“Mainstreet is headquartered in the Cayman Islands, a notorious tax haven”

By JORDAN PEARSON From Motherboard

Charlie Shrem once branded himself “bitcoin’s first felon.” In December of 2014, Shrem was sentenced to two years in prison for knowingly processing funds associated with Silk Road, a darknet marketplace for illegal drugs.

Now, following his release from a Pennsylvania prison in July, the 27-year-old has a plan to use Bitcoin rival Ethereum as a platform for a crowdfunded investment fund called Mainstreet. Its first goal: to buy out a full 25 percent of Michigan’s mom-and-pop waste management industry over several years, according to an investment prospectus shared with Motherboard.

Mainstreet acquisitions will be directed by Shrem and his partner, Jason Granger, and any dividends will be payed to investors over the Ethereum blockchain to create an unchangeable record of payments, he told me. Purchasable tokens that indicate ownership of a share in the fund will be sold starting in late January.

The plan has several eyebrow-raising catches. Mainstreet is headquartered in the Cayman Islands, a notorious tax haven. It’s also intentionally not registering with any US or European regulatory agencies, and is thus closed to investors from those regions. Instead, the prospectus vaguely notes, tokens “will be offered and sold under exemptions under the laws of the jurisdictions where the offerings will be made.”

Technological polish aside, Mainstreet is essentially an investment vehicle for foreign money founded by two Americans in the Cayman Islands. Since Shrem and Granger are US citizens, they can’t directly invest in their own fund. In the future, Granger said, they may invest a nominal amount through an “offshore entity.”

The prospectus warns investors to consider it as carrying a “high degree of risk.”

“We didn’t register in the Cayman Islands for tax purposes,” Granger said in a phone call. “All of our holding companies are going to be paying taxes here in the US, and it’s really just because of the regulatory environment in the US as it relates to the new world of digital securities.”

Granger said Mainstreet will comply with SEC requirements, although it won’t sell tokens to American citizens or register with the SEC. Granger said the decision was made in order to avoid being caught up in the emerging field of securities law as it relates to virtual currencies lest future regulations become overly burdensome.

“I’ve made mistakes in the past, I went to prison, I served my time, and I’m not interested in getting involved with anything that has to do with the US government or any legal or regulatory matters in that regard,” Shrem said when asked about why the company won’t register in the US. He declined to comment on regulatory concerns.

“Do you trust these individuals, and their ability to pick winners?”

On the technical side, Mainstreet is built on so-called “smart contracts,” pieces of code that self-execute an action once certain requirements are met. It’s the same technology that, thanks to a missed nuance in a contract’s code, allowed an unknown hacker to siphon more than $50 million away from a crowd-directed investment fund known as the DAO.

There are differences between the DAO and Mainstreet, however. The “tokens” purchased by DAO investors allowed them to vote on the fund’s investments. Mainstreet tokens only indicate ownership of a share of the fund. All the investment decisions are solely made by Shrem and Granger. As for the smart contracts, their only function in Mainstreet is to automatically distribute a cut of the profits to token holders.

“If you look past the obvious problem, which is that this is an unregistered security offering that is illegal to offer in the US or the UK, and you buy into the premise that this management team will somehow be able to identify sound investments, then we hit the glaring technical problem: this is essentially a defunct use of smart contracts,” Emin Gün Sirer, a hacker, cryptocurrency expert, and Cornell University professor, wrote me in an email.

Basically, Mainstreet’s use of digital tokens is nothing new, and that’s kind of the point, Shrem confirmed over the phone. The whole thing is very DAO-like in that it’s an investment fund where investors receive digital tokens and payouts governed by self-executing contracts, but the way this tech is deployed is fairly unexciting.

To mitigate the chance of a flaw in the payout contracts leading to another massive drain by a hacker, Shrem said the code is being externally audited, and will be made open source in the coming week so that it can be scoured for bugs by the public.

“Perhaps, this kind of a baby step is a reasonable step after the DAO episode,” Sirer continued. “In that case, it makes most sense to evaluate this as a traditional investment fund, but as a blockchain play: do you trust these individuals, and their ability to pick winners?”

And in Shrem’s latest bet, the hope that investors will place their trust in him may be the biggest gamble.