Block, formerly Square, the company behind popular payments application Cash App; has been accused of fraud by short-selling firm Hindenburg Research. I dug deep into the report to try to access the claims and see whether or not Cash App is really a fraud.
Find the Hindenburg report here.
Other videos referenced in this video
Hindenburg Research rap video compilation:
A Eulogy for Twitter:
Crypto Critics’ Corner podcast episode on the STABLE Act
Crypto Critics’ Corner episode with Jim Chanos:
Reacting to Vice Documentary about Money Launderers:
Video about Frank, the company with 4 million fake users:
Video about why pharmacies are getting worse:
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00:00:00:03 - 00:00:20:20 Bennett Tomlin Cash App is a convenient way to send people money. But could it also be a fraud? A report from famous fraud investigators and short sellers Hindenburg Research has come out investigating Block formally Square, the company behind Cash App, which was started by Jack Dorsey, the founder of Twitter. Now, just to make sure this is clear. Hindenburg research has a short position on Block. 00:00:20:23 - 00:00:46:10 Bennett Tomlin They benefit financially if Block does poorly. I want to make sure you have that context as we go through this report. This report from Hindenburg research claims that Block overstated its user count, understated their customer acquisition cost, manipulated other lines of revenue and provided services to criminals. One particularly direct line in the report, said Block has embraced one traditionally very underbanked segment of the population criminals. 00:00:46:10 - 00:01:09:11 Bennett Tomlin The company's Wild West approach to compliance made it easy for bad actors to mass create accounts for identity fraud and other scams. Then extract stolen funds quickly. As part of this report. Hindenburg. Even made a video where they compiled a whole bunch of rappers rapping about different crimes they committed using Cash App, which I probably cannot include for copyright reasons, but will link in the description. 00:01:09:12 - 00:01:35:20 Bennett Tomlin They point out that these songs include references to buying drugs, hits, and even being able to purchase a new phone and create additional Cash App accounts, if they end up banned. So is Cash App a fraud? Let's dig in deep and walk through the claims in this report and see what evidence they have. One of the first points I went to make and the reason I was really motivated to make this video is that Block the company behind Cash App is not a bank. 00:01:35:27 - 00:01:56:12 Bennett Tomlin And that ends up being an important point throughout the report. Block like PayPal and others, is what's called a money transmitter. And if you want to understand how money transmitters are able to bypass banking regulations and engage in banking activities without the appropriate licensure and regulations, then you should check out the Stable Act episode we did on that issue. 00:01:56:12 - 00:02:26:28 Bennett Tomlin exactly on Crypto Critics’ Corner because we get really into the weeds on it. In short, money transmitters are regulated on a state by state basis and offer bank like services specifically taking deposits, often by partnering with banks or by trying to market their products in a way which they think avoids the regulations that are expected of banks. So Block launches as Square thanks to their super cool and actually useful credit card device, which lets small vendors easily take credit card payments and actually useful innovation. 00:02:27:09 - 00:02:48:13 Bennett Tomlin I mean this, by the way, it was actually easier and very often cheaper for small vendors and creators to get set up with Square than with a traditional merchant account and point of sale provider. Eventually, Square moves into making loans to their clients. They launched their own debit card and then finally their own payment app with Square Cash, which is now called Cash App. 00:02:48:13 - 00:03:19:04 Bennett Tomlin To this, they end up eventually adding Bitcoin features along with stock trading like Robinhood, becoming potentially a one stop financial app for users without having to comply with a single banking regulation. A clever end around if I say so myself. Finding loopholes in regulation is not fraud, though maybe it should be, but that requires us to do something meaningful, like have our legislators pass meaningful regulation, like the stable act which would put all these money transmitters under a federal framework. 