated in it. Ignoring the ethical question of how responsible it is for an exchange to be heavily involved in the creation of a coin, artificially pumping that coin would be a clear-cut example of defrauding investors.
Spencer Lievens of Sterlingcoin has had misgivings about centralized exchanges. When asked to comment on what he thinks of Bter's actions, he gave this quote:
“The recent actions of Bter concerning BitBay is another example as to why it is of paramount importance to have decentralised exchanges. Decentralised cryptographic currencies deserve to be traded on equally decentralised platforms.”
I have reached out to all three parties involved. At press time, Zimbeck has been the only one willing to speak to me. He has shown me several chat logs where he discussed concern about effects on his reputation. He stated on more than one occasion that he didn't want his name attached to a pump-and-dump scheme, artificial or not.
Early chats between Zimbeck and a “Chinese investor” show that the Chinese investor and Bter promised a lot: A coin that wouldn't be dumped, one with connections to the Chinese e-commerce giant Alibaba, and one that will have a team of developers in addition to himself.
With those promises, along with a 100 BTC advance, he agreed to have his name attached to the coin, but it appears he was initially against a pump scheme.
[10/27/2014 10:34:33 PM] David Zimbeck: So you will be in this for the long run?
[10/27/2014 10:34:34 PM] ******* dai: sir
[10/27/2014 10:34:40 PM] David Zimbeck: its not just a pump
[10/27/2014 10:35:28 PM] ******* dai: i worked at alibaba as a product manager before
[10/27/2014 10:35:38 PM]******* dai: yes sir, this will be our long term Project.
[10/27/2014 10:35:48 PM] David Zimbeck: yes
[10/27/2014 10:35:53 PM]****** dai: we do not want this be a pump and dump Project.
[10/27/2014 10:36:02 PM] David Zimbeck: that makes me very happy
At a certain point however, Zimbeck became aware of the scheme and admits that he worked to disguise both the scheme and his awareness of it. He also accepted a significant portion of BitBay after knowing of the ICO scam. He claims that he only became aware of the scheme as the ICO went live, after it was too late to warn investors. According to Zimbeck, at that point he was in a panic, unsure what he could do to protect investors and his reputation, so he publicly denied the pump plan. He felt dumping his portion of the Bay would have made him look guilty and further hurt the coin's value. He never dumped his Bay and stated in his official comment that it would be used for bounties.
There does appear to be a smoking gun that does show Zimbeck knew at least of a pump plan before the ICO went live, some evidence that Zimbeck was aware of a pump before he admitted it publicly but not necessarily before the ICO went live or that it was done with artificial orders.
[2014-12-04 8:52:56 PM] International Rob: yoyoyoyoo
[2014-12-04 8:52:58 PM] International Rob: david
[2014-12-04 8:53:02 PM] International Rob: how was ur bday man?
[2014-12-04 8:58:20 PM] International Rob: hey bro
[2014-12-04 8:58:31 PM] International Rob: please hit me up before you release the new wallet
[2014-12-04 8:58:35 PM] International Rob: were gonna set up a pump
[2014-12-04 8:58:42 PM] International Rob: so we all need to be working on the same timetable
[2014-12-04 11:45:13 PM] International Rob: heyaaaa
[2014-12-04 11:45:16 PM] International Rob: you around yet?
[12:38:47 AM] David Zimbeck: hey Rob saw your message. I'm doing a build which should be avail today or tomorrow
[12:39:42 AM] David Zimbeck: I'm here meeting Steven in Thailand so its possible we may not find a convenient time
It is worth pointing out that Zimbeck never responded to the comment about the pump directly and didn’t reply at all until three hours later, and then about a different subject. Still, it seems unlikely that he completely missed that comment.
Pump and dump schemes are common in cryptocurrencies. Some would even argue that they are a part of the ecosystem at this point, regardless of their legality. However, a pump and dump using actual purchases to inflate the price and a pump and dump that uses fake purchases to artificially increase the price are two different beasts. Both are amoral actions that prey on the naive, but one is a virtually accepted practice that comes with the territory and the other is a new scheme. While both are manipulations of investors, one is at least actual manipulation, the other is creating a market out of whole cloth.
Exactly when Zimbeck knew the orders were going to be fake is not clear. But it does appear that he knew, or at least should have known, that the ICO would be pumped prior to its release, and that will be enough to ruin his reputation in the eyes of many.
bobsurplus and his partner Gekko are shown in the chat asking for more money, money that was previously earmarked for development purposes. According to the chat logs shown to Cointelegraph, threats were made, and attempts (some successful according to sources) of blackmail and extortion aimed at Bter took place. Eventually, the two decided to abandon Bter and Zimbeck, discrediting them while knowing they had little reputation to lose themselves.
Despite advocating for the coin publicly, including to the pump group he runs, Bob and Gekko threatened to destroy the coin by using their knowledge of the underhanded dealings they were seemingly heavily involved in.
[11/28/2014 1:18:26 PM] Gekko: We don't need halo
[11/28/2014 1:18:33 PM] David Zimbeck: sure you do
[11/28/2014 1:18:41 PM] David Zimbeck: you dont have a coin without dev
[11/28/2014 1:18:42 PM] Gekko: I can say anything I want to push the price
[11/28/2014 1:18:51 PM] David Zimbeck: yeah but people wont listen
[11/28/2014 1:18:55 PM] David Zimbeck: thats pump and dump
[11/28/2014 1:19:00 PM] David Zimbeck: people are tired of that
[11/28/2014 1:19:02 PM] Gekko: Want to bet?
Other altcoin developers have talked to Cointelegraph about BobsSurplus; none admitted to working with him. They all told similar stories of Bob offering to artificially pump their ICO in a manner similar to this plan, except the BitBay plan had the additional layer of an exchange's involvement.
Prior to this, Zimbeck had been quickly gaining a reputation as a talented coder in the cryptocurrency community. BitHalo is still arguably the most reliable smart-contract system available to Bitcoin users. For decentralized markets dealing in physical goods, it is still one of the only solutions providing a viable way to prevent fraud.
Unfortunately, he didn't come forward until it was too late, after the entire plan was exposed, and this failure will likely tarnish his name in some people's eyes forever. However, the chat logs provided to Cointelegraph seem to exonerate him at least from the initial formation of the plan, and even seem to indicate that he was at one point misled. According to the logs, he did in fact fight for increased development on the coin throughout. The chat logs also seem to indicate that Zimbeck and the pump group had no communication until a few days before the ICO.
As for BitBay, Zimbeck promises to continue his work on it, eventually incorporating the smart contracts and decentralized marketplaces found in BitHalo, NightTrader and BlackCoin. He is also promising price pegging, which (one way or another) should help the price. He has promised to continue developing BitBay. Bter, for what it is worth, has agreed to help. According to Zimbeck's official statement there will be a 1:1 exchange and Dai (the Chinese investor) has promised an additional 100 BTC toward the developer funds. Of course, this indicates that many of the same people who were behind the pump, or at least participated in it, will still be involved with the coin.
Zimbeck and Bter will be judged by the community, and their relevance moving forward depends on how forgiving the community is. Guilt can arguably be found in all parties involved. Zimbeck was the only one willing to speak to me. He is also the only one who had the naivete to put his name on the project publicly. Those two facts alone should lend him some level of credence. Questions still remain, and the ones that have answers aren’t pretty. In the future, it will be up to investors to decide whether his talents hold more weight than this fiasco.
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