By November 16, EOS and Block.One founder Brendan Blumer had spent over $90 million to buy 9.27% of Silvergate stock. Since then, the crypto-friendly bank has collapsed by over 80% — Blumer has personally lost at least $74 million.
In a press release announcing Block.One and Blumer’s investments, Blumer is referred to as a passive investor. Technically, the company Block.One owned a 7.5% stake in Silvergate as of November 16; Blumer owned the 1.7% balance listed on the SEC filing. For regulatory purposes, Blumer admitted to being the beneficial owner of all 9.27%.
Silvergate was known to be a major bank for FTX and Alameda Research — FTX filed for bankruptcy five days before Blumer’s investment. Now, Silvergate is the latest ship to sink to the bottom of a rather cluttered crypto pool. Why did Blumer make such a blunder?
EOS and Block.One made and paid big money
Dan Larimer, Brock Pierce, and Blumer launched Block.One in 2017. Like many digital asset startups, Block.One raised a significant amount of money at the height of the initial coin offering (ICO) craze — Block.One claimed it sold over $4 billion EOS tokens between June 2017 and June 2018. However, US government researcher John Griffin flagged most of that sum as wash trading.
In 2019, it paid a $24 million fine to settle a civil charge by the Securities and Exchange Commission (SEC) for selling unregistered securities. This was rather light compared to cases like Kik and Telegram, which had to issue full refunds to token buyers or shut down operations.
In an interview following the SEC fine, Blumer mentioned plans to build the EOS ecosystem and invest in EOS-oriented businesses. Block.One sunk an astonishing $150 million into Voice, an EOS-based social media platform, and further spent $30 million to acquire the domain name Voice.com — it’s now an NFT marketplace with negligible trading volume.
Block.One announced an ostensibly enterprise-quality “EOSIO for Business” platform — all mention has since been removed from its website.
The company also faced legal challenges, including an investor lawsuit alleging that it conducted a fraudulent ICO. The investors won a $27.5 million settlement that was blocked by a federal judge in August. District Judge Lewis Kaplan of the Southern District of New York questioned whether the US had jurisdiction, citing concerns about whether the token sales were primarily “domestic transactions” — Block.One was based in Hong Kong when it sold the tokens.
Why did Brendan Blumer invest in Silvergate?
Banks servicing the crypto industry are scarce and dwindling rapidly. Maintaining a US bank account — any bank account, at all — as a major crypto industry participant is exceedingly difficult.
Silvergate Capital developed a reputation as a digital asset-friendly bank, while so many others turned away customers. This reputation might have attracted Blumer’s attention, even as Silvergate’s biggest account holders, FTX and Alameda Research, were imploding.
EOS started as a promising blockchain. Community members joked that it stood for “Ethereum On Steroids.” By the end of 2021, EOS’ value had declined from $10 to $4.40. Beyond a few popular apps, it was barely used.
Block.One got blamed for dragging it down. At least one community member – Yves La Rose – opined the EOS community could salvage the situation if they could separate it from Block.One and recoup some of the money it raised during a virtual event attended by mostly Chinese users. He accused Block.One of failing to live up to the promises it made while conducting its ICO.
If Yves La Rose had addressed the EOS community more recently, he might have pointed to Block.One’s and Blumer’s ownership of a large stake in Silvergate Capital of one example of the company straying from its promise to invest primarily in EOS-based ventures.