00:03:19:27 - 00:03:43:06 Bennett Tomlin But our government is broadly reticent to do anything meaningful, preferring to engage in sound bite fights in hearings between each other. Let's get back to Block and Cash App for now. Block experienced a 1% decrease in revenue for 2022 and had a net loss of just over 500 million. That number may surprise you because Block also reported a $613 million profit. 00:03:43:16 - 00:04:19:00 Bennett Tomlin That's right, a $500 million loss and a $613 million profit. The $613 million profit is what is called a non-GAAP profit gap. GAAP is generally accepted accounting practices, which describes how companies are generally supposed to be reporting their profits and losses. And Block does report that that's how we know they had a $500 million loss. Block, like many companies, report a second set of numbers which contain adjustments to account for the irregularity of certain costs, which they think GAAP does a poor job of managing. 00:04:19:00 - 00:04:39:19 Bennett Tomlin Among these adjustments for Block was adjusting at about 1 billion in stock based compensation, which is a relatively common practice. To be clear, when I had a chance to interview legendary short seller Jim Chanos for Crypto Critic's Corner. This specific adjustment is when we talked about companies love to do this, especially when they're growing fast because it helps the numbers look far better. 00:04:39:25 - 00:05:01:23 Bennett Tomlin And when demand is high for your stock, it doesn't seem as dilutive as it is, but fundamental only eventually that value has to come from somewhere. And once that realization is made, compensation becomes expensive broadly. The important thing here is that in real terms, Block seems to be losing money and they need to continue growing and improving their margins. 00:05:01:28 - 00:05:23:00 Bennett Tomlin For that to change Cash App Jack Dorsey and Block have frequently talked about how one of their missions is to help serve unbanked and underbanked parts of the population. Historically, minorities in the poor have had difficulties accessing and using the banking system, in part due to systemic discrimination, but also because poor people often don't fit the model that banks are expecting. 00:05:23:01 - 00:05:56:27 Bennett Tomlin They may not receive Aquila direct deposits, instead being paid irregularly or in cash. They may not have a permanent address, or their address may end up changing frequently. They may struggle to afford to get necessary ID or in many cases have very little money and are just worried about the exploitive and extractive fees that our banks charge. I mean, consider how banks will often have a certain monthly fee they charge, but it gets waived if you have over a certain amount in the bank, which means that those who have enough money and could afford the fee never have to pay it. 00:05:57:01 - 00:06:20:23 Bennett Tomlin And those that have almost no money and can't afford the fee always have to pay it. Meaning month by month, they watch the little bit of money they have get taken by the bank. Banks live and die by charging excessive fees to poor people. Rich people barely overdraft and many banks, when they do extend a low interest loan from the bank to these rich people to cover it, resulting in smaller fees. 00:06:21:02 - 00:06:50:08 Bennett Tomlin Poor people end up frequently overdraft ing and are charged exorbitant fees, often repeatedly, in a manner which is fundamental to the bank profits and the bonuses Those bankers end up getting. There are a variety of reasons that people end up unbanked and underbanked, and few of them are solved by a sleek app. However, it's another type of unbanked and underbanked customer that Hindenburg research claimed was the primary target for Block, and that was criminals. 00:06:50:09 - 00:07:15:27 Bennett Tomlin Banks are obligated under a variety of different laws and regulations to take appropriate steps to prevent their services from being used for criminality. They're often quite bad at this, to be clear, but they do end up banning people for crimes and suspected crimes. Hindenburg claims that criminals wanted to avoid some of the scrutiny of the banking system, were able to turn to Cash App as an end around. 00:07:15:27 - 00:07:35:16 Bennett Tomlin When you set up an account at a bank or many other financial institutions, they are required to complete a process called Know your Customer or KYC. If you've had to hand over your driver's license, Social Security number, and a utility bill so that they can verify your identity and address, you have some idea of what this process looks like. 00:07:35:16 - 00:08:07:21 Bennett Tomlin Cash App, on the other hand, always advertised, emphasized how easy it was to set up an account initially requiring only an email or a phone number. This means that people, including criminals, are able to quickly set up accounts and in the cases when their accounts are shut down for able to quickly set up new accounts. Those of you who watched my recent stream taking a look at the vice documentary about money mules in London, you'll remember how important it was for the criminals to be able to have access to accounts which were not tied to their identity so they could help clean the funds they were laundering. 