A millionaire who made his wealth in London real estate isn’t the most obvious investor for a crypto exchange.

But Jonathan Sandelson, a prominent British real estate magnate, was more than an investor in LBX founder Ben Dives’ vision of a digital exchange for the British masses. He was a friend and mentor first and foremost, having hired Dives straight out of university as his driver in 2001. Seemingly having forgiven Dives for scratching his luxury car in their early days, the two eventually went into business in 2017, riding the bitcoin wave.

Sandelson funded the full £2 million private seed round, taking 50% of the London Block Exchange (LBX).

It looked to be another solid investment. The press flocked to LBX after they launched in November 2017 with plans for a crypto Visa debit card, boasting on-shore banking and compliant oversight. They signed up around 10,000 early users within months, promising to “bridge the gap” for those lacking crypto knowledge but wanting to take part. They brought in a former UBS senior manager as Chairman.

But the lessons Dives learnt from his millionaire business partner from the front seat of his car – things haven’t turned out as planned.

Two executives, Adam Lee and John McLeod, have resigned (their wages to be paid in arrears). Their prime product – the Visa Dragoncard – never launched. And a swathe of banking and legal setbacks has left the firm on the brink of extinction.

Most notably, Dives liquidated a further 25% of his stake to Sandelson, in exchange for another emergency cash injection of £1.5 million early last year.

Following a month-long investigation by The Block and amid an onslaught of online accusations, we go inside the exchange and its strained two-year history. Where did it all go wrong? Where did the funds go? And is there a chance of survival?

A series of unfortunate events

At its core, LBX’s woes today are the product of having bitten off more than it could chew. And a serious dose of bad luck.

Story continues

It began with a poor turnaround on its first major investment, a crypto debit card. The card issuer, WaveCrest, lost its Visa-payment license and as a result, LBX's most-celebrated product fell through. Dives says LBX has also yet to see at least half of the money they paid come back to them.

The remainder of the year saw going-to-market costs spiral. Dives provided an accounting overview of how £2 million disapparated quicker than expected, listing “staff, suppliers, HMRC [tax], tech, advisors, consultants, banking fees [near £20,000 per month], security firms, accountants, lawyers, compliance, branding, advertising, PR.” He added that they had opted to build “an exchange that was [regulatorily] robust, and that was expensive.”

Early 2018 saw the firm descend into operational and financial difficulty, prompting Sandelson's second investment. “There wasn’t really any choice,” Dives tells The Block of his business partner's decision to continue backing them. Meanwhile, trading on its fiat on-ramp all but dried up as the bear market took hold.

Then, the firm hit every exchange’s worst nightmare. A compliance glitch saw LBX being targeted by a money laundering unit, resulting in several accounts being temporarily frozen at behest of a court order. Asked if LBX cut costs on compliance, Dives argues the opposite happened.

“Absolutely not. We paid them [the compliance officer] well above market rate…Compliance is our commercial advantage." He added, "Almost every exchange has had money laundering of some sort."

Dives had been acting as chief compliance officer at the time after parting ways with the individual contracted to lead compliance, with whom there is now an ongoing legal dispute. He says a new reporting officer is due to start in May.

As expenses added up, and having exhausted Sandelson’s financial contribution, LBX then looked to raise money with an ICO in late 2018. As notable crypto personality Peter McCormack said on Twitter, it fell through. Dives confirmed a few token buyers had not yet had their investments returned. He also did not rule out the possibility of an ICO further down the line.

The funding issues culminated when their representative law firm, Squire Patton Boggs, issued a public “winding-up petition” for a billing conflict. If successful, the petition forces a company into liquidation to pay back its debtors. Dives says LBX paid a £9,900 bill but were then asked to pay another lump sum, resulting in the dispute.

"They're trying to say there's an additional cost of another £4000 on top of the £9,900, if not more. It smacks of bullying...we've never received a justification on it."

Squire Patton Boggs could not comment further when approached by CoinDesk. The Royal Court's cost officer will give a verdict tomorrow.

Finally, over the last few months, LBX staff have received only a fraction of their salaries. It also resulted in the departure of two executives who Dives says nonetheless left on “good terms.” Still, he rejects claims by Peter McCormack that there has been no pay this year. He also denies that the firm is insolvent.

Operation salvation

Dives isn’t under any illusion of the difficulties that await him and indeed the industry he’s opted to join.

“Starting an exchange is either an incredibly brave or stupid thing to do,” he says. “It is a game of risk management…It’s consistently high emotions because it's high risks and it's money. It brings out the most extreme aspects of humanity... It's terrifying.”

The company is now pivoting to become a sterling (£) liquidity pool or OTC desk with a financial services spinoff, LBX Pay. Dives says the service has around 150 clients and is “profit-making,” having “turned around the fortunes” of the company.

Beyond that, the goal is to become the 'Silvergate of the UK.'

"In September we were given permission to operate business accounts for businesses who couldn’t get banking elsewhere," Dives said, confirming they were in advanced discussions with one crypto firm to offer them blockchain payments services and liquidity.

Now Dives is projecting LBX Pay will see revenues of over £10 million in the next 5 years, hoping for a lucrative exit strategy. The hope is that a clean sheet will be enough to steady the ship and lure in both clients and investors.

And he’s adamant he won’t go down without a fight. The firm is now “close to closing” a fundraising round and has already reportedly secured two capital packages in the form of convertible loans. He also said they are expecting a £500,000 tax rebate.

“Look I’m 40, I’m not messing around, I really want to make this work."

Success at this point is arguably a long shot. LBX will need to settle its debts and court proceedings first. But crazier things have happened – and if there’s any industry prepared to give second chances – it’s crypto.