This piece originally appeared in The Nation on December 22, 2021 and has since been updated to reflect developments in the case.

It’s understandable why millions of people would like to see Elizabeth Holmes’s head on a pike.

She has become, conveniently if involuntarily, the poster child for a wide variety of sins: the excesses of Silicon Valley, commonplace corporate lies, a thorough lack of executive accountability. The jury just found the Theranos founder guilty on four of the 11 charges, including multiple counts of wire fraud (that quaintly named crime, suggesting that American statutes have not caught up to the 21st century). Holmes, at one point the world’s youngest self-made female billionaire, could go to prison for 20 years or more, having defrauded the investors who put a billion dollars or so into her company.

The trial and the Theranos saga have been an object lesson on what is wrong with health care and American capitalism.

It’s impossible to fault Holmes or Theranos for trying to produce a quick, pinprick blood test that would make so much of the world’s health care delivery easier, faster, and putatively cheaper. True, some or perhaps most of Theranos’s champions may have had less-than-pure motivations; John Carreyou’s vital book Bad Blood depicts Walgreens executives, for example, as conspicuously incurious observers of Theranos’s technology, lest there be any obstacle on the path to the cash register. In 2010, the Walgreens CFO visited Theranos’s Palo Alto headquarters and was, according to Carreyou, unfazed by lack of access to the laboratory, happy instead to accept an autographed American flag that Holmes said had flown over an Afghanistan battlefield.

Still, we want entrepreneurs to swing for the fences, don’t we? If venture capital and other investors are going to pump their billions into start-ups, it’s better that they support health care innovation than, say, Juicero, the VC-backed $400 kitchen device for squeezing fruit that quickly went the way of all peels and rinds.

Virtue of purpose is, of course, no excuse for fraud. Theranos, depending on your perspective, committed fraud for many years, almost immediately from its 2003 launch. Holmes’s intensity and gender-pioneer status bamboozled not only investors but a small army of journalists. I was among them: As the editor of Inc. magazine, I put Holmes on our October 2015 cover. (I’ll still defend the story, but regret calling Holmes “the next Steve Jobs” on the cover, not that Jobs was a CEO without flaws.)

More surprising and disturbing than the seduction of journalists is that Theranos’s top-tier investors didn’t smell something unpleasant years ago. This has been an essential discovery during Holmes’ trial; Bloomberg reported: “Theranos forecast revenue of $140 million in 2014, and almost $1 billion for 2015. Holmes’s top financial officer testified that Theranos posted just $150,000 in revenue in 2014. Evidence at trial shows it was even less in 2015.” This kind of shortfall should have triggered nuclear alerts, from major investors and board members; the lack of public flares vividly illustrates the cynical corruption of America’s financial leadership.

But the broader indictment should be of the for-profit health care system that made Theranos attractive in the first place. One of the trial’s most telling threads involved Theranos not disclosing basic information to Walgreens because it was trying to protect trade secrets.

Whether it’s quick blood tests or mRNA Covid vaccines, health care technology is an obvious public good, and the Theranos debacle—regardless if Holmes is convicted or acquitted—shows the predictable perils of entrusting those technologies to a patent-enabled private sector. The public sector is hardly immune to missteps or corruption, but a blood-test technology under the supervision of the government would not have needed to fake revenue results, and would likely not have produced fraud on a Holmesian scale.

That juxtaposition is especially ironic because, as the flag-over-Afghanistan anecdote reminds us, Theranos was in a critical sense a creature of the military-industrial complex. The US military was highly interested in Theranos’s technology, because it believed that this technology could be supremely useful in a battlefield setting. One of Theranos’s board members was former secretary of state George Shultz (in a wonderfully Oedipal twist, his grandson Tyler, briefly a Theranos employee, was a major source for the Wall Street Journal series that destroyed Theranos and ushered in the federal indictment).

I can’t help wondering: If Theranos had been indirectly working on behalf of a taxpayer-funded military, what would have happened if taxpayers had directly funded the blood-prick research? Might we have achieved the science without the fraud? It seems like a useful experiment.

James Ledbetter is the publisher of FIN and chief content officer of Clarim Media.

In September, after watching nonresponses to disingenuous Senate questions, FIN wrote:

a Congressional hearing is typically a poor venue for gaining insight into the American financial regulatory system. Even when the events are not contentious, they can seem like experiments to concoct a maximum number of ways for people to talk past one another.

Those remain reliable watchwords, but a recent House Financial Services Committee hearing on cryptocurrency showed that it doesn’t always have to be an exercise in bad faith. The four-plus-hour hearing, with several crypto executives as witnesses, was almost entirely civil in tone—if anything, some of the witnesses could have been grilled much harder—and touched on a wide range of subjects in ways that were genuinely edifying. We’ll get to a broader, arguably troubling theme in a moment, but it’s worth cataloguing several legitimate policy issues aired during the hearing.

At what point should we be concerned about the possibility of a bubble? With the massive growth of cryptocurrency, this question from Al Green (D-TX) seemed pretty relevant. Brian Brooks, the CEO of Bitfury and the former acting Comptroller of the Currency, provided a solid, if not bulletproof, answer: crypto volatility stems a lot from being a relatively new and thinly traded market. Much of what provides stability in, say, equities markets is an ecosystem that provides a lot of price discovery: mutual funds, futures, derivatives, etc. He also claimed that some 80% of Bitcoin holders, for example, have never sold any of their holdings, and therefore days or weeks when Bitcoin tumbles can often be attributed to a very small number of people (even one) selling. Therefore, he argued, what the crypto market needs is more liquidity and price discovery, not less.