00:08:08:07 - 00:08:30:01 Bennett Tomlin Being able to set up an account with just an email or phone number works similarly, allowing you to help obscure the flow of dirty funds. This is why Hindenburg thought it was worth bringing together all these rappers talking about how they used Cash App as the way to transmit funds for their crimes. They wanted to highlight that Cash App has actually become known for this in popular culture. 00:08:30:02 - 00:08:58:23 Bennett Tomlin These songs, talking about this criminality is a thing that Jack Dorsey has reference before, is evidence that Cash App has a powerful brand with organic penetration into culture. One of the most striking examples of this was rap artist 22Gz, who made a song called Cash App, and the song was about using Cash App to pay hitmen to murder members of another gang and even includes the artist showing off Cash App to make one of these purported payments as part of the music video. 00:08:59:02 - 00:09:27:13 Bennett Tomlin AKLO Studios Who produced the video, told Hindenburg Research that Cash App provided $1,000 for a sponsored giveaway using Cash App associated with the music video. Now, hip hop often is not literally describing the truth Just because someone raps about killing someone or paying to have someone killed does not mean they actually did it. However, 22Gz, the rapper in this aforementioned song, was later arrested for murder. 00:09:27:14 - 00:09:48:14 Bennett Tomlin Now, what was most interesting to me about these songs, while reading this report and doing research for this video is that this is definitely not the only song they have sponsored in this way. Cash App has a venture called Cash App Studios with the stated goal of and I'm reading this off their website. Cash App Studios believes in freedom for artists, both financial and creative. 00:09:48:18 - 00:10:13:00 Bennett Tomlin We fund emerging creators’ break out projects to stitch Cash App's guiding principle of economic empowerment into the fabric of the creative industry. I really want to emphasize stich Cash App's guiding principle into the fabric of the creative industry. Kind of explains why Jack Dorsey had so many songs. He was able to brag about, doesn't it? They were sponsoring those songs. 00:10:13:15 - 00:10:51:14 Bennett Tomlin It was not that these people organically decided that what their song needed was the inclusion of a popular fintech company. It was a popular fintech company paying them to include Cash App. Now I want to pause here and know that the organizations that end up laundering the largest amount of money are not things like Cash App, but things like the world's largest banks or the trusts in South Dakota or a variety of other financial institutions that are broadly tolerated by our political and regulatory ecosystem because of their perceived importance in the many contributions of money launderers and tax evaders to politicians. 00:10:51:15 - 00:11:17:04 Bennett Tomlin Cash App may end up enabling it more often, or it may make it easier for the criminals. But it is important to remember that this is a multifaceted problem that has permeated a ton of financial institutions. HSBC was laundering an absurd amount of money for the cartels. The cartel eventually made custom boxes that were fit to exactly the dimensions of the teller window, which would be stuffed with cash and pushed into HSBC. 00:11:17:14 - 00:11:45:28 Bennett Tomlin The eventual thing for HSBC was 1.9 billion, which is a lot of money, but it was certainly not enough to prevent HSBC from existing. So is cash yet used more commonly by criminals? I mean, paying to promote that cash that works for criminal activities certainly looks suspicious, but on its own it's not proof. One of the pieces of evidence that Hindenburg research references comes from Polaris Project a not for profit that works against sex trafficking. 00:11:46:08 - 00:12:12:04 Bennett Tomlin They're the ones who run the national human trafficking hotline, and they have said that Cash App is the most commonly used app to pay for sex trafficking. Though here we run into another problem, namely the Polaris Project, which has been criticized for their failure to distinguish between consensual sex work and nonconsensual sex trafficking. Furthermore, the hotline they operate and use to gather data is not confidential. 