Telegram Michael Mathias 2021-06-02 Wednesday (pdf)
CCH: comments CryptoChemist.net
Three Negative Events
Hijacking: To take control of (something, typically a vehicle) by force
There were three significant negative events in 2018 that occurred in the ecosystem which ended up creating innumerable negative consequences.
Each started with a type of hijacking – and ended with a surprise.
The first could be described as an incidental hijacking.
The second could be described as an opportunistic hijacking.
The third could be described as a strategic hijacking.
Negative Event #1: Hijacking of $12 million by a Polish Processing Company
In an apparent attempt to manipulate a higher final price for an acquisition, executives and board members of a Polish processing company (PPC) made a series of decisions that set in motion a chain of events that ultimately involved Polish regulatory agencies and the Polish Prosecutors office, and resulted in catastrophic damage to our ecosystem.
When a weekly deposit of NetLeaders credit card processing was unexpectedly returned by the recipient bank, an unfortunate chain of events was triggered. Rather than send an official notification to the client and immediately stop processing their payments, the Polish processing company (PPC) chose to ignore industry standards of professional practice by:
- NOT sending any official communication to NetLeaders
- CONTINUING to accept charges from NetLeaders
During what ended up being a 6-month period, over $12 million accumulated in the bank account of PPC, an amount that was greater than the entire revenue base of PPC’s previous year of operations. Throughout the 6-month period, PPC requested one administrative hurdle after another be overcome by the NetLeaders team. All the while, PPC executives and employees provided assurances to NetLeaders executives and employees that the funds were close to being released. However, it eventually became clear that PPC was actively deceiving the NetLeaders team and was holding the funds to further its own agenda. Less than two weeks after NetLeaders made the decision to stop processing charges through PPC, an announcement was made that a large European processing company was acquiring PPC for €73 million.
The surprise ending: PPC never released the funds to NetLeaders.
Negative Event #2: Hijacking of the same $12 million by Polish Authorities Polish regulators (KNF and UOKiK) and the Polish prosecutor’s office used a two-step process that was highly dependent on the cooperation of PPC to gain possession of the funds PPC had collected and withheld from NetLeaders.
Step 1: Issued a 3-month freeze order to PPC on the funds it held from NetLeaders. Step 2: Upon expiration of the freeze order, a demand letter was sent to PPC requesting that the funds be transferred to the Prosecutor’s bank accounts for the purpose of securing evidence.
This was not a bank seizure, which would have required extensive evidence to be presented in a court of law for bank-held funds to be seized. Instead, it was a voluntary forfeiture of funds that had been illegally accumulated by a merchant processing company (which was subsequently in the process of being acquired by a larger company). Nonetheless, the processing company’s transfer of these funds to the Polish Prosecutor became the pivotal event in a classic sequence of self-fulfilling prophecy committed by Polish authorities that resulted in catastrophic consequences for the entire ecosystem.
The surprise ending: it’s not over – Polish authorities are still holding those funds.
Negative Event #3: Hijacking of the Marketing Program by Marketing Leaders
As I described in an earlier document, there was a core group of marketing leaders that directly influenced the design of the NetLeaders marketing program at its start. This same group (and the marketers they led) then helped to generate the majority of the license sales that occurred within NetLeaders. Consequently, this group wielded tremendous power over virtually every aspect of the NetLeaders marketing program – essentially, they took control of the marketing program from the outside due to their sales production and the influence they were able to wield. Consequently, every request they made was listened to and addressed. There was an entire infrastructure of support dedicated to ensuring their satisfaction of this group of leaders. Many sacrifices were made in the interest of keeping this group satisfied – it was reasoned that the marketing company’s dedication to these leaders would create tremendous loyalty from them which would provide support to the entire ecosystem for years to come. The members of this core group of marketing leaders were also far and away the prime beneficiaries of the rewards generated through the program.
The surprise ending: suddenly they left – and sold all their coins.
