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Bank CEO: Retract your debanking piece? Me: No.

In December 2024, in response to the press/advocacy campaign by Marc Andreessen and other crypto advocates regarding a phenomenon they call debanking , I wrote Debanking (and Debunking?) in Bits about Money. That piece is the definitive explanation of the issue. It examines many angles including: Debanking (and Debunking?) won wide acclaim for being accurate, incisive, and balanced. Experts who publicly praised it include the crypto VC who coined the phrase “Choke Point 2.0” ( “… the best and fairest treatment of the issue [I] could expect from a skeptic…” ) and a former federal banking regulator ( “This is a tour-de-force. This is absolutely excellent. Anyone interested in this issue should read this piece.” ). I am notoriously a crypto skeptic, but I do believe advocates have some points which are just true about debanking, a phenomenon which is much larger than crypto. They also have some arguments which deserve a fair hearing. They also say some things which are untrue and will not get more true simply by being strategically convenient. In many years of writing for the Internet, I’ve gotten my fair share of negative comments. It happens; oh well. Sometimes randos use cliches like “Delete this post.” These are easy to ignore. I recently received a request for retraction from a bank CEO . ( Tweets sometimes become unavailable .) That is a first, and it deserves careful attention. Bits about Money is a reader-supported professional journal about the intersection of finance and technology. It has been my primary professional output and source of income for the last two years. It generally takes pains to avoid antagonizing specific banks, in part because banks can be prickly about their reputations. But there was always a risk, in writing candidly about banking, that a bank or banker could react with severe displeasure. Bits about Money is, like most of my professional writing, published by Kalzumeus Software, LLC. The following is in the voice of the company. Retractions are, in the standard practice of journalism, research and other professional writing, extremely rare. They are reserved for the worst offenses: plagiarizing, fabricating quotations or data, committing libel, and the like. I publish analytical essays about complex systems, and mostly do not break news. One is welcome to one’s opinion as to whether that counts as journalism. I have a high regard for the truth. If I ever wander into error about the thing readers pay me to be an expert about, I try to correct the record. My preference is strongly towards corrections rather than retractions, as I have never unpublished a piece, but I would do it if warranted. I have considered, and asked external advisors, whether it is possible that the CEO of a tech startup valued at over $3 billion might be unaware of what the word “retraction” means or that asking for one is a serious act. We unanimously concluded that I am entitled to assume the professionalism and competence of a founder of a tech unicorn or a bank CEO. McCauley is both. Because the specific allegations made do not show the professionalism and competence of the speaker in a positive light, I reached out to Anchorage Digital in advance of publication, via their PR department’s published email address . I asked, among other things, if they had reason to believe their CEO’s Twitter account was compromised. There is always a risk that someone is signing one’s name to stupid letters without authorization. Anchorage Digital’s PR team did not reply to my request for comment, despite receiving three emails and a clearly communicated timeline which was longer than one business day. As Anchorage Digital itself tagged McCauley’s account the day prior on the occasion of his testimony in front of the U.S. Senate Banking Committee , and did not identify his account as compromised, I treat the authenticity of his messages as a settled question. I will take the charitable perspective that a tech founder and bank CEO does not necessarily speak for the startup and/or bank themselves. Anchorage Digital knows my email address if they would like to clarify this or any other point. On receiving the request for retraction we reached out to McCauley to ask what specifically he believed was inaccurate in the piece. This was also an opportunity for McCauley to recharacterize his request as, for example, an indelicately phrased expression of personal opinion. McCauley did not respond by walking back the request for retraction. Instead, he replied with what he seems to believe constitutes a litany of improprieties. As he has numbered his subpoints, we will address them in turn. A few areas were incorrect and misleading, lots of omission of key facts, and missing the point about what we mean by debanking. Silvergate was trivially solvent based on their call reports. Anyone assessing their liquidity position saw this (we were doing so). Your implication that they were doomed due to BSA findings doesn’t comport with any regulatory practice—banks don’t get closed for this. Our response regarding solvency: Had we stated or implied that Silvergate was insolvent, that would have been very improper. Insolvency of a financial institution is a serious charge. We assume McCauley believes we must have made it, because no bank CEO could possibly believe that solvency is the only obligation of a financial institution. We did not make this accusation. We reviewed the 4,300 words written about Silvergate specifically, and cannot identify any statement which can be reasonably read as alleging insolvency. A reader who wanted to quickly verify this might use Ctrl-F “solv” (three hits in the piece, none about Silvergate, and one expanding to “solving”). One could also run the piece by an expert in banking practice, who might point out the following is persuasive evidence of solvency. Debanking (and Debunking?): Silvergate voluntarily liquidated in the wake of the FTX implosion. Limited props for them here: they managed to do this in a mostly orderly fashion, as opposed to Signature, which had substantially less crypto exposure but blew up. If one’s bank does not employ an individual who understands the above paragraph to mean that Silvergate was solvent, Anthropic will sell you artificial cognition for $20 a month. Claude 3.5 Sonnet demonstrates sufficient reading comprehension to analyze complex technical documents to the standards of an early-career employee in financial services. We would recommend supervising Claude with management at least as competent as it. Our response regarding Bank Secrecy Act (BSA) findings: We have reviewed our writings with respect to Silvergate’s broadly deficient BSA compliance regime, including the anti-moneylaundering (AML) errors it made. We stand by the entire analysis, most particularly the conclusion, which we did not articulate lightly. Silvergate was not a competently run institution. We charitably assume that Anchorage Digital has mandatory training regarding BSA/AML compliance. This is required of all banks. McCauley has even more reason to be familiar with this requirement than the typical bank CEO. McCauley and Anchorage Digital Bank, National Association are signatories to a 2022 consent order with the Office of the Comptroller of the Currency (OCC) . That consent order stems from the OCC’s finding that, quoting the order: As of 2021, the Bank failed to adopt and implement a compliance program that adequately covers the required BSA/AML program elements, including, in particular, internal controls for customer due diligence and procedures for monitoring suspicious activity, BSA officer and staff, and training. We have no particularized knowledge as to what Anchorage Digital’s internal training instructs employees regarding the range of sanctions available for non-compliant behavior. If that training does not rhyme with every other training in the financial industry, we suggest Anchorage Digital might consider updating it. (We gave McCauley and Anchorage Digital’s press team days of advance notice of our intention to mention the consent order. We gave them the opportunity to provide a comment regarding it. Neither offered a comment.) Debanking characterizes the standard training thusly: If you’ve worked in the financial industry in any capacity, you went to mandatory Compliance training. Attendance is taken and you likely had a refresher annually. And there were smirks, and jokes. And your trainer said, very seriously, “Pay attention. This is important. If we eff this up, they can do anything to us, most likely large fines but up to and including closing this firm. You, personally, could go to jail.” Banks are, of course, welcome to their own risk analyses, and may consider the risk of being closed for AML/BSA compliance violations to be very low. This point of view appears common among crypto bankers. Silvergate executives have professed to share it. As mentioned in Debanking , closing a bank is an extraordinary remedy, but it is on the table. Case studies which might enliven one’s next training include: Summary: McCauley fails to identify an incorrect allegation of fact made by Debanking . Viewing his statements in a light most favorable to him, he disagrees with our analysis . He is welcome to articulate his point of view in his own spaces, the bank’s spaces, or the halls of the Senate. He is not entitled to a retraction. To the extent McCauley believes that any respectable publication would retract over this, he is greatly miscalibrated. We could end the inquiry here, because his next two bullet points do not even purport to allege inaccuracies, but we will continue. You completely fail to mention the exhaustive set of communications publicly coming from the regulators indicating clear guidance that crypto businesses are to be viewed as, quoting, “highly unlikely to be compatible with safe and sound banking practices”. Particularly joint letter of Jan 2023, OCC IL 1179, and the rescinding of the Fair Access to Financial Services rule. Credit for the fdic letter mention but the sum total of these moves had a clear chilling effect, that caused most large banks the country to 180 about face in crypto. You also dismiss sab121 as boring accounting (it is) without acknowledging the meta message of it to banks. We concur that the Joint Statement on Crypto-Asset Risks to Banking Organizations (of the Federal Reserve, FDIC, and OCC, in January 2023) was an important milestone. Which is why we cited it as such . It was linked in the following discussion. Debanking : Banking regulators get to weigh in on proposed banking products. That is the absolute core of the job. That will extremely routinely result in saying something which rounds, like many of the letters do, to “We are going to have a considered think about this and get back to you, but in the meanwhile, please don’t roll this out widely.” (The think was had; the results were published . Many crypto advocates do not like those results, and are asserting procedural irregularities because of that.) The piece extensively argues that, contra the claims of crypto advocates generally (and McCauley in his testimony before the Senate after the piece was published), the publication of extensive written guidance ( which we linked to ) militates against concerns that these actions are, quoting McCauley’s testimony, “opaque [and] unfair.” Debanking : Conversely, when the government is capable of publishing extensively researched