00:12:12:09 - 00:12:40:28 Bennett Tomlin Calls are referred to the police who have arrested sex workers. Polaris has been accused of issuing false and misleading data before and to solve that problem. They eventually decided to partner with Palantir data analyst for the military industrial complex and funded of course, by one of the worst people on Earth, Peter Thiel. The Hindenburg report is also responsible for this conflation of consensual sex work and non-consensual sex trafficking in the section about the sex trafficking problem. 00:12:40:29 - 00:13:10:10 Bennett Tomlin Hindenburg references several songs which discuss using Cash App for illicit sex. But not all illicit sex is sex trafficking. Paying a sex worker is very often illegal, and I imagine many regulators and law enforcement wouldn't look fondly on Cash App regularly facilitating that. But it is not necessarily sex trafficking and want to make sure that distinction is clear, because I think that's one of the weakest parts of this report. 00:13:10:11 - 00:13:37:04 Bennett Tomlin There is very often a meaningful difference between illegal and immoral. And when you're grappling with things like sex work, that distinction becomes very important. So, yes, I think it's absolutely possible that Cash App is used commonly as a way for people to pay sex workers and that many of these probably are illegal transactions. The presence of it front and center in these songs would seem to support that. 00:13:37:04 - 00:14:01:25 Bennett Tomlin But I think the more interesting accusation, the report and the one that enables far more criminality and far more insidious criminality is the accusation that it was so easy to set up an account that some people had hundreds. If it's true that people could easily set up dozens or hundreds of accounts that would make it look like Cash Apps, reported user numbers are inaccurate and suggest that their actual market penetration is smaller. 00:14:01:25 - 00:14:23:06 Bennett Tomlin It would also suggest that it would be an easy way for criminals to receive funds and even pass them around as a way to obscure flows. Hindenburg research said that multiple customer service reps told them that some individuals had hundreds of accounts and that when they would Blocklist one account for a user, they would be able to see those users almost immediately switch to one of their other accounts. 00:14:23:07 - 00:14:48:21 Bennett Tomlin Cash App apparently does have a piece of software that helps them identify overlaps between accounts and Hindenburg. Includes a couple of these diagrams in the report. It shows a bunch of supposedly distinct accounts each of which share either a Social Security number, phone number, email address, bank account or device with the Blocklisted account. This looks like exactly what you would expect for a criminal who is cycling through different accounts when they're Blocklisted. 00:14:48:21 - 00:15:22:11 Bennett Tomlin And it suggests that Cash App is reticent to blacklist associated accounts when they find one committing fraud. Customer service. But apparently call this the web of lies. The way you would generally expect a company to handle something like this, at least the way I understand it, is that when you found one of these accounts committing fraud, you would ban or at least suspend all the accounts using that same Social Security number, that same phone, that same email, because based on the information you have, those accounts are almost definitely the same individual. 00:15:22:14 - 00:15:44:19 Bennett Tomlin And, you know, the individual is engaged in inappropriate behavior. My gut instincts and why they're hesitant is for two reasons. One, it looks good for them to have more users and to sometimes actual users would have their information stolen. And so there would be other accounts sharing part of their information. But that is not actually used by them. 00:15:45:24 - 00:16:04:15 Bennett Tomlin If you ban the fraud account and all associated accounts, you end up banning both the criminal and the person who had their information stolen. The combination of the internal diagrams showing shared information between accounts and the ease of impersonation does suggest to me that it would be pretty easy for Cash App to inflate their user account cash up. 00:16:04:15 - 00:16:26:14 Bennett Tomlin Inflating their user account would matter for several reasons. One, investors are directly valuing this company based on their penetration and how many customers they're able to reach to. The business is also valued and how expensive it is to get new customers. If you overestimate your users, then you underestimate the cost to get new customers and you cause people to value your business incorrectly. 