On a weekday morning in October, a day before the Knesset passed a law outlawing Israel’s widely fraudulent binary options industry, the streets of Ramat Gan’s diamond district were far from bustling.
“You see the streets here — at this hour they used to be full of young people who worked in binary options,” said the proprietor of City Cigar, a cigar and wine store/cafe. “There was a company across the street that employed a hundred people and another in the building behind it that also employed over a hundred. Now they’re working in Cyprus, Kiev, Georgia and Belgrade. The companies have all left.”
On nearby Tuval Street, a worker at De La Paix bakery described a similar scenario. “There’s definitely a lot less street traffic. I am told there were over 10,000 binary options workers in Ramat Gan alone. The company across the street shut down a few months ago. Some of the salespeople are working abroad and I am told some of the companies moved to other parts of the city,” he said, pointing south.
“Where?” we asked. “Just that way,” he shrugged.
But the flight of binary options companies was not being felt in all parts of Ramat Gan’s diamond district.
A few blocks away, near Jabotinsky Street, the proprietor of a restaurant said he had seen no decline in business beyond the regular lull around the autumn Jewish holidays. A beauty salon worker echoed the assessment that business was not particularly slow.
A criminal industry
On October 23, the Knesset unanimously voted to ban the entire Israeli binary options industry, a vast, multibillion dollar scam that has defrauded millions of victims worldwide for a decade.
The law, which takes effect in late January, came about as a direct result of The Times of Israel’s investigative reporting on the fraud, which began with a March 2016 article entitled “The wolves of Tel Aviv: Israel’s vast, amoral binary options scam exposed.” The law gave all binary options firms the intervening three months to cease operations. After that, anyone involved in binary options — where fraudsters promised lucrative short-term investments but fleeced their victims through rigged trading platforms, refusal to pay out, and a multitude of other ruses — faces up to two years in jail.
In the meantime, ex-binary options operatives are looking for new work. Israel’s job boards for foreign language speakers, which became nearly bereft of binary options ads over the summer, are once again filled with jobs for “money hungry” sales people to come work in call centers that offer “the highest bonuses.”
“Experience in binary options an advantage!” some of these ads even declare, undeterred — and evidently believing applicants will be undeterred — by the fact that this entire field is now illegal.
At the luxurious new 40-story Atrium Tower at 2 Jabotinsky Road, there is no slowdown in business activity. Young men in hybrid hipster-gangster attire huddle in groups outside smoking cigarettes. Chimes sound as office workers board glass elevators that offer dizzying views of the city. ”We have over 90 percent occupancy,” a front desk receptionist told The Times of Israel recently.
Asked if there are any financial companies in the building, the receptionist replied, “Yes, there’s Beta Media [the company that operated the binary options website 24option.com] but they changed their name to Bit-tech, and there are others as well.”
The next big thing?
In late October, on the 24th floor of the Atrium Building, a company called “Traffic Lords” — which describes itself as an online marketing training center, co-working space and affiliate network — held an event that was attended by about 150 people, many of them exiles from the binary options industry.
Headlined “Have you heard of the cryptocurrency market? Don’t get left behind!” the event targeted affiliate marketers looking for lucrative opportunities in the emerging cryptocurrency and “initial coin offering” (ICO) markets.
“Come discover the hottest new area for affiliate marketing and listen to top experts, find out why you should get involved in cryptocurrency affiliation, and most importantly, how to make money!” the Traffic Lords Facebook invitation urged.
Affiliate marketing is a branch of online advertising that consists of one website driving sales or traffic to another website in exchange for a commission or fee. Affiliate marketers can advertise anything, from clothing to books to dating website memberships, receiving payment from the seller when the sale goes through. However, in Israel, which is considered a global powerhouse of affiliate marketing, many affiliate marketers have focused their efforts on the forex, binary options and online gambling industries, with an emphasis on binary options. One former binary options employee described the work of affiliate marketers to The Times of Israel thus:
“Generally, they farm leads from around the internet using something called a funnel. A funnel is a crude video on an even cruder website, and the subject matter is usually about some former Wall Street trader who came across some secret news or had some crazy algorithm and wants to release it to the public. There’s always an urgency to it, a limited time offer and, of course, everything is fake — from the video itself to the reviews.”
Taken as a whole, the affiliate marketing industry created a “fake news” environment for the binary options industry, where an unsuspecting investor who Googled the words “binary options” or searched for binary options information on Facebook would largely encounter websites created by affiliate marketers singing the industry’s praises.
Not everyone in the Traffic Lords audience was an affiliate marketer. One man in the audience even asked a speaker to explain what affiliate marketing is. Others came to hear leading experts from Israel’s cryptocurrency movement explain this hot new trend that is sweeping the high-tech world, not just in Israel but in Silicon Valley.
