We’ve talked before about the problems in the early days of PayPal, then called X. Elon Musk, in his infinite wisdom, decided that customer acquisition was the most important thing, and as a result, PayPal had to deal with widespread fraud. Don’t just take my word for it – here’s Peter Thiel, describing these days:
The crypto company Gemini, named after the Winklevoss twins, has a fraud problem
We had decided to give credit cards to absolutely everyone who wanted them. You have a credit limit of up to $10,000. Elon had told the woman launching the service that he wanted a million people to use the new credit card by the end of the year. Fortunately, it was about two levels down from the front, so not many people were able to spot this. Some people did; they wrote back to us and said, “This is amazing, I haven’t had credit in years. I can’t believe you’re giving me credit. I haven’t even had a checking account in 10 years.” These were people who wrote so many bad checks that the banks wouldn’t allow them to have checking accounts. It turned out that we ended up with a return rate of 50 percent. The worst subprime companies were like 4 to 6 percent. Then luckily we rolled that product back very quickly.
Now, to be clear, I have met many members of the crypto community, and many of them are avid financial history buffs. But it seems our friends, errant sea gods Tyler and Cameron Winklevoss, didn’t learn about PayPal’s early history, despite the existence of several excellent books on the subject. And then, perhaps inevitably, when they launched their crypto rewards credit card at Gemini, they got scammed.
“Gemini approved a wave of new customers who had signed up with stolen identities.”
Unlike Musk’s PayPal credit card, they advertised on billboards and social media platforms. And when the card launched, Gemini “approved a wave of new customers who had signed up with stolen identities,” The information writes and cites two anonymous sources. They had to pause the card rollout – and the fraud cost Gemini “millions of dollars”, according to three anonymous sources.
I don’t mean to choose Gemini. Fraud is a widespread and very funny problem in the banking industry. The ideal amount of fraud in finance is not zero – the classic example is the man whose porn payment is discovered by his spouse on their shared credit card statement and who calls the bank to lie that it’s a fraudulent charge to avoid a nasty marital battle. The customer commits technical fraud – he has knowingly approved the payment! — but in order to keep him as a customer, the bank agrees. This “friendly fraud” can happen for many reasons, but a certain amount of it is built into payment systems.
With something like cryptocurrency, on the other hand, there are a lot of people who use it who use it for a reason: either they don’t have access to the regular banking industry, or they don’t want to, for example because they’re trying to get ransom money for the hack they did on some business. I mean, the first widespread use of crypto was drugs, human beings. This is a group that’s maybe a little more likely to do some shady stuff than the general population, you know?
Anyway, this isn’t the only fraud problem Gemini has. You know how many financial services, like PayPal, prefer that you give them your bank account number instead of your credit card number? That’s because of the Automated Clearing House, which is the system your job can use to deposit your paycheck. ACH is old as hell, but it’s cheaper than credit cards because it doesn’t incur as many fees.
Because it is cheap, many fintechs, including crypto providers, prefer it. The only problem is if the account information is stolen – or, crucially, if the owner of the account disputes the transfer. Now remember, for banks this kind of friendly fraud is part of the cost of doing business, so they just want to believe their customers. But Gemini, funnily enough, let people withdraw crypto before their ACH deposit cleared! Here is The information about how it went:
For example, if a user initiated a $100 transfer to buy crypto and the value of that crypto rose to $150 before the transfer settled, the user could withdraw $50 in crypto.
That scenario made Gemini a target for fraudsters who initiated ACH transfers using stolen bank account information, two people familiar with the matter said, because they could quickly exploit that loophole to withdraw crypto. This meant that the exchange had less crypto to seize if the bank transfer was eventually contested by the real bank account owner and the exchange had to pay back the transfer, and therefore even greater losses if crypto prices fell again.
There’s a part of me that wonders if Gemini would have avoided all of this if someone in a position of power had read, like Ashlee Vance’s Elon Musk biography, or Max Chafkin’s The Contrarian, or Jimmy Soni’s The founders. PayPal set out to revolutionize the financial industry fairly recently, after all. I guess it was people the inside The twins who had a clue how this would go and they probably tore out all that rich hair. But the Winklevii needed to go to band practice, and here we all are.