00:16:26:15 - 00:16:46:29 Bennett Tomlin Both of these in the app especially important if your profits depend on the ability to effectively create demand for your stock. Remember that stock based compensation adjustment we talked about earlier. Apparently, since the time these incidents were described, Cash App has created an identity team who is trying to get an accurate count of users to really accentuate how much more they could be doing. 00:16:46:29 - 00:17:18:26 Bennett Tomlin Though Hindenburg pointed out how very easy it is to find what looks like accounts being used for scams. Searches for Elon Musk and Donald Trump returned dozens of accounts and others with variations of customer service or sweepstakes or get rich quicker. Easy to find as well. These obviously are not legitimate accounts and it certainly seems like Cash App could pretty easily make people who want to set up accounts with the name of, for example, Jack Dorsey, their CEO, go through additional verification, but they choose not to. 00:17:18:27 - 00:17:39:15 Bennett Tomlin Now, I personally will making this video was curious whether Block could fix this either since Hindenburg did their initial analysis in November or since this report was published a couple days ago. So I open up my Cash App and I started searching. And yeah, there are tons of these accounts which seem to definitely not be Jack Dorsey, Elon Musk or Donald Trump. 00:17:40:03 - 00:18:05:12 Bennett Tomlin Cash App apparently enables people to change their name after they make their account, which does probably have some cases where it's useful trans folk who've started socially transitioning but have not yet changed their name and legal documents could have very legitimate reasons to want to have their display name different from the name. And their ID that I struggle with is what legitimate reason someone would have to change their name to Elon Musk. 00:18:05:12 - 00:18:24:23 Bennett Tomlin Though Hindenburg even went a little bit further to saying they set up two different accounts, changed the name and one to Donald Trump in the name and the other to Elon Musk, and then sent some money back and forth between them just to show that it actually does still work if you change your name like this. They were even able to order a cash card with the name Donald J. 00:18:24:23 - 00:18:51:12 Bennett Tomlin Trump, which obviously is not their real name. Now, those cash cards also may end up being a problem because apparently Cash App was not collecting full Social Security numbers for many of the cards they issued. The Patriot Act required that financial institutions collect the full Social Security numbers. We should also note that the Patriot Act is a truly awful piece of legislation that represented an absolutely immoral expansion of the federal government surveillance apparatus. 00:18:51:18 - 00:19:13:22 Bennett Tomlin But unfortunately, it is the law, and so you're obligated to follow it. One former employee told the Hindenburg that Block did not collect Social Security numbers because they didn't want to be nosy. Yep, they didn't want to be nosy. So they instead relied on a third party service called Ideology to verify people's identities and only collected the last four digits. 00:19:13:22 - 00:19:38:27 Bennett Tomlin More recently, Cash App has apparently realized this is a problem and now collects all nine digits. Things like this may eventually lead to issues with regulators, specifically, the Consumer Financial Protection Bureau has been reportedly investigating Block since 2020, and Block has finally been ordered to produce information to the bureau. The investigation seems to focus on how Block handled reports of fraud and unauthorized transfer. 00:19:38:27 - 00:20:11:26 Bennett Tomlin In their report, Hindenburg also discusses how Cash App either witting or not may have ended up facilitating a whole bunch of COVID 19 related fraud Cash App advertised. Their ability for people to get a direct deposit of their CARES Act stimulus check directly to their Cash App account and advertising. This allowed Cash App to increase their number of deposit enabled accounts from 3 million to 14 million when states started trying to claw back funds from fraudulent payments, Square and Cash App ended up being pretty central. 