Hijacking of over $12 million by Polish Processing Company
In late November 2017, a weekly transfer of proceeds from processed credit card transactions done on behalf of the parent company of NetLeaders (referred to as the Marketing Company in this section) was returned to the Polish processing company’s (PPC) bank account. Apparently, the transfer bounced back because the bank where the Marketing Company had its account was in the process of shutting down the account. While no reason was provided for the termination of the Marketing Company’s bank account, it came at a time when banks around the world were terminating the accounts of any business affiliated in any way with cryptocurrency. The Marketing Company owned a subsidiary company that had accepted cryptocurrency as a payment method, and the subsidiary company had already had a bank account terminated a few months prior to this incident.
- No official communication was ever sent from PPC to the Marketing Company about this matter. This would typically be standard operating procedure for any merchant processor. Instead, virtually all interactions during the first months of the situation occurred between lower-level employees at both companies. If there were any serious internal concerns about the NetLeaders account, these were never expressed in any formal communication to the company nor in conversation (according to those involved).
- In general, the matter was treated very lightly by the staff of PPC and there was little conveyed beyond just the need to get additional documentation and a replacement account in place. On numerous occasions, NetLeaders employees were led to believe the funds were close to being released once the next information request was fulfilled.
- Merchant processing for the NetLeaders continued uninterrupted for over six (6) months from the date of the returned payment by the Marketing Company’s Dubai bank. Standard action in this situation would be to send an official notification to the company and immediately suspend processing services. Otherwise, in more extreme cases when the processor had reason to believe there was a serious problem, the account and all processing privileges would simply be terminated. The client could then appeal the decision directly with the processor.
- Numerous solutions were attempted: In the six months prior to the ultimatum, there were numerous efforts by Marketing Company executives (and consultants) to meet the conditions for release of funds provided by PPC. Extensive documentation was provided to PPC in an attempt to fulfill their requests for information. The NetLeaders team pursued several potential solutions, including:
- Having the Marketing Company directly establish a Polish bank account
- Creating a Polish subsidiary for the Marketing Company and adding a Polish bank account
- Having PPC wire to a UK processing company that the Marketing Company already had an account with, and this solution came complete with a supportive legal opinion by a Polish law firm and full KYC disclosures from all principals involved, including all principals of the UK processing company.
- Having the Marketing Company establish a new bank account in Hong Kong
- Each of the ideas received an initial favorable response from PPC. However, once the information was provided and the specified conditions were met, additional hurdles were placed in front of the Marketing Company – this happened repeatedly.
- Board Involvement & Refusal: In March email communications, it was disclosed to NetLeaders’ Polish attorney that PPC’s board of directors were aware of the situation and were refusing to approve the recommended solution of the PPC executive (who informed the NetLeaders’ attorney about the matter).
- PPC Cooperation with Authorities: Based on the sequence of events that followed, it seems likely that the KNF, Poland’s financial supervision authority, was in communication with PPC’s management (and/or possibly one or more of its board members) about NetLeaders during the spring of 2018.
- Agreement had been reached: In another instance, on May 15th, several members of PPC’s team met with two attorneys from the NetLeaders side. After discussing the situation at length, a “gentlemen’s agreement” was reached between the parties to proceed with a particular verification procedure, and upon that being completed, the funds were promised to be released.
- Ultimatum Letter: That agreement would not be honored. Instead, the tide changed significantly, and a letter was sent from PPC on May 29th that demanded that an EUbased bank account be presented by the company within 5 days. The letter further stated that “failure to provide a bank account number within the above deadline may lead to depositing of the funds with the court escrow or notification of the transaction to the General Inspector of Financial Information.”
- PPC management was well aware that the NetLeaders account was categorized as highrisk and was therefore paying a premium rate on its merchant processing. At the same time, there were virtually no charge-backs occurring within the NetLeaders merchant account, so permitting additional processing posed no financial risk to them and would enhance their cash position as well as accelerate their revenue growth and profit margin. NetLeaders was an attractive client, with significant credit card processing each month and an extremely low charge-back rate. (The refund request rate for NetLeaders over the lifetime of its marketing business was less than 1/10 of 1%).
