ZrCoin is a crowdinvestment project about to be launched on the Waves blockchain platform. Their website, zrcoin.io, claims it’s no less than “the first ever blockchain option for investing in the production of an in-demand industrial material”.
The read is rather long I'm afraid, but as it’s probably the only attempt at providing due diligence for this project I suggest you go through the whole report if you are considering investment.
TLDR:
- Ferocious legal terms with no liabilities or warranties and really tricky dispute resolution
- The figures look a bit too good
- Too many questions regarding the ICO itself, buyback and liquidity of the token
- Questionable viability and market potential of the product
- Too many present engagements for the founders and possible conflicts of interest
- Russia as primary place of business
Kowalski, status report!
What they say:
With over $1 million invested in R&D the team has developed a technology for turning industrial waste into an innovative product. With the funds they are hoping to raise they are going to buy a plot of land in Russia, near Magnitogorsk and build a “state-of-the-art green manufacturing facility” there for production of “synthetic” Zirconium concentrate. Which, according to them, has brilliant market opportunities. Investors will receive blockchain-based digital tokens called ZrCoins which will be bought back later with the profits from selling the concentrate.
Everything looks peachy there: 100%+ return for investors and moneyback on demand after the end of the ICO. The project is fully insured. It is unique, stable, eco-friendly, innovative and completely transparent. Investors can even redeem their ZrCoins for physical ZrO2 or trade ZrCoins for the company’s shares “if the company is eligible for IPO”.
Their promo video is full of the right keywords: guaranteed high yield, investment security, full transparency and control, minimal middlemen, unique refractory material, cutting-edge industrial technology, Russian scientists, unique, keeping our planet clean, high-demand products, high-interest investment, 100% return etc.
Looks like a no-brainer, right? Who would not invest into such modern, secure and transparent project? Save the world, “join one of the most high-tech ecological projects of our time”!
What their small print says:
Before you do join, however, I would suggest that you have a closer look at their Terms and Conditions (T&C). The version of Terms and Conditions described in this post is what they had on zrcoin.io on March 30, 2017.
The very first paragraph greets you with this disclaimer: “BY UTILIZING THE WEBSITE LOCATED AT WWW.ZRCOIN.IO (“WEBSITE”) AND PRODUCTS OFFERED THEREIN, YOU ACKNOWLEDGE THAT YOU HAVE READ THESE TERMS AND CONDITIONS AND THAT YOU AGREE TO BE BOUND BY THEM.” What this means is that you agree to everything this document says, just because you are using ZrCoin website, ZrCoins or anything else they advertise on zrcoin.io. It is not that rare an occasion, there are lots of web-sites with this kind of provision in their T&Cs. However, it gets curiouser and curiouser the further down you go.
“YOU MAY BE REFERRED TO YOU OR THE ENTITY YOU REPRESENT” looks vaguely intimidating (although this particular one is completely harmless, I suppose).
The document then proceeds to say they can change their T&C, remove and even add (!) clauses at any time and for any reason and if you access their web-site after that it will automatically mean you agree to the changes. My advice: do check on their T&C at least twice a day as it is the only legal agreement you have with them.
Then they just say they are not selling you anything at all, not even ZrCoins and waive any responsibility whatsoever. Just like that.
Not bad, right? It only took the first three paragraphs in capslock.
According to Article 1, the whole web-site and ZrCoins belong to Lagata Logistics Ltd (UK), which handles the funds, converts money and organises buyback and refunds. The production of the Zirconium concentrate will lie upon ZrCoin Ltd (Russian Federation). There is also a Cyprus company between those two (Whitepaper, p.13), but we will get to that in the next part of the assessment.
Article 3, “Refund policy” says that you get your money back only if there is someone who wants to buy ZrCoins. Your only option is USD, at the exchange rate published on the website after the end of the ICO and you get to pay all the “transaction costs”.
Article 4. Buyback! At the current market price, but not higher than $2.8 per one ZrCoin, carried out by Lagata Logistics Ltd (UK).