00:20:11:26 - 00:20:32:10 Bennett Tomlin Hindenburg included this table that points towards the scale of the problem. They filed a public records request in Ohio and found out that Sutton Bank, who was providing services for Cash App, was the fifth largest individual processor for Ohio. You will also notice that Huntington is at the top, processing just about double the total amount of Sutton in terms of dollars. 00:20:32:10 - 00:20:58:06 Bennett Tomlin The documents obtained by Hindenburg showed that Sutton Bank ended up having 32,120 claimants who were disallowed because they were presumed to be ineligible. Huntington, who again seemed to process about double the total amount, ended up with only 3884 disallowed claimants. In a similar vein, 31,726 claims intended for Sutton were flagged as suspicious because the account in question was used by other people. 00:20:58:06 - 00:21:28:04 Bennett Tomlin Huntington again had way less, with only 3390. This also does not seem to be an Ohio exclusive problem. The funds Massachusetts tried to claw back also seemed to disproportionately go to Sutton. Sutton was the second largest recipient of suspect funds, beating out JPMorgan and Wells Fargo, who are much larger banks with way more accounts in Washington state. Sutton similarly had more suspected losses than JPMorgan or Wells Fargo, though less than Green Dot Bank in Go Bank. 00:21:28:18 - 00:21:56:11 Bennett Tomlin Green Dot is the bank behind Walmart's prepaid debit card and I'm pretty sure go bank is a green dot brand as well. So I think both of those are actually green bank but I could be wrong. The frictionless Cash App experience seems to have attracted a disproportionate number of people hoping to take advantage of the system internally. Cash App struggled with what to do about accounts receiving payments from multiple states in multiple names to a single account where the name and the payments did not match the name and the account in question. 00:21:56:12 - 00:22:18:20 Bennett Tomlin Imagine a John Smith in Illinois who has a Cash App account but who also gets payments for Betty White in California, Jack Wick in Colorado, and Ethan Van Dike in Connecticut. One employee told the Hindenburg that they were told that perhaps these accounts were shared by multiple working age adults across multiple states who all collectively were receiving unemployment and putting it in the same shared Cash App account. 00:22:18:21 - 00:22:41:17 Bennett Tomlin This seems unlikely to me, but Cash App stated mission was to bank the unbanked and as we talked about, the unbanked looked different than what banks tend to expect. And so they thought this was a possibility. Apparently. You may be wondering why Block was willing to take these risks. Well, about one third of Block's revenue comes from the fees they charge related to their instant deposit feature. 00:22:41:17 - 00:23:11:01 Bennett Tomlin This feature involves Block charging somewhere between 0.5 to 1.75% of the total amount to basically make sure it gets to your account the same day, other than through the normal clearing process, which can take a few days. Scammers would find this type of feature appealing because they could get their money out of Cash App before Block had time to remove their account or freeze the money, reported the eventually Block realized there were some problems and started banning accounts if they received more than one mismatched name payment. 00:23:11:12 - 00:23:31:09 Bennett Tomlin But that was too little too late because the scammers learned this pattern would just set up new accounts. There were also problems reportedly with the Cash App card. Normally when you order a new debit card or credit card, you have to active date the card after you get it. The idea is that if your address on file has been verified, it's part of the KYC process. 00:23:31:18 - 00:23:55:03 Bennett Tomlin And so if someone is stealing your identity, they would need to physically intercept your card at your address in order to use it. If instead you receive it, you can never activate it and may even realize that your information has been stolen. This helps slow identity theft and fraud. At one point, Cash App in Sutton Bank reportedly started receiving complaints from users about receiving cards they didn't order. 00:23:55:17 - 00:24:18:04 Bennett Tomlin And one employee told Hindenburg Research that Cash App solution was to start allowing for the cards to be delivered to addresses which weren't even on file. And yes, of course, there is a song where someone rapped about doing that. Now, to be clear, I don't think this report is flawless. I discussed my reservations about Polaris in the way sex trafficking is classified in here. 00:24:18:12 - 00:24:36:15 Bennett Tomlin They also talk about how Block largely did not act on people sharing a single address. And this one makes a little bit of sense to me as a thing that would be ignored, especially for a company still scaling. If you're focused on banking the unbanked, then you have to grapple with the fact that you're going to have more people living together than the middle to upper class. 