position papers and extensively footnoted indictments, that should give you more confidence that it is less likely to be engaged in lawless, arbitrary behavior. Not limitless confidence, certainly, but it is evidence in a direction. Our response regarding SAB121 : McCauley is the CEO of a technology company with a custody business and a foothold within the regulated financial perimeter. We are extremely aware of why he has a particular interest in SAB121. While this accounting arcana is material to his firms’ business interests, we judged it of only tangential interest to most readers. We only gestured at it to ( accurately and fairly ) identify changing SAB121 as a policy goal of the crypto industry. It has since been rescinded . McCauley’s apparent dissatisfaction with the discussion of SAB121 asserts no inaccuracy and is accordingly not a reasonable grounds for retraction. Debanking wasn’t just about losing access to settlement services like SEN/signet. It was about comprehensively being unable to get bank accounts after those banks were closed. It was about banks we’d been working with for years kicking us out of the blue - and this happening across the whole industry. Far from “missing the point” of what crypto advocates mean by “debanking”, Debanking points out that crypto advocates are engaged in strategic conflation of different issues. We could not have, at the time of publishing the following, known that McCauley would request a retraction using this strategic conflation , pretending (a word we do not choose lightly) that advocates do not really care about bank supervision, and only want business checking accounts. Debanking : Advocates often invoke a user-centric perspective of debanking, focusing on the impact on individuals/firms. Then, they conflate it with regulators’ decisions regarding bank supervision, in ways which are facially not about direct user impact. Crypto advocates routinely exaggerate the universality of banks’ treatment of crypto. As Debanking discusses extensively, we absolutely agree with advocates that crypto companies have, at times, routinely experienced banking friction. If one is demanding a retraction, though, it pays to be precise and not use words like “comprehensively” to mean “not comprehensively.” For example, as McCauley admitted in his testimony to the Senate Banking Committee, Anchorage Digital did find a banking partner . Debanking , (following a discussion of our own two debanking incidents): That is the typical end to a debanking story. “And then, I opened a new account.” McCauley asserts, in his testimony, his belief that “over forty banks” would not have rejected Anchorage Digital but for regulators pressuring banks to cut off services to the crypto industry. We have no specific knowledge about Anchorage Digital’s relationship with its former bank or more than forty prospective banks, and will let the common factor in those discussions describe them. Quoting McCauley’s testimony to the Senate: One day in June 2023, we received an urgent email from the bank informing us that they needed to speak with us that day. On the call, we were told that our account would be closed in thirty days because they were not comfortable with our crypto clients’ transactions. We attempted to explain the source of all payments from our crypto clients were fully documented as a part of our robust KYC, AML, sanctions compliance, and other internal transaction monitoring and attribution processes, and that we would be willing to provide more information to their risk management team. They were uninterested. They refused to engage in further discussions, provide any additional explanation, or offer any chance to appeal the decision. Alongside this experience, we found ourselves shut out of the banking system at other touchpoints. After the closure of some of the few banks that were willing to serve crypto clients in March of 2023, we were forced to find a new banks [sic] to hold clients’ cash funds in custody for trading purposes, as well as an account to hold segregated regulatory capital, both required to be held at an FDIC-insured bank under the terms of our bank charter. Again, we should have been a desirable, low-risk client for a bank. Yet over the course of a seven month period we spoke to over forty banks and were rejected by all of them. Many did not even cite a reason; others just vaguely told us it was not within their risk appetite to work with crypto clients. Our response: We trust McCauley’s representation that this happened. We also believe Debanking adequately explains to a non-involved individual why it happened. See the section Debanking specifically for AML risk . Indeed, a reader of Debanking would have, months before McCauley’s testimony, been able to predict elements like the 30 day notice period, the disinterest in further negotiations, and the lack of appeals process. McCauley, like many crypto advocates, professes to believe that a legitimate crypto company is a low-risk bank client. His testimony discusses the desire of Anchorage Digital to have demand deposit accounts, on its own behalf and on behalf of customers. We empathized in Debanking with crypto entrepreneurs who are not banking experts. Some might not understand how a legitimate, legal business could be anything other than a low-risk bank client. We explained how. At substantial length. Crypto advocates love a bit of risk, and love even more when somebody else has to buy them out of the downside, while they keep the upside. The demand that banks just give them deposit accounts is a demand that bank shareholders backstop their credit (and other) risk. Crypto advocates mostly do not intend to give their banks equity for this risk. One can understand how a crypto founder who is raising their seed round might not yet be a banking expert. Members of a bank board of directors, on the other hand, are charged with managing a variety of risks to their bank. They must be able to articulate how a legitimate business could pose credit (and other) risk to a bank with only demand deposit accounts. This topic is discussed extensively in Debanking , including a worked example from the experience of Metropolitan Commercial Bank. Metropolitan primarily provided “low-risk” cash management services to Voyager Digital, a cryptocurrency platform/exchange. Voyager was a legitimate business, publicly traded, and believed to be well-capitalized. It represented to its bank, investors, and regulators that it had best-in-class risk and compliance programs in place. Voyager blew up, due to its best-in-class risk program seeing single-name exposure to $666 million representing 60% of loan book / 30% of all assets and leaping at the opportunity. When it collapsed, customers who had sent Voyager money, but not received crypto in return, began to initiate reversals of those transfers. Metropolitan was faced with a credit loss large enough to imperil their entire crypto banking practice, which was approximately a quarter of deposits prior to the collapse. Metropolitan was dragged into Voyager’s contentious bankruptcy. It was sued over its conduct and alleged lapses. One wonders whether Metropolitan, in clarity of hindsight, considers providing cash management services to an upstanding cryptocurrency platform to be “low-risk.” Metropolitan attributes “the strategic assessment of the business case”, along with the regulatory environment, for deciding to fully exit crypto banking, which they claim they had pivoted from beginning in 2017. McCauley’s assertion that Debanking ignores a constellation of regulatory activity which caused the banking industry to update negatively on its view of crypto is unsupported and unsupportable. We analyzed it extensively, along with the other reasons the banking industry negatively updated on crypto. Broadly, the meta thesis of your piece is “nothing to see here regulators gonna regulate and banks gonna bank” which is just not what happened. Sprinkle in some non sequiturs about FTX and your humorous crypto skepticism and you have an entertainingly written piece that sadly misses the point. The biggest problem with it is how well it’s written! A passive observer unfamiliar with the details probably reads it and agrees with you and feels they are smarter. McCauley misinterprets the thesis of the piece, which is hinted at in the usual place and in the usual manner: stating it explicitly, very near the top. “It’s not a conspiracy theory if people really are out to get you.” sums up part of my reaction to [the claims of crypto advocates], but only part. There exists some amount of conflation between what private actors are doing, what state actors have de facto or de jure commanded that they do, and which particular state and political actors have their fingers on the keyboard. These create a complex system; the threads are not entirely divorced from each other. We concur with McCauley that many readers might, after reading Debanking , feel that they are better informed about debanking than if they simply trust the representations of crypto advocates. Kalzumeus Software does not consider this a bug and WONTFIX. We disagree with McCauley’s characterization of readers moved by the piece as “passive observer[s] unfamiliar with the details.” Many of our readers are extremely professionally invested in these topics, perhaps by dint of working in finance, financial technology, bank supervision, policy roles in the U.S. federal government, or the cryptocurrency industry. McCauley has failed to identify a single fact alleged in Debanking which is incorrect, or any other malfeasance. Differences of opinion or different preferences in emphasis are, of course, not a reasonable basis for retraction. We accordingly reject his request for a retraction. I need to promote an important subtext to text. It is exceedingly rare for bank CEOs, who are chosen for probity, sound judgement, and professionalism, to demand retractions. It is rare enough for banks to do it, and when they do, it usually follows quiet outreach by e.g. PR or Legal teams. Some might mismodel writers as being thrilled by unprofessional behavior. The incorrect model is that the writer immediately enjoys the opportunity to embarrass someone, and probably gets paid to do it. There is an old saw about “Never pick a fight with someone who buys ink by the barrel”; a more modern articulation might mention the Streisand Effect . (Wow, more than 20 years old now?! There are bank employees too young for that reference. Yeet it into an LLM if you need to.) These bits of folk wisdom do not match how serious professionals perceive the incentives and power dynamics at play here. Banks are, as a class, much better resourced than writers (and almost all publications). I am a very atypical writer vis the financial industry. Most writers work for an institution, and that is a Faustian bargain. On the one hand, working for an institution means that when a bank sues for libel , they will sue your employer, and not you. On the other hand, one’s Legal department, being very sensitive to the expense and annoyance of being sued for libel , will tread very lightly around prickly institutions and individuals. This includes exercising prior restraint of reasonable reporting and commentary. A demand for a retraction by the CEO of a well-resourced financial institution is reasonably read by most outlets as being backstopped by potential legal consequences if they do not comply. Well-calibrated professionals understand retractions will only happen in the