But many if not most of the people in attendance were former forex and binary options operatives. Eighty percent were men, most in their 20s and 30s. Some sported designer shoes, $80 T-shirts and gritty, unshaven faces. The women were mostly quite young, looked well-groomed and were dressed in high fashion.
“What have you been doing lately?” one young man asked, high-fiving an acquaintance.
“Nothing, I’ve been sitting at home. And you?”
“We’ve been thinking about it, and we’re starting a casino.”
“It’s good you got out of binary options in time. Once the regulators start getting involved, you get exposed, you can’t work anymore. But I think this cryptocurrency thing looks promising.”
The next binary options?
ICOs are a hot topic among securities regulators worldwide. On the one hand, they’re an innovative way for startups to raise money, similar to Kickstarter but often involving vastly larger sums of money. Many boosters of cryptocurrencies and ICOs describe blockchain, the technology underlying cryptocurrencies, as a cure-all that will fix everything that ails the digital age, from rising global inequality to to financial fraud over the internet.
On the other hand, in recent weeks, some Israeli experts have been sounding the alarm that cryptocurrencies may be the next binary options — in other words, the next multibillion dollar fraud committed by Israelis against unsuspecting targets all over the world. The Israel Securities Authority’s outgoing chairman, Shmuel Hauser, who drafted the binary options law, is one of them. In a speech to the Calcalist Fintech conference on November 8, Hauser warned: “We want to make sure that the world of cryptocurrencies does not turn into a mutation of the binary options industry, that it does not become a haven for scammers.”
Cryptocurrencies and initial coin offerings are not fraudulent in and of themselves, and on the face of it cryptocurrencies are an unlikely vehicle for a scam. You may notice advertisements for ICOs crowding your Facebook or Twitter feed. “Register now for our token pre-sale” they read. Or “Read our white paper,” or “meet our team.” The text on these sites is often dense and full of specialized lingo, like “we are the next-generation decentralized platform utilizing the power of blockchain to democratize the solar energy market.”
Potential investors are essentially being asked to think like venture capitalists, evaluate a high-tech startup, and, if they are convinced of its merits, to buy “tokens,” or digital coins issued by the startup to raise funding. The concept of ICOs is so wonkish and demands so much time and effort from the investor that it would necessarily seem to be limited to a narrow audience. And yet some ex-binary options operatives are betting on ICOs and cryptocurrency trading as the next big way to make money.
‘We’re very concerned about ICOs’
In a recent interview at the Israel Securities Authority headquarters in Tel Aviv, Hauser told The Times of Israel there are several things that worry him about the new cryptocurrency craze.
“When we talk about cryptocurrencies, we’re talking about several things,” he said. “First, there’s blockchain technology. That’s a very legitimate technology that is going to cut costs and conquer the world. Then you have bitcoin and cryptocurrencies. There are thousands of different digital coins. And then there are ICOs.”
“We’re very concerned about cryptocurrencies because the phenomenon exhibits many signs of a bubble. Someone will tell you to buy this or that token because its value is going up, but you don’t know who is behind the token, and you don’t know who is behind the demand, who is behind the supply. And if something goes wrong, there is no one to turn to.”
Several sources who are familiar with Israel’s fledgling cryptocurrency industry stressed that not all of it is fraudulent, and that the legitimate side of the industry could be a boon for Israel’s high-tech economy. Indeed, many of those involved in the legitimate cryptocurrency industry fear that binary options could ruin the reputation of the industry as a whole.
According to sources who spoke on condition of anonymity, binary options operatives who have entered the field are hoping to make large windfalls in one of three ways. The first is to encourage investors, many of them recycled leads from the binary options industry, to buy and sell cryptocurrencies on their “exchange,” and then eventually — using some of the cruder ruses of binary options fraud — when the investor seems unlikely to buy any more tokens, the company would freeze the investor’s account and stop taking his phone calls.
In a second variation of the scam, investors are offered leverage on their initial investment in cryptocurrency. Then, because of fluctuations in the price of the token, the investors suffer a margin call and their balance is wiped out.
Third, an investor can be offered the opportunity to invest in an ICO, which is usually a blockchain-technology-based startup. The investor is presented with a short film about the startup, biographies of its founders, and a “white paper” explaining the technology and business plan in more detail. If the investor is impressed by the startup, he can buy tokens in its initial coin offering. These tokens often give him access to the product and if the product is successful, it is hoped, the tokens will rise in value on secondary exchanges. None of this is fraudulent. But in the fraudulent scenario, sources told The Times of Israel, the startup is a bluff and the sole purpose of launching it is to pump and dump its tokens and run away with the proceeds.