00:24:36:15 - 00:25:05:22 Bennett Tomlin White experience in America might predict. Some individuals live together for financial reasons. Some cultures have more of an expectation of multi-generational families living together. Or one example that a former employee gave was a college dorm where apartment building Now, perhaps these accounts deserve some extra level of scrutiny, but the reality is that serving the least serve means you need to be able to accommodate situations which are unusual, though. 00:25:06:13 - 00:25:32:01 Bennett Tomlin Having said that, one case they described in the report was 125 people reportedly living in a single family home. That one seems pretty unlikely to me. That one sounds like fraud. 125 people is a lot. It's also worth pointing out that many executives, including Jack Dorsey, decided to take advantage of the elevated stock price of Block during the pandemic to cash out. 00:25:32:01 - 00:26:05:28 Bennett Tomlin Block stock price ran up over 600% during the pandemic, and Jack Dorsey sold over 500 million in stock between March 2020 and the end of 2021. Co-Founder James McKelvey also sold nearly 500 million in stock. Good market timing, it looks like, especially since the price of Block has been falling closer and closer to pre-pandemic levels since. Do y'all remember way earlier in this video, which is way longer than I expected we talked about are many of these money transmitters are effectively trying to do banking without having to actually be a bank? 00:26:05:28 - 00:26:27:20 Bennett Tomlin One of the examples given in this report is about interchange fees and the interchange fees, the fee charged to merchants for processing debit or credit card transactions twice, some places offer a cash discount or credit card surcharge or insist on remaining cash only, though sometimes businesses insist on remaining cash only for tax evasion purposes. But that's a different video. 00:26:27:21 - 00:26:47:24 Bennett Tomlin Block earns these interchange fees when people use their Cash App card. In 2010, right after the great financial crisis, the Dodd-Frank bill was passed to regulate banks, and it included an amendment introduced by Illinois Senator Dick Durbin, which meant that banks had at least $10 billion in assets. We're limited in how much they could charge in interchange fees. 00:26:47:24 - 00:27:09:24 Bennett Tomlin Block has over 30 billion in assets, but it's not a bank. Their partner for these cards, Sutton Bank, is, of course, a bank, but there are pretty small banks, specifically a bank that stays under that cap and can charge whatever fees they want. Pretty cool way to end around that little consumer protection regulation, isn't it? Jack is doing what it can to help people avoid those evil, evil banks. 00:27:09:24 - 00:27:34:17 Bennett Tomlin Fun fact which was also included in the report. PayPal, who also runs Venmo, disclosed that they had received subpoenas from the SEC related to the fees they were earning from their branded cards. PayPal doesn't use such an, of course, because if they used it and Block used it, it might get too big. Instead, they use Bancorp Bank, which was small enough to avoid having their fees capped money transmitters when again, consumers and users not so much. 00:27:34:18 - 00:27:56:23 Bennett Tomlin Now banking has two parts. Well, it has way more than two parts, but we're going to focus on the two most important parts for simplicity here. Banks take deposits and banks make loans. What does take deposits? As we discuss relying on their partner bank, they also extend loans both to their merchants directly. But I think more importantly through their buy now pay later company after, buy now pay later. 00:27:56:23 - 00:28:20:06 Bennett Tomlin Companies extend consumer credit for a period of several weeks, two months, and act as though it's not really debt because as long as you pay it off, there's no interest. If you miss a payment, though, they charge really high fees. The Consumer Financial Protection Bureau is looking at new regulations for this type of model because many people are ending up in dangerous positions just like other forms of consumer credit. 00:28:20:06 - 00:28:39:10 Bennett Tomlin These regulations would probably look like these companies having to do things like confirm your income and check your credit, which you would assume they're already doing. But nope, they don't have to. They don't have to check those things. Now, the final section in this report is entitled Conclusion A fintech darling like all others. And that's what I really wanted to talk about. 