Can the Wirecard scandal be repeated with cryptocurrencies? Bitcoins in danger?


A DAX company with a glaring hole of 1.900.000.000 € in the balance sheet. By this time, every person interested in finance should have heard something about the Wirecard scandal. In this article, we will reflect the chronology of the deep fall of the Wirecard AG and reveal similarities, effects, and possible risks in the crypto-industry. 

What happened to Wirecard?

On January 30, 2019, a report appeared for the first time in the Financial Times, alleging that high-ranking Wirecard managers had falsified contracts and engaged in money laundering in the previous year. As a result, the company’s share price plummeted by more than 20 %. Two days later, another critical report followed in the Financial Times, referring to the audit of Wirecard’s Singapore branch by the law firm Rajah & Tann, in which evidence of serious criminal activities regarding the accounting was supposedly found. There followed another report in the Financial Times, in which even more accusations of improper business practices were made against seven high-ranking Wirecard employees. The company is said to have systematically developed a fraud model over the years. One day later, the Singapore judicial authorities ordered a raid on the local branch office. 

After all, the BaFin also got involved in mid-February 2019 because of all the turbulences and imposed a short-selling ban on Wirecard shares, an event never seen before. In the past, of course, there have been bans on short-selling certain financial products, but never on an individual company.

Meanwhile, the Munich Public Prosecutor’s Office I announced investigations against one of the authors of the Financial Times on suspicion of a violation of the German Securities Trading Act.

A few days later, the Handelsblatt reported that there had also been raids on Wirecard’s corporate offices in India. The reason given for the raids is the suspicion of money laundering and document falsification. 

The Financial Times again takes off and reports about an ongoing investigation by the law enforcement authorities in Singapore for fraud, mainly involving transactions totaling €2,000,000, which were allegedly authorized by Wirecard employees and of which the former Chief Operating Officer, Jan Marsalek, is also said to have been aware.

Short term recovery

At the end of March, with the publication of parts of an audit report by the law firm Rajah & Tann, which had previously made serious accusations against Wirecard, the company caused a sigh of relief among investors for a short time. Although Wirecard admitted to mistakes made by individual employees from several branch offices, it generally considered itself to be innocent or exonerated. As a result, the publication of the balance sheet was postponed for the first time. 

The payment service provider announced that it will file a lawsuit against the Financial Times at the Munich public prosecutor’s office. Soon afterward, the Federal Financial Supervisory Authority (BaFin) also filed charges against up to 9 people on suspicion of market manipulation. There were several confrontations between Wirecard and the Financial Times, in which the British finance newspaper rigorously denied the accusations of market manipulation through collusion with short-sellers.

News from the Financial Times

After half a year of silence, the Financial Times again came back on 15.10.2019 and referred to internal documents of the DAX group, which are supposed to prove that the company has inflated its balance sheets with shady financial transactions in Dubai and Ireland. The name of a company appears frequently, Al Alam Solutions. According to the Financial Times, half of Wirecard’s profit in the 2016 financial year alone is said to be generated by transactions with the Dubai-based company.

In response, Wirecard commissioned KPMG, one of the big Big Four auditing companies, to conduct a special external audit of the balance sheets and to prepare an attestation. After Wirecard repeatedly postponed the publication, KPMG’s audit report was available on April 28, 2020, which shocked investors and made the drama truly take off. KPMG complained that the lack of documents not provided by Wirecard hindered the investigation and that it was therefore not possible to make an indisputable statement on the accusations of balance sheet manipulation. Investors were shocked and the share price at times slipped by 35% below the € 100 mark.

At the time of publication of the KPMG report, the company’s former CEO, Markus Braun, still insisted that the auditing firm had clearly found no evidence for the accusations against the payment service provider.

The company announced restructuring activities and the establishment of a compliance department. 

Finally, on May 26, 2020, Wirecard postponed publication of the Group’s final report and the Annual General Meeting, as the auditing company EY (formerly Ernst & Young), which had audited Wirecard’s balance sheets over the past few years, had not yet completed the audit. 

On June 5, 2020, the public prosecutor’s office in Munich made an appearance at Wirecard’s headquarters in Aschheim for a raid on the business premises.

