Jack Dorsey’s Block (NASDAQ: SQ) saw its share price crash following a short-seller’s report that the payments firm facilitated fraud and misled investors about its user numbers.
On Thursday, March 23, Hindenburg Research issued a lengthy report on how “inflated user metrics and ‘frictionless’ fraud facilitation enabled [Block] insiders to cash out over $1 billion.” While Block claims to have “a mission to empower the ‘unbanked’ and the ‘underbanked,'” Hindenburg’s report concludes that “Block has systematically taken advantage of the demographics it claims to be helping.”
Hindenburg’s report is based on a two-year investigation involving “dozens of interviews with former employees, partners, and industry experts, extensive review of regulatory and litigation records, and [Freedom of Information Act] and public records requests.”
Dismissing Block’s claims to have revolutionized finance, Hindenburg accused the company of “dressing up predatory loans and fees as revolutionary products, avoiding regulation and embracing worst-of-breed compliance policies in order to profit from its facilitation of fraud against consumers and the government.”
Hindenburg believes Block investors will pay dearly for buying into the company’s hype, even as the company appears to be “betting that the consequences will either be a ‘cost of doing business’ or at the very least, come later … In the meantime, Dorsey and top executives already sold over $1 billion in equity near the top, ensuring they will be fine regardless of the outcome for everyone else.”
Late Thursday afternoon, Block issued a statement saying the report was “designed to deceive and confuse investors” and that the company “will not be distracted by typical short seller tactics.” Block added that it will “explore legal action against Hindenburg Research.”
Block’s shares fell as much as 20% in pre-market trading Thursday but rallied somewhat to close down nearly 15% to $61.88. That’s roughly half the stock’s value at this point last year.
Block began as a merchant-focused payment processor, but its customer-facing Cash App unit took off during the pandemic, accounting for $848 million of Block’s $1.66 billion gross profit in Q4 2022.
However, Block reported a net loss of $541 million for FY22. The company warned that it “may not be able to maintain profitability” due to what it claims are ongoing investments in its operations. But Hindenburg notes that Cash App’s growth in terms of both active users and cash inflows is slowing, a potential sign of even rockier times ahead.
By the end of 2022, Cash App’s monthly transacting active users were 51 million, up from just 24 million at the end of 2019. But Hindenburg claims Block has “wildly overstated its genuine user counts … Former employees estimated that 40%-75% of accounts they reviewed were fake, involved in fraud, or were additional accounts tied to a single individual.”
Asked whether the app’s user numbers were inflated by one individual holding multiple app accounts, a former Cash App staffer said, “Bingo.” Asked how common it was for a lone individual to hold a dozen or more account connections, the staffer claimed “60-70% of the time.”
To support this assertion, Hindenburg provided a screenshot of a Cash App customer relationship management (CRM) chart showing a single account connected to “dozens of others by a shared Social Security number, phone number, email address, bank account, or device.”
The assumption staffers made from these types of sprawling connections was that the account holders “must be doing something, you know, risky.” A different former employee called the multi-account linkages “the web of lies.”
Not all multi-account users are necessarily involved in criminality, but it does make verifying the actual number of individuals transacting on Cash App a black box. This is a problem even for Block, which set up an ‘Identity Team’ to quantify the inflation’s extent.
Hindenburg believes that if Cash App’s user numbers are overstated, then its customer acquisition costs must be understated. Yet even as these costs doubled from 2020 to 2022, Block execs continued to claim that their costs are “much smaller than what a traditional financial institution would pay.”
Unknow your customer
Block’s inflated customer numbers contribute to the company’s willingness to onboard customers with just a ZIP code and an email address or phone number, relying on “machine learning and data science to manage risk.”
While Cash App might blacklist an account that engages in a sketchy activity, the individual behind that account could open a new account simply by supplying a different phone number or email. As one former staffer put it, this system “wasn’t like, TSA’s No-Fly list.”
Cash App’s Terms of Service requires users to assure the company that the info they provide is “true and accurate” and doesn’t “mislead or deceive others as to your business or personal identity.” But the app allows customers to change their account name even if it doesn’t match the name they used when they opened the account.
Hindenburg tested this vulnerability by creating Cash App accounts using the names and photos of Elon Musk and Donald Trump, then successfully exchanging funds between the accounts. Hindenburg also ordered and received a Cash App debit card under the name ‘Donald J Trump.’
Block ignored federal rules requiring financial institutions to collect taxpayer investigation numbers—including Social Security numbers (SSN)—when issuing prepaid debit cards. Multiple former employees told Hindenburg that Cash App “only collects the last four” digits of a nine-digit SSN. Litigation records confirmed the existence of this partial collection process, which a former employee explained was because Block “didn’t want to be nosey.”
Cash App vetted these incomplete Social Security numbers through a third-party identity-check service called IDology. Block execs publicly touted its “seamless, easy-to-onboard, frictionless, consumer-friendly” practices, while former staffers told Hindenburg that this “super lenient” approach made it “super easy to defraud this company and to join the platform.”
Block recently began requiring new Cash Card applicants to provide their complete SSNs, offering an apology that the company is “legally required to collect this.” Hindenburg calls this change “seemingly an admission of past illegality” and wonders whether Cash App has taken any steps to require full SSNs from its existing customers.