What effect will the growth of crypto have on community banks and minority-owned depositary institutions? This question from Greg Meeks (D-NY) turned into a bit of a commercial for Circle Impact, an ambitious initiative announced last month by Circle, which operates USDC, the second-largest dollar-denominated stablecoin. Circle CEO Jeremy Allaire explained that because Circle isn’t a lending institution, it intends over time to allocate billions of dollars worth of USDC to minority-owned and community lenders, to shore up their balance sheets and, ideally, create more capital for underbanked communities. The program has yet to get off the ground, but using crypto to enhance financial inclusion is an area where Congress can at least theoretically play a useful role.

Does cryptocurrency represent a threat to the dollar’s status as the world’s reserve currency? This concern came from Blaine Luetkemeyer (R-MO), and presents a tricky challenge to the way that a lot of people think about crypto. That is, US crypto advocates talk about the need for monetary innovation, and the need to keep that innovation inside the US, not drive it abroad. But if the US dollar—even in a future digital form—has to compete in a global marketplace on the basis of its features (as opposed to the hegemonic status that Bretton Woods conferred upon it), then there is no guarantee that it will beat Bitcoin, or the digital yuan, or some currency that hasn’t been invented yet.

Brooks, at a minimum, has thought about the question. “I’ve said for a long time that the secular reduction in dollar holdings as a percentage of global central bank holdings is alarming,” he said. Actual solutions, however, seemed in short supply.

Should stablecoins, until future legislation might deem otherwise, be regulated as commodities? Sean Casten (D-IL), referring to the federal government’s recent report on stablecoins, asked this, noting that the legal protections to make stablecoins behave like a currency are not now in place. Allaire gave a reasonably plausible “no” answer, pointing to a number of existing regulatory requirements that treat USDC the same way that cash transactions on Square or PayPal are handled.

Largely absent from the hearing was the kind of swashbuckling, Muskian sneering at the very idea of regulation. Indeed, FTX CEO Sam Bankman-Fried said explicitly that there were certain consumer protections around crypto trading that he would welcome, and that would benefit the crypto industry.

Despite such comity, the hearing did surface a burgeoning theme of conflict. Ranking member Patrick McHenry (R-NC) alluded to it in his opening statement: “My fear is that we’ll have a partisan divide.” Some Democrats, he said, may already have made up their minds about crypto, and intend to file regulatory laws that will stifle or kill crypto innovation in the US. A cynic might point out that McHenry may actually welcome such a divide; at least since the middle of the year, there has been a palpable sense in some public settings that Republicans want to champion and enable the cryptocurrency ecosystem, while Democrats want to attack it, or at a minimum regulate and tax it.

An opinion piece this weekend on the Decrypt site used the headline “Democrats Are Blowing the Bitcoin Vote.” It argued:

Republicans are becoming the party of crypto, while Democrats are earning a reputation as anti-crypto….This is a terrible mistake….Why are Democrats opposed to crypto? Their hostility may be rooted in the libertarian leanings of many early crypto adopters, few of whom are inclined to support a party associated with big government. What they’re missing is that Bitcoiners will happily support any politician who supports Bitcoin, no matter how flawed, from Nayib Bukele to Ted Cruz.

There are some questionable assumptions here, such as the idea that “the Bitcoin vote” represents in any given non-national election a sufficient, freestanding constituency of any importance. It does seem to be the case, at least for now, that crypto owners have no automatic party allegiance. A Morning Consult poll released this week found that “61 percent of crypto owners say they voted for Biden last year, compared to 32 percent who say they voted for former President Donald Trump.”

And neither is it clear that regulation is an especially partisan issue: “Notably, 45 percent of Democrats and 58 percent of Republicans didn’t know or had no opinion on the amount of cryptocurrency regulation.”

But that picture may change as crypto companies become bigger players in the political arena. Especially this summer when it emerged that the proposed (and now passed) infrastructure law targeted crypto brokers, the crypto industry has frantically increased the amount of time and money it spends on federal lobbying:

Membership has risen from 28 firms to 65 since January 1. Meanwhile, the 2020 budget that was just shy of $2 million has gone up to nearly $8 million, according to executive director Kristin Smith and the association’s most recently filed 990 forms. Among the most recent members are Solana Labs, Republic, Dapper Labs, Tacen and Messari. 

Here’s a safe bet: with Congressional elections coming next year, that $8 million figure is going to balloon. Indeed, with all of the cyberwealth looming around the cryptocurrency industry, it is increasingly likely that individual members of Congress will raise substantial piles of campaign cash from crypto firms.

Cynthia Lummis may be a small indicator of what the future looks like. Elected last year as the junior senator from Wyoming, Republican Lummis has developed a reputation as a crypto advocate. Keeping in mind that Wyoming campaign spending is relatively small and that Lummis doesn’t face re-election until 2026, it’s still interesting to note who is donating to her campaign. A recent investigation by The Block (behind a paywall) found that a majority of the individuals who have donated to Lummis’s campaign work for firms that The Block deems either “crypto native” (such as the CEO of Kraken) or “crypto adjacent.” The crypto industry has lots of money to spend, and important policy issues at stake; look for more Lummis scenarios in next year’s elections.

This piece originally appeared in FIN, James Ledbetter’s fintech newsletter. Ledbetter is Chief Content Officer of Clarim Media, which owns Techonomy.

This piece originally appeared in FIN, James Ledbetter’s fintech newsletter.

It’s merely an impression, but it feels like the climate criticism of cryptocurrency mining has been less prominent in the second half of 2021 than in the first half, even as cryptocurrency itself has continued to skyrocket. In May, for example, the New York State legislature considered a bill that would have imposed a three-year moratorium on cryptocurrency mining until an environmental impact study could be concluded. That bill died quickly, and there’s been not much formal action since then. In part, this may be because the crypto industry has been on a global lobbying offensive this year, successfully circulating the message that blockchain technology could help boost growth in renewable energy.

US Senator Elizabeth Warren (D-MA), however, is not having it.

