On March 23, Hindenburg Research released a lengthy research report alleging in part that the Cash App payments tool created by Jack Dorsey's Block (formerly Square) has been rampantly abused by criminals, and that Block has not taken sufficient steps to halt that activity.
Hindenburg is a fairly new but widely respected research-based short seller, which has successfully exposed fraud at firms such as Nikola Motor. Observers have so far found Block's rebuttals of the report unconvincing, and even evasive. The allegations are serious for Block and the fintech sector, and deserve attention from the crypto industry, too. Cash App is a significant bitcoin onramp, for one thing, so there are potentially direct impacts.
But more deeply, the (unsurprising) discovery that Cash App has been a vector for criminal transactions and identity fraud helps cast enduring criticisms of cryptocurrency in a more nuanced light.
On the most superficial level, it's an opportunity for some satisfying but low-IQ whataboutism. As Elizabeth Warren moves to assemble her anti-crypto army, is she equally concerned about fraud and crime facilitated by traditional financial services? The bank Credit Suisse not only just blew up because of its risk-loving ways, but was accused of facilitating "torture, drug trafficking, money laundering, corruption and other serious crimes."
These are fun points to make. But as I said, whataboutism is an entry-level critique for crypto advocates. Malfeasance somewhere else doesn't excuse it in your own backyard.
Instead, the Block allegations, like the persistent endemic corruption at major banks, should invite deeper consideration of the relationship between money, control and profit. Cryptocurrency reshapes that trilemma.
Cash App, like most banks and corporate-owned payments processors, has accepted substantial responsibility for policing its customers in exchange for the right to generate profit from processing payments. The Hindenburg allegations drive home the deep conflict of interest inherent to this dynamic. Whether or not it was a conscious, deliberate strategy, Cash App's popularity for illicit transactions did, in whatever small way, feed into its bottom line. This is even more obvious and direct when banks cater to criminal customers.
A more generous take would be that it's unreasonable to expect even the most pure-hearted payments operator to block all criminal activity. They're dealing with millions of customers, and those looking to evade control systems will always find loopholes.
Even in its attempts to blunt Hindenburg's allegations, the best Block can do is say that only 3% of activity on Cash App is from unverified users – that is, those whose real-world identity is unclear. While not quite an index of criminal activity, that ratio is vastly higher than the sub-1% proportion of criminal activity on public blockchains, according to Chainalysis.
Neither of these is a good thing. But blockchains have at least two major advantages in the discussion of financial enforcement. The first, and most immediately important, is transparency. Most public blockchains retain records of all transactions, and sleuths can often follow the trail to the really bad guys. Both banks and corporate rails like Cash App are relatively opaque by comparison, their workings only accessible by law enforcement and regulators backed by state power – if then.
But more profoundly, crypto offers a framework that removes both selective censorship and the profit motive from financial infrastructure, cutting the Gordian knot of politicized payments. Bitcoin miners don't have the individual power to block payments on the network. That puts responsibility for controlling what people do with their money back in the hands of law enforcement where it belongs.
It's unsurprising that authorities are not fans of this increased responsibility, preferring to have convenient middlemen to lean on. A more mature society would acknowledge that in a capitalist and digital age, open access to digital payments is a human right on par with free speech. So far, that argument has held the most sway when it benefits the already wealthy and powerful.
Our civilization has faced struggles in reshaping itself around freedom of speech since the concept arose alongside the printing press, but there's little doubt we're stronger and happier for it. With time, freedom of payments will prove itself just as empowering for us all.
– David Z. Morris
@davidzmorris
david.morris@coindesk.com
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