Not all that glitters is gold
A new company called Arbitrade is making the news with claims that it is setting up a gold and cryptocurrency trading platform in Bermuda, backed by gold in Dubai, held by a Nevada corporation called Scotia International of Nevada.
Since 1996, there have been several legitimate gold-trading platforms, even one that allows trading of gold against Bitcoin. These include goldmoney.com, vaultoro.com, bullionvault.com, etc.
It would be wonderful to see a new one. However, there have also been about two dozen gold Ponzi scams over the same time period, some of which were functional peer-to-peer payments platforms until they collapsed. More recently there have been dozens, if not hundreds of initial coin offering scams selling cryptotokens with grandiose claims, backed by nothing at all.
The chief executive of Arbitrade is Leonard Schutzman, who claims to have been a “senior vice-president and treasurer” at PepsiCo. Among the claims made by Schutzman on behalf of Arbitrade are that its $DIG cryptotoken will be backed by gold and will pay interest. On his LinkedIn profile, Schutzman states: “The platform is the highest standard in existence and is 100 per cent insured against all deposits, earns you interest for your deposits in accounts, and pays you for sharing it with others.”
Having personally been in the financial crypto and gold industry for more than 20 years, the claim that Arbitrade pays interest on gold is a red flag to me.
Arbitrade's November 5 press release claims that it has obtained title to 395 metric tonnes of gold, which are stored in an “independent storage facility”. There are further claims that “Arbitrade has completed the required regulatory gold-vaulting verification compliance”.
The press release refers to regulators and audits by an accounting firm, yet it fails to name the country by which the firm is regulated, the firm that conducted the audit, or the location where the gold will be stored.
Bermuda has no “gold-vaulting verification compliance” regulation. This sounds very fishy.
In the financial sector, there are two kinds of gold storage: allocated and unallocated.
An unallocated account simply means the bullion bank or institution owes you an amount of gold equal to your account balance, but there is no guarantee they actually have this gold. Their contract usually has a clause that allows them to pay you US dollars in lieu of the gold. Bullion banks by definition are licensed as fractional reserve banks. This means they put the gold deposits at risk by lending them to earn a return.
An allocated gold account is one where the institution holds physical gold, which is segregated and can be identified as belonging to a particular customer account. This is the safest form in which to hold gold with an institution, although it is not foolproof.
When MF Global failed in 2011, CEO John Corzine, an associate of the Clintons, confiscated the allocated bullion accounts of its customers in violation of their contract. In total, $1.2 billion of customer funds went missing, for which Mr Corzine was punished with a mere $5 million fine and no criminal conviction.
Historically, it was possible to earn a gold return on gold by buying gold bonds or lending gold in the real bills markets. However, the London bill market was closed at the end of the First World War, and no alternative has been created since. At present, several central banks are known to have lent gold to bullion banks, such as JP Morgan, at interest, but these deals are not available to the general public.
Arbitrade's claim to offer interest-bearing gold accounts is therefore highly suspect, along with its other claims. If the claim is actually true, then Arbitrade is in the business of banking, and would require a banking licence. Additionally, holding gold in Dubai is a risky venture even if the company doing so is legitimate.
Gold.ae was a gold-trading platform in Dubai, certified by the Dubai Multi Commodities Centre, and whose chairman was the Crown Prince of Abu Dhabi, one of the emirates that makes up the United Arab Emirates.
In 2014, Gold.ae failed. The reason it failed turned out to be that the principals were using it for illicit purposes. In the process, some of the trades lost money. When it was made known to the chairman that his company was underwater, he promptly withdrew his own gold, collapsing the company and leaving the account holders with nothing.
The DMCC revoked the licence of Gold.ae, but nothing was ever done to recompense the account holders or punish the perpetrators. Do you really want to hold a cryptotoken backed by gold in Dubai?
The evidence did not take long to come in. Quoting last Thursday's story in The Royal Gazette, “However, the Dubai Gold & Commodities Exchange, in a response to an inquiry by The Royal Gazette, said: “We can confirm that Sion Trading FZE is not a member of Dubai Gold & Commodities Exchange, and we have no affiliation or relationship with them.”
Furthermore, on the Arbitrade.io website, it is impossible to open an account. The press releases claim that Arbitrade is a “leading cryptocurrency exchange”, but it is not listed as an exchange on coinmarketcap.com, which keeps statistics on all the exchanges in the industry.
Apparently, Mr Schutzman issued a lot of tokens in 2017, claiming they were backed by gold; and now in 2018 is trying to raise more money with an ICO issued from Bermuda.
The problem is that none of the facts claimed by Mr Schutzman or Arbitrade appear to be confirmed as true. Several of their claims have been confirmed as false.
It would be wonderful to see a genuine gold-trading platform make its home in Bermuda, but the taint from letting an apparent scam operate from here would ruin the prospects for legitimate companies.
Arbitrade looks highly suspect to me. I hope that the Bermuda Monetary Authority will closely examine all of its claims before allowing it to issue an ICO from Bermuda.
• Ken Griffith is the chief executive of Solidus Limited Bermuda