This week she sent a remarkably detailed letter to Jeffrey Kirt, the CEO of Greenidge Generation Holdings, a publicly traded Bitcoin mining company headquartered in Dresden, New York, in the Finger Lake region. Warren asked for information about Greenidge’s operations and “the resulting impacts on the environment and local communities.” What makes Greenidge especially interesting—and this is starting to become common among large Bitcoin miners—is that the company doesn’t merely use energy by mining Bitcoin, it also produces the energy, in its case primarily through natural gas, and sells some to state residents.

For Warren, this might represent the worst of both worlds, energy and crypto. The Senator strongly implied that Greenidge’s stated commitment to sustainability is, at best, lip service: “Your company claims carbon neutrality through the purchase of carbon offsets, but its Dresden facility is still putting hundreds of thousands of metric tons of carbon dioxide into the atmosphere that would not be emitted otherwise.”

Greenridge is, to put it mildly, an unusual company. It describes itself as a “vertically integrated Bitcoin mining company,” but Greenidge only began commercial Bitcoin mining last year. It grew out of a consortium of coal plants in upstate New York that date back to the 1930s. A lack of electricity demand bankrupted the plant in 2011, but it reopened a few years later and converted to natural gas. The company has faced pressure around the state air permits for its main plant but, intriguingly, it has strong public support from the local electrical workers’ union. Earlier this year, Greenidge also purchased a public company called Support.com, which operates remote call centers.

You might think that a company at the heart of the cryptocurrency explosion would be, well, minting money. In reality, though, Greenidge is fairly small and, while growing fast, unprofitable. In the third quarter, Greenidge mined 729 Bitcoins, not quite 3x what it mined the year before. At current prices, that comes out to about $36 million. Given Bitcoin’s market capitalization of about a trillion dollars, you get a strong sense of how decentralized Bitcoin mining is. Greenidge is not only far from being a global leader in Bitcoin mining, it’s not even the largest in the US. (That honor would appear to belong to the Whinstone mine in rural Texas; in October CNBC.com reported that it was mining more than 500 Bitcoin a month.) Greenidge’s most recent earnings statement showed a Q3 loss of about $8 million on revenues of $35.75 million. Greenidge did not respond to FIN’s request for comment.

Nonetheless, the company clearly plans for meteoric growth, which provides some basis for Warren targeting it; Greenidge is also planning to open a power/mining plant in Spartanburg, South Carolina. FIN predicts that it’s going to be a while before Greenidge responds. Warren’s six-page, single-spaced letter delves pretty deeply into the details that one might expect from a former law professor. For example:

How does your impingement data compare to the Environmental Protection Agency’s (EPA) proposed numeric performance standard of limiting fish impingement mortality to no more than 12% on an annual average and 31% on a monthly average, and how does your entrainment data compare to the EPA standard for new units of reducing entrainment mortality to the equivalent of 90% of reductions achieved by closed-cycle cooling?

Warren’s legislative goal here is unclear, especially because this Congress seems unlikely to pass any new laws cracking down on crypto mining. Still, it’s far from impossible to envision a future in which large renewable energy companies generate power for free for their local grids, and subsidize that social goal by mining cryptocurrency. After all, cities like Miami have already made millions by issuing their own crypto coins. If Warren’s grilling can push toward that outcome, then let’s see more of it.

Wise Storms the US

Wise is one of Europe’s most successful fintech startups (OK, it’s based in London, but back when it launched in 2011 and was known as TransferWise, London was still part of Europe, plus the founders are from Estonia). Wise made a splash by offering crossborder currency exchanges at rates far lower than traditional banks and, while the company has had a bumpy ride since going public in July, it’s been profitable for years and is one of very few European fintechs worth billions of dollars.

Now, Wise is making a serious push into the North American market. This week, the company launched a “Wise card” in Canada that allows customers to spend money in US dollars and other currencies without any transaction fees. Wise also announced that it is opening a major office in Austin.

Currently, about a fifth of Wise’s business is in North America, but the company is pushing for more. Wise CTO Harsh Sinha told FIN “the US is one of our fastest-growing markets, and obviously a very large market.” Sinha says Wise chose Austin in part because “there are a lot of people who are a little bit fed up with the Bay Area.”

How much does it matter to Wise that, especially since the COVID pandemic, Americans travel less outside their own monetary borders than Brits and Europeans do? Sinha acknowledges the issue, but argues that 1) younger Americans are more internationally focused, and 2) Leisure travel per se is a limited use case. Wise will focus on businesses and remittance payments in the US market.

Even so, N26’s very recent abandonment of the US market has to give any outside fintech companies pause. Sinha makes a very reasonable point that for a banking relationship to work, many people psychologically need to feel that their money is somehow close by (there are a few large multinational banks with prominent roles in the US, including Banco Santander and HSBC, but Sinha maintains that they function as if they were domestically controlled). By contrast, he argues, a payments/transfer business is intrinsically virtual, and consumers will be attracted to a good deal.

This piece originally appeared in FIN, James Ledbetter’s fintech newsletter. Ledbetter is Chief Content Officer of Clarim Media, which owns Techonomy.

Next week, thousands of people will gather from around the globe for the United Nations’ two-week COP26 climate conference in Glasgow, Scotland. The COP (Conference of Parties) was canceled last year, so this is the first such gathering since the COVID-19 crisis began, and the pressure is on global leaders to do something significant about climate change.

On the global scale, nations have been making new carbon-reduction pledges in the runup to COP26. A major breakthrough seemed to come in 2016 with ratification of the UN’s Paris Agreement, when all nations—including top emitters of greenhouse gases—committed to significantly reduce their carbon footprints by 2050. The pledges were voluntary, however, and most countries haven’t made much progress toward their goals. But now COVID and other natural and human-made disasters that have befallen us add to the realization that we face an existential threat—and many government leaders are responding.

