Headline: What happened to Coin Cloud and what can we learn from it?
Body: I still remember being 5 years old, and thinking just how modern and high-tech our bank is. We were able to drive our 1981 Honda Civic thru the DRIVE-THRU!!! Mom didn’t even have to get out of the car, the teller just handed her the cash she requested. There was even a cool plastic tube that jetted the little capsule to the teller. In 1981, this WAS modern, this WAS the future. Then there were ATMs that eschewed the teller totally. Now, there are ATMs where you can trade cash, directly from your account, for a digital asset that you can put in your digital wallet. One of the first such services was Cash Cloud, and they recently declared bankruptcy. The question is, what can we learn from them?
Where did they start?
They got their start in, surprise, Las Vegas, Nevada. Zappos aside, the commercial successes in Vegas are thin on the ground. But, when they do blow up, they blow up FAST!!! That can actually lead to the problems.
What actually happened?
Yes, this is foreshadowing. Over a 2-3 year period, Coin Cloud had 1,100 ATMs nationwide that would trade cryptocurrency. The company website claims to have had just about 5,000 ATMs at its zenith. But, what they didn’t count on was that current ATM owners would upgrade the existing machines to offer BOTH cryptocurrency and fiat currency. So, like the “foolish seedling” disease in rice plants, they shot up, before developing enough of a base to support their own weight. In February, the CEO spoke to Cointelegraph, “We are announcing today that our company has filed for Chapter 11 reorganization. This decision will allow us to rework our debt, protect the interests of our creditors and emerge as a stronger, more financially stable company.” We shall see.
What is most interesting to me is that nobody can seem to agree upon elementary attributes. The company has between 5,000 and 10,000 creditors and only has between $50 and $100 Million in assets to service between $100 Million and half a Billion dollars of debt. Before your eyes swim away, the bottom line is that it’s a LOT of debt, and a commensurate amount of doubt. This is not a good combination.
OK, haven’t we seen these characters before?
We have seen many of these characters before. By far, the largest creditor is Genesis Global Capital, which, in turn, is a subsidiary of the Digital Currency Group. We have seen both of these characters over and over again (FTX, anybody?) At present, Genesis too is bankrupt.
Another thing we’ve seen before is the security or lack thereof being a telling attribute. A group of hackers claim to have stolen personal information on 300,000 customers of these ATMs.
The Verdict
What was most telling in this situation was the sheer lack of information. Nobody is sure how to count the debt, and even the number of creditors is unclear. Even Enron knew how many creditors it was cheating on. But, we have seen this pattern too, over and over again. Many of the cryptocurrency firms that run afoul of the government are cited for having insufficient recordkeeping functions. This also seems to apply to Coin Cloud. Given all of this, I guess we can learn a lesson that it is highly risky to invest a lot of hard-earned money into an industry or sector who doesn’t yet have agreed upon rules.
REFERENCES
https://cointelegraph.com/news/coin-cloud-data-hack-united-states-brazil
Editor’s Note: Please note that the information contained herein is meant only for general education: This should not be construed as Tax Advice. Personal attributes could make a material difference in the advice given, so, before taking action, please consult your tax advisor or CPA.