Pike County received its first repayment last week on a controversial $400,000 loan it made in 2014 to RCL Chemical — a company promising hundreds of jobs in Eastern Kentucky at a proposed plant that would convert natural gas into various liquid products.
Money for that $50,000 payment, though, was raised from a very unconventional source: cryptocurrency. It's an industry that has sparked warnings and scrutiny from the U.S. Securities and Exchange Commission.
Last month, New York-based cryptocurrency investment company Y2X Infrastructure agreed to secure $325 million to fund RCL's proposed natural gas-to-liquids plant in Eastern Kentucky. Y2X was founded less than a month ago and defines itself as a "blockchain-centric company," which means it uses cryptocurrencies, such as Bitcoin, to fund its projects.
The first payment on RCL's loan came from the company's deal with Y2X, said RCL Chairman and Chief Operating Officer William Johnson.
The project began in 2014, when representatives of RCL Chemical proposed building an industrial plant in Pike County that would convert natural gas into synthetic waxes, base oils, specialty lubricants and fuels.
In August of that year, the county agreed to loan $400,000 to RCL to jump-start the operation and help diversify the region's stagnant economy.
But two years later, citing a lack of sufficient infrastructure at the site, RCL decided to move its operation to neighboring Floyd County.
The move caused a rift between Pike County and RCL, and between Pike and Floyd counties, that delayed the project even further, said Herbie Deskins, Pike County's deputy judge-executive.
In addition to their grievances over the move, officials worried about the project's financial stability, and wondered what would happen to the $400,000 if the project fizzled out.
The Pike County Fiscal Court eventually voted to file a lawsuit against RCL, but never acted on that vote.
"If a lawsuit had been filed when they first wanted to, it would've bankrupted the project," Deskins said.
Last month, RCL announced it had secured the $325 million investment deal with Y2X.
Floyd and Pike County officials praised the news, saying the plant could provide hundreds of jobs in a region that has seen coal employment drop from 13,679 in 2011 to 4,042 last year.
“It could change the face of our coal economy,” Floyd County Judge-Executive Ben Hale said at the time.
'An entirely new market'
The future of the project, though, now rests on the shoulders of the newly-formed Y2X Infrastructure and its cryptocurrency investment model.
According to a news released dated May 15, Y2X is raising an initial $200 million through a "Global Token Offering," a process similar to an initial public offering, when investors buy shares of a company.
Most of these initial coin offerings raise money before a company makes its first product, which "makes the investment extremely speculative and risky," according to an article in Bitcoin Magazine.
Some companies, though, have been able to raise staggering amounts of money in short spans of time through similar offerings. One such company, called Status.im, raised $270 million in just a few hours, according to Bitcoin Magazine.
In a public statement issued in December, SEC Chairman Jay Clayton warned investors to be careful of blockchain-centric companies, saying there are still many unresolved questions regarding the legality and trustworthiness of the industry.
"A number of concerns have been raised regarding the cryptocurrency and (initial coin offering) markets, including that, as they are currently operating, there is substantially less investor protection than in our traditional securities markets, with correspondingly greater opportunities for fraud and manipulation," Clayton said.
In April, the SEC charged two co-founders of a blockchain startup with creating a fraudulent coin offering that raised more than $32 million.
Y2X declined to comment on its funding model or its investment deal with RCL.
According to its website, "Y2X Tokens will be issued in compliance with U.S. and other securities regulations and the company is working with trading venues to create secondary markets."
One of the key issues with initial coin offerings, according to the SEC, is whether the coins, or "tokens," qualify as securities. If the coins do qualify as securities, companies like Y2X must register as a securities broker and comply with other federal laws.
"It is especially troubling when the promoters of these offerings emphasize the secondary market trading potential of these tokens," Clayton said. "Prospective purchasers are being sold on the potential for tokens to increase in value — with the ability to lock in those increases by reselling the tokens on a secondary market — or to otherwise profit from the tokens based on the efforts of others. These are key hallmarks of a security and a securities offering."
To date, no company has registered an initial coin offering with the SEC, an SEC spokesman told the Herald-Leader.
David Yermack, a business and law professor at New York University who has taught courses on Bitcoin and cryptocurrencies, said the agreement between RCL and Y2X "looks very unusual, even unprecedented."
"I am not aware of any cases in which they have constructed a bricks-and-mortar manufacturing facility in an industry like chemicals," Yermrack said. "Also, the scale of the investment is far beyond the size of most of these funds."
If Y2X manages to raise the money, "it would take token-based financing into an entirely new market," he said.
'We're not going anywhere'
Even if Y2X succeeds in raising the money needed to build RCL's chemical plant, there are other concerns about the project's economic viability.
A 2017 study by researchers at the MIT Joint Program on the Science and Policy of Global Change casts doubt on gas-to-liquids projects similar to RCL's.
The study concluded that, even under the most optimistic circumstances, gas-to-liquids technology will likely fail to emerge as a profitable industry in the coming decades.
Researchers found that gas-to-liquids technologies are too expensive to compete with similar products made from crude oil, particularly fuels used within the transportation sector.
There are companies, including Chevron and Shell, operating gas-to-liquids plants in other countries, including two in Qatar and one in Malaysia, but none are under construction in the United States, according to the study.
Using a model that analyzes the feasibility of gas-to-liquids under different economic and price-based scenarios, the researchers found that "GTL is not likely to be a major part of global industry."
Johnson said the Floyd County plant will focus much of its operation on specialty waxes rather than fuels.
Because those waxes are not as closely tied to the price of crude oil, RCL's plant will still be economically viable, he said.
"We’re kind of in an independent specialty market," Johnson said.
The waxes could be used for a wide range of products, from candles to shampoo. If the project comes to fruition, the Floyd County plant will be the first in North America to concentrate on producing those products.
The company expects construction to begin this fall.
"We're not going anywhere," Johnson said. "It's been a long time coming for us."