They’re not moving as quickly as some climate activists would like, though. “Unless we do something, and fast, it’s going to bring a collapse of all of the earth’s systems,” says Peter Head, chairman of Resilience Brokers, a UK sustainability not-for-profit, and one of the founders of Pivot Projects, a global initiative that launched at the beginning of the COVID pandemic to help address the climate crisis. “I would tell world leaders that every child that’s born in your country from now on is going to face the collapse of human civilization, and you’ll never be forgiven unless you do something about it very urgently.”

Delegates to COP26 as well as heads of state from as many as 120 countries will gather in the sprawling Scottish Event Campus on the north bank of the River Clyde.  Meanwhile, climate activists from the UK and around the world will be staging their own “fringe” events across the city. One of them, After the Pandemic @ COP26, is a combined street fair, education center, and design charette aimed at helping Glasgow and other cities and towns transform themselves in response to climate change.

While policy changes and investments on the national and global levels are critical to addressing climate change, civil-society groups realize they can’t depend on the UN or national governments to save the planet. They have to act now to reduce their communities’ carbon footprints and to adapt to the changes that are coming. After the Pandemic @ COP26, for example,  was developed by local Glasgow organizations including After the Pandemic, a grassroots group that was formed at the onset of COVID to help the city become more sustainable and resilient. Graham Hogg, a director of the design firm Lateral North and one of the founders of After the Pandemic, says After the Pandemic @ COP26 “is a space where people can come in and engage with others at the local level. It’s about making sure COP is community focused and people focused.”

Since COVID, there has been an explosion of such groups aimed at helping to make the planet and communities more sustainable and resilient. “The role of non-state actors, including community-based projects and grass-roots movements, is more important than ever,” says Alex Joss, the lead for technology and innovation with the UN High Level Climate Champions team for COP26. He hailed the recent explosion of collaboration on digital platforms: “This makes community and grassroots projects scale even faster.” The Climate Champions have developed two programs, Race to Zero and Race to Resilience, which are aimed at elevating ambition and mobilizing climate action among communities, cities, regions, businesses, and investors.

(For an amazing example of a city where the government and private industry are aggressively pivoting away from reliance on fossil fuels and towards renewable energy, read about Aberdeen, Scotland, at Techonomy.com in an article to be published Wednesday, November 3.)

Some progressive businesses are also now leading the way, either individually or in partnership with other organizations. In September, more than 200 U.S. companies pledged to reduce their carbon emissions over the next two decades. One of the signers, Salesforce, went much further, announcing it has already become a net zero company—achieving 100% renewable energy across its operations and supply chain. The company also announced a cloud service to help its customers track and reduce their emissions. “I see a major change in the attitudes of businesses,” says Suzanne DiBianca, Salesforce’s chief impact officer. “Their employees are shouting about it. They see regulation coming. They see they have a role to play in social change. They have to serve all of their stakeholders, not just their shareholders.”

The US Coalition on Sustainability was inspired by a collaboration with UN Deputy Secretary-General Amina Mohammed to help unite businesses and other organizations committed to climate action and the UN’s Sustainable Development Goals. Its SustainChain platform, available from any connected device, provides an AI-based recommendation engine, search, and joint action space to inform action and help advance the SDGs. In a little more than one year, more than 1000 organizations have joined. (We’ll explain much more about SustainChain in an article that will be published on Techonomy.com Monday, Nov. 1.)

A number of related sustainability initiatives have emerged around the world since the onset of COVID that take a new approach, Pivot Projects and SustainChain among them. They share a set of core values, including a belief in the power of collective intelligence, systems thinking, and digital research and collaboration technology to help society and communities adapt and address environmental challenges.

Systems thinking is the idea that the world is a gigantic system of systems, both natural and human-made, where everything is connected, ultimately, to everything else. One of its key tenets is that when dealing with complex situations, it’s futile to try to break issues down into discrete problems to be solved in isolation from one another. We have to understand how they’re interrelated and then design interventions that address those factors.

Governmental leaders don’t tend to be big systems thinkers. In democracies, many of them focus primarily on getting reelected. Nor are CEOs oriented towards this approach. Many corporate leaders focus laser-like on quarterly earnings “We see a gross deficit of systems thinking at the level of senior decision making,” says Tim Lenton, a professor at the University of Exeter in the UK and director of the Global Systems Institute.

Still, Lenton is hopeful. His research into climate systems convinces him that there is great potential for what he calls “positive tipping points” to catalyze profound changes at a massive scale. He points as an example to the UK government’s imposition of a tax on carbon emissions in 2013 that led to a cascade of closings of dirty coal-fired power plants. “Positive tipping points can help accelerate or self-propel the change we need,” he says.

Lenton believes that positive tipping points can be launched at the hyper-local level as well. Examples are the transition town movement in the United Kingdom and the community garden movement in the United States. That’s one of the reasons he backed the creation of Exeter Living Lab, a partnership between Pivot Projects and the University of Exeter aimed at using systems modeling, collaboration, and AI-research tools to help students and faculty members connect with community groups in Exeter City for sustainability projects. (Exeter Living Lab will be the focus of an article at Techonomy.com on Friday, Nov. 5.)

Another core belief many of the new sustainability groups share is that society needs to make a major mind shift in how we operate day-to-day. Today, most government and business interactions with people are viewed as transactional. These sustainability groups believe we should treat our interactions as connection points in long-term relationships. Only if we recognize and deal with people as individuals—rather than generic customers, consumers, or clients, they have concluded, will we truly understand their needs, improve their lives, and make society work better.

This thinking has given rise to a new approach to managing organizations called “Human Learning Systems.” The initial focus has been on government services, and the idea is that the people who are being served by government agencies should be treated as part of complex webs of relationships; that the government agencies and non-profits that serve them should coordinate the services they provide with a focus on the needs of each particular individual; and that clusters of service organizations should experiment together and learn from their successes and mistakes. The same principles can be applied to organizations of all types and even to our personal interactions. “This scales from the individual level to local, national, and transnational,” says Toby Lowe, visiting professor of public management at the Centre for Public Impact, who was one of the initial developers of the Human Learning Systems approach. 