event of serious malfeasance. Accordingly, a request for a retraction is a statement that one believes one has suffered serious malfeasance. Not all CEOs are well-calibrated. But publishers have to take certain genres of statements from certain genres of business owners much more seriously than other people might take them. This includes when those statements are communicated via the Internet. The Internet is real life. A statement made by a bank using the Internet is a statement by a bank . Of course it wasn’t transmitted by telegraph, stagecoach, or carrier pigeon! A statement made by a bank CEO, etc etc. And thus the recital above that e.g. Kalzumeus Software, LLC was and is the publisher of Debanking (and this piece), and thus the serious discussions with professional advisors. While I sometimes feel like I am LARPing at running a business, the great state of Nevada, the bank holding my mortgage, the IRS, and my insurance company are unanimous that I do in fact run a business . I am obliged to operate it in a competent fashion, including taking my legal responsibilities seriously, and managing risk to the business and other stakeholders. Perhaps some bank CEOs feel like they’re just LARPing sometimes. I can empathize. But, to quote U.S. District Court Judge Ana Reyes (in a hearing on FDIC’s recent tussle with Coinbase ), “welcome to the NFL.” I speak only for myself and, as I’ve said for years, I work for the Internet. The Internet is humanity’s crowning achievement. It is also a community and that community has norms. One of those norms is that it fights attempts at censorship. As an Internet-native independent writer who is better resourced than almost all writers who will ever get a saber rattled at them by a bank or banker, I will say what they cannot. This conduct is unwarranted, unprofessional, and dishonorable. It should cease. The opinions , on the other hand, are merely wrong. One is welcome to publish one’s opinions to the Internet in a manner of one’s choosing. (One may have stricter obligations with respect to representations made to one’s regulators or e.g. Congress. Ask one’s lawyers.) Many readers might wonder why a bank needs a bank. Indeed, McCauley’s verbal statement to Congress has a mic drop moment where he expresses incredulity that a federally chartered bank could be debanked. It’s great theatre. A fun bit of banking Compliance trivia: there exist banks which one cannot bank at. Anchorage Digital Bank, National Association is one such bank. Quoting Anchorage Digital’s home page’s fine print: “Anchorage Digital” refers to services that are offered through the wholly-owned subsidiaries of Anchor Labs, Inc., a Delaware corporation. Anchorage Labs, Inc. is a tech company, and not a bank. That tech company has a relationship with Anchorage Digital Bank, National Association. That relationship involves receiving fees from the bank for services. As to whether it is an ownership relationship, well, I’d bet their lawyers can tell you a scintillating and true story about bank holding companies. Anchorage Digital Bank, National Association makes much of the fact that they are a federally chartered bank, operating under the auspices of an agreement with the OCC. Quoting Article V of their operating agreement with the OCC : The Bank shall limit its business to the operations of a trust company and activities related or incidental thereto. The Bank shall not engage in activities that would cause it to be a “bank” as defined in section 2(c) of the Bank Holding Company Act. Those activities? Taking deposits and making loans, the traditional business of banking. Anchorage Digital was previously a trust company in South Dakota prior to getting the OCC charter. Trust companies, a type of regulated financial institution, can run custody businesses. A custodian maintains legal and operational control of an asset, but does not own it. The owner pays them because keeping that asset safe and useful increases the value of the asset by more than the cost of custody. You are yourself, reader, very likely a beneficial owner of assets held at a custodian. This is especially likely if you hold financial assets which are not cryptocurrency tokens. You have probably not paid an invoice for these professional services directly. Another entity, such as e.g. your brokerage or a fund you are invested in, paid for them as a prerequisite to offering you a bundle of services, of which custody is one necessary component. A custody business might have other modern products such as e.g. a real-time settlement API. That is one of Anchorage Digital’s marquee products . For a fuller discussion of real-time settlement APIs and why the crypto industry considers them structurally important, see Debanking ’s discussion of the Silvergate Exchange Network. Speaking of crypto trust companies, remember Prime Trust? It was a Nevada chartered trust company, which also had a custody business. Prime Trust purported to be the adults-in-the-room bilingual-in-TradFi eagerly-complying-with-regulations crypto custody company. They were going to clean up the cowboy behavior in the industry. This is a familiar sales pitch, also made by FTX, Voyager, BlockFi, Genesis, and probably some firms which are still with us, too. Prime Trust lost a portion of the assets they were custodying due to technical incompetence (they wrote seed phrases allowing recovery of private keys on a piece of metal… then lost the metal). They then misappropriated other customer assets to buy substitute assets to fund withdrawals. This, per their bankruptcy filing , resulted in insolvency which they concealed from their regulators and customers through intentional fraud. When this came to light, they were closed by their regulators. This was in June of 2023. By coincidence, that is the same month that Anchorage Digital lost their banking partner. This loud and notorious collapse of a major competitor to Anchorage Digital, happening as a result of incompetence and malfeasance, despite that competitor having said all the right things, as part of a pattern , seems relevant to the interests of banks in the summer of 2023. One might choose to recount it in describing those banks’ reticence to do business with one’s industry. Perhaps one might acknowledge that one’s prospective banks might have had legitimate concerns. (Washington professionally appreciates a well-executed limited hangout.) Having done so, one might tease out the nuance that those concerns might have been surmountable but for excessive regulatory pressure. Time is precious in front of elected officials, though, and Anchorage eschewed that and stuck to simpler messaging. Anchorage Digital mentioned its strong commitment to seeking (direct quote) “the highest level of regulatory scrutiny and certainty”, and its determination to meet the obligations it has signed up for. This was repeated multiple times for emphasis. At approximately 1:08:30 in the recording of the Senate hearing , CEO McCauley stated “That’s right. I’m a bit of a square, and like following rules, and so we always followed all the rules and regulations.” I am also a bit of a square. I have never signed a consent order with the OCC regarding deficiencies in my bank’s BSA/AML program, however. McCauley’s testimony that Anchorage lacks the ability to facilitate customer wires to third parties, “a basic banking service that we previously had access to”, may have surprised some listeners. Readers of Debanking might be able to predict what point of view a sub-custodian bank might have regarding AML risk of third-party wires for crypto clientele. The sub-custodian might not be moved by a valued customer’s complaints their customers are simply crypto-native and traditional institutions requesting wires to crypto-native counterparties. For example, readers might remember the statement (quoted in Debanking , on the basis of reporting by Nic Carter ): Where we were not as buttoned up as we should have been was in regards to the FTX/Alameda clients. That was a function of the bank growing incredibly quickly[.] … Probably we could have figured out FTX was brokering deposits via Alameda. In retrospect I think we could have pieced this together and figured it out. Readers are welcome to their estimate of whether the quoted Silvergate executive, who Carter granted anonymity to, will work in banking again. Executives at many other banks do not relish the possibility of waking up to news that a crypto company was, once again, not as buttoned up as it should have been. As I point out in Debanking and elsewhere, crypto advocates would prefer to be judged on their potential rather than their track record. As a sometimes resident of Washington put it memorably: “What can be, unburdened by what has been.” Optimism about future potential is highly prized in the startup community. It does not require unpublishing true claims about track records. I continue to agree with crypto advocates on many of their claims. I will continue writing about the reality, warts and all, of the financial system. I will explain how history, humans, policy decisions, and technology have come together to deliver it. I will cover upgrades we’re collectively trying to build for it. When those systems confound our expectations, or when their regulators are disregulated , interested readers will find facts and fearlessness in Bits about Money .

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Tether's Troubles in November 2022

I described Tether in 2019 as “the internal accounting system for the largest fraud since Madoff.” This remains true. Earlier in 2022, in the wake of the Luna/USDT collapse and shockwaves hitting the industry, I wrote that their May 2022 attestation showed that, even if one believes the contents of the attestation, they again went insolvent and required recapitalization. Tether is required to produce a quarterly attestation showing the state of their reserves because they settled with the NYAG in 2021. The NYAG confirmed most of the allegations us Tether skeptics had been making. They were further reinforced in Tether’s settlement with the CTFC , which found (based on their accounting records) that Tether was only solvent for 27.6% of the days in a multi-year examined period. This week, in November 2022, crypto is dealing with another market-wide contagion. By coincidence, on November 10th, Tether released another attestation , based on data current as of September 30th ( archived here ). Tether has again crowed that this proves their substantial success in risk management, for example in decreasing their reliance on commercial paper. I actually read their accountant’s work product. It, again, demonstrates that if one believes their own numbers, it would have taken supernatural intervention to avoid them again becoming undercollateralized. Tether serially lies about the existence, composition, and security of their reserves. They’re extremely probably doing it again, much like they did in May, much like they did for the past several years. The Consolidated Reserves Report alleges assets of $68,061,618,458 and liabilities of $67,811,510,720. This implies approximately $250 million in equity, via standard balance sheet math. $250 million was their margin of safety between September 30th and today. Even one assumes arguendo that Tether is being correct and honest about the existence and composition of their less risky reserves, such as e.g. short-term U.S. Treasuries, this is grossly insufficient equity to support Tether’s risk-on holdings in almost