The following article originally appeared in CoinDesk Weekly, a custom-curated newsletter delivered every Sunday exclusively to our subscribers.
“Innovators who seek to revolutionize and disrupt an industry must tell investors the reality about what their technology can do today, not just what they hope it’d do someday.”
That quote, from the director of the SEC’s San Francisco office, Jina Choi, mentioned Theranos, the blood-test company and one-time Silicon Valley darling that the agency charged with fraud last week.
But you’ll be forgiven for thinking it had been about the cryptocurrency space, given the frenzied fundraising through initial coin offerings (ICOs) for projects with little quite grand visions, a buggy prototype, zero users and many of speculators betting it can work.
To be sure, a cryptocurrency isn’t equity during a business (at least, it’s not alleged to be), and an open-source project isn’t an equivalent thing as a corporation . But the Theranos case, during which founder and CEO Elizabeth Holmes paid a $500,000 fine and was barred from serving as a public company executive or director for 10 years, offers several sobering lessons for the blockchain community.
Some of them could seem obvious, but they bear repeating. the primary two apply to investors:
For those that don’t spend their days on crypto Twitter, that stands for “do your own research.”
You know how Google Ventures found out it didn’t want to take a position in Theranos? consistent with an investigative article published in life style in 2016, Google’s risk capital arm sent one among its associates to Walgreens, the pharmacy chain that had a partnership with the startup.
Supposedly, the “wellness centers” Theranos had found out within the stores were showcasing the company’s technology, which it claimed could test for many diseases just by taking a small little bit of blood from the fingertip. But, consistent with Nick Bilton’s expose, “as the VC sat during a chair and had several large vials of blood drawn from his arm, much more than a pinprick, it became apparent that something was amiss with Theranos’s promise.”
It would later end up that Theranos was using its vaunted Edison machine in just a sliver of the tests it sold to consumers.
What’s the crypto equivalent of “just go right down to Walgreens and see what’s up?” Well, if a blockchain network is up and running, you’ll start by buying a small amount of a coin, downloading the software and fooling around with it to ascertain if the thing works as advertised.
That’s how I found out bitcoin was legit early , and if the cryptocurrency you’re watching is anything like bitcoin, you won’t need to buy an entire unit (and if you are doing , well that’s a red flag right there). Better to blow $50 on initial due diligence than $10,000 on someone’s assurances.
However, that “try it yourself” approach might not be sufficient if, say, the network is running on alittle number of nodes manually controlled by the event team, with a promise to eventually begin the training wheels. And for a token sale that’s funding a yet-to-be-built blockchain, one that theoretically could do awesome things within the future…well, the homework goes to be tons more involved.
Holmes’ Steve Jobs-style turtlenecks, Stanford-dropout backstory and change-the-world rhetoric made for nice magazine copy. And like her idol Jobs, Holmes was reportedly secretive and imperious, largely forbidding even Theranos employees from communicating with one another about their activities.
Unlike the iPhone or the Mac, however, Theranos’ devices didn’t work the way Holmes led investors and patients to believe.
You would think that in cryptocurrency, a field whose own founder (or founders) remain unknown and where decentralization is one among the very best ideals, cults of personality wouldn’t be much of a problem . on the other hand there was Josh Garza. So don’t pin your investment decisions on one charismatic individual.
Of course, simply because someone is charming doesn’t mean they’re a fraud, either. It just has little relevance to the merit of the project. Until some future time when we’re all disembodied brains, we’ve to find out to discount these superficial distractions.
(On a related note, ignore “gravitas.” Theranos’ board included two former secretaries of state, a former secretary of defense, a retired Marine general and two former senators. many gravitas. Not an entire lot of medical expertise, though. it had been perhaps a more highbrow version of the celebrity-endorsed ICO phenomenon.)
The other two takeaways from this affair apply to token issuers, entrepreneurs and developers seeking to boost money during this space. and that they could also be even harder pills to swallow, because it were:
Many may find it unfair that Holmes paid only a six-figure fine considering the dimensions of the fraud ($700 million), especially in light of the tough treatments given over the years to some crypto entrepreneurs who operated in straightness , just because they didn’t invite regulators’ permission.
(Holmes didn’t admit or deny wrongdoing within the settlement agreement; consistent with the Wall Street Journal, a criminal investigation of Theranos remains ongoing.)
And it’s going to rather be unjust. But it shows the benefits of working within the system instead of outside it. Theranos paid millions for high-powered lawyers well before the govt started investigating the corporate .
Even as a sham enterprise, it had resources to defend itself.
“You buy things a method or the opposite , upfront or down the road ,” said Joe Colangelo, a replacement Jersey entrepreneur and longtime bitcoin enthusiast.
The wheels of justice turn slowly
Coming nearly three years after cracks began to show in Theranos’ facade, the SEC charges show that enforcement actions can take time. simply because the govt hasn’t gone after someone for possible violations doesn’t mean it won’t.
“Whatever statute of limitations you think that exists, it doesn’t ,” Colangelo said. “They will catch up to you ultimately .”
Teams who thought they might “do an ICO really fast” because there have been “so many they can’t possibly punish all of us” were mistaken, he said.
“You could be getting charged with crimes related to your ICO in 2023,” Colangelo added. “You need to be able to spend subsequent five years brooding about this.”
Ouch. That smarts worse than a needle within the arm.