(On Nov. 12 we’ll publish an article about a community-building program called Resonate Together in Alloa, Scotland that treats people respectfully and nurtures them via creativity.)

Pivot Projects shares these beliefs about the power of respect for the individual and connectedness. It was launched early in the COVID crisis as a global all-volunteer collaboration to help communities set out on more sustainable paths. It aims to size up climate-related challenges, using collective intelligence, systems mapping, and an AI-assisted research tool, SparkBeyond’s Research Studio. If you want to learn more about Pivot Projects or get involved, register for a free live and live-streamed event, It’s Time to Pivot, that the group is presenting on Nov. 6 in Glasgow as part of the Malin Group’s Spotlight series.

It has been a rough 19 months since COVID broke out globally. In addition to dealing with a pandemic, we face the complex threat of climate change even while political polarization and misinformation are clawing away at the pillars of civilization. But it’s not too late. There are things we can do as individuals and in small groups. And, in democracies, we can vote to save the planet. Let’s pivot now.

—

Steve Hamm is a freelance writer and documentary filmmaker based in New Haven, Connecticut, USA. He was embedded as a journalist in Pivot Projects and his book about the journey, The Pivot: Addressing Global Problems Through Local Action, has just been published by Columbia University Press. His dispatches from COP26 will be published by Technonomy.com over the next two weeks.

Historically technology has undone the economic power it creates.  IBM is a good example, still here, but living off its past and fumbling the future.  Yet for the current generation of tech giants, this time may be different.  It is hard to see what displaces the huge installed base that exists today for these companies.  Artificial intelligence, mirror worlds, quantum computing——these will all play an important part in our future, but I am not sure they create a discontinuity.  The current tech giants are already the leaders in these, across the board. So we must find ways to manage and restrain their power.

The technology giants benefit enormously from two factors.  First, they have been able to largely monopolize the market for top technology talent by being able to offer above-market but below-value compensation that others cannot match, aside from potential startup unicorns.  The vehicle for this has been equity-based compensation, aided and abetted by favorable tax treatment from the government along with short-term focused equity markets.  Second, their key raw material, for the most part, is aggregated personally-identifiable information (PII), which they collect by offering free services.  Again, the free services are above market but below value, as there is little value in one person’s data but enormous wealth in aggregating the data of many. 

Thus their dominance is the result of a combination of things.  There is a virtuous circle here—for them.  Top talent yields good business results yields rising stock prices, which yields tax advantages and high compensation for employees. 

Yet we have to find ways to level the playing field. Otherwise, this small group of vastly powerful companies will continue to amass disproportionate wealth even as they periodically wreak social havoc. Legal constraints like antitrust and conventional regulation just do not seem to work.  Taxes do.  We have what we have because corporate leaders optimize within the rules they are given. So we need new rules, and changing how and what we tax may be the most promising approach to genuinely-impactful positive progress.

To level the playing field, I propose five interlocking policy changes. Four of these tax changes are designed to alter behavior more than to raise revenue.  The last one alters how equity compensation awards are taxed, effectively raising taxes on the tech giants but lowering them for their employees.

1. An Excise Tax on Corporate Market Value. 

Here’s a strawman for this: a tax of 1% on market capitalizations over $100 billion, rising by 1% for each incremental $100 billion.  Thus, a corporation valued at $300 billion would pay $3 billion annually in tax.  This tax simply reflects the principle that diversity is good and increases economic robustness, but it lets the market decide what to value and who to punish. Competition is good for society and the economy.  The levels and amounts of such a tax will be a political decision.  This applies to all companies.  The social costs of excessive market and societal power are the same regardless of industry.

2.  An Excise Tax on Personally identifiable information.

PII is the core value for the tech giants, even more than their software.  Just as we tax oil companies for the oil they extract from the ground, we need to tax the tech giants on the PII they collect.  Since no individual’s data is very valuable on their own, but the value of large aggregated groups of such data is high, people charging for use of their own data is not realistic. But since the exact value of such data is impossible to accurately assess, despite its obvious worth, there are metrics such as petabytes accessed per month.  The tax should be targeted to collect, say, an annual tax equal to 20% of the profits of Facebook. Again, the level is a political decision.  It could be as low as 5% or as high as 50% or even higher.  There are ways for Facebook and similar companies to avoid aggregating PII but still conduct their business.

3.  An Excise Tax on Stock Trades. 

This is called a “Tobin tax” after its initial developer, Nobel-prize-winner James Tobin.  Essentially, it presumes that capitalism is too efficient and overweights the present.  Such a tax offsets this overweighting.  Such a tax would reduce the ability of managements to spike stock prices for their own advantage and focus our capital markets more on the longer term. Make it a low tax, maybe 0.5%, but even that would help refocus the market on economic rather than trading value. The goal is to change behaviors not raise revenue.

4.  An Excise Tax on Stock Repurchases. 

Corporate repurchases of their own stock are often motivated by the desire to increase executive pay packages which are tied to the price of the stock.  So it is no surprise corporate managements favor them.  There are some legitimate purposes for such repurchases, so the tax might be set relatively low, something like 5%.  Again, the intent is to drive behavior, not raise revenue.

5.  Tax Treatment of Equity Compensation. 

The tax code encourages companies to grant stock options by giving companies a tax deduction for the actual amount received by employees after a stock has appreciated, even though they do not include that in their reported earnings.  Employees pay ordinary income tax on that amount.  We should tax equity compensation for employees the same way we tax carried interest for venture capitalists, at capital gains rates. But we should allow corporations to only deduct their accounting cost of these awards or maybe a multiple of that.  No one would have foreseen the huge gaps we have seen.  Today this is a huge tax advantage for the tech giants.