The implications of such lax approaches are huge. Hindenburg cites the example of a Mississippi church’s congregants who mistakenly sent hundreds of dollars to Cash App accounts posing as the church’s Pastor Bartholomew Orr. The pastor alerted Cash App to the fraudulent accounts, but Orr told Hindenburg, “I don’t think they actually did anything.”
Orr made subsequent attempts to get Cash App to address the situation with a similar lack of results. Cash App deactivated the fraudulent accounts only when Orr involved the media and his Congressman. But neither Orr nor his parishioners saw the money sent to these accounts. Orr summed up Cash App’s apparent philosophy as “if you sent it to the wrong person, you just sent it to the wrong person.”
In February 2022, Block alerted investors regarding an investigation into its activities by the Consumer Financial Protection Bureau (CFPB). The CFPB wanted to know whether Block “failed to adequately address customer concerns regarding fraud” and ignored rules regarding “resolving errors and liability of consumers for unauthorized transfers.” However, Hindenburg notes that this investigation actually began back in August 2020.
Moreover, Hindenburg notes that the CFPB complained in August 2022 that its investigation was being “stymied by Block’s slow-walking” delivery of the requested documentation. Despite receiving multiple deadline extensions, Block offered “no explanation … as to the reasons for its failure to produce” the requested evidence.
Block was ultimately ordered to comply with the CFPB’s demands by January 5, 2023. The investigation remains ongoing.
Cash App grew dramatically in the spring of 2020 as the U.S. government opened up the pandemic relief spigot. Cash App heavily promoted the fact that recipients didn’t require a bank account to access these stimulus funds, resulting in a tsunami of new accounts opened on the platform.
However, states almost immediately began flagging what they suspected were fraudulent benefit claims. In many cases, the volume of these fraudulent claims made through Cash App’s partner bank was 8x-10x the number flagged at the next highest banks in those states.
Hindenburg said Cash App’s biggest pandemic compliance failure was its “willingness to allow multiple individuals to receive payments into a single account.” As one former employee put it, if a Cash App account “is getting unemployment payments from 7 different states in 72 different names, there’s a problem.”
One former staffer noted that there were “all these name mismatches,” while another wondered why Cash App wasn’t following the lead of some of its competitors. “[These competitors] said, ‘Look, if you want to send an [automated clearing house payment], the name of the beneficiary has to match the name of the account holder or it doesn’t go through.’ [Block] refused to do that.”
Hey… ho… um… no
Cash App’s disinterest in preventing scammers from opening multiple accounts even after being flagged was widely recognized and even celebrated in ‘scam rapper’ Teejayx6’s video for Cash App, which features the lyric: “They banned my Cash App because I sent a thousand transactions…I just bought another phone and made a Cash App.” Teejayx6 even released a ‘fraud bible’ with a subdirectory devoted to the ‘CASHAPP METHOD.’
Teejayx6 isn’t the only rapper to sing Cash App’s praises, a phenomenon that Dorsey was too happy to celebrate. Hindenburg thoughtfully compiled a ‘greatest hits’ video of hip-hop artists singing Cash App’s praises. These testimonials include using Cash App to not only engage in stimulus fraud but also pay for literal hits, aka targeted assassinations of rivals. (Your move, JPMorgan!)
I BTC what you did there
There is much more to read in Hindenburg’s report, which unfortunately didn’t address Cash App’s BTC business, accounting for half of Block’s overall revenue in 2021. Note that this $1.96 billion in BTC’ revenue’ is actually the volume of BTC sales to Cash App customers—Block’s actual ‘gross profit’ from BTC was a mere $46 million.
Given all the pandemic fraud talk in Hindenburg’s report, we can’t help but recall other reports that found a not insignificant percentage of Americans used the government’s pandemic stimulus to buy cryptocurrencies, including BTC. In other words, Block’s lack of ‘know your customer’ rigor likely boosted BTC sales to Cash App customers.
Block is a ‘platinum member’ of the Crypto Open Patent Alliance (COPA), a group that was formed for the sole purpose of thwarting Dr. Craig Wright’s efforts to deploy a global peer to peer electronic cash system based on a robust data ledger that uses a scalable micro and nano-payments network known as Bitcoin (BSV). Dorey has backed an inferior technology known as BTC, which he and other members of COPA are trying to pass off as Bitcoin.
BSV remains true to Satoshi Nakamoto’s vision of peer-to-peer electronic cash, while BTC has settled for an alternate identity as ‘digital gold’ (despite recent history exposing the lie behind BTC’s ability to serve as a ‘store of value’). And yet Block follows the example of fellow COPA members Coinbase (NASDAQ: COIN) and Kraken in ‘passing off’ BTC as Bitcoin.
Hindenburg’s report calls Dorsey a fraud, a designation that sometimes appears almost a requirement for COPA membership. In 2019, Kraken CEO Jesse Powell basically tweeted a confession to bank fraud during the exchange’s formative years. COPA’s ranks include Worldcoin, for crying out loud.
In 2000, Michael Saylor, founder of COPA member Microstrategy (NASDAQ: MSTR), was charged with fraud for fudging his company’s figures to boost its share price. Saylor is currently fighting tax fraud charges for dodging $25 million in unpaid taxes in the District of Columbia.
COPA’s stated mission is to “remove patents as a barrier to growth and innovation,” but their sole action to date is to legally challenge Wright’s authorship of the 2008 Bitcoin white paper. It’s worth asking why everyone who throws the word’ fraud’ in Wright’s direction seems to be hoisted with their own petard. Project much?
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