Hauser told The Times of Israel that even non-fraudulent ICOs are problematic and something the Israel Securities Authority is examining carefully in order to decide whether to prohibit or regulate them.
But the potential for fraud adds an extra wrinkle, he said.
“I am troubled by the possibility of frauds. When it’s not regulated, the investor has no one to turn to. If they live abroad they will have to turn to the Israeli police and that worries me.”
Added Hauser: “It could be fraud in the sense that people can invest money and never hear from the company again.”
An alignment of interests
Meanwhile, inside Israel’s fledgling cryptocurrency industry, operatives are hoping regulators will not regulate their industry to death.
At the October Traffic Lords event, the speakers hailed from two groups. First, there were veterans of Israel’s bitcoin community, like Meni Rosenfeld and Yuval Rouach, hard-core cryptocurrency and decentralization activists who have spent the last several years trying to win converts among the wider public. The second group was businessmen, some from various legitimate industries, others from binary options, seeking to capitalize on cryptocurrency’s growing popularity.
Four of the six speakers at the event were from a group that calls itself Alignment, a new partnership, announced in a press release on September 7, involving renowned Israeli venture capitalist Moshe Hogeg’s Singulariteam Technology Group, along with blockchain firm BlockchainIL and cryptocurrencies investment group CoinTree Capital. Alignment is billed as a startup incubator that will “advise, create and finance early-stage blockchain projects and existing firms, from beginning through Initial Coin Offering and beyond.” The Times of Israel has no reason to believe that the Alignment incubator plans to act in any way that is other than lawful.
So bullish is Hogeg on the future of blockchain technology and cryptocurrency that he promised, in the same press release, to “invest, without exception, in every Israeli blockchain company in 2017.”
The four representatives of Alignment who spoke at the event were Sefi Golan, the CEO and chairman of Blockchain IL; Hogeg; a man named Ofir from Cointree Capital, and a representative from Traffic Lords who did not give his name. According to Israel’s corporate registry, Traffic Lords is jointly owned by Singulariteam and by Yaniv Levi and Oren Ozeri, two veterans of the online trading industry. According to a recent lawsuit in Israeli court, Levi is the de facto owner of “Investing Academy,” an online and bricks-and-mortar school that teaches investors how to trade and then introduces them to online brokers. Ozeri registered the website rtoption.com. BlockChainIL’s junior partner Roman Abramov (the same individual who has been in the news recently in connection with police investigations into Prime Minister Benjamin Netanyahu’s relationship with Australian gambling tycoon James Packer) is a former employee of Yaniv Levi’s as well as a former international operations manager for Israeli forex company Matach24, according to his own LinkedIn profile.
One of the things that became clear at the meeting was that the participants were unsure about the direction of this new industry. Cointree Capital’s Ofir tried to convince the affiliate marketers in the crowd to get involved in ICOs, but many were skeptical.
“We’re a fund that helps launch ICOs in Israel,” Ofir told the crowd. “Our first project was called Kik (a messaging app) and it raised $100 million. Our second project, Stox (a blockchain prediction platform), raised $40 million.”
Ofir told the audience that companies launching ICOs have raised over $3 billion since May, surpassing the early-stage funding globally invested by venture capitalists.
“If you can place yourself between the money and the companies at the right time, there is tremendous opportunity there.”
But audience members were unsure. ICOs sounded risky; what if some of them fail to raise money? How would affiliates get paid? Why not just send traffic to online forex and CFD trading platforms, where the payout is guaranteed?
Ofir replied: “It’s a question of how much risk you’re willing to take and how much you’re willing to earn. Ever since Ethereum was invented, when people saw that its ICO raised a lot of money, lots of people around the world who don’t know what they’re doing will just put $1,000 or $2,000 or $3,000 into an ICO. People are raising huge amounts of money in what is essentially a casino.”
What could go wrong?
The problem with ICOs is that they provide few protections for investors, said Jacob Ma-Weaver, the founder of Cable Car Capital, a San-Francisco based investment advisory.
“The issue with coins is that unlike equity in a company, there are no real legal rights attached. If you invest in venture capital in an early stage business and the company doesn’t succeed, you’re left owning the company in bankruptcy, or potentially recovering some liquidation value. Raising capital is a long-established legal process with rights and privileges that everyone understands. The investor protections are there for a reason.”
Ma-Weaver said that a token, by contrast, is merely a vague future promise of something, perhaps a discount on a product that doesn’t exist yet, or a currency to use on a platform under development.
“People are buying them solely because they expect to be able to resell them to a greater fool,” he surmised.