any market conditions, much less the ones we have seen this week. The Consolidated Reserves Report alleges that Tether’s reserves included, as of September, $2,617,267,750 of “Other Investments (including digital tokens)” and $6,135,946,415 of Secured Loans. These assets must have been impaired in the last six weeks. If they are not, Tether would have a legitimate claim to being the best risk managers. Not in crypto, no, in the history of the human race. The risk-on assets are 12.86% of the reserves, via simple division. Their equity is 0.36% of assets. (No, I did not forget to multiply by a hundred when converting to percent.) If their risk-on assets were impaired by more than about 2.86%, Tether must have (by their own numbers) needed recapitalization. Again. It is not credible that they suffered no serious impairment. Bitcoin, the blue chip cryptocurrency, is down by more than 10%. I challenge anyone to find a portfolio construction for digital token investments that possibly survived this environment with only a 2.86% impairment. The only even remotely conceivable option would be “put it all in stablecoins” and that just makes no sense at all; their business model (as they describe it) is operating the stablecoin to earn assets from the reserves. Why hold non-yielding USD-denominated stablecoins in reserve when you could turn them into 3.75% yielding Treasury bills using the same process that one alleges one has used many more than 40 billion times. The loans are an even worse story. Tether’s accountants carefully avoid saying that Tether’s reserves are adequate, presumably because they like money but do not like the prospect of jail. This causes them to write very defensively about what they are and are not actually attesting to. Here is one caveat from the accountants, reprinted verbatim: The valuation of the assets of the Group have been based on normal trading conditions and does not reflect unexpected and extraordinary market conditions, or the case of key custodians or counterparties experiencing substantial illiquidity, which may result in delayed realizable values. No provision for expected credit losses was identified by management at the reporting date. Got that? The accountants want to emphasize that all bets are off if the crypto markets are roiling. This is exactly what is happening this week. I do not know whether Tether had anything in exchanges which folded this week, but it is an incontrovertible historical fact, in both slow databases and public reporting , that Alameda Research was historically their single largest counterparty. Alameda has been vaporized . Tether says they dodged that bullet . It does not take vaporization of the #1 current counterparty or custodian, whomever that is, to impair their loans sufficiently to eat through their equity. Their equity is already vapor. They are leveraged 35:1 against their risk-on assets alone . Their debt to equity ratio of about 270:1 would place them comfortably in the leagues of the firms that were at ground zero of the global financial crisis in 2008. Even a tiny impairment, a slight worry of insolvency risk, to a relatively minor contra would push them into insolvency. The math is extremely straightforward. This is not simply a liquidity risk; the problem is not merely that realization of the value of collateral might be delayed. It is solvency risk; if market conditions prevent Tether from demanding repayment or liquidating collateral, it is very possible for their contra to no longer exist and their collateral to be worth far less than the value of the debt. Tether has historically been very tight lipped about their contras and custodians, because they are (sensibly!) worried that public disclosure of them would allow the government to freeze and seize all of their assets. See, for example, the UI screenshot captured by Larry Cermak , a journalist/researcher who (for some reason) believes they seem like people worthy of trust. [Do not share these instructions] except with your financial institution. Divulging this information could damage not just yourself and Bitfinex, but the entire digital token ecosystem. Accordingly, you are cautioned that there may be severe negative effects associated with this information becoming public. Who are their contras and what are their exposures? It probably matters, in an abstract sense. It matters much less in the concrete reality of contagion. Yes, both finance and crypto have substantial experience with the theory that loans being secured means that they won’t blow up. Recent experience with this theory is available at your news outlet of choice. Treasury bills are yielding in the neighborhood of 3.7% at present, which means Tether generates a substantial amount of interest income. Where is it, though. How do they only have $250 million in equity if just their Treasuries are generating about $120 million in interest a month ? Regulators and financial journalists seem to not be very interested in answering this question. The answer is probably some variant of “We’re either dissipating it or using it to work out issues with our lower-quality assets, like the issues with the commercial paper that we claimed was lower than 120 days in average duration but for some reason took years to clear off our books.” But the answer is irrelevant. Wherever that money is, it isn’t in their equity. Tether is a gigantic piggy bank, run by confessed liars. It has previously been looted to cover for the illiquidity of their affiliated exchange. Tether represents a bet that their consolidated group (headed by Bitfinex, which despite past lying about this fact is essentially co-extensive with them) will inject equity to cover losses in the future, as they have done in the past. Sophisticated Tether contras, such as their now-bankrupt bankers, understand this. They are cagey about saying it in as many words. Tether has steadfastly claimed that no, no, they are really backed. They have always been backed. And since they seem now incapable of even lying competently to support that, the story is shifting. Tether’s history of deceit and prevarication is very well documented, including in the NYAG and CFTC settlements. They have moved the goalposts many times regarding the composition and sufficiency of their reserves. In an interview with CNBC, Tether bragged that they had more than 24 hours of liquidity. Another crypto actor recently underestimated daily liquidity needs during periods of duress. “Financial commenters understand this to be a risk” would win an award for understatement except it was already won by Matt Levine. Tether’s March press release included this language: “This latest attestation further highlights that Tether is fully backed and that the composition of its reserves is strong, conservative, and liquid.” They required recapitalization in May. They have not, to the best of my knowledge, admitted that. The November press release includes this language: “Tether is a trustworthy organization that communicates that by providing facts and in its actions.” Interestingly, neither their newest press release nor the attestation even try to claim it is fully backed anymore. (Ctrl-F if you don’t believe me.) Now they want us to focus on liquidity, and not solvency. The secret sauce, which is not in their published reserves, is and has always been the community’s estimation that the Bitfinex combined group would inject equity if required to paper over a Tether insolvency. They have done this before. Bitfinex’s equity offering of 2019 was used to bail out Tether. This came after Tether’s money launderer embezzled their reserves and then had some of them frozen due to governments not being a fan of laundering money. Tether, of course, had consistently represented that its reserves were “dollars in a bank account” and forgot to mention the money launderer thing. (They characterize him as a “payment processor.”) I agree with clueful cryptocurrency watchers that there is likely some appetite to attempt to rescue Tether again if necessary, since it is systemically important infrastructure. This has always been the argument, that crypto will rally to the central bank of crypto to prevent a crisis there from taking down the rest of the sector. I disagree that there is capacity . The larger Tether gets the more systemically important it becomes and the more risk the system is implicitly taking on. This is particularly acute in worlds where their contras are not merely risky but factually failing. In those worlds, the cryptocurrency ecosystem’s dry powder is either exploding, being used to bail out Tether’s contras, or running to greater safety. It is possible that a prompt crisis in the rest of the sector might make it beyond the capabilities of any actor in crypto to step in to rescue their central bank. Frauds being discovered after other extreme market events is a very, very old story. Consider Madoff, for example. He was, like Tether, skilled at releasing tiny amounts of liquidity, for more than a decade, as customers asked for it. He was financially savvy, though, and didn’t feel the need to brag about his ability to tie his shoe laces or meet redemption requests [Even] in [our] darkest days, Tether has never once failed to honor a redemption request from any of [our] verified customers. Then the global financial crisis hit. Madoff didn’t kick off the financial crisis. But it caused his clients and feeder funds to lose money, and that put them in liquidity stress, and they asked Madoff if he could please wire them the $7 billion their statements showed him as having. Then, and only then, he had to admit that the statements were fabrications. I have no reason to believe Tether/Bitfinex wouldn’t lie about important things and many reasons to believe they would. Again, I believe them to have perpetuated what is now the largest fraud in history. They are a criminal enterprise and have been for years. I am just saying that, even if we believe Tether’s reserves report for the sake of argument, and we grant them very favorable assumptions as to their asset mixes and sagacity as traders, we still arrive at their reserves having again become insufficient. Their own numbers indict them. I wrote this essay today with attached supporting documentation for the benefit of present journalists and future lawyers. For reasons which are a little unclear to me, journalists and lawyers seem to think that math needs to be blessed. They need someone, and ideally someone on a surprisingly short list of professions, to speak that 4th grade math into the universe. After it is in the written record, then and only then can they take notice of it. It’s like a quixotic version of Wikipedia’s Citation Needed, except with higher stakes. For better or worse, I apparently count as a professional financial columnist . The Guardian took notice of the May vintage of this math. They then contrasted it with a response from Tether. I will let you be the judge of which was more credible. Speaking of judges: in other recent Tether news, they’re currently under investigation . The district that was recently re-assigned the investigation has the U.S.’s experts in prosecuting complex financial fraud, which is why I namechecked it in my 2019 post: Bitfinex and its principals have not yet been indicted by the U.S. Attorney for the Southern District of New York, but crucially, not in the same sense that you have not been indicted by the U.S. Attorney for the Southern District of New York. Madoff lasted more than 17 years. Tether won’t.

