When AriseBank announced last week that it had become the first crypto platform to purchase two traditional banks, it won plenty of attention.

Its press release was picked up by major media sites like HuffingtonPost and its endeavor was endorsed by Stan Larimer, founder of the decentralized cryptocurrency exchange Bitshares, who announced a partnership with the bank.

The firm claimed it had raised $600 million within a few weeks through its initial coin offering and the issuance of the AriseCoin token. It also said it had secured Federal Deposit Insurance Corp. approval for its bank purchases.

But within days, those claims fell apart.

Texas regulators finalized a cease-and-desist order against AriseBank and its founder, Jared Rice Sr., claimed the FBI raided his home and the Securities and Exchange Commission seized all the firm’s assets. The FDIC told American Banker it had received no applications of any kind from AriseBank, much less approved them.

A look at AriseBank is a glimpse into the murky world of initial coin offerings and cryptocurrency startups, a place where it can be hard to tell who is legitimate.

Statistics on fundraising by initial coin offerings

Arise’s story

In an interview American Banker conducted with Rice on Jan. 24, before the regulatory actions were public, there were already red flags.

Although the press release claimed AriseBank already had FDIC’s approval for the purchase of two banks, when pressed on how it won the regulator’s backing, Rice acknowledged the applications were not finalized. He also suggested the FDIC had significant problems with what he was doing.

“The FDIC does not like us, as you can imagine,” he said. “We’re not on good terms, they’re doing everything they can to stop this. They've hired an army of people to take every skeleton out of my closet, put them on the internet, put pictures of my children all over the internet.”

He had no proof the FDIC had done this, he said. "But nobody else would have done it like this. This is way too strategic.”

The FDIC declined to comment on Rice’s claims beyond saying it had received no applications from AriseBank.

Additionally, the two banks AriseBank claims it purchased — KFMC Bank Holding Company (described as a “100 year-old commercial bank”) and TPBG (“a 25 year-old investment banking and management firm”) — cannot be found in searches of the FDIC’s BankFind database.

Asked how Rice planned to get FDIC approval given the agency’s alleged concerns, Rice responded, “It’s about a platform for us. I’ve always believed that the people are far more powerful than the government. So many people are involved in cryptocurrency, the government is trying to regulate something they haven't realized they can’t regulate. We're just a bunch of genius programmers who are trying to change the world.”

Rice’s motivations

During the interview, Rice cited a personal motivation for setting up a decentralized bank: he was going through a divorce and had started a few different small businesses that had funding cut off by traditional banks. He argued that banks charge too many fees, and he thought blockchain and cryptocurrencies could be used to create a bank that no one would own and where consumers would get a better deal.

“PayPal, credit card merchant services companies and banks in general are so hard to work with, they hold the little guy down so bad it’s unbelievable,” he said.

Rice said he was inspired by watching history videos on YouTube about Alexander Hamilton and Thomas Jefferson about “central banks versus the people’s bank.”

“If there was a cryptocurrency bank, technically it would be decentralized, which means that it could be like bitcoin — thrown out to the world, everybody uses it, they could store their own money on their own phones, we could have a merchant system where people could put this stuff on their website, it would be revolutionary,” he said.

He wrote a 100-page white paper. Larimer offered support and suggested that Rice buy an FDIC-insured bank.

“We got the bank deal done, which is unbelievable because now we can have this FDIC-insured bank on the left, an investment bank in the middle, and this decentralized bank we created on the right,” Rice said. “We can bring consumers into the bank and walk them over to the decentralized bank to buy bitcoin.”

Texas takes action

It’s not just federal regulators that have problems with AriseBank, however.

Texas Banking Commissioner Charles Cooper finalized a cease-and-desist order on Friday that said the company, which is registered to a Texas address, is not authorized to engage in the business of banking in the state. The order also noted that Texas law prevents use of the word “bank” in a way that implies to the public that the person is engaged in the business of banking in this state.

Rice responded through a letter posted on Steemit that AriseBank refuses to comply with the Texas commissioner’s order and will not remove the word “bank” from its name. He argues that the AriseBank software is decentralized, not under the control of AriseBank, and therefore not subject to bank regulation.