- The resulting dynamics of continuing to accept merchant processing from NetLeaders led to an unauthorized accumulation of over $12 million in the bank account of PPC, an amount equivalent to the total revenue generated by PPC over the entirety of the previous year (€12 million for the fiscal year of 2017 according to PPC media releases).
- In light of PPC’s acquisition (which was publicly announced on June 19th 2018), it appears likely that PPC executives and board members made specific decisions and took specific actions regarding this situation designed to increase the final sale price that PPC shareholders would receive upon the completion of the sale of PPC.
- Executives at PPC were aware of how actively the NetLeaders side had been in attempting to gain access to these funds, and yet over the course of more than six months were somehow unable to resolve the situation in a mutually beneficial manner, and instead threatened to transfer the funds being held to the Polish authorities after giving a 5-day deadline in a letter couriered to NetLeaders’ Polish attorney. An amount of this magnitude being withheld from a young, fast-growing company would force bankruptcy on virtually any company in such a predicament.
- At best, PPC was careless and unprofessional in how it handled the administrative issue of the returned payment from the Company’s bank. At worst, executives and board members of PPC committed a series of violations (and possible crimes) in their attempt to increase the final price of their company’s pending sale. Had the matter been handled in accordance with industry standards from the start by PPC management, an official letter would have been immediately sent to the Company and all merchant processing for the Company would have been suspended until this important administrative issue was resolved. The simple actions of sending an official communication and immediately suspending processing privileges would have likely prevented the subsequent chain of events from ever being set into motion. However, that same prudent and responsible action would have also ended up possibly reducing the purchase price of PPC in its June 2018 acquisition, and apparently that was an outcome that their executives and board members were unwilling to accept.
Negative Event #2: Hijacking of the same $12 million by Polish Authorities
- A preliminary investigation was opened by the UOKIK. This itself did not signal much, as this is a standard procedure. It was simply the starting point of regulatory inquiry.
- Step 1: 3-month freeze order issued to PPC on June 5.
- Step 2: Demand to secure evidence issued to PPC on September 6.
- Coordinated public appeal for victims of NetLeaders/DasCoin with Trading Jam.
- Secret police conduct interviews with NetLeaders customers who made purchases through PPC.
The securing of evidence was covered widely by the Polish media and picked up by minor media outlets (mainly blogs) in countries throughout the world. The news was very slanted and portrayed that it was conclusive that both NetLeaders and DasCoin were scams despite the fact that it was NOT a bank seizure (which would require significant evidence) and NO charges were filed (and still haven’t been). Not one story sought a comment from NetLeaders or DasCoin.
Polish PR consultants advised not to respond to the negative press as any attempts to clarify the situation would likely cause additional backlash.
The worldwide press coverage of a “seizure” of over $10 million by the Polish authorities created a tsunami of destructive repercussions.
Attempted Self-Fulfilling Prophecy
A self-fulfilling prophecy is the sociopsychological phenomenon of someone “predicting” or expecting something, and this “prediction” or expectation comes true simply because the person believes it will and the person’s resulting behaviors align to fulfill the belief.