Facebook and others did no wrong.  They did what our laws and courts ask them to do: maximize profits.  Maybe they made business judgments that were short-term biased, but our entire capital market is focused that way.  All these taxes should be phased in over time.  The biggest challenge to any policy change is the enormous amount of wealth their equity represents, with all the political pressures that implies. One consequence might be that we’d have more, smaller, companies. But letting the giants divide into multiple companies may ultimately be very beneficial to their shareholders.

If we want a different outcome, we must set different rules.  These tax ideas are but a start. The political reality may be that none of these are feasible, or perhaps only some.  But without major systemic change in how we give companies incentives, society will remain the victim of their ever-growing power.

This piece originally appeared in FIN, James Ledbetter’s fintech newsletter.

Perhaps we were not paying the closest attention—shouldn’t-this-have-happened-months-ago?—to who would be nominated to head the Office of the Comptroller of the Currency (OCC), that backwater financial regulator that is part of Treasury and is impervious to reform because its statutory empowerment dates to the Civil War. The last we had dialed in, there was a pundit battle about whether President Biden would or should nominate former Treasury official Michael Barr versus Mehrsa Baradan, who is, among other things, the author of the vital book The Color of Money.

This week, Biden surprised a lot of people by nominating Saule Omarova, a singularly fascinating figure who is: a Cornell Law Professor; an accomplished scholar with a radical critique of the American financial system; a former lawyer at the white-shoe firm Davis Polk; and a former Treasury official in the George W. Bush Administration. Oh, and she was born in what is now Kazakhstan and was educated in Moscow.

Omarova as OCC chief would be a trifecta of identity politics: the first woman, the first person of color, the first person born outside the United States to grace the OCC throne. In the fintech and crypto worlds, however, people are freaking out. “Omarova is another Gary Gensler and possibly worse,” tweeted one crypto commentator. Reuters’ Breakingviews labeled her “a dubious choice.”

Why all the fear? Well, there is her proposal for a “people’s ledger” which does seem like it would eliminate banking as we’ve historically understood it. Omarova’s point of view about fintech and cryptocurrency might seem at first blush ludicrously broad, but it reflects a wariness about the stability of the overall financial system, clearly an overhang from the 2008 economic breakdown and ensuing Great Recession. Her perspective contrasts notably with most of SEC chief Gary Gensler’s public comments about crypto, which tend to focus on investor protection. Omarova is concerned that fintech and cryptocurrency accelerate already-existing threats to what she calls the “New Deal” framework of financial regulation, and indeed to the economy as a whole.

Her “New Deal” frame can be inadequately summarized like this: Forged in a crucible of global economic meltdown, the New Deal’s approach to financial markets was to strike a balance between market activity—consigned almost exclusively to the private sector—and public-sector responsibility for market stability (including backstops of last resort), and consumer protection (such as FDIC deposit guarantees) that propped the whole thing up. This structure, while fragile, was able to propel the US economy through the strife of the Depression and World War II to a period where sustained prosperity was at least theoretically possible.

The model, though, has been breaking down for decades (she doesn’t say so, but FIN would argue the 1971 closing of the gold window and subsequent breakdown of Bretton Woods was the first knockout blow). Omarova fear about systemic stability focuses more on developments in the ‘80s and ‘90s, emphasizing the development of derivatives and other ways of “synthesizing assets.” In her her 2019 paper in the Yale Journal on Regulation, Omarova categorizes the aspects of new financial products that made the system more unstable: pooling, layering, acceleration, and compression.

So: this is the lens through which Omarova views cryptocurrency and the blockchain. Almost everything that crypto advocates tout as a revolutionary breakthrough—more efficient transactions! decentralization!—she sees as a potential threat to global financial stability. Here is a crucial passage from testimony she delivered to the Senate in 2018:

If [blockchain technology] succeeds in making wholesale payments, clearing, and settlement instantaneous, easy, and cheap, it will enable potentially exponential growth in the volume and velocity of trading in securities and other financial assets. To put it simply, in a fully frictionless world of blockchain-powered transaction processing, overtly speculative trading will also be faster, easier, cheaper, and thus more voluminous.

It’s not quite Mo Money, Mo Problems, but it’s close.

How much, though, would Omarova’s academic opinions truly matter in a regulatory position that’s both modest and constrained? It’s important to remember that the OCC has effectively no jurisdiction over any important cryptocurrency producer or exchange. It’s also entirely possible that the Senate won’t approve Omarova’s nomination, although her Bush administration history might earn her some cred with a Senate Republican or two.

It would be dim-witted, though, for the fintech or crypto community to celebrate a shootdown of Omarova’s nomination as a meaningful victory. The day of reckoning between crypto/blockchain and the state is coming. It could be entirely authoritarian; China this week officially declared all cryptocurrency activity illegal. It could be more constructive; also this week, Britain’s Financial Control Authority announced it would work with the Bank of England to use blockchain technology to speed up regulatory reporting. Most likely it will be a mixed bag, but the path will be easier through thoughtful, experienced regulators like Omarova; instead of reflexive opposition, the fintech and crypto worlds should look for ways to engage her.

This piece originally appeared in FIN, James Ledbetter’s fintech newsletter. Ledbetter is Chief Content Officer of Clarim Media, which owns Techonomy.

This piece originally appeared in FIN, James Ledbetter’s fintech newsletter.

While there are probably few superior alternatives, a Congressional hearing is typically a poor venue for gaining insight into the American financial regulatory system. Even when the events are not contentious, they can seem like experiments to concoct a maximum number of ways for people to talk past one another. Not only are answers infrequently in direct response to the questions posed, there is a kind of competition to formulate questions that *can’t* be answered, usually because they are asked in bad faith.

That sorry dynamic was on full display this week as Securities and Exchange Commission (SEC) chair Gary Gensler testified before the Senate’s committee on banking, housing and urban affairs. A striking amount of time was spent discussing cryptocurrency, which is a little strange, given all the other issues at hand—such as mandating that public companies disclose their climate risks—and given that the same committee devoted an entire hearing to cryptocurrency as recently as July. It appears that the fury created by proposing a cryptocurrency tax as part of the infrastructure put the issue on several Senators’ agendas.

