Oyster Protocol: Feds charge founder over self-minting scam, unregistered ICO and tax evasion

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Bruno Block, founder of a blockchain-based cloud storage platform, faces decades behind bars in connection with an unregistered ICO, as well as allegations of secretly self-minting tokens and tax evasion. Block is alleged to have defrauded thousands of investors through a pump and dump scheme that made him millions of dollars.

The U.S. Securities and Exchange Commission charged Block in connection with an illegal securities offering for his company, Oyster Protocol. Block, whose real name is Amir Bruno Elmaani, is alleged to have sold millions of Pearl tokens which powered the protocol. He claimed that users could pay for cloud storage with the tokens.

In a separate action, the Justice Department is charging Block with tax evasion in relation to his blockchain venture. The DoJ alleges that the 28-year-old “made millions of dollars from the sale of a new cryptocurrency but evaded reporting that income to the IRS, including by filing a false tax return, operating his business and owning assets through pseudonyms and shell companies.”

In its charges, filed at the Southern District of New York, the DoJ claims that in September 2017, Bruno started marketing Oyster Protocol as the next big thing in online data storage. A month later, he launched an ICO for the Pearl tokens and in three weeks, raised 300 ETH, worth just a modest $90,000 at the time.

However, as one report reveals, Block and his team launched a second token sale in December when the digital currency market was on a massive bull run. He sold 25 million Pearl tokens in 5 separate sell walls on EtherDelta, raising $1.75 million.

Riding on the interest in digital currencies in late 2017 and January 2018, Pearl tokens surged to $4, up from 9 cents during the token sale. This gave the token a market capitalization of $240 million. Its volume on KuCoin, the major exchange where it was trading, was soaring.

In the months that followed, Block handed over the CEO role to Bill Cordes, formerly the CFO. The Oyster Protocol team also continued to build the platform, shipping code to GitHub regularly.

When it all came crashing down

It all came crashing down for the project on October 30th when millions of Pearl tokens were liquidated on KuCoin. While Cordes, the CEO, contacted KuCoin and requested the exchange to shut down all Pearl token markets, it was too late.

As it would later be discovered, Block had continued to mine new Pearl tokens behind his team’s back. He relied on a trapdoor mechanism which he exploited to reopen the ICO and mint millions of tokens.

As an executive who worked at KuCoin at the time revealed later, Block exit scammed after learning that the exchange would impose strict KYC policies, requiring every user to verify their identity. This would have forced him to reveal his identity, which he had managed to hide from everyone, including Cordes and the other team members.

In addition to the impending KYC policy, Block had also fallen out with the other team members. Just days after the exit scam, Block posted on the official Oyster Protocol Telegram channel, stating:

“Bill [the CEO] told the group that we got accepted on Binance. That’s when the problems started. The price immediately started pumping. I warned Bill against insider trading, he didn’t care. So instead of him and his VC friends dumping on you, I dumped on him.”

The DoJ is now charging Block with two counts of tax evasion, each of which carries a maximum of ten years in prison. The SEC is charging him with violating the registration and antifraud provisions of the Securities Act.

Follow CoinGeek’s Crypto Crime Cartel series, which delves into the stream of groups—from BitMEX to Binance, Bitcoin.com, Blockstream, ShapeShift and Ethereum—who have co-opted the digital asset revolution and turned the industry into a minefield for naïve (and even experienced) players in the market.