In legitimate criminal and civil cases, victims are not hard to locate and typically come forward to the authorities with their damages. However, as of September 2018, when the 3-month freeze order had expired, there were no NetLeaders or DasCoin victims. Likely reasons for this at the time (early September 2018) was:
- NetLeaders had done what it agreed to do, including providing excellent supporting to marketing teams and paying rewards accurately and on time
- NetLeaders had virtually no refund requests for license purchases (< 1/10 of 1%) in almost two years of operation
- Most NetLeaders license purchasers were holding DasCoin and new coins were being minted every 10 minutes on the ecosystem’s blockchain
- Other license holders were holding capacity in a world-class blockchain system that had been designed for commercial applications and optimized for speed, efficiency and transaction capacity
- DasCoin was listed on CoinMarketCap, the world’s leading cryptocurrency tracking service
- DasCoin could be held in a decentralized non-custodial wallet called the Validator, which was a customized Ledger Nano S device (the top hardware wallet in the world)
- DasCoin could be traded on five cryptocurrency exchanges
- Virtual debit cards for AlliancePay had been launched two months earlier and were enabling DasCoin to be used to make purchases using a virtual AlliancePay Mastercard card
- A new crowdsourcing initiative (Das33) had just launched its first project
- The DasEcosystem was poised to popularize cryptocurrency to a wide group of consumers throughout the world, and also provide low-cost, high-capacity blockchain services and applications for businesses
- The overall DasEcosystem market proposition was intending to combine a more decentralized Crypto.com offering (including debit cards) with an optimized VeChain for global SMBs
Nonetheless, from the standpoint of Polish authorities, victims needed to surface, one way or another. The two simple steps taken by Polish regulators and the widespread dissemination of the hyperbolic “seizure” narrative began to create difficulties for our ecosystem. While it’s impossible to know intentions, with enough pressure and negative dynamics resulting from these regulatory actions, there was sure to be an amount of damage to the ecosystem capable of creating the necessary victims. Polish authorities needed to maintain focus to achieve their desired results.
Liberties Taken in the Search for Victims
The lack of any victims coming forward during the 3-month period (when formal charges were supposed to be prepared) put the Prosecutor’s office in a precarious position. In order for charges to be filed, it was imperative for victims to come forward.
To assist them in the search for victims, they enlisted the help of two Polish advocacy groups, one was a forex trading group called Trading Jam and the other a cryptocurrency group called Krypto Waluty. The Polish authorities used these two groups to reach out to the public through the group’s Facebook and Twitter posts to find victims of NetLeaders and DasCoin.
Clearly, the Prosecutor’s office also made use of a variety of media channels after they demanded (and received) the funds from PPC. Immediately after they took possession of the funds held by PPC, reports began to be published in several media outlets about their “seizure” of funds from NetLeaders and DasCoin. They likely reasoned that this media coverage would work together with their social media efforts to locate victims.
In this search for victims, the Prosecutor’s office also made use of a list of the PPC’s clients who had purchased NetLeaders licenses from the KNF, which it had collected in its physical inspection of the PPC in late May 2018. Deviating from accepted protocols, the KNF provided this list to the Polish secret police who then arranged informational interviews with people on this list, in violation of privacy protected under the EU’s General Data Protection Regulation (GDPR). While public authorities are permitted access to private data when acting in official capacity, they are not allowed to use this type of private data as a means of trolling for victims in an effort to try to reinforce a case where no victims had come forward. In virtually all jurisdictions of the world, it is not legal for public authorities to use protected private data to search for victims in this manner. Acceptable behavior would have been to have the PPC organization send an email message to the purchasers of NetLeaders licenses through the PPC email system, asking for victims to come forward.
Additional information relevant to this situation:
As was clear in the previous document, Poland was highly impacted by the Amber Gold scandal, which was a classic Ponzi scheme. Newly-empowered prosecutors working for the interests of the new ruling PiS party have been keen to find the next Amber Goldlike Ponzi company so they could publicly display to the country how quickly and effectively they take action against any company attempting to take advantage of Polish citizens.
The KNF was watching the emerging cryptocurrency and blockchain industry very closely, and was sending mixed signals. Apparently, the Bitcoin association in Poland was able to get an audience with high-placed members of the KNF. In an attempt to gain favor with the KNF, these bitcoin lobbyists spent time extolling the virtues of the fully decentralized blockchain systems, while criticizing and de-legitimizing permissioned blockchain systems. This may have been the starting point of the KNF’s biased opinion against permissioned blockchains. Apparently, despite the industry’s nascent status, the KNF has already legally defined the term of “cryptocurrency” to only include completely decentralized systems. The Polish legal definition of the term apparently does not include permissioned blockchain systems, despite several Top 50 cryptocurrencies being structured in this manner.
