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Coinbase In Talks to Buy Bitcoin Startup Earn.com

Coinbase may be on the verge of its biggest acquisition yet.

According to sources close to the situation, the San Francisco startup, which has raised more than $225 million in venture funding, is in talks to purchase Earn.com, which rebranded late last year from 21.co with the launch of its eponymous paid messaging platform.

One source with knowledge of the talks said Earn could be selling for more than $30 million, with the figure representing a low estimate of the terms discussed. (Earn.com has raised more than $120 million over multiple funding rounds since it was founded in 2013).

Still Earn.com is said to be in talks with multiple parties about a potential acquisition, with one source indicating that the suitors were all “household names” in the industry.

While no deal has yet been struck, the news follows the March announcement that Coinbase had hired Emilie Choi, the former head of mergers and acquisition at LinkedIn, as its vice president of corporate and business development.

Earn.com CEO Balaji Srinivasan would potentially join Coinbase under the terms of the deal.

Coinbase did not respond to requests for comment at press time.

Balaji Srinivasan image via Consensus 

The leader in blockchain news, CoinDesk is a media outlet that strives for the highest journalistic standards and abides by a strict set of editorial policies. CoinDesk is an independent operating subsidiary of Digital Currency Group, which invests in cryptocurrencies and blockchain startups.

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ICOs Iced: A 12-Month Freeze on US Token Trading Is Just Beginning

“The market is being chilled.”

Issued by Mike Lempres, chief legal and risk officer at Coinbase, the statement captures the mood of the moment for crypto innovators in the U.S. as regulatory uncertainty and months of wanton market growth appear to be finally coming to a head.

Spurring the shift is that the SEC finally confirmed last week what had been long rumored, that it’s investigating companies and startups associated with initial coin offerings (ICOs). In response, entrepreneurs are largely surrendering on the idea new cryptocurrencies created and sold to investors could be considered so-called “utility tokens,” a term denoting a digital commodity meant to represent the share of a blockchain protocol.

Still, U.S. companies preparing to issue tokens as securities may not have an easier time reaching buyers. There’s no registered broker-dealer capable of trading security tokens in the U.S. yet. And as multiple founders pointed out to CoinDesk, as issuers shift to issuing these tokens under a Regulation D exemption, most are still under the 12-month lock-up required by the rules.

At the MIT Bitcoin Expo this weekend, the issue was on display in a panel that struck a sour note on the state of ICOs. There, Nick Ayton, CEO of blockchain funding platform Chainstarter, went so far as to predict U.S. regulators will view every token as a security.

“Most exchanges are listing coins that are securities, and our view is a large number of these exchanges are going to be closed,” he told the crowd.

Even a panel on regulation more generally saw talk of the concern, with former CFTC chair and MIT professor Gary Genseler indicating his belief action on exchanges could be ahead.

“I think it is without a doubt that numerous exchanges will have to seek exemptions under alternative trading system [rules] because many of the exchanges, not all, have tokens that are securities trading on them,” he explained.

But it’s not just existing exchanges, businesses seeking to fill the market need may be held up.

As Gensler and others have put forward, participants in this new market think they might know what’s forbidden, but no one can be sure until regulators address cryptocurrency more specifically.

Joshua Ashley Klayman, counsel at Morrison Foerster, told CoinDesk:

“People who want to comply and don’t want to do something wrong are left trying to find the rules.”

Death of utility tokens

Stepping back, the market disarray perhaps shouldn’t be surprising.

The SEC’s decree on a little-known ICO called Munchee in December should have landed like a bomb, but it has rather had a delayed reaction, its shockwave not really hitting the industry until rumors began circulating that the SEC had issued a wave of subpoenas earlier this month.

With Munchee, “what the federal regulators think of as a utility token and not a security token is so small, and the eye of the needle got even smaller,” Klayman explained.

For a while there, companies seemed to think that even if utility tokens couldn’t be sold to the general public, they could still be given away (in what’s usually called an airdrop). However, we recently reported on how that’s probably an SEC violation there, as well.

Earn.com, which has been facilitating airdrops of tokens to its pool of verified users, noted doubts about their legality in the U.S, with Dave Bean of the company’s sales team admitting that “geo-filtering has become a very popular feature.”

Other new issuers are just abandoning retail investors.

“I have perceived a trend in the market wherein legitimate projects seeking to issue a native token for functional networks is steering toward relying on the Reg D exemption within the U.S.,” Tekin Salimi, a project manager at Polychain Capital, told CoinDesk.

As reported, the rule requires purchasers to be accredited investors, which means they must have a minimum net worth of $1 million, or have earned $200,000 annually for the last two years.

That said, there have been plenty of market participants that never believed unregistered tokens could work under SEC laws, and have factored such options into their models. Long-time entrepreneurs have moved in, offering platforms built specifically with different regulatory regimes in mind, such as TokenSoft.

But it’s still hard to imagine how a product that, say, creates a tokenized VPN, that both pays people for broadband and lets them buy it back with the same token, works if those tokens are securities.

Caitlin Long, an industry veteran who helped move legislation on utility tokens through the Wyoming legislature, has even asked whether federal securities rules could be applied in ways where they may harm the user experience of more popular projects to the point where they’re no longer even feasible.

For example, she raised the idea that, should utility tokens be outlawed entirely, users of filecoin, a distributed online storage system, might need to use a brokerage to hold the tokens they need just to back up files.