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Tether Required Recapitalization In May 2022

In 2019, after years of following along, I described Tether as “the internal accounting system for the largest fraud since Madoff.” This remains true. I made many very specific claims in that essay, which have been borne out in detail in the NYAG settlement and CFTC settlement . I won’t rehash all of them here. I have one tiny update. Tether, as part of their settlement with the NYAG (see NYAG Settlement Agreement Paragraph 59 b 2), goes through the motions of lying about their reserve backing once a quarter. On May 19th 2022 they published an attestation ( archived here ) from their accountants, which they purport confirms the accuracy of their Consolidated Reserves Report as of March 31st, 2022. The attestation and Consolidated Reserves Report conclusively demonstrate that Tether became undercollateralized and required recapitalization in May 2022 during the crypto selloff. I anticipate Tether will lie about this fact, as they have done many times before. (See CFTC Settlement; Tether admits to the finding “[T]he Tether Reserves were ‘fully-backed’ by fiat currency reserves held in the Tether Bank Accounts only 27.6% of the time [for the time period of September 2, 2016 through November 1, 2018].”) The Consolidated Reserves Report alleges assets of $82,424,821,101 and liabilities of $82,262,430,079. This implies approximately $162 million in equity, via standard balance sheet math. You can think of $162 million as the overcollateralization cushion of Tether. If the value of its assets declines by more than $162 million, it requires recapitalization or will, with mathematical certainty, become undercollateralized. Note that redemptions cannot materially increase collateralization because Tether promises to perform redemptions at par (less a fee of the greater of $1k or 10 bps). Tether does not earn sufficient interest from its reserves, which it alleges are in Treasury Bills and very secure commercial paper, to build its capital buffer by itself if it is stressed. Tether originally promised to back the reserves with cash in a bank account. This was a lie. It was a well-chosen lie, because the value of cash does not routinely fluctuate. Backing a fixed liability with volatile assets and a wafer-thin equity cushion would have the predictable result of causing the liabilities to become unbacked in many stressful situations for any of the backing assets. The Consolidated Reserves Report alleges that Tether’s reserves included, as of March 2022, $4,959,634,446 of “Other Investments (including digital tokens).” A 3.27% decrease in the value of these investments wipes out all Tether equity and causes their tokens to be undercollateralized. (Tether alleges a mix of assets outside this line item which, if one takes their words at face value, should have had flat-to-decreasing value over the course of the prevailing interest rate environment. Short duration Treasury bills don’t change in value much even in volatile markets; that is precisely why one buys short duration Treasury bills.) Cryptocurrency suffered a broad-based decline in May 2022, during which Tether lost the peg not later than May 12th. As of this writing, on May 20th, it has yet to regain the peg. Bitcoin, the most blue-chip of all cryptocurrency investments, declined by approximately 36% between March 2022 and today. As an example of an asset which is certainly impaired: Tether has invested $62.8 million of the reserves into Celsius Network, including $52.8 million into their Series B of October 2021 . (I am indebted to Intel Jakal for some legwork here.) Celsius is in free-fall due to the current market dislocation; the value of their native token is down by over 86% since their Series B. Clearly, that investment has suffered more than $20 million in impairment. Impairment of 1% of one line item on their balance sheet ate more than 10% of their equity , under assumptions which are extremely generous to Tether. Tether should have repeated a similar analysis for each of their equity and token holdings. That analysis would have, certainly, suggested that their liabilities exceeded their reserves at multiple points in May. This is an occupational hazard of attempting to back a money market fund with almost no equity cushion with VC investments and other risky assets. Tether alleges that management’s policy is that “Intangible digital assets are valued at cost less any impairment.” Tether defenders might allege that, because Tether recognizes impairment but does not recognize gains, that it’s undercollateralization is merely an artifact of ( their own ) accounting choice rather than real. This defense is false. Tether’s attestation of June 2021 ( archived here ) reports $2.05 billion in Other Investments. Since Tether purports to value their investments at the lesser of cost or impaired value, they mathematically must have made approximately $3 billion in marginal investments between July 1st 2021 and March 31st 2022. A ~5% decline in the value of those marginal investments alone would wipe out their equity cushion. I will reproduce the price history of Bitcoin over this interval below: The average price of Bitcoin over the interval is, by eyeball, well above $40,000; it currently trades near $30,000. Tether would have needed near omniscient prediction of the future to avoid a substantial drawdown in the value of any BTC which entered its reserves in this interval. It would be ludicrously favorable to Tether to suggest that they were taking only as much risk in these $3 billion of marginal assets as putting it all on Bitcoin; almost anything else they would have picked got hit harder, like their Celsius investment did. It could be argued that Tether’s marginal $3 billion of Other Investments were primarily stablecoins. An advocate arguing that would probably hasten to add “Stablecoins that did not just get vaporized.” This argument is simply false; Tether factually does not hold $3 billion dollars of e.g. USDC. Tether’s history of deceit and prevarication is very well documented, including in the NYAG and CFTC settlements. They have moved the goalposts many times regarding the composition and sufficiency of their reserves, and may attempt to do so again, such as saying that they have sufficient liquidity to meet redemptions. (In an interview with CNBC, Tether bragged that they had more than 24 hours of liquidity, which occasioned disbelief from financial commentators. Similar to a memorable scene in The Big Short, that’s bragging one’s way into a confession .) I expect that they will again repurpose language like this, from their release not two days ago of the March numbers: “This latest attestation further highlights that Tether is fully backed and that the composition of its reserves is strong, conservative, and liquid.” This language has been a now-admitted lie many times when they trotted it out in the past. It will be a lie again when they make it in Q2, as demonstrated in this essay. They will avoid disclosing a thing they absolutely must disclose, which is that the reserves were undercollateralized due to a reckless decision to back them with risk-on assets, and that they needed to recapitalize Tether as a result. It is well-understood in the cryptocurrency community that Tether’s reserves are a polite fiction. If pushed on this, clueful members of the community, such as their co-conspirators, will (quietly) admit that Tether depends on a de facto guarantee of support from members of its consolidated group, such as Bitfinex, which can inject more equity at will. The community believes, based on prior experience, that there is appetite within the crypto community to conduct “private bailouts” to rescue their central bank if it comes under stress. They would point to, for example, Bitfinex’s equity offering of 2019 which it used to bail out Tether after reserves which Tether had purported to have in the banking system were seized by authorities in several nations because Tether had custodied them with a money launderer. Reggie Fowler, who organized that money launderer, has plead guilty . I anticipate that the many hundreds of millions seized will be forfeited, though Bitfinex holds out hope that they will get “their” money back. I agree with clueful cryptocurrency watchers that there is likely appetite to attempt to rescue Tether again if necessary, since it is systemically important infrastructure. That is… an argument. It’s a different argument than the one they make in public. It says, essentially, “Yep, we print money on demand and lie about this fact. It has worked out pretty well for us so far.” I have no reason to believe Tether/Bitfinex wouldn’t lie about important things and many reasons to believe they would. Again, I believe them to have perpetuated what is now the largest fraud in history. They are a criminal enterprise and have been for years. I am just saying that, even if we believe Tether’s reserves report for the sake of argument, and we grant them very favorable assumptions as to their asset mixes and sagacity as traders, we still arrive at the result that they required recapitalization of the reserves. Their own numbers indict them. My feelings regarding Tether are open and notorious to many people who follow me. However, there is a tactical difference between “Random Internet commenter says stuff on Hacker News and Twitter” and “ Professional financial commentator releases well-sourced essay on topic at a citable URL.” I wrote this essay today with attached supporting documentation for the benefit of present journalists and future lawyers. Perhaps I am a good citizen and want to continue pointing at the largest fraud in history saying “That is the largest fraud in history. Maybe someone in a position of authority should do something about it. Perhaps people who aspire to integration into the grown-up financial ecosystem shouldn’t do business with it.” But, on self-reflection, I’m mostly in it for the Internet points. I am not materially exposed to Tether or cryptocurrency financially. I think if all cryptocurrency went to zero tomorrow that would result in a gain of something like 10bps for me, as a result of e.g. puts on Microstrategy and immaterial wagers I made for entertainment value. That hypothetical outcome would produce enough chaos in passive investments that it isn’t even guaranteed to be positive on net. This is a silly disclosure already but I anticipate getting “You clearly have financial motivations here, statist shill” thrown in my face. As always, opinions on my site are my own and do not reflect those of any other person or entity. You can find a copy of the original markdown corresponding to this essay here ; it has not been edited except to clean up some typoes. I will shortly drop a hash of it on Twitter. This essay makes some confident claims about the future and I wish to have cryptographic proof that I did not edit those claims between now and when they inevitably come to pass.