The Big Shock

On 18.06.2020, the scheduled date for the presentation of the consolidated balance sheet, the big shock for investors occurred. Instead of an audit certificate and a consolidated balance sheet, Wirecard was informed by EY that amounts of 1.9 billion euros from the balance sheet would not exist in this form, or that there is no proof of their existence in foreign trust accounts. In simple terms: € 1,900,000,000 are missing from the balance sheet. EY also assumed to have received fake balances. As a result, Wirecard’s share price plummeted and at its peak slumped by up to 66%. On the same evening, Wirecard published an ad hoc statement announcing the restructuring of the Management Board. For this purpose, COO Jan Marsalek was released from his position on the Management Board. As a manager, he was responsible for third-party business, among other areas.

As was inevitable, CEO Markus Braun resigned the following day, and the recently hired head of the new Compliance Department, James Freis, was appointed interim CEO.

On Monday, June 22, 2020, the Munich public prosecutor’s office I issued an arrest warrant against ex-CEO Markus Braun, who gave himself up that evening and was released the next day on a bail of € 5,000,000. 

Jan Marsalek, who was released from the Wirecard board on 18.06.2020, has now been fired without notice. The public prosecutor’s office Munich I had also obtained an arrest warrant against him, but because he is presumed to be on the Philippines, he has not yet been caught. Initially, his lawyer said that he wanted to turn himself over to the authorities. These plans have now apparently been discarded. 

A bitter ending

On Thursday, 25.06.2020, the time had finally come. The Wirecard AG filed for insolvency at the Munich Local Court due to imminent illiquidity and overindebtedness.

Since then, one thing has led to another and investors have been severely blaming BaFin, the auditors, and, above all, Wirecard, as many existences have been destroyed by the bankruptcy. At present, the share price stands at just € 2.91.

Did the scandal directly affect the crypto industry?

Yes, there were. Because Wirecard UK, a subsidiary of Wirecard, acted as a publisher of VISA debit cards for many blockchain companies. TenX and Crypto.com were among them. Due to the insolvency filing of Wirecard AG at the Munich Local Court on June 25, 2020, the British Financial Market Authority (FCA) decided to prohibit the subsidiary Wirecard UK from operating for the time being. This ban served to secure any customer funds that may have been left over. However, the crypto debit card companies TenX and Crypto.com were also affected by this decision, and they had to deactivate their cards within 24 hours of the decision becoming known.

But the Wirecard scandal has also made itself noticeable in the everyday lives of ordinary people who have nothing to do with the blockchain industry and crypto-debit cards. For example, the users of Holvi Business Mastercard, Curve Mastercard, Laterpay, and many more. In the case of the companies just mentioned, there have been restrictions on the usability of credit cards or payment processing with them. The German retail giant Aldi was also affected by the Wirecard bankruptcy. In the past, the discount chain had processed credit card payments and the voucher card business via Wirecard Bank AG, which will not be included in the insolvency, but which nevertheless belongs to Wirecard, and now saw itself forced to move the processing of credit card transactions to Payone GmbH within a few days. However, the customers did not notice anything of this in the branches.

The Wirecard scandal should make you question which company you give power over your financial resources by concluding an account or credit card contract. It can be assumed that the majority of the customers who are now standing there with blocked credit cards did not previously know that their cards belonged to the Wirecard system.

Do similar risks tend to exist for investors in the crypto market?

In order to answer the question to what extent the entire crypto market can learn from the Wirecard case, we have to look at the entire market from above and see whether there are similar structures or providers as Wirecard, or whether in some cases similar scenarios to Wirecard are conceivable. The answer: Unfortunately, the crypto market has also been undermined by similar institutions. Let us take a look at the example of Bitwala and Celsius Network.

The cooperation between the two companies is as follows: Owners of Bitcoin can make these assets available to Bitwala. Bitwala acts as a contractual intermediary on behalf of the licensed solarisBank in accordance with § 2 para. 10 KWG. At the same time, customers can take out a loan with Celsius Network in the form of crypto-currencies, for which they have to pay interest, similar to a loan agreement with an ordinary bank. Part of this interest is paid to the Bitwala customer who provides his Bitcoins. The goal of the whole system is to give customers a weekly passive income from their assets. What at first sounds like an interesting and serious business, however, becomes clouded when you read the accompanying risk information. It states that the investor bears the full risk of insolvency of Celsius Network. Worse still! Any insolvency of the company would mean the total loss of all the bitcoins provided by the investors. This has to do with the fact that Celsius Network is a company and not a state-controlled bank, even though that company provides loans. They are not even subject to extensive state scrutiny, and the most dangerous thing about it all is that Celsius Network is registered at the US Financial Crimes Enforcement Network (FinCEN), which does not even come close to the same security standards of a German, comparable state security authority. In plain language, this means that the investor has no protection at all against possible abuse of his Bitcoins. Consequently, the assets invested with Bitwala leave the regulated area, into the not regulated area by Celsius Network, without the customer, at first sight, even noticing this.

