2018-01-30 19:24:07
The Shift: Kodak’s Dubious Cryptocurrency Gamble

An eon or two ago, Eastman Kodak was a bleeding-edge technology company. It hired the smartest engineers and put them to work racking up patents, pioneering new chemical processes and building a globe-spanning camera and film business that, at its peak, employed 145,000 people.

But the digital photo age passed Kodak by, and today, the Rochester, N.Y., company exists mostly in the past tense. Many of the patents have been sold, buildings have been rented out or demolished, and the company has continued to shrink since it filed for bankruptcy in 2012.

Now, the 130-year-old company is trying an unlikely sort of comeback — one built by betting on cryptocurrency. It’s a bold gamble that has excited some investors, perplexed others and raised questions about how closely Kodak vetted its cryptocurrency business partners, who now include a paparazzi photo agency, a penny-stock promoter and a company offering what has been called a “magic money making machine.”

This month, Kodak lent its name to a digital currency called KodakCoin, which is billed as “a photo-centric cryptocurrency to empower photographers and agencies to take greater control in image rights management.” The basic idea behind KodakCoin is to use the blockchain to help photographers manage their collections by creating permanent, immutable records of ownership. The company also struck a licensing deal for a Bitcoin-mining computer called the Kodak KashMiner, which allows users to generate their own cryptocurrency.

Kodak’s stock rose more than 200 percent following the announcements, and has not fallen much since.

That’s partly because the blockchain — the mathematical ledger system that forms the basis of digital currencies — has a kind of talismanic effect in today’s stock market. As investors seek to capitalize on the popularity of currencies like Bitcoin and Ethereum, a number of struggling companies have reversed their fortunes, at least temporarily, simply by adding “blockchain” to their names or announcing a new cryptocurrency venture unrelated to their previous line of work. (The most notorious example is Long Island Iced Tea Corp., a beverage company that tripled its value overnight after it rebranded itself “Long Blockchain Corp.”)

These sudden, brazen moves have also attracted the attention of regulators. In a recent speech, Jay Clayton, the chairman of the Securities and Exchange Commission, said that the agency was “looking closely at the disclosures of public companies that shift their business models to capitalize on the perceived promise of distributed ledger technology.”

Kodak is the most prominent old-line company to enter the cryptocurrency game so far, and maybe the most controversial. Almost immediately, critics pounced on the company’s plans, characterizing them as a desperate money grab.

“It feels like a publicly traded company issuing a token to raise its stock price from the grave,” said Kyle Samani, a partner at the cryptocurrency trading firm Multicoin Capital.

“I would not be sleeping very well if I was involved in this,” said Jill Carlson, a blockchain consultant.

In an interview, Jeff Clarke, Kodak’s chief executive, said that the company’s blockchain ambitions were genuine. He began looking into blockchain technology last summer, he said, and realized that it could solve a perennial problem for photographers — proving ownership of their images, tracking down copyright violators, and getting paid.

“This is not a dog food company that’s creating a currency,” Mr. Clarke said. “This is a real solution around digital rights management that Kodak has been involved in for many years.”

In theory, photographers will be able to upload their images to a platform called KodakOne, create a blockchain-based license for each image, and use web-crawling software to scour the internet looking for copyright violations. Instead of using dollars, photographers can have clients pay them in KodakCoins.

KodakCoin’s initial offering, scheduled for Wednesday, is expected to raise as much as $20 million. But there are few details about what that money will be used for, or why a similar system could not be built without the blockchain. There is also a more obvious question: Why would photographers want to be paid in digital tokens, rather than cash?

In several calls with KodakCoin leaders, I couldn’t get straight answers to these questions. And KodakCoin’s white paper, a technical document that details the plans for the currency, is a 40-page mishmash of marketing buzzwords and vague diagrams, like the one below:

Make no mistake: Digital rights management is a real issue for photographers, and the blockchain does, in theory, offer a compelling solution. But the specific attributes of KodakCoin present some red flags.

First, despite the name, KodakCoin is not actually a Kodak project. The company behind the offering, WENN Digital, is a California-based affiliate of a British photo agency that specializes in paparazzi photo licensing. Under their licensing agreement, Kodak will not receive any direct revenue from the public offering. It will receive a minority stake in WENN Digital, 3 percent of all KodakCoins issued and a royalty on future revenue.