Senator Pat Toomey (R-PA) honed in on an issue FIN has covered regularly: are cryptocurrencies securities, from a regulatory standpoint?

I’m frustrated by the lack of helpful SEC public guidance explaining how you make this distinction—what makes some of them securities while others are not securities?….Why wait to make the SEC’s views known only when it swoops in with an enforcement action, in some cases years after the product was launched? This is regulation by enforcement, and it’s very objectionable.

These are, superficially, legitimate questions, even if Toomey had to know that Gensler was not going to answer them in any greater detail than he or the agency have many times before. “There is a small number that aren’t” securities, Gensler said—presumably referring to the Bitcoin and Ethereum exceptions the SEC articulated in 2018—“but as [previous SEC] chair [Jay] Clayton said when he was in front of Congress, I think very many of these facts and circumstances are investment contracts.”

This points to a reality that doesn’t fit into the hearing’s theatrical requirements. Although the SEC has very broad authority granted by Congress, it’s a fairly small agency with limited staff. There are an estimated 6500 cryptocurrencies in existence, with new ones being created every day. It is simply not possible for the SEC or anyone to examine the conditions of every existing crypto coin, much less apply the appropriate tests to determine whether or not they are securities. To lay down universally applicable rules is practically a guarantee of obsolescence, given how fast the space evolves. The SEC has tried, through actions like the charges against Ripple, to send the signal that many such coins are securities—and for that it gets damned by Toomey as “very objectionable.”

At another point, Toomey hit on another favorite FIN topic. “To me, a stablecoin doesn’t meet the second prong of the Howey test, that there has to be an expectation of profit from the investment,” Toomey said. This concern-trolling seems at a minimum a little late; FIN dealt with this prong of the Comey test applied to stablecoins in our 7/25 installment:

This could be the trickiest of the four tests. It’s entirely conceivable that a purchaser of a USD-backed stablecoin would say “I did not buy this coin because I expected, or even wanted, to make a profit. I bought it as a store of value,” or “I bought it because it was a seamless, low-fee way to move my money from Bitcoin to Ethereum without having to convert back into fiat currency.” Those arguments are logical but essentially untested in this context. The case law here seems to hinge on how the investment is pitched to the investor….A flock of lawyers is going to make tons of money arguing over this.

Toomey asserted to Gensler: “Stablecoins do not have an inherent expectation of profit, they’re just linked to the dollar….Is it your view that stablecoins themselves can be securities?” Unsurprisingly, Gensler responded: “I think, Senator, they may well be securities,” reminding his audience that “the laws that we have right now have a very broad definition of security.”

Toomey’s grandstanding reflects a too-common stance in and around the crypto community that Gensler is hostile to cryptocurrency and blockchain technology. “I’m not negative or a minimalist against crypto,” Gensler said, somewhere between befuddled and perturbed. Reviewing the Senate hearing, a Coindesk podcaster, citing a tweet, said “[S]ome astute observers noted…Gensler’s use of a term that literally has never been used before: “stable value coins” in place of “stablecoins’.” The implication of outrage seems to be that this phrasing is supposed to justify SEC regulation of stablecoins by way of its oversight of stable value funds.

But, er, no: Gensler used this exact term in his August remarks to the Aspen Security Forum. It’s silly to pretend that Gensler is engaged in some kind of linguistic drip-by-drip plan to crack down on stablecoins. Financial regulators have been warning about the systemic dangers of stablecoin growth for months, and this week the Treasury Department got in on the act. At some point the industry and its supporters are going to have to live with a truth that Gensler, in his low-key way, tried to articulate: wanting to regulate a financial product or company does not mean that you oppose its existence.

Why Trust Matters

As a general practice, FIN does not cover the world of NFTs very much, but this week’s developments at OpenSea, the largest NFT exchange, make an important point with potentially far-reaching consequences. An anonymous Twitter account began posting accusations that Nate Chastain, head of product at OpenSea, used secret Ethereum wallets to purchase NFTs before they were promoted on the OpenSea home page. This is akin to what in the stock market is called “front-running,” a time-honored practice that is usually banned. On Wednesday, OpenSea published a blog post, admitting that the story was true and saying that it had asked for and received Chastain’s resignation: “We have a strong obligation to this community to move it forward responsibly and diligently.” Remarkably, as Frank Chaparro of The Block points out, what Chastain did is probably not technically illegal—precisely because OpenSea is not a registered exchange and NFTs are not regulated as securities. This is exactly the point that Gensler was trying to make to the Senate; if you have innovation for too long outside the regulatory framework, consumers will get burned and trust in the technology will erode.

This piece originally appeared in FIN, James Ledbetter’s fintech newsletter. Ledbetter is Chief Content Officer of Clarim Media, which owns Techonomy.

This piece originally appeared in FIN, James Ledbetter’s fintech newsletter.

The crypto-payments firm Circle has made a big splash recently. In July, it announced that it would become a public company, traded on the New York Stock Exchange, via an Irish-based SPAC. This week, the company announced, sort of, that it intends to become a fully-regulated, chartered bank in the United States. According to its blog post:

Circle intends to become a full-reserve national commercial bank, operating under the supervision and risk management requirements of the Federal Reserve, U.S. Treasury, OCC, and the FDIC. We believe that full-reserve banking, built on digital currency technology, can lead to not just a radically more efficient, but also a safer, more resilient financial system.

This is potentially a big deal. Circle—based in Boston but incorporated in Ireland—operates USDC, one of the largest stablecoins in the world. Circle’s blog post continues:

With USDC at more than $27.5 billion in circulation, and building on our long-standing commitment to trust, transparency and accountability in the dollar-denominated reserves backing USDC, we are setting out to become a U.S. Federally-chartered national commercial bank. 

