2017 closed with a flurry of ICO activity, especially on the legal and regulatory side of the table. Throughout Q4, ICO participants filed a slew of class actions against the organizations running those ICOs, and an ICO by restaurant review platform aspirant Munchee even triggered an SEC Cease and Desist.
This post spotlights Centra, a Miami startup that promised to build a crypto debit card platform, and its $30 million ICO, questionable credit card company relationships, A-list entertainment proponents, and alleged securities law violations.
At the time of its ICO, Centra planned to develop a cryptocurrency-focused debit and credit card system that would allow users to spend bitcoin, for example, anywhere that accepted certain major cards. Through the Summer and Fall of 2017, Centra publicized relationships with Visa and Mastercard, leverageable towards facilitating instant crypto-transactions. Centra also published its intentions to create an online crypto marketplace (“cBay”) and Centra-centric blockchain. The startup generated hype for its ICO via celebrity endorsements. In mid-September, boxing champ Floyd Mayweather encouraged his 8 million Twitter followers to “Get yours before they sell out,” referring to Centra’s CTR tokens. Rapper DJ Khaled trumpeted Centra across social media platforms as well. Seemingly overnight, millions knew of Centra, and the startup raised between $30 and $50 million by October 2017.
A Florida Class Action
On December 13, 2017 a Centra ICO participant filed a class action complaint on behalf of fellow Centra ICO participants in the US District Court of Southern Florida, alleging that the Centra ICO was a securities sale illegally unregistered with the SEC. Rensel v. Centra Tech, Inc., 1:17-cv-24500-JLK (“Rensel”). Via this ICO, Centra orchestrated “a flimsy façade” claiming that its tokens were not securities but rather “utility tokens” over which the SEC had no jurisdiction, complains Rensel. Id. at 13.
Utility Tokens versus Securities
Rensel alleges that Centra dubbed its CTR tokens as “utility tokens”—not because this term accurately described CTR, but because the startup believed this tag alone would shield Centra from SEC jurisdiction. Id. at 14. Centra made contemporaneous, conflicting statements to this effect concerning their offering, asserts Rensel, including:
- That each CTR was a “utility token” that “will surge in value,” in an online post, Id. at 15;
- That ICO participants would be able to either use their CTR “or trade them on cryptocurrency exchanges for a profit,” per Centra’s white paper, Id. at 18; and
- That Centra's ICO participants were “investors,” stated repeatedly, Id. at 2.
These statements—and a multitude of others made on podcasts and online—sent contradictory signals to participants as well as regulators, per Rensel. A (non-SEC regulated) utility token’s function is to provide a utility, i.e. access or future access to a product or service, not to passively rise in value on the efforts of the offeror, which is the function of a (regulated) security. Centra sought to straddle the line between securities and utility tokens, in effect marketing both ways on a one-way street, in increasing regulatory traffic. And ended up, according to Rensel, simply offering an unregulated, and therefore illegal, security.
Red Flags – Visa and Mastercard
Rensel isn’t the first to raise red flags around Centra. In October, a New York Times investigation revealed substantial inconsistencies concerning Centra’s touted connection to Visa and Mastercard. These relationships, pivotal to Centra’s pitch towards developing a crypto-credit and -debit system, turned out to be nascent at best, and outright nonexistent at worst.
Centra’s proposed debit and credit capability hinged on its claimed connection with established credit card companies. So, Visa once featured heavily on Centra’s website. The site even displayed mockups of crypto credit cards stamped with the Visa logo. But when the Times asked Visa about the nature of its connection with the exciting new crypto startup, Visa responded that it had never approved Centra to work with the Visa network. In fact, said a Visa spokesperson, Centra never even applied to Visa for this capability.
After the Times contacted Visa, Centra erased Visa’s logos and mentions from the Centra website. Soon after that, per the Times, a Centra founder said in an interview that Centra had refocused on the Mastercard network, which Centra would employ instead of Visa. But, yet again, when the Times reached out to Mastercard, this credit card company also denied any ties to Centra. Rensel folded much of this allegedly deceptive narrative, as well as other press releases and interviews in which Centra claimed relationships with both Visa and Mastercard, into its complaint. Rensel, at 10-15.
As of now, Visa is not mentioned on the Centra website. However, while Centra’s credit card mockups show only the Centra “C,” Centra's white paper still asserts that its "customers can use Centra Card anywhere in the world that accepts Mastercard."
Red Flags – Celebrity Endorsements
The Times also reported certain oddities regarding Centra’s celebrity endorsements. And Rensel, citing the Times, alleges that the defendants paid—in cash—for the high-profile Mayweather and Khaled endorsements, then claimed "partnerships" with the entertainers. Rensel, at 13. Mayweather’s spokesperson, for one, told the Times the boxer was “not involved in any continuing relationship with Centra.” Id.
Although Rensel clarifies that alleged deceptions such as these are not determinative of Rensel’s claims—since “Defendants are strictly liable for the offering and selling of unregistered securities in connection with the Centra ICO,” Id. at 3—these surrounding deceptions are presented rather “to stress the need for judicial immediate intervention given Defendants’ clear manipulation of investors.” Id. at 13.
On December 15, Centra's blog published the company's refutation of Rensel, calling the plaintiff an "alleged purchaser of Centra Tokens" whose suit "attempts to mimic claims and allegations the Securities and Exchange Commission has lodged against other cryptocurrency offerors."
Centra exhibited other red flags, from a founder’s spotty criminal history to a crew of nonexistent employees—including an executive who apparently existed only on LinkedIn (more on these in the Times).
Yet Centra still lives. In a press release published January 14, Centra announced a revamped executive roster including a new CEO, COO, and CIO. The press release highlights the new execs' legal and regulatory experience, in particular, and mentions that Centra’s new CIO just left Visa, where he served as Senior Information Security and Compliance Officer for Global Service Operations.
Also noted in this press release: Centra just shipped its first batch of Centra Cards. But this time, Centra refers to its card recipients not as “investors,” but as “contributors.”