Cameron Chell, a lead adviser to the KodakCoin project, told me that the initial offering represented a “seminal moment” for Kodak, and that the company’s interest in blockchain technology was a savvy long-term investment.

“The real story is that it’s about to be a renaissance,” he said.

But Mr. Chell, a Canadian entrepreneur and motivational speaker who once opened for Tony Robbins, has a troubled track record. In 1998, Mr. Chell agreed to a five-year ban from the Alberta Stock Exchange in Canada and paid a $25,000 fine in connection with a violation of the exchange’s rules. A previous company of his ended in ignominy after its chairman was charged with fraud.

Asked about these incidents, Mr. Chell said that he was “young, inexperienced and was irresponsible in my actions,” and that he had “learned a lot since 1998 and work hard to conduct myself in a manner that does not reflect that poor judgment.” A Kodak spokesman did not return a request for comment about Mr. Chell and whether it knew about the ban.

Mr. Chell has refashioned himself as a blockchain expert in recent years, and KodakCoin is his biggest project so far. He is the chairman of Appcoin Innovations, which was registered as a literary agency — Redstone Literary Agents — until last year, when it became a consulting firm that provides “a turnkey set of services for companies to develop and integrate blockchain and cryptocurrency technologies,” according to securities filings.

The company, which trades over the counter as a penny stock, earned no revenue in 2015 or 2016, according to S.E.C. filings. Appcoin Innovations is slated to receive 20 percent of all KodakCoins issued and a portion of the offering proceeds, a stake that could amount to millions if the offering is successful.

“Once formally launched,” Mr. Chell wrote to me in an email, “the company will hopefully provide shareholders a traditional and transparent place to participate in the crypto space with projects that are regulatory compliant.”

Now, about those coins. You might think that a digital currency that is trying to “democratize photography and make licensing fair to artists,” in Mr. Clarke’s words, would be easily accessible. But because of regulatory requirements, KodakCoins will be available only to so-called accredited investors in the United States. An accredited investor is defined as a person with a net worth of $1 million or more, or an annual income above $200,000.

How many cryptocurrency-obsessed millionaire photographers do you know?

Even if photographers do meet the requirements to participate, they could have a hard time spending their KodakCoins, or redeeming them for cash. The S.E.C. has warned that securities sold in private offerings, such as KodakCoins, may be difficult to resell — and that investors may be required to hold on to them “indefinitely.” A KodakCoin representative told me that the company believes its tokens will eventually be freely traded, and that it may issue other types of tokens in the future that will not be subject to the same restrictions.

KodakCoin’s white paper says that token holders may receive other benefits, such as a share of KodakOne’s revenue and access to a “marketplace” that will allow them to spend their KodakCoins on camera equipment, studios for photo shoots, and travel expenses. But these benefits could fail to materialize.

Cryptocurrency experts also do not seem impressed with the Kodak KashMiner, a Bitcoin-mining machine advertised at this year’s CES electronics trade show. According to the advertisement, users will pay $3,400 to rent the machine, a Kodak-branded computer that solves complex math equations to unlock new Bitcoin, for two years. Half the Bitcoins successfully mined with the Kashminer will go back to Spotlite, the company licensing Kodak’s name, and the user will keep the other half.

Kodak hasn’t shared many details about its KashMiner deal. But renting the machines could be a hard sell. In its CES advertisement, KashMiner estimates that each renter will earn $9,000 from mining Bitcoin over the two-year contract window. Experts told me that figure was most likely inflated, because Bitcoin mining gets harder over time. And they pointed out that the KashMiner itself appears to simply be a rebranded version of a popular Bitcoin-mining machine that can be purchased outright for less than the rental cost.

All of this — the origins of KodakCoin, the currency itself and the lofty claims about the KashMiner’s moneymaking potential — adds up to a big question mark, and points to the possibility that Kodak may be in over its head.

“The best-case scenario is that they believe that the technology will eventually be able to deliver what they’ve pitched,” said Ms. Carlson, the blockchain consultant. “The worst-case scenario is that they are just being very opportunistic.”

Mr. Clarke, Kodak’s chief executive, characterized the blockchain projects as a small part of the company’s overall strategy, and said it was “ironic” that critics were faulting Kodak for embracing a young technology like cryptocurrency, given that its past problems were caused by a failure to innovate.

“This isn’t speculative,” Mr. Clarke said. “We’re taking an emerging new technology in blockchain, and we’re using it to solve a real problem.”