Liquidity and trading

But even if an exchange goes lives, the final issue for ICO projects in the U.S. is liquidity.

The trouble is that there’s no unified place to trade tokens that’s registered with the SEC now. As several founders have pointed out, that doesn’t mean that trading is impossible, it’s just not as easy.

CoinDesk has reported on several forthcoming attempts to launch an ATS, including Templum and tZERO. An existing alternative trading platform has also recently launched the Open Financial Network, with its token trading platform opening in April, a spokesperson said.

But no real trading is going on using these platforms yet, other than one security available in Templum’s private beta and the sale of Overstock shares on its platform.

Chris Pallotta, CEO and co-founder of Templum, told CoinDesk that he expects to open the platform up in a matter of months, however. With most security tokens still in their 12-month holding period, he said, “I think the timing will work out pretty nicely.”

Even if Templum were to go live soon though, it may find it doesn’t have much product for its order books, as it will take a while for tokens created in the boom to get through that holding period.

That’s also assuming there are no additional holdups, and if the ICO space has shown anything, that might be a big if.

As Lempres put it to members of Congress:

“If the U.S. does not provide a clear, thoughtful regulatory environment, the investment can move very quickly to other countries.”

Additional reporting by Pete Rizzo.

Frozen money via Shutterstock.

The leader in blockchain news, CoinDesk is a media outlet that strives for the highest journalistic standards and abides by a strict set of editorial policies. CoinDesk is an independent operating subsidiary of Digital Currency Group, which invests in cryptocurrencies and blockchain startups.

Disclaimer: This article should not be taken as, and is not intended to provide, investment advice. Please conduct your own thorough research before investing in any cryptocurrency.

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Meet Earn.com: 21 Rebrands Social Network In Shift Away from Bitcoin

21 Inc, once a maker of bitcoin mining hardware, is rebranding to emphasize its new focus on using cryptocurrency to power a social network.

Effective today, the startup has changed its name to Earn.com to drive home the message users can get paid for answering emails and completing tasks, according to a company blog post. The rechristened startup also confirmed it’s on track to issue a token that would replace bitcoin as the currency it uses to incentivize people to join the network by the year’s end.

Separately, the company notified customers last week that it had discontinued support for the Bitcoin Computer. The pocket-sized mining device, which initially retailed for $400, was once 21’s flagship product.

Taken together, the moves underscore how far one of the best-funded startups in the blockchain space has moved from its roots.

In an interview with CoinDesk, CEO Balaji Srinivasan said the new name gives people “an easier way to understand the purpose of the company.” He described Earn.com as “the first commercial social network,” combining elements of LinkedIn and Amazon’s Mechanical Turk.

The advantage for users over popular social media platforms like Twitter, he said, is simple:

“You’re not just wasting time, you’re making money.”

Sends with benefits

Specifically, users can make money in several ways, according to the company.

They can create a public profile for receiving paid messages; join lists of people with similar skills (e.g. Python programmers) to receive “microtasks” such as completing surveys; or set up an autoreply on their email encouraging senders they don’t know to pay for responses (with a whitelist, so real acquaintances can be spared the request for money).

As for the senders of mass emails, who aren’t used to paying for the privilege, Earn.com claims they can get much higher response rates when recipients have a monetary incentive to write back.

According to the post, offering $1 for the recipient to read and answer an email yields response rates over 30 percent within 24 hours, and $10 gets response rates over 70 percent – crushing the low-single-digit performance typical of cold emails. Senders pay only if they get a response.

‘Not an ICO’

Stepping back, 21 raised $116 million from a group of prominent investors in multiple rounds revealed two years ago, when it was still squarely in the hardware space. The valuation reflected 21’s early success in bitcoin mining, but that business has since grown more competitive, and Srinivasan (a board partner at VC firm Andreessen Horowitz who joined 21 as CEO in 2015) has been steering the company toward a software model.

According to Srinivasan, the company has plenty of capital left, and fundraising is not the purpose of the upcoming token issuance.

“It’s not an ICO,” he said emphatically. Tokens will be exchanged for “labor,” not capital, he explained.

Rather, the Earn.com token launch is meant to encourage users to join the network sooner. Users earn tokens just by signing up for the platform and getting verified, and the token reward for doing so will be cut in half each time Earn.com’s user base doubles. (After receiving that reward for joining, users will be able to earn additional tokens by answering emails or doing tasks, the way they earn bitcoin currently.)

To give the asset scarcity, no tokens will be created after the launch, and supply is capped at 21 million, of which 54 percent will be reserved for users, according to the firm. Another 30 percent will be allocated to Earn.com employees and backers, and the remaining 16 percent will go to outside researchers and developers.

Aside from their function as an internal currency to compensate users for their work, the tokens will also serve as an API key for programmatic purchases, according to Srinivasan. And since they are ERC-20 tokens, they will be eligible for listing on exchanges, giving users a way to cash out.

An end, and a beginning

In addition to being the company’s first day as Earn.com, Friday marked the “end of life” for server-side support of the Bitcoin Computer, 21 command line interface (CLI) and API marketplace, according to the email sent to customers last week.

Despite the wind-down, the email deemed the hardware product a success – because, it said, one of the tutorials published when 21 released the device grew into the current get-paid-to-answer-emails application.

“Going forward, we’re going to be putting all our energy into that product and the corresponding token launch … because we think the ability to earn digital currency by replying to emails and completing tasks will be one of the most useful applications of the blockchain,” the note said.

Image via Consensus 2016 YouTube

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