The consumer protection agency, UOKIK, actually made a public statement in December of 2017 with clearly outdated information in which they stated that “The DasCoin cryptocurrency does not exist, the originators are only promising to start ‘mining’ it. Nobody really knows what DasCoin is, which means that consumers are contributing money to something that does not exist.” This was a perplexing set of erroneous statements. There seemed to be a fundamental lack of understanding about DasCoin and the ecosystem, including the facts that DasCoin was never directly sold and there were never promises of returns of any type. Rather than attempting to understand the new businesses operating in this emerging industry, the Polish regulators seemed to prefer to make sweeping generalizations based on the industry, marketing methods and newness of the business. Their actions and conclusions showed they weren’t interested in examining the actual merits and/or deficiencies of each individual business. While it’s possibly effective in limiting the potential liability of the regulators, this kind of approach can be very damaging to legitimate businesses that are genuinely innovative. It can also result in lost opportunities for the Polish society.
It is well-known that the KNF has been actively working on its own national cryptocurrency and blockchain efforts. In June of 2016, Poland’s Ministry of Development Affairs announced an expansive plan which will explore blockchain technology in government digitization efforts. According to the Ministry of Digital Affairs, these efforts will promote digital public services, the development of cashless solutions and the implementation of electronic identification. The Ministry expressed its intent to open up the huge field for the development of innovative Polish projects related to digital currencies and non-repudiation of transactions and data.
Financial scandal. Marek Chrzanowski, the head of the Poland’s financial regulator (known as KNF) until he was arrested on corruption charges and forced to resign from his position. The KNF wields a lot of power in Poland. It exercises supervision of the financial market, including banking and the capital market, as well as insurance and pensions. It can audit an institution as often as it likes, it can impose fines, blacklist an organization, agree to a merger and grant a license. Chrzanchowski was caught (on tape) soliciting a $10.5 million bribe from Poland’s second largest banking group to prevent KNF intervention. It was enough evidence of corruption to threaten the control of the government by the Law and Justice (PiS) party.
The Polish central bank has been accused of orchestrating a subversive, online smear campaign against cryptocurrencies. Apparently, the central bank (known as Narodowy Bank Polski, or NFB) spent around $27,000 on Google, Facebook and other websites in a subversive smear campaign aimed directly at attacking the legitimacy of cryptocurrencies, such as Bitcoin, Ethereum and Litecoin. The revelation became newsworthy in Poland since the NFB failed to disclose that anti-cryptocurrency videos that ran on a prominent YouTube channel were technically sponsored content. ?
Current Status: In the three years since the Polish authorities took possession of the funds, no charges have been filed. Interviews continue to be conducted periodically. NetLeaders is challenging UOKiK in Polish court. The case is moving slowly through the Polish system.
Negative Event #3: Hijacking of the Marketing Program by Marketing Leaders
Loyalty can be built over years – and somehow disappear in a flash.
Despite having gone from one deal to another in previous years, the members of the original group of marketing leaders who approached the ecosystem in October of 2016 openly stated that they wanted to find a permanent home for their business life – a place they could focus on for the rest of their careers. They claimed to have found it in NetLeaders.
Given all the influence, all the control and all the benefits this group had with the NetLeaders marketing program, it was difficult to understand their reaction to the ecosystem event in Barcelona in July of 2018, and their behavior after that event. It was the first incident when a representation made by one of the ecosystem companies had not been fully delivered. Virtual debit cards were successfully delivered at that event which enabled DasCoin holders to make online purchases at Amazon and any other ecommerce site that accepted Mastercard – and pay for each purchase with DasCoin held in their DasWallet accounts without having to sell the DasCoin prior to the transaction. This was a world first! No other cryptocurrency or payment service had achieved anything like this.