Article 5. Exchanging ZrCoins for Zirconium concentrate is only possible “after 1 year from the beginning of production” under additional agreement with the manufacturer, if the concentrate is available. And you will have to arrange your own delivery from Magnitogorsk.
Article 6. “All content included on the website, including the ZrCoin tokens…is the property of Lagata Logistics ltd”.
Article 8, “Privacy” means that you have no privacy whatsoever. Furthermore, immediately upon their request you will have to provide any document, including sworn statements and taxpayer numbers. 8.11(d) says they can share your personal information with third parties not only when requested by fraud prevention or law enforcement agencies and government officials but also when they investigate violations of their T&C.
Article 10. “Access to services” says they can terminate your access to any service, selectively or on the whole, at any time, without notice and for any reason they like. No, “in particular” does not mean “because of”.
Article 11. You absolutely cannot use ZrCoin if you are a US citizen or live in the USA.
Article 13, “Risks” contains noteworthy provisions like 13.2 (h) “Risk of low or no liquidity” and 13.1 (i) “Risk of uninsured losses” which informs us that “funds held using ZrCoin or Waves network are entirely uninsured”.
Article 14, “Liability”. This article says there is no liability, no warranties, not even representations, regarding the ZrCoins, the web-site, information, products and services. For instance, “neither we nor any of our affiliates or licensors will be responsible for any compensation, reimbursement, or damages arising in connection with…any investments, expenditures, or commitments by you in connection with this agreement or your use of or access to the ZrCoin tokens”.
Article 15.9 “All disputes or claims…shall be finally settled under the Rules of Arbitration of the Russian Federation in Moscow”. Actually, arbitration in Russia is in the hands of the state. You will have to go to “arbitrazhny sud”, which in reality is state commercial court. It is not arbitration in your normal sense of the word.
Article 15.10 practically means that this agreement is all you have. Nothing else works.
What reality check says:
The first question that comes to mind is: guys, you’ve spent over $1,000,000 on R&D and you have a unique, brand new, superb, eco-friendly technology, so why are you wasting your time raising meagre $3.5 mln? Go find some big industry investors and make billions!
Seriously, look at the economy of the project. The project will use not less than 70% of the profit for the buyback (T&C:4.2). The Whitepaper says the buyback amount will be “not less than $400,000 a month” and that “estimated monthly yield of the factory’s operation should be RUR 70.6 million” (roughly $1,240,000 at the moment).
Let’s assume that 70% of the profit equals $400,000. 100% of the profit would then be $520,000, which is 42% profit margin. With profit margin that high are you sure you need an ICO?
Speaking of the ICO. As of 30 March 2017 there is no information on the ICO’s max cap and no ending date (their minimal threshold is $3.5 mln). If it stays this way it means no shortage of tokens. You will be watching the price of your ZrCoins climb all the way up to about $1.78 because such raise is hardwired into the ICO (T&C:2.5), but you will not be able to sell a single one of them until the ICO ends. After the ICO you will end up with a fistful of tokens which everybody who wanted to buy has already bought, so good luck with finding someone to fix your profit.
Also, as I have already mentioned, the buyback price is not set, it is $2.8 per ZrCoin or less, depending on the current market price (T&C:4). Theoretically speaking, someone with a heap of ZrCoin (I have no idea who that might be) could barge into the exchange (if there is any, T&C:13.2(h)) and make the option price hit the floor, collecting additional profit on the way and then initiating the buyback of ZrCoins at the fraction of their original cost.
But you can always collect your “synthetic” Zirconium concentrate in Magnitogorsk a year after the start of production (T&C:5), sell it and turn a handsome profit, right?
And here we might have another problem. I asked someone with intimate knowledge of Zirconium industry to take a look at the composition of the ZrCoin underlying asset (I found it in the investor section of the web-site). Here is some serious Zirconium talk from a real expert:
The combination of ZrO2/HfO2 + Al2O3 + SiO2 + alkaline earth & alkalis is indeed unique to the market. However, the high concentration of alumina and alkali & alkaline earth makes it unsuitable for many applications and it cannot be nearly as versatile as widely used zircon sand (Zirconium silicate).