Lack of transparency

In addition, the right to a say and transparency at both companies are nil. The risk warnings state: „Investors cannot check whether Celsius Network is carrying out business activities that will enable it to service the claims of investors from the Crypto Income Account in the future“. Due to the investors‘ right of co-determination and lack of knowledge, they cannot weigh up how high the individual risks actually are, although Celsius Network „may make decisions that may have an adverse effect on the investors“. The crowning glory of the whole thing is that the closed deal between the investor, Bitwala, and Celsius Network is based on American, not German law. For example, if an investor wants to sue Celsius Network for the loss of his Bitcoins, he has to do so before a foreign, more precisely an American court, which can mean very high costs and difficulties in enforcing the claims.

Conclusion of the whole thing: The investor risks all his assets but has little or no security or legal certainty. Moreover, the whole system works like a bank, which means that the investor also co-finances all the administrative and personnel costs of the two companies. Investing assets with this company would probably be the same as with a bank, but the bank is located abroad and is not subject to government scrutiny. In this case, the customer is not entitled to compensation for the total loss of his assets. So, would you invest your money with such a bank?

The verdict on Bitwala and Celsius Network may be harsh, but the Wirecard case has shown us that a corporate structure with too many unaudited parties can quickly get out of control and lead to losses for investors. However, as already mentioned, insolvency, in this case, could not mean the devaluation of the assets, but the complete loss of them. It should also be noted that Bitwala and Celsius Network, due to the multiple intermediary institutions, resemble more Fintech than crypto companies. The companies are, more or less, a hybrid between traditional banking and crypto-lending. In the early 2000s, companies such as PayPal created similar connections between the worlds of software and traditional banking; with the big difference that, in the event of bankruptcy, PayPal customers could not lose all the money they had entrusted to it.

solarisBank, Bitwala und Celsius - das Konstrukt
investment construct solarisBank, Bitwala & Celsius

The role of solarisBank

So far only mentioned in passing, we will now go into more detail about the solarisBank. Because in this whole chain, it is not the beginning, but only an intermediate party. It was founded in 2016 by the Berlin-based Fintech company FinLeap. The solarisBank not only received a global banking license but could also count on Finleap’s support in terms of capital and development. In return, the Berlin-based company acted as a provider of ideas and used solarisBank to complete its own Fintech ecosystem.

The problem with all this is that FinLeap is virtually an indirect investor of a venture capitalist. In fact, FinLeap already has investors who put money into the company. Ping An, a Hong Kong venture capitalist who invests in Fintech and Healthtech companies, holds 48% of all shares in the Berlin company. The success of solarisBank is thus based, among other things, on the goodwill of Chinese investors. This also shows how fragile the whole structure is. What would be the consequence for solarisBank or Bitwala customers if Ping An decided to withdraw its capital from Germany?

It is not quite clear to us why solarisBank has been receiving such negative reviews (2.4 stars with 113 ratings) from Google for quite some time, especially because of the apparently bad accessibility of customer service, but judging by the current reviews, it has not done much. The problem also seems to be, the more companies that act as partners or agents of solarisBank, as their customers are probably often not aware that they will also be bound to solarisBank when they sign a contract. For us, the question arises on how solarisBank selects its partners or intermediaries. Are there predefined selection criteria that determine who receives a partner or agent license and who does not? Is there quality management? Do certain KPIs have to be achieved in the course of the partnership, otherwise, you will lose the license?

We will now forward these open questions to solarisBank with the request for a detailed statement.

solarisBank Rezensionen Google - sortiert nach Relevanz
solarisBank Google reviews

Overview

What is certain, is that this whole chain of several parties seems very opaque.

Therefore, we summarize the construct once again compactly for our readers:

  1. Business angels, corporate VCs, as well as well-known venture capitalists, invested their money in the so-called Fintech Company Builder „FinLeap“ from Berlin. On 18.11.2018 Finleap announced on its own company page that it had received 41.5 million euros from Ping An Global Voyager Fund from China. Source Finleap
  2. With this risk capital, Finleap founded solarisBank, a digital banking platform with a German banking license, almost exactly 5 years ago.
  3. The hyped Fintech Bitwala operates on behalf of the aforementioned solarisBank as a contractual intermediary. Thus, no own banking license is required anymore.
  4. Customers can now invest assets like Bitcoin or Ethereum with this Fintech Bitwala via an app or buy assets directly.
  5. The unregulated player in Germany, Celsius Network, was integrated directly into the Bitwala Banking App through a back door. Celsius Network has therefore not received its own BAFIN approval.
  6. This process allows customers to actively conduct financial transactions directly via the Bitwala App Integration in Celsius Network. However, the invested assets of the Bitwala customer flow abroad, into an unregulated area
Sonderbedingungen für Celsius Network Nutzung in der Bitwala App
Only the light grey „Powered by Celsius Network“ logo draws attention to the integration