But instead of appreciating and celebrating this collective accomplishment of our ecosystem, this group of top marketing leaders was extremely upset about the fact that the first batch of physical debit cards had not been delivered. Their reaction was so severe that it put a damper on the entire event. Rather than build momentum for the ecosystem coming out of the event, which was the result of virtually every other event, due to the reaction of this influential leadership group, an internal crisis of confidence was created.
This was the first milestone that was partially delivered, rather than fully delivered during the almost two years that this group of marketing leaders had been involved with the ecosystem. This included the launch of the blockchain, the launch of the internal exchange and the launch of trading on public exchanges. All of these had been delivered on time at previous ecosystem events.
This was the first episode of difficulty collectively encountered by the ecosystem, and it was mainly coming from a group of marketers that had been the most active in the ecosystem and had received the most benefits throughout its history. At a time when this group needed to rise to the occasion and provide true leadership to our community, they chose to make the problem far worse that it was. The group that was supposed to be the most loyal to the ecosystem were the ones expressing anger and fear when circumstances came to test their character.
In the weeks that followed, efforts were made to “rebuild trust” that these leaders claimed had been lost. These efforts included having a number of them participate on calls with select executives in various ecosystem companies. A “buddy system” was established with ecosystem executives to ensure there was complete transparency with these leaders. Unfortunately, these efforts did little to stem the tide, and there seemed to be a systematic pulling away by this group that only accelerated when the Polish “seizure” news began to circulate in September of 2018.
Subsequently, it’s been learned that hardcore career MLM marketers (like the ones in this leader group) believe that only suckers run the marketing companies. They see company owners as idiots who put their personal names and reputations on the line. They, on the other hand, play it smarter. Apparently, the best of them supposedly participate in these programs completely anonymously, using proxies to interact with the marketing companies. Others may expose their names and faces while actively working the business but are careful to not hold any responsibility. They believe their primary job as marketers is to figure out how to “break the plan” – how to pull out the maximum value from any marketing plan – before making a well-planned EXIT.
Within the executives of the ecosystem companies, there were no career MLMers or experienced network marketing executives. So unfortunately, this information was discovered far too late. Naively, the feedback provided by this group of marketing leaders was directly incorporated into the design of the marketing plan (yes, unfortunately, the foxes actually ended up designing the hen house – that they intended to break). Every member of this group was catered to and supported every step along the way – all with the thought that these efforts would create long-term loyalty to what was being created in the ecosystem.
Instead, this group of leaders engineered and executed a “rug pull”. Their exit was thoroughly planned and highly coordinated. They systematically withdrew their support from the ecosystem, and quietly sold ALL of their coins. So not only did they benefit the most from a marketing plan itself (that they had designed to unsustainably overpay), but the large quantities of coins they had accumulated along the way were then dumped on the market.
Even worse, to cover their tracks and deflect any blame from themselves, they systematically attacked the ecosystem with a web of lies and deception. On good authority, we are aware that certain members of this group have knowingly deceived Polish authorities with an assortment of lies and misinformation designed to deflect away any scrutiny of themselves.
Their sociopathic pattern of mercenary “rug pulling” continues, as the group is reportedly on its 4th deal since having exited our ecosystem almost three years ago. While they refer to themselves as “leaders”, no one within that entire group has the moral character to lead anything besides a “rug pull”. (If anything, they should be known as the “RugLeaders”.)
Let’s Understand the Past and So We Can Let It Go
All three of these hijackings hit our ecosystem hard and their combined effects have triggered a complex chain reaction. The past three years have been extremely difficult as we have had to work through the innumerable negative consequences that resulted.
As part of the healing process, in the next section, I will present some of the details of the negative dynamics that have occurred due to these three events. It’s important that the community more fully understands what the ecosystem has been up against. But let’s also realize that we are now leaving this tumultuous period behind us, and moving into a whole new era of expansion, value creation and increased decentralization.