00:28:39:10 - 00:29:00:11 Bennett Tomlin Block does seem like they were missing steps they could have been taking to reduce fraud and crime. And some of this fraud in crimes seems like it might have financially benefited them. Executives were able to cash out. Well, prices were inflated, but as Hindenburg says in some sense, it is like all others. That's why I wanted to talk about this report. 00:29:01:05 - 00:29:23:00 Bennett Tomlin Let's assume for a second all these allegations are true. And the Hindenburg has a very solid track record. So there's a good chance they are. The fundamental problem is that they are not the only ones doing this. So many of the largest banks have been implicated in money laundering. PayPal was doing the same tricky stuff with interchange fees and many other growth. 00:29:23:00 - 00:29:44:02 Bennett Tomlin Stage startups and fintechs are doing a ton of different things to juice the numbers. I'm sure Cash App is trying to create the narrative that they're not a bank and they're not doing anything untoward or unique and in their official response, they said they're working with the SEC and considering suing Hindenburg. The response did not actually answer any of the allegations, though. 00:29:44:02 - 00:30:09:26 Bennett Tomlin As I discussed way back at the beginning of this video, money transmitters basically exist as an end around banking regulations. Regulating money transmitters falls heavily on the individual states because there is no federal money transmitter framework. A company like Block with over 30 billion in assets is left to each individual state to try to regulate. Some states have basically no requirement and other states have basically no one to investigate and enforce the regulations. 00:30:09:26 - 00:30:34:14 Bennett Tomlin We cannot be sure, based on this report alone, that Block has committed fraud. That's a criminal offense and they are innocent until proven guilty. But fundamentally, as users of these products, we are the ones who get taken advantage of. We get told that this will free us from the extractive fees of evil institutions like Wells Fargo, and then they'll turn around and charges fees higher than those banks are even allowed to. 00:30:34:14 - 00:30:57:00 Bennett Tomlin And let's talk for a second about inflating user numbers, which is such a common practice already in this chain. When we talked about Frank a financial services company, which was supposed to help people fill out the FAFSA and was purchased by JPMorgan for 175 million, allegedly 4 million of Frank's 4.3 million claimed users were fake when JPMorgan started digging. 00:30:57:11 - 00:31:23:12 Bennett Tomlin It's a crazy story. They hired a data science professor to make an entire synthetic list. And you should check out my video on it. But broadly, as a society, we have followed easy metrics and rarely punish white collar crimes like fraud severely compared at all to other things. Even when companies and banks and fintechs end up committing massive fraud or malfeasance, the company ends up paying a fine and continuing on. 00:31:23:12 - 00:31:54:06 Bennett Tomlin It is uncommon for these executives to go to prison, assuming they eventually plea or settle, and regulators in the Department of Justice do not want to shut down companies because they worry about the political blowback. They will be seen as anti innovation job destroyers, anti-business or even anti-capitalist. But you know what? Fuck that. Like I said in my pharmacy video a few months ago, our politicians and our regulators work for us and we collectively need them to do better. 00:31:54:17 - 00:32:16:11 Bennett Tomlin They should be acting on our behalf and trying to improve these things collectively. We must demand they actually try to make things better. Politicians who take donations from bad actors, politicians who make bad bills should be heavily criticized by their constituents, by journalists, by anyone who can see how willing these people are to plunder for their own gain. 00:32:17:04 - 00:32:38:06 Bennett Tomlin Otherwise, each attempt to make things better will end up with a loophole large enough for Jack Dorsey to have a silent meditation retreat. And thank you all for tuning into this video. I think it is very plausible. Block has been doing some inappropriate things, and I think the full report is absolutely worth reading. Check out my video on Frank if you want to see another financial fraud. 00:32:38:06 - 00:32:39:24 Bennett Tomlin And thank you all for joining.