This is a long chain of players, some of whom come from completely different countries with completely different laws. Wirecard was previously massively criticized for such a chain. Time and again, there was talk of a lack of transparency. Wirecard, an individual case?

Especially in the last few days, the mainstream media increasingly reported that solarisBank actively solicits Wirecard customers. Source Handelsblatt

So, it is precisely this solarisBank that enables Fintech companies like Bitwala to exist at all and opens the doors to unregulated, legal grey areas.

What does the BAFIN say about this?

„Mistakes can happen, but the important thing is to learn from them.“

In view of these interconnections of solarisBank, Bitwala and Celsius Network, the question obviously arises whether BAFIN has really learned from the Wirecard scandal? Once BAFIN arrives in 2020, does it even understand the depths and possible effects of such a ping an – Finleap – solarisBank – Bitwala – Celsius Network construct?

When Wirecard inflated its balance sheets with flimsy financial transactions in Dubai and Ireland, the outcry was huge. It was seen as an impossible, almost paradoxical thing that should never happen again. Wirecard is publicly pilloried for, among other things, this procedure, while Bitwala with Celsius Network would have similar possibilities to make customer funds disappear through their non-transparent processes. In this case, the assets of the investors leave the regulated legal sphere without the investors‘ first impression of having any direct knowledge of it. Only at a second – third glance and after self-study of the terms and conditions on the smallest mobile display can the process be understood. The risk is therefore passed on to the customer. We have asked the BAFIN for a statement of why such a construct is tolerated.

The answers are not yet available at the time of publication of this article. The answers will be published separately and additionally in subsequent articles as soon as they are received. After all, it is precisely this procedure that allows any unregulated player to operate on the German market without having to undergo a Bafin examination of its own. Can this, therefore, be in the interest of investor protection?

Does the crypto-universe really need more central institutions?

However, this question can be answered with a clear „No! Anyone who has already dealt with „DeFi“ (Decentralized Finance) will recognize that companies such as Celsius Network and Bitwala are actually unnecessary risk carriers. Because on blockchain protocols such as Kyber Network, Maker Dao, Kava or Aave, the user can provide the networks with liquidity or grant loans without the need for a central institution. Furthermore, these protocols are decentralized and based on code and smart contracts. This means that there are no excessive fees or personnel costs, which they can co-finance with the interest, and there is also no risk of balance sheet falsification because these protocols are coordinated by codes, not by people. Since, as we know, codes cannot cheat their own system, there is no great risk, which is still borne by investors in central institutions. So, with DeFi protocols, the user does not need to be protected by supervisory authorities at all; the computer code does that, and it certainly won’t take your money to the Philippines!

Conclusion

In summary, it can, therefore, be said that the crypto-universe can learn from the Wirecard case to the extent that the solution to many problems should no longer be centrality but decentralization. Decentralized finance is on the rise and the Wirecard case was once again a prime example of what DeFi is needed for in the financial system. Should DeFi prevail in the coming years, the next generation will be largely spared such financial thrillers. Companies such as Bitwala and Celsius Network are more of a hindrance than an enrichment to the further development of Blockchain and DeFi. An investment in such companies is risky and not very recommendable in view of the interest rates that are expected.

Furthermore, investors must be wary of long investment chains. If you take a closer look at the complete construct of Bitwala and Co. you will see how non-transparent and fragile it is. It is also disappointing how quickly funds from German investors can get into an unregulated area without them even noticing it directly and at first sight. A domino effect inevitably threatens the networking of dependencies of central institutions. This is another argument for more decentralization in the financial system.

It remains to be hoped, therefore, that the crypto-universe will be spared central institutions and obvious cases of fraud such as that of Wirecard.

However, if it is still possible for foreign companies that have not yet been regulated in Germany to evade necessary regulation in a long, non-transparent chain and thus escape scrutiny by the authorities, then this hope will probably remain unfulfilled.

This article was written by Juri Maibaum and Jan Albrecht.

Wirecard skyscrapers
Wirecard © Cryptoticker
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