If the material had ZrO2 content over 66% and SiO2 at 20% with Al2O3 <0,15% and no MgO, no CaO, no Na2O, no K2O then it would offer a benefit for refractory makers and could fetch the prices indicated in their Whitepaper. However, the Fe2O3 is extremely high; too high to make this product desirable for the refractory market. The only way to clean up this waste material is through chemical processing using hot NaOH in autoclaves, probably followed by acid leaching. This process will likely make it economically infeasible.
For further reading on Zirconium oxide I suggest you refer to this article on encyclopedia.com. I highly recommend the Quality Control section which explains why purity of the product is important for refractory applications.
The Whitepaper says the price threshold for their 66% “synthetic” Zirconium concentrate is 165,000 RUR/ton. Last time I checked you could easily buy “regular” production-grade 66% Zirconium concentrate in Chelyabinsk (3 hours drive from Magnitogorsk) for 120,000 RUR/ton.
Well, it doesn’t matter that much, does it? Think blooming economy, stable currency, unflagging demand, no tax or legislation hiccups, no hostile takeovers, totally predictable business environment. The factory is located in Russia, so what could possibly go wrong?
And here is how the ICO money gets to that haven of innovative eco-friendly businesses:
1. ZrCoins are issued by Lagata Logistics Limited (registered 21 October 2015 by Mikhail Grishin from “Sankt-Peterburg, Russian Federation”) which transfers the money to
2. Lagata Investments Limited, registered in Cyprus, 2012 (reg. number 309275) which, in turn, lends it to
3. OOO “Zircon”, registered in Russia 20 Feb 2017. This company is jointly owned by Mr. Merzlyakov, Mr. Sychev, Mr. Panov and Lagata Investments Limited. and is supposed to build the factory and ensure production. The factory is due to be built in Magnitogorsk and the company is registered in Moscow, 1,500 km apart.
Okay, we know how the money gets to the Russian company. What about getting the buyback money out of Russia, back to the issuer of the tokens? Is there a ready solution for that?
If you follow the link for OOO “Zircon” you can check if the shareholders have any ties to other companies in Russia. It turns out that the trinity of shareholders are also shareholders and/or directors in several limited companies simultaneously. For instance, Mr Sychev alone is currently performing as director in four companies, including OOO “Zircon”. The companies are registered in different locations. Are you sure those members of the team who seem to have such vast business interests will be able to dedicate all their time and effort to the project? Some of those companies are in the line of business similar to OOO “Zircon”. Are you sure there will be no conflicts of interest?
Taking into account all the information above I came up with some recommendations for potential investors:
- Do not forget to take screen-shots and notarize them regularly in case your account suddenly ceases to exist (T&C, 10). Make sure you always have a freshly notarized copy of Terms and Conditions and don’t forget to check on that document online for changes and notices as often as you can.
- Remember, if anything happens to your investment you are always welcome to try “arbitration” in Moscow (T&C, 15.9). When in arbitrazhny sud (state commercial court) be polite and say “Hi! I’ve invested $100,000 into a Russian Ltd. via intermediaries and I have proof: look here, I open my laptop, hook up to your wi-fi and there — you can see all my ZrCoins!”
- Of course you can always forgo “arbitration” and hold on to your ZrCoins until the Russian limited company goes for its IPO. Smart move! You’ll probably be richer than Mr. Zuckerberg.
Update: there is Part II, where the author, at the behest of ZrCoin team, strives to provide “constructive serious notes”.
This is all I have time for now. I hope this helps. Make sure you have read and understood the disclaimer at the bottom. If you come across any factual mistakes or faulty grammar you are welcome to point them out in your comments. To get updates or PM me you can always follow me on Twitter.
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My IBO address: 13KoSmPCvKNcWMyXANEShyGW7iUjX7mdRA
My IEO address: 0x4CE74183c002Ea7555Ca4877Ab8f273F10cFBFB6
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