“The software cannot be erased nor does the State of Texas have any sort of regulations that prevent any of our Texas-based users from storing cryptocurrencies on their computers or cellular devices using the AriseBank platform,” the letter said. “The concept of storing, sending, spending, receiving and viewing cryptocurrency balances, holdings and other related data in correspondence with these cryptocurrencies has long been outside the purview of the State of Texas, the United States Government or any government entity for that matter.”

Bob Bacon, deputy commissioner of the Texas Department of Banking, told American Banker said that Texas finance code section 31.005 prohibits an entity from using the word “bank” in its name without authorization by his or a federal agency. It also can’t refer to itself as a bank in its advertising.

“We have the statute for a reason, and that is to protect the public from being confused about what is being offered,” Bacon said. “Our main goal in this is to make sure the public doesn’t think they have protections in place — those protections are only in place if it’s an actual registered, chartered financial institution that undergoes exams and there’s insurance in place.”

Bacon also said his department never received an application requesting the use of the name AriseBank.

There have been other instances in the past where people have used the term “bank” in a name, he said, but the department has never seen a firm refuse to back down.

“We’ve always achieved compliance through informal means," Bacon said. "But we do have the option of referring the case to the attorney general’s office if we find the order has been violated. So we could seek injunctive relief.”

Bacon additionally noted that he and others tried to visit the Dallas offices AriseBank lists on its website and they don’t appear to exist.

Rice did not respond to follow-up questions about AriseBank’s dealings with the Texas regulator or its apparent lack of physical locations. AriseBank did issue a new press release on Thursday, after the interview. It corrected its press release from earlier, noting that the FDIC still had not approved the deal.

‘Put your hands up’

The situation highlights how ICOs are an extremely murky legal area. The SEC would like to regulate ICO tokens as securities. The Commodity Futures Trading Commission would like to regulate them as commodities. Some, like AriseCoin, are utility tokens — the right to use a yet-to-be-developed blockchain — and are regulated by no one.

Still, regulators appear to have acted to settle any further debate about AriseBank, at least according to a radio interview by Rice given late Saturday.

Rice claimed that FBI and SEC agents stormed AriseBank’s office in the middle of the night where the team had been sleeping after a long night spent coding.

“I got woke up with guns pointed at me,” he said. “It was, ‘Put your hands up where we can see them.’ I didn’t know why they were there. They brought us outside, handcuffed us, and put us in a Suburban in the driveway.”

The FBI did not confirm or deny any investigation into AriseBank.

A court-appointed receiver from law firm Jones Day came to seize control of all of AriseBank’s assets. Rice and his colleagues showed him where the computers were and shared their passwords.

In its complaint against AriseBank and its founders, Jared Rice, Sr. and Stanley Ford, the SEC said it filed its action “to halt an ongoing, fraudulent, and unregistered offering of securities and to protect investors who are being actively defrauded.” The SEC said AriseBank was offering investment contracts that fit the definition of security under the Securities Act.

The agency said AriseBank’s initial offering of AriseCoin is illegal because there’s no registration filed with the SEC. It also said the offering materials “use many materially false statements and omissions to induce investment in the ICO,” such as AriseBank’s earlier claim that it had bought a commercial bank and could offer FDIC-insured accounts.

The SEC further said in its complaint that AriseBank “omitted to disclose the criminal background of key executives — most notably, Rice, who is currently on probation for felony theft and tampering with government records."

Asked by the podcast host, Connie Willis, why the raid occurred, Rice said he didn’t know.

“I think there’s a lack of understanding about AriseBank and what we do,” he said.

Rice remained confident throughout the Saturday interview, noting that a hearing for AriseBank was set for Feb. 8 in federal court, and “we’re going to be there in suit and tie.” Additionally, he said, some “patriots” had set up a Twitter page to raise funds for AriseBank’s legal defense.

“They can seize everything they want to seize, but they can’t seize a vision,” Rice defiantly declared at the end of the interview.

Rice did not return calls seeking further comment.

Editor at Large Penny Crosman welcomes feedback at penny.crosman@sourcemedia.com