Added Ma-Weaver: “Some in the venture capital community argue that ICOs are just another means of financing startups. But the difference is that there’s no ownership rights! They are selling nothing for something. On the one hand, I can understand why people take the money that is offered, but on the other it’s clearly taking advantage of the buyers. Once you layer in a marketing scheme, then it crosses the line into fraud.”
In 2017 alone, investors have poured billions into ICOs, with an American startup called Tezos raising $232 million in a July ICO. An Israeli startup called Bancor raised $153 million in just three hours in June.
“The type of people who invested in cryptocurrencies early are gamblers,” said the insider. “It worked out for them and they got rich but they’re not diversified. All their wealth is in bitcoin or Ethereum. They don’t want to miss the next big thing. So they put ten percent of their wealth in all these different ICOs and then they’re diversified. It’s kind of like buying lottery tickets.”
A laughing matter
At the Traffic Lords event, Hogeg, a managing partner of the venture capital firm Singulariteam (together with Kazakh oligarch Kenges Rakishev), encouraged affiliate marketers to try to find ways to make cryptocurrency investing attractive to ordinary people.
At this point in Hogeg’s lecture, a very telling incident occurred.
Hogeg pointed out that today cryptocurrencies have just three practical uses in peoples’ daily lives: as an instrument for financial speculation, as a way for entrepreneurs to raise money, and, third, as a way for criminals to transfer money to each other.
“Cryptocurrency is great for micropayments and for people who sell drugs,” he explained. “They have no need for money mules. In fact it’s a great use for the world of crime, but that’s not why we’re here.”
After a pregnant pause, a large portion of the room burst into laughter.
The Times of Israel contacted Moshe Hogeg to ask what he thought about the large number of binary options operatives entering the cryptocurrencies field but did not receive a reply.
Three business models
As with any industry that is still in its infancy, it is not clear which business model involving cryptocurrencies will become most successful and dominate the others.
“We here at Traffic Lords, we are an affiliate network,” said a representative of the company that night. “The offers we have in our system pay in dollars, not cryptocurrency. We pay for ICOs; we pay for people who can bring traffic to exchanges where you can buy and sell bitcoin.”
“That’s small change,” shouted someone in the crowd. “We’re better off working with eToro,” this objector added.
EToro — a Tel Aviv-founded, self-styled “social trading and investment network” — does not have a license to solicit Israeli investors. However, it is licensed in Cyprus and a UK version of the site is licensed by the British FSA.
“No problem,” said the Traffic Lords representative. “We have offers that pay more than eToro. But if you want to work with them, be my guest.”
“Look, ICOs are a bit of a different bird,” he went on. “They haven’t totally figured out the payment structure yet, but there are cryptocurrency trading platforms that are identical to all the online trading industry offers you are already familiar with. We’ve been doing this a long time and just recently we did a big pivot into the world of cryptocurrency or blockchain. I am telling you there is opportunity here. We identified it a few months ago.”
‘We have the best lawyers’
Due to their risky nature and the potential for fraud, countries like China and South Korea have banned ICOs. The United States and Canada have said that depending on how they are structured, many ICOs may already fall afoul of securities laws. On August 30, ISA chairman Hauser announced the formation of a committee that would study whether ICOs are a legitimate way to raise capital. The committee is due to issue its initial recommendations by December 31.
At the Traffic Lords event, Sefi Golan of BlockchainIL said that regulation was of great concern to his team and that he was confident regulators would take the right steps to “support this industry while protecting investors from fraud.”
“We have the best lawyers in Israel, Switzerland and the United States,” Golan told the crowd.
“We have a direct channel to regulators, and you need to understand that countries see this technology as an opportunity to develop their economies. In the last three months we have filled four-and-a-half floors of this building with new companies. This is a real business; I think the authorities understand that this is a real business.”
As if to underscore Golan’s points, on October 23 Moshe Hogeg met with Finance Minister Moshe Kahlon to discuss cryptocurrencies and ICOs.
“I am very happy to report that I just finished a terrific meeting with Finance Minister Moshe Kahlon on the topic of blockchain and cryptocurrencies,” Hogeg wrote on his Facebook page. “The minister is very positive and supportive. This is heartening and moves us towards a solution and together with the government, which supports innovation, we will be able to create a lot of value for everyone.”
While the regulators deliberate and convene committees, Israel’s cryptocurrency industry is moving full steam ahead.
“The advantage in affiliate marketing of cryptocurrencies and blockchain technologies is that it’s a blue ocean,” the representative from Traffic Lords said at the end of the Traffic Lords evening.
“It’s the Wild West. No one knows what is going on. Facebook aren’t blocking the ads yet. Google aren’t blocking the ads. You can do whatever you want.”
He quickly corrected himself. “I am not saying do whatever you want, I am saying there is a real opportunity here.”