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App Store Payments Will Have Increased Competition

Late on Thursday, Apple announced some refinements to their App Store policies. The most important one is about so-called “steering”, which is the practice of letting customers know about out-of-app options for transacting with them. I couldn’t not write about the trifecta of payments, platform strategy, and video games. (Disclaimer: while I work at Stripe, these are my own opinions.) The bottom line: This is likely to be important for app developers. I think people underappreciate the magnitude of the likely impact due to the incrementality of it. It is not what developers have asked for, which is the ability to pitch users within the app itself on consummating payments out-of-band, but it also is not simply a return to the status quo ante to this summer, when Apple announced it would rigorously enforce guidance against steering transactions off-platform. To appreciate why, remember that a large share ( 60% or so ) of revenue on the App Store is from games, and game developers are in the business of incentivizing users to take small incremental actions within a play session. Sometimes those incremental actions involve e.g. learning the UI of your princess saving application , sometimes they advance the plot, and sometimes they directly achieve business goals for the developer. Consider MiHoYo’s Genshin Impact , which I’ll use as an example because I think it is up there with Fortnite or WoW in terms of future expected impact on games industry practices. 1 Genshin Impact is an extremely well-implemented gacha game. Gacha games, and other games with virtual currency systems, are extraordinarily well-positioned to directly influence user payment behavior. Gacha games are named after the onomatopoeia describing vending machines in Japanese malls and arcades which dispense toys and trinkets for, typically, 100 to 200 yen (about $1-$2). The pool of trinkets is displayed prominently on the machine; which trinket you get is effectively randomized. If you had your heart set on a particular one, you might spend much more than $1 on getting it, and some children (and adults!) very much do. Many very successful games have a monetization strategy which descends from a variant of this. Generally, there is game content (most typically, characters) gated on receiving a random draw within the game. Pulling these random draws is a core game mechanic with many systems supporting it. One can generally purchase draws both with limited free currency, awarded through gameplay (and capped on an absolute or periodic basis), and with a paid currency, which you can purchase with real money. This is far from the only gaming monetization model, but its an extremely effective one, because it tends to naturally incentivize “whales” (high spenders) to go after the characters whom they most wish to play, and those whales can probabalistically spend surprisingly large amounts of money in small increments 2 . OK, let’s go back to rewards systems and how they’re going to be used to modify payments choices. Genshin Impact has a few hundred currencies. The one which converts into gacha pulls is called primogems. The game trains you early to do things for primogems. Open any chest in the game, get 2 primogems. Complete a main quest line, 100 primogems. Complete your daily commissions (short quests), 40 primogems. Do I think Genshin Impact can incentivize out-of-game activities? Yes, I do, and I think they already do it in a way which feels not incredibly off-theme for the game world. Consider this request which one’s constant companion character sent via in-game email. (Truly, every application expands until it can handle email.) Paimon, a character who directs you to do everything in the game world, is here directing you to take a customer satisfaction survey. Paimon could be employed in a B2B SaaS company’s marketing department , and would be crushing her KPIs, because unlike the typical marketer she has literally infinite gold to incentivize uptake with. The new policy change allows (and, importantly for companies which sensibly have low risk budgets because of platform risk, gives explicit imprimatur to) collecting users’ contact information in-app and then pitching them on payments out-of-app. It’s trivial to imagine game companies incentivizing different purchasing choices because this is already a core competence. Here’s one of the most A/B tested screens in any free-to-play game: the one which has paid currency purchases spelled out in-app. This is from the Windows version of the game, but the iPhone version is identical in presentation and price points. You can see that the team has played heavily with packaging options to get users to commit to paying for the product and pushing them to larger purchases over smaller ones. (Again, there’s an iceberg worth of intellectual effort put in here that this post will elide.) Under prior prevailing guidance, if one had established one’s account after downloading the game from an app store (as opposed to the open Internet), one might be locked from purchasing the paid currency except through that app store. Similarly, the Playstation version’s currency is locked to only being useful on Playstation consoles (and external currency can’t be used). Even if you were using an unlocked platform, such as Windows, you’d have little reason to visit the website to purchase. It’s… functional. But. Imagine a tiny, tiny, tiny tweak to your daily quests, emails, notifications, etc. Paimon is starting a Substack wants to write you a letter. Give us your email address here. Privacy policy applies, see details etc etc. Reward: 20 primogems. (The implicit cash value of 20 primogems is approximately 25 cents but they’re, of course, free to the Federal Reserve of Primogems. The most work I’ve ever done for 20 primogems? It very literally involves scaling mountains… and I had fun doing it.) Followed later by: Traveller! I found a coded message from a renowned sage. I can’t make heads or tails of it, but I sent it to your email address. That email will include an appropriately themed request to go to the newly revamped web purchasing experience for the paid currency. It will have been thoroughly reworked and received some TLC from designers and strategists. And it will, almost inevitably, offer a ~10% discount to the in-app prices for purchases. This improves the margin on currency purchaes from about 70% to about 85%, at a stroke, which is an incredible 20% lift for one engineering sprint. Genshin Impact has transacted more than a billion dollars through app stores to date. Imagine that you are the PM of revenue for it. Not implementing this costs millions of dollars per week you delay . I predict, with over 90% confidence, that games are going to implement experiences like this within 6 weeks. Genshin Impact will almost certainly roll it out by October. This is available even for games without a gacha model specifically. Games which directly sell skins (cosmetic improvements) can similarly offer a bonus skin if you purchase your next one from their site. Games can “window” content releases; new expansions/levels/characters available direct on Friday and in-app on Sunday. Since launch windows are invariably spikey in games, this has outsized margin impacts even if the price in both places is the same. Single app developers selling on a more traditional “license” model might not benefit as much, but presumably they’re pretty happy with the conversion rate and distribution afforded by the app stores. It’s mostly service developers who feel, somewhat justifiably, that after getting into a multi-month relationship with a customer they have a relationship and don’t feel like continuing to pay a finder’s fee indefinitely for their custom. It will be interesting to see whether this affects B2B services as well, which are a much smaller portion of the App Store but which make up a huge amount of revenue transacted on other software platforms. Basecamp was extremely vocally opposed to being unable to sell SaaS accounts and also maintain an app for Hey , their email product, and presumably they’ll likely experiment with ways to convince their users to go direct. Other businesses may choose the same. It will also be interesting to see spillover effects of this on other ecosystems. Apple is a trendsetter in the industry; Steve Jobs effectively established a Schelling point that owning a customer relationship in digital goods was worth a 30% take rate, and everyone since has either been on that Schelling point or positioned in direct opposition to it. Relatively niche concerns such as whether one can take advantage of their distribution while also marketing to customers gained through it matter quite a bit, as their decisions will likely influence policies at many other ecosystems. I, for one, am thrilled that there is a vibrant market in different ways to pay and be paid. It is clearly in the best interests of customers and businesses, and platforms ultimately succeed if and only if both sides of their marketplace are successful, so I expect it is (over the long run) positive for platforms as well. Some might ask whether it is sporting to pay the user to change their transactional behavior. This is, to put it mildly, not unprecedented in payment ecosystems! Payment methods engage in an unending brutal competition for (term-of-art incoming) share of wallet, and the competitive axes include the ergonomics of the payment method, branding, customer perceptions of trust and risk, and also concrete economic inducement to use them. There is an entire subculture devoted to playing rewards cards off each other. Every credit card company has whales, too, and (at least in the U.S. 3 ) they attract and maintain their custom by rebating them a portion of their spend. All’s fair in love, war, and payments. A full discussion of why would include Chinese developers’ arrival onto the global AAA scene, Chinese/Japanese/Western gaming cultures and storytelling cultural tropes being interpreted through a Chinese lens, and the game just being rollickingly good fun. It has a phase as an exploration game almost as well-executed as Breath of the Wild (which it draws inevitable comparisons to) and another phase as a fascinatingly deep combat puzzler with thousands of interesting strategic choices and a fair bit of mechanical skill required.  ↩ There’s an interesting discourse about whether gacha games are anti-consumer or not which I don’t have enough space to do justice to here. Broadly I think they have some challenges similar to gambling, insofar as many adults gamble recreationally and enjoy it, while some are clearly harmed by it. I used to think that free-to-play games’ dependence on whales was strong evidence that they were a negative development, but I heard an argument from the CEO of Kongregate which changed my mind. Distilled to its essence, it is that “Many whales are simply employed professionals who enjoy what they enjoy, and professionals historically spend a lot of money on what they enjoy. Why should we have contempt for this in a video game when we don’t if it is e.g. figure skating or wine?” I recommend reading or watching the entire talk if you’re interested in this topic.  ↩ There are a few national equilibria with regards to credit card rewards. In the United States, credit cards are relatively expensive for businesses to process. A large portion of that expense is rebated to end users in the form of rewards or cash back. In Europe, credit cards are (by regulation) relatively inexpensive to process, and end users do not enjoy rewards. In Japan, credit cards are relatively expensive to process, but financial institutions have exercised strong and <salaryman>doubtlessly totally uncoordinated</salaryman> discipline on capping rewards at 1%. It is not obvious which of these equilibria card issuers, businesses, or users should prefer; that different regions ended up in different equilibria was very path dependent.  ↩

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Solving The Vaccine Data Problem

