Pathogenic biometric bitcoin

A veri bad day for pathogenic finance.

One of the hard parts in dealing with any new or disruptive technology is separating the small amount of actual wheat from the very large amount of totally inedible chaff. Sometimes the inedibility is clear to anyone with an ounce of common sense and the market (and regulators) just take time to catch up. Take the case of Veritaseum and "pathogenic finance," about which the SEC just filed a lawsuit in federal court in Brooklyn. (You'll find some coverage on that one here).

The tl;dr about Veritaseum is that it was (allegedly) an unregistered securities offering that raised more than $10 million in cash and in addition to outright fraud and failing to register, the SEC accuses Veritaseum and its founder Reggie Middleton of price manipulation. Per the Complaint: “after the ICO phase, Middleton placed a series of secret, manipulative trades in VERI on a digital asset platform, artificially increasing VERI’s price by approximately 315% during just one day of trading. He then touted these price increases and returns to VERI holders, stating, for example, that because VERI was “up 33.51x from its April 25th initial sales  price [,] [s]ome prescient folk are quite happy.”

I remember reading about Veritaseum more than two years ago and thinking it looked like hooey and while we don't know how this will be finally adjudicated apparently a federal judge was sufficiently persuaded by the SEC's filing that the Court entered an asset freeze order.

The thing that blows my mind about this case is that the guy was under an active SEC investigation, was asked by staff to stop spending money and what does he do? Immediately transfers $2 million in crypto.

As you can see from the excerpt above, apparently because of this blockchain thing the transfer was readily apparent to the SEC, which went to court and got the asset freeze. Anyway, It doesn't look veri great for $VERI at this juncture, but we will of course have to see.

Suffice it to say that there's going to be so much more litigation like this between now and 2022 that it will probably become boring.  I frankly don't expect this particular case to last that long before preliminary and permanent injunction is entered. 

The allegations in this lawsuit are certainly different from the Kik Case, which includes a single count for an alleged unregistered offering (no fraud). That said, there is one kind of common thread. In the Kik case, the defendant publicly stated that it was going to fight the SEC and made a large public noise about raising a defense fund to change the law, after a failed settlement attempt.  The SEC filed suit in a couple of days. Here, the Defendant refused to comply with an SEC demand that he stop spending money – he refused, and they went right to court and got pretty much exactly what they wanted.

Insurance Company Crypto Investors?

While pathogenic finance may not be long for this world, there’s interesting work being done in the Wyoming State Legislature. The Cowboy State has worked hard to become a destination for blockchain building companies and a review of some new draft legislation has some interesting proposals. 

I was particularly intrigued by a draft law that would authorize insurance companies to invest in "Digital Assets" as long as those assets comply with Wyoming law. Digital Assets is defined to mean "a representation of economic, proprietary or access rights that is stored in a computer readable format, and includes digital consumer assets, digital securities and virtual currency."

If the statute is amended that would mean, at least in theory, that a Wyoming insurance company could invest in assets like bitcoin or ethereum.

This could actually be kind of a big deal. Insurance companies are by nature (and because of regulation) extremely conservative about what they invest money in. An insurer makes money by pooling policyholder capital and investing it (I'm oversimplifying a lot), and while placing assets at risk via investments is part of how insurance companies make money, they have to be pretty conservative in their picks to (1) keep regulators happy and (2) make sure they have enough to pay claims.

I'm unaware of any other state where insurance companies can statutorily invest in crypto. At least in theory, a Wyoming insurance company that held a part of its portfolio in crypto could offer certain lines of coverage in other states through excess and surplus lines brokers.

If you're not an insurance person this may seem eye-dryingly boring but it's at least another step forward, if the bill becomes law, into treatment of virtual currencies as an appropriate asset class for institutional investment. So it could be kind of a big deal.

Biometric Blockchain Bonanza

Marko Karppinen described the risk/benefit of user data in a 2015 blog post: "[a]ctionable insight is an asset. Data is a liability. And old data is a non-performing loan." A fresh-off-the-presses case from the 9th Circuit Court of Appeals involving Facebook and Illinois' Biometric Information Privacy Act ("BIPA") shows how fraught with peril identity data collection can be. It also shows why offloading identity verification where possible is an opportunity (and this got me thinking about “self-sovereign identity and blockchain identity solutions," which is why I am covering this case). 

The case is Patel et al. v. Facebook, Inc. The facts of the case are pretty simple. In short, Plaintiffs alleged that Facebook's use of facial-recognition technology violated BIPA. The Court said that because violating the statute "injures an individual's concrete right to privacy," Plaintiffs were sufficiently injured to have standing to sue.

At issue is a Facebook feature called "Tag Suggestions." Where enabled, "Facebook may use facial-recognition technology to analyze whether the user's Facebook friends are in photos uploaded by that user ... [T]he technology extracts the various geometric data points that make a face unique [and then] compares the face signatures to faces" that Facebook has already matched to users. 

According to the lawsuit, Facebook violated BIPA "by collecting, using, and storing biometric identifiers ... from their photos without obtaining a written release and without establishing a compliant retention schedule." BIPA protects "'concrete interests' in privacy, not merely procedural rights" and an alleged violation of the statute reflects a "concrete and particularized harm" (which is enough to allow the lawsuit to go forward). 

Is there a blockchain angle here somewhere? As the nice people at IBM tell us, “[y]our data and identity are your most important assets. Blockchain is the missing component that enables trust in relationships without the need for an intermediary identity provider. This is a new era of trust where establishing, proving, verifying and controlling identity are decentralized.” (emphasis added).  So called "self-sovereign identities" will, among other things, allow people to own their own data and wrest control away from corporate behemoths who are by their nature looking out for their bottom lines and not acting in the interests of their users. (You will also have fuller hair and whiter teeth).

I am not in love with the term "self-sovereign identity" and also skeptical that cryptography can entirely remove identity storage and retrieval risk. BIPA isn’t going to disappear. But there is an overlapping commercial application here perhaps, which could make the data into a slightly higher performing asset. Consider the vision articulated by Jaron Lanier in his 2013 book "Who Owns the Future." Lanier posits as a starting point that users should be paid for information gleaned from them in their use of technology. At the moment, the "lion's share of wealth now flows to those who aggregate and route those offering, rather than those who provide the raw materials."

Think about the modern ad sales business as an example, where multiple intermediaries exist between consumer and advertiser, and where the consumer isn't paid directly for their data. What if instead of paying ad agencies and other intermediaries for prospects, consumer preference data was available directly from consumers on a tradeable data market, where my refrigerator buying history and preferences are owned by me in the form of my own self-sovereign and tradeable Palley token? Instead of an ad sales funnel where businesses pay intermediaries for impressions and conversion, you would pay me directly for access to my preference data.

So maybe the silver bullet (or is it fool's gold Palley?) is a distributed cryptographic identity solution that is also a personal data/consumer preference asset class. I don’t think anyone has quite gotten there yet, but if you have names please send ‘em my way.

Disclaimer: This discussion is provided for educational purposes only. It is not legal advice. These are my opinions only, aren’t authorized by any past, present or future client or employer. Also I might change our minds. I contain multitudes.