This vision of a regulated digital currency is highly compelling, and close to unique although, as far as FIN can tell, Circle’s actual applications for this fascinating goal have yet to be filed. Axios’s Felix Salmon argues that “Circle’s USDC stablecoin could become a de facto central bank digital currency….In Circle’s case, the “depositors” would be holders of USDC, and the collateral backing up USDC would be the money on deposit at the Fed. Circle would pocket for itself the interest that the Fed pays on bank reserves.”

It’s crucial to understand just how preliminary and provisional this idea is. There are at least two major reasons to doubt that a Circle bank charter will be approved any time soon.

First, a huge question mark looms over Circle’s much-hyped but quickly dumped acquisition of the crypto exchange market Poloniex. Few commentators on Circle’s imminent public market debut have noted this, but it’s hard not to conclude that Circle’s aborted dance with Poloniex stemmed from a lapse in judgement and/or due diligence. Strong evidence exists that Circle/Poloniex was conducting business in countries that are prohibited by US law, hence the companies’ apparently still-pending negotiations with the US Office of Foreign Assets Control (OFAC), a division of the Treasury Department that deals with trade sanction violations.

Asked about Circle’s questionable due diligence, a company representative said: “We cannot comment on legacy legal matters.” OFAC did not respond to a FIN inquiry for documents pertaining to Poloniex.

So let’s review the Circle-Poloniex timeline as best we can now construct it:

• December, 2017: The US Securities and Exchange Commission (SEC) files a complaint against Poloniex related to “the trading of cryptocurrencies that may be characterized as securities.” The SEC maintains that even after the agency issued a major rule-establishing report in July 2017, Poloniex “made available for trading…digital assets that were offered and sold as securities as defined by Section 3(a)(10) of the Exchange Act, generating millions of dollars in revenues from transaction fees charged to Users,” without registering with the SEC as legally required.
• February 26, 2018: Circle announces it has acquired Poloniex “to accelerate the emerging token economy,” for a reported $400 million. (The “token economy” was collapsing at the time.) Circle CEO Jeremy Allaire tells CNBC: “These markets are still in their infancy but they hold enormous promise. Maybe the first $1 trillion company in the world will be created in this space.” (Or maybe not.)
• April 10, 2018: Just six weeks after Circle’s announced acquisition, OFAC serves Poloniex “with an administrative subpoena requesting documents and information regarding accounts opened and/or closed on the Poloniex digital asset trading platform by persons potentially located in Iran.” Here’s the crucial question: when Circle was researching the Poloniex purchase, did it not see Iranian accounts as a red flag? Or did it miss them?
• December 14, 2018: Circle responds to OFAC’s Iran-related subpoena.
• September 11, 2019: “OFAC serve[s] a second administrative subpoena on Poloniex, LLC requesting documents and information regarding accounts opened and/or closed on the Poloniex digital asset trading platform by persons potentially located in Cuba, Syria, North Korea, Crimea, and Sudan.” Again, a competent compliance department should have detected these legal thorns—what did Circle know, and when did it know it?
• October 18, 2019: Circle announces it is “excited” to announce a Poloniex spinoff. BUT: “Unfortunately, in order to be competitive in the global market, we will not be able to include US customers in the spin out, so Circle will be winding down operations for US Poloniex customers. Beginning today, US persons will no longer be able to create new accounts on Poloniex.” This seems like an obviously legally required carveout, and leaves US-based Poloniex customers to vent on various complaint sites. Meanwhile, the new owner of Poloniex is Polo Digital Assets, which may or may not be controlled by the Chinese entrepreneur Justin Sun, and which has repeatedly fallen afoul of Canadian regulators.
• July 2021: Circle announces its intention to go public via a SPAC, noting that it has set aside more than $10 million to deal with the SEC charges against Poloniex.
• August 9, 2021: The SEC fines Poloniex more than $10 million for security law violations that took place before and during Circle’s ownership of the company. “Poloniex chose increased profits over compliance with the federal securities laws by including digital asset securities on its unregistered exchange,” says Kristina Littman, Chief of the SEC Enforcement Division’s Cyber Unit.  “Poloniex attempted to circumvent the SEC’s regulatory regime, which applies to any marketplace for bringing together buyers and sellers of securities regardless of the applied technology.” Circle agrees to pay the fines without admitting or denying the SEC charges.

There exist relatively benign interpretations of these events, but the legacy is there and regulators are going to want the full story. And so are potential investors: Circle’s SPAC filings indicate that the company lost $156 million on the Poloniex acquisition, and that’s not even a final number until all the fines are assessed and legal fees paid.

So if you are Biden’s financial regulators, do you really want to give a bank charter to a management team with this track record? And that’s the second reason to doubt this charter will be approved: at least in year 1 of the Biden Administration, there is little reason to think that digital-first “banks” are going to be approved as real-world banks. When acting comptroller of the currency Michael Hsu testified before Congress in May, he was clearly skeptical about the handful of bank charters that went to fintech companies under the Trump Administration. Most legal and regulatory commentators concluded that OCC under Hsu has “hit the brakes” on cryptocurrency. And that’s only one agency; it seems impossible that Circle could be granted a bank charter without the Federal Reserve and FDIC weighing in.

Of course, it’s entirely possible that FIN is misreading this. Maybe Circle’s USDC is now simply too big to ignore. Maybe the new compliance officer that Circle hired in May has made some friendly inroads through Janet Yellen’s working group. Maybe if Circle agrees that USDC is a security and will be regulated as such, that will create a path for the Biden administration to resolve the whole question of how to handle the dramatic growth in stablecoins that regulators have been fretting about in recent months. But don’t bank on it.

This piece originally appeared in FIN, James Ledbetter’s fintech newsletter. Ledbetter is Chief Content Officer of Clarim Media, which owns Techonomy.