VaccinateCA , the non-profit I have been leading for the last few months, has expanded to Vaccinate The States . (Consider it a beta; we will keep improving it, but it can save lives today, so today it goes up.) We have the country’s largest and best public data set on covid-19 vaccine availability. We get it by directly gathering intelligence (largely by calling healthcare providers), collating public sources, brokering data between other projects, and applying some engineering and operations elbow grease. We work with the federal government, some states and counties, and the world’s largest publishers (such as e.g. Google Maps). The vaccination effort remains critically important in America. Half of our neighbors have not been vaccinated yet. The faster we can help them, the faster normal life returns and the faster we can use America’s manufacturing capacity to save lives elsewhere. Here’s what we’ve learned, and how you can help. Back in January, vaccine availability was chaotic. Distribution and allocation decisions were made at multiple levels of government and private enterprise via processes and systems which did not interoperate. Eligibility decisions were guided by a patchwork of policies and often overridden by individual healthcare workers. The situation was a mess. Our friends and loved ones reported that they had to visit upwards of a dozen websites to figure out where they might be able to get a vaccination. They were calling 20+ locations sequentially and swapping tips via messenger. This clearly could not stand. There were some whispers that someone in a position of authority was going to launch a Grand Unified Site which had all the information on it Any Day Now. I thought this was unlikely, and thought that the private sector would likely have to step into the gap. I tweeted that this would make a good hackathon-style project for interested technologists. Within hours, the brightest team of people I’ve ever had the pleasure of working with were building it on Discord, and making all the right decisions. So I joined up for an evening, then a weekend, and then one thing lead to another and I ended up as CEO. The core insight of VaccinateCA on Day 1 was that, if doses were actually being injected, that the person actually doing the injecting both a) knew whether or not they had more doses and b) to whom they could administer them. Essentially all other data in the ecosystem were stale or lies. Promulgated county policy? Doesn’t matter if a pharmacy chain isn’t following it. Reported stock numbers? Doesn’t matter if the database disagrees with the pharmacist on how many doses are left in the bottle. While many waited for there to be a grand technical solution to the issue, we started with the scrappy startup version: call locations which might have doses. There are, after all, a finite number of pharmacies and hospitals. At this point we were unknown, uncredentialed, unaided volunteers who had no special connections or expertise, so we did exactly what a vaccine seeker would do: pick up the phone book and start dialing. I’ll never forget my first call, at 2 AM in Tokyo, to a pharmacy in California. “Excuse me, can I speak to the pharmacist?” “One moment.” … “Yes, how can I help you?” “Iwaswonderingifyouhadthecovidvaccine.” “I’m afraid we don’t have it yet, but we expect to get it it maybe two weeks.” “Thank you. If a patient who was 65 wanted it, what would they need to do?” “Register on the county website. Here’s the address: … “ “Thank you.” And just like that, we learned that you don’t have to be anybody special to get useful information out of a pharmacy by calling their published number. We did things the scrappy startup way, putting call results into Airtable (a wonderful product, by the way). Our website, for the first few months, was static HTML generated by Jekyll with a bit of JS on the frontend. The API was a JSON file in the cloud exported from Airtable on a cronjob. And it started working, very quickly. We began to get anecdotal reports of successful vaccination (generally of a user’s parents) within 24 hours of launching. Within a few days, it was obvious that the little hackathon project was much more impactful than we had ever expected, and so we intensified efforts, becoming a “real” non-profit, hiring some folks onto the project full-time, and quickly iterating on strategies. We’ve since served millions of users, had hundreds of thousands of them get vaccinated, and become the best public data set on vaccine availability in California… and soon the nation. This has been the fastest-moving startup I’ve ever worked on, both because of the speed at which we were working and the speed at which reality changed out from under us. We were trying to give away the most anticipated product launch in history; our competition had 50% week-over-week growth and was the world’s leading expert in viral marketing. As we got a bit of press for being a volunteer-led effort while there were not high-quality government-backed efforts available, we were worried about getting told to not interfere. Gradually, the opposite happened. First quietly, and then formally, various official parties in California started to talk to us and ask what we were seeing in the data. This is probably surprising, but true: the formal vaccination efforts also had a data problem. Governments did not always know precisely where the vaccines were being administered, or under precisely which eligibility criteria. Ground truth was critical for vaccine seekers but no one had it for them. The formal effort didn’t know to what extent formally promulgated policies were being followed. This was often very spotty and often at a lag. Pharmacists often learned of changes in eligibility criteria by reading about them in the paper a few days after they had formally changed. So we started developing some backchannels to report individual incidents that our phone operations discovered, and also passed over data sets and analyses in an ad hoc manner. We were able to e.g. unstick hundreds of doses in a particular county which were chillin’ in freezers because the local health department had, in all the hustle and bustle, missed a single CSV upload and therefore wasn’t scheduling appointments at a dozen pharmacies. (No one noticed because there was no infrastructure to check. It was no one’s job.) As we developed a compelling data set and an operating model which kept it relatively fresh and accurate, we started to have success in convincing publishers to adopt it. It has backed Google Maps for the last few months; try [covid vaccine near me] if you live in California and look at the citations. Our effort began helping healthcare providers directly. Increasingly, as we called pharmacies to ask them if they had the vaccine, they said “No, but check Vaccinate CA dot com. They list everywhere in the county that has it.” We had originally thought this was going to be an OSS-style project and expected that interested groups might clone it in other states. This didn’t prove to be maximally viable, partially because we didn’t have the cycles to manage the OSS project and partially because this is not solely a software project. The really hard part is an operationally intensive effort to make hundreds or thousands of calls a day, and most volunteer projects couldn’t sustain that cadence for months. Nonetheless, there have been many important efforts by technologists to gather and expose vaccine data, like VaccineSpotter . We have ended up in an emerging data broker role between community efforts and large consumers of this data, such as large publishers (e.g. Google) and government initiatives. We also work with formal data sources, such as VaccineFinder , the CDC-blessed national initiative run out of Boston Children’s Hospital. They have a pipeline for updates directly from pharmacies’ internal systems; we have the ability to combine that list with other sites like community walk-in clinics that VaccineFinder was never designed to accommodate. Being an independent non-profit affords us some freedom to report ground truth directly in ways that the government often cannot. This is useful when work needs to be done quickly. Once it became clear that we had a compelling data set, governments started to ask us how to integrate it into their own operations. Counties in California wanted data to use their own sites. We said we’d do them one better, and built them an embed , so that it would stay up-to-date without additional operational toil. (Here’s Alameda County’s ; our map is halfway down the page.) Many governments need a months-long RFP process to get software written. We had a working URL 30 minutes after they emailed us, and localized it to 7 languages the following day. We will shortly have something similar working nationally. We have an extremely compelling data set in California, as a result of working on it for the last 100 days. We have wanted for months to expand nationally, but the default strategy of building from zero again was daunting. VaccineFinder helped us get a leg up on this. We were also accelerated by the efforts of individual states and county health departments. It turns out that the most common publishing platform in America for vaccine availability is, I kid you not, a Facebook page. There are literally thousands of them. We have a group of “web bankers” who, with some assistance from cronjobs and purpose-built UIs, reload those pages frequently, key in new vaccination locations, and queue them up for direct verification if required. We then fan the information out from the originating agency’s post to all consumers of our data set (our site, Google Maps, participating government entities, etc.) We also do a metric shedload of web scraping. A lot of county health departments are rocking DreamWeaver on an ancient machine. Ahh, Windows 95, those were the days… Technical archeology brings back memories. For structural reasons, the challenge presented by covid-19 is pathologically misaligned with how the government writes and, more importantly, procures software. The pandemic moves faster than public digital infrastructure. Our nation made the political decision to administer the vaccination effort very locally. This resulted in thousands of county health departments, most with no software capability to speak of, being in charge of availability criteria, stock levels, and allocation decisions. State and local governments invested in separate systems which didn’t talk to each other. The bid process gives only one chance to get a system working; adapting to the situation at launch required months. The federal government repurposed vaccination infrastructure built around the yearly flu shot and not optimized for quickly responding to day-to-day updates on an intensely fluid situation. Political and legal considerations sometimes blocked government-to-government collaborative efforts. We should have seen this coming. I should have seen this coming. I regret that I didn’t start work on this project last year. We could have had a national site ready the day of the first shot. This is a lesson for next time. It took America two days— two days —to develop a covid-19 vaccine. That is a triumph worth celebrating. Next time, we should match our world-leading scientific expertise with the relatively pedestrian web application the country needs. There has been a turn in the narrative from “the vaccination effort is a disaster” to “the vaccination effort is going very well”, largely because the vaccine is now frequently available to people who write about national political issues. This is not nearly good enough . The experience of getting the vaccine is still challenging, particularly for Americans who are characteristically underserved by the healthcare economy and by government. Sites which take appointments still run out of them in minutes (and they’re routinely canceled when promised shipments fail to arrive on time). The government does not specialize in conversion optimization and it shows . Primary healthcare providers are often in the dark about the vaccination effort; patients often assume (wrongly) that they will be contacted when it is “their turn.” We still have to vaccinate half the country. We have to bring the technology industry’s expertise to bear on the conversion problem. It can’t be harder to get vaccinated than it is to buy something on Amazon or sign up for Facebook. We have to decrease the barriers to vaccination and deliver this everywhere throughout America. We have to publicize walk-in sites which are available outside of work hours. We have to surface the many vaccines available in underserved neighborhoods which are not on official maps, sometimes due to poor organization and sometimes, God help us all, as a considered policy choice. We have to move faster. Most American lives which will be saved by the vaccination campaign have already been saved, due to the intensely higher risk among senior citizens. That should not cause a decrease in urgency. Many who are not yet vaccinated will die or suffer brutal (and sometimes lingering) bouts of covid-19. The longer it takes to approach herd immunity, the more disruption to daily life and the economy we will suffer. Perhaps most importantly, the longer America struggles with covid-19, the later we will make the choice to help others. India is currently dealing with a prompt national healthcare crisis. Lower-income countries are looking at multi-year timelines until they can be vaccinated. Even relatively well-off nations like Japan and much of the EU are months behind the US on the vaccination curve. The faster we accelerate our efforts, the faster the best parts of the US vaccination’s response get to work on saving lives elsewhere. Every day matters. Every dose matters. We’re currently hard at work expanding our national data set to the coverage levels of our California data set. Our rate limiting step is ingesting new vaccination locations for contact. They’re scattered across literally thousands of URLs using hundreds of CMSes/data architectures/etc. If you can write scrapers, you can turn some of those URLs into structured data to feed our pipeline. We’ll perform a concordance (“deduping, with style”) with our other data sources, put them into the queue for validation, and publish them to our site and our partners. For more detail see Github . We’ve got a small team here working through things, and will without help probably cover 95%+ of sites in the nation within 4-6 weeks, but a few hours of your engineering time can help accelerate the work. It is a high leverage way to help your community quickly emerge from this crisis. We welcome programmers of all skill levels; this is not rocket science. We are also hiring a few mid-career engineers. This is not the typical startup gig; you’ll get no equity, your employer will burn through their funding as quickly as possible, our TAM is declining by millions daily, and successful execution in your job duties will see all of us unemployed within months. If that sounds interesting, drop us a line and we’ll get back to you in the next few days as dust settles. We also have opportunities for volunteering if you’d like to help call pharmacies, join the web bankers, or work on other tasks.

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What Working At Stripe Has Been Like

I joined Stripe four years ago to make starting an Internet business easier, mostly by work on Stripe Atlas . This has been a series of adjustments for me: to working as an employee, to experiencing hypergrowth, to being closer to the Silicon Valley culture, and to some of the challenges in balancing career and other commitments during my life stage and the global coronavirus pandemic of 2020. Perhaps some commentary will help other folks make decisions, so here it is. I’ve previously written about my experience after two years and my thought process in joining Stripe . I’ve had a very fluid job at Stripe for much of my tenure, which has had pluses and minuses. It has allowed me to work on broad challenges throughout the company’s operations, but sometimes means less legibility internally and externally. That has started to matter more as we’ve scaled. When I was hired, there was a fiction for my business cards but the job rounded to “Do anything required to make Stripe Atlas successful.” I contributed on a part-time basis to things outside of Atlas. For about a year I was formally in the Marketing department while continuing to do a broad portfolio of things, many of which aren’t classically considered marketing. As of December or so, I’ll be joining a new cross-functional team with designers, publishers, and writers. We will run some of Stripes publishing properties (like Stripe Press and Increment), continue doing not-quite-software-product experiments to make the Internet more hospitable to starting and scaling businesses, and help to maintain and improve the developer experience and candidate perceptions of Stripe. My job within the group will remain a bit tough to pigeonhole. I’m not and haven’t been a manager at Stripe; I’m a senior IC 1 . I work from Tokyo and most colleagues close to me on projects are in San Francisco, Seattle, or remote in North American time zones. This means I get up early frequently and (thankfully decreasingly) sometimes go to bed late. A typical day for me is an hour of meetings starting at about 7 AM in Japan, an hour helping my kids get to school, another hour to two of meetings, and then focused work time which may include a meeting or two with someone in an APAC time zone in the afternoon. Due to the coronavirus situation, I’m presently working from home; prior to it, on most days I would work from the Tokyo office, commuting in after morning meetings. I wouldn’t call myself a paragon of work/life balance; I’m a recovering salaryman and used to run businesses which routinely paged me during core user hours when I was sound asleep. The nature of my work makes it hard to give a rigorous estimate of “how much I work.” My job and my main hobby overlap. I’m basically never not thinking about the Internet economy. My sleep schedule has ranged from atypical to disastrous, but that has been true for almost all of my adult life. My work falls into three buckets which are approximately equal weighted in importance and time spent: Project work : This is the core work for my assigned team. A typical smallish project would be getting a blog post written; a largish project would be assisting a Stripe product launch. My actual involvement work on the project generally involves planning, execution on particular bits of it (often involving writing directly public-facing artifacts and internal plans), and being a generalist happy to do anything required to ship. Back when I was working on Stripe Atlas, due to how that team operated I was more directly involved in product work. These days I’m generally brought in early during the ideation and customer discovery phases and late in the launch / go-to-market phase, but don’t frequently contribute directly to design or implementation of the products. Consultative work : I spend a lot of time on community work (including on HN and Twitter ), work directly with individual users, and advocate for some user personas internally. I have been described as an evangelist, and that makes me feel a little weird, but part of the job is turning personal karma into corporate karma. Stripe makes products which are much more central to our customers’ businesses than most software. We have to demonstrate good taste and probity, and we have to do so prior to winning the customer’s business. I love talking to founders and acting as an entrepreneurial commentator, and would (and did, and do) do it for free, but part of the reason I can do from a work laptop is that, at the margin, it makes it more likely that you will build your next business on Stripe. In addition to this, every time I convince a Stripe customer to raise their prices or otherwise improve their business, we benefit directly. “I am employed to tell people to Charge More TM ” sounds like a self-deprecating joke, but you could imagine me attaching a spreadsheet to performance reviews. One sheet would be my best guess of how many software founders would listen to my advice, one would calculate the relative distribution of $100k, $1M, $10M, and $100M annual revenues among software companies, and one would include observed uplift after implementation of advice. My consulting business used to be centered on turning $20 million a year software businesses into $22 million a year software businesses. A quick perusal of our pricing page will suggest why we can afford to give my advice away for free. Sometimes this involves scalable writing such as the Stripe Atlas guides. Sometimes I work with a single founder to get their B round accomplished. People sometimes ask whether we’ll retain our startup-focused soul while increasingly serving enterprises . A portion of my job is helping folks communicate that we’re serious, reliable infrastructure for the largest participants in the global economy while also keenly appreciating that the user might be on a small team trying to sell bingo cards or politically-themed breakfast cereal . This sometimes means intervening if it looks like we’re not living up to our expectations. We care about supporting upstarts because that increases economic opportunity worldwide, which is a worthy mission to have. Also, directly relevant to the business, you never know what people are going to go on to accomplish. Non-core projects : Every few quarters, I rotate to a new team to spin up some new experiments and see if they’re worth doing long-term. If they are, I try to set an appropriate team up to own them. Two notable successes: YC application review , where we solicit applications before founders send them to YC, and help the founders tell their story better (and sometimes provide direct business advice). That started with me solo reviewing every application . We built it into a repeatable process with 100+ Stripes involved every six months. The Remote Coffee Chat series , where we experimented with radically decreasing the barriers to actually meeting future coworkers by doing Zoom meetings with a panel of six Stripes and anyone who wanted to hear us talk shop. Coworkers are the best possible advertisement (and one core benefit) for working at a company, so just exposing potential candidates to people talking about just actually doing work has led to great opportunities. We have hundreds of remote Stripes and a surprising number are here because they decided to drop by to a coffee. This is a refinement of a previous process, where I just took requests from anywhere at Stripe to pitch in. That became acutely unsustainable, because… Stripe has experienced hypergrowth over the nine years where it has been publicly available, and I’ve seen four years of that personally. You’ll forgive me for not putting a number on it. Read “hypergrowth” as “sustained, geometrically compounding growth in most metrics of interest, persisting for years at a time, at growth rates which one does not see sustained for years in almost any field of human endeavor except 2 at hypergrowth companies.” From this simple observation about growth rates you can predict many statements about the world, and those statements will sound outlandish. Many of them are true, which might not make them less outlandish. Here’s one: I started in September 2016. At that point, Stripe Payments had publicly been available for 5 years. Stripe is, qualitatively and quantitatively, about as different counting from my start date to today as it was counting from launch to my start date. The midpoint isn’t an arithmetic mean, it is a geometric mean; huge changes happened over short intervals. What does that mean concretely ? Well, I was employee #650 or so. A common worry of folks joining around the time I joined was whether there was anything left to do. Have we solved all the challenges we’re going to solve? Have we built all the things we’re going to build? Has all the fun work already been done? This was a serious worry in 2016. It is laughable now. We have almost 3,000 employees and it feels like too few to do all the work. We have solidified a lot of our operations, security posture, resiliency, etc, and it still feels like we have huge opportunities for improvement. We keep shipping things, including both incremental improvements to the N dimensional capabilities matrix that is Payments (e.g. expanding JCB acceptance ) and fully new products like e.g. Corporate Card . One thing coming down the pipe is more exciting to me personally than anything since Stripe Atlas. This has required a lot of work, including metawork on the organization itself. This has been the defining challenge of hypergrowth for me, and it never stops : if a company is hypothetically growing at 2X per year, then on the day you join half of your coworkers will have less than a year of experience. A year later, half of your coworkers will have less than a year of experience. A year later… This means that, while working on the project that should land in mid-October and also working on infrastructure to keep the lights on, you are also working on making sure your organization (or sub-org, or team, etc) can quickly spin up people who recently joined and get ready for the next phase of organizational scaling challenges. When I interviewed at Stripe the Marketing Department came to meet me. Her name was Krithika . We now have about 60 people in Marketing. Every milestone is simultaneously project work, attempting to teach newer members the company voice and tone, letting more experienced team members stretch their wings a bit in their careers, and updating the list of things that are on the cusp of breaking. And break they do! We got an incredibly long way on having a very small group of Stripes care passionately about e.g. product launches, but “the entire team working on this page could split a pizza” doesn’t scale to e.g. needing to localize it for 40 countries, give regulators in many of those countries a heads-up, get formal approval for quotes from enterprises with A Process For That where previously we could have just texted a startup founder, etc. And so the way we work changes. I used to read essays about how some people don’t “grow with the company” they founded and leave it to start something again, or how some people have a preferred stage of company. These never made intuitive sense until seeing much more range in four years than my career had exposed me to in the 15 prior. As Stripe has matured around some of these challenges, the type of contribution I do most often has changed. If I were doing exactly what I did on day 100, I’d probably be useful at the margin but underperforming my desired contribution to Stripe and the Internet at large. When I was on Stripe Atlas, a small, focused team with many high-horsepower generalists who largely didn’t have a huge amount of entrepreneurial experience, part of my job was bringing skills and connections and part was just standing up portions of our offering by sheer force. We wanted helpful advice for founders and didn’t have it; I locked myself in a room for a month and wrote a 30,000 word guide plus the ERB 3 to put it on the Internet. We wanted to inculcate an Atlas community; I installed Discourse, wrote our SSO code for it, sent out invites, and commented on every thread for months. These days, while I still do have occasionally grindy just-do-all-the-things sprints, a lot of my value to Stripe is understanding Stripe . As an organization gets larger, an increasing portion of its activities turn inward. There is a line in Hollywood set design: “Make sure your budget gets on screen.” In startups, you want your efforts to be directly customer-visible. A well-operated early stage startup should spend basically no time on things which aren’t either product or talking to customers. Productive work is, by definition, “on screen” to users. You minimize (and regret) nuisances like incorporation, setting up payroll, and the gigantic productivity tarpit that is fundraising. Stripe is still a relatively small company. The high school I attended was larger; AppAmaGooBookSoft have individual products with more engineers than our company has people total. But even at our scale, a large portion of all effort expended is “off screen.” It is interviewing candidates, writing performance reviews for teammates so that they have a career path, teaching new hires how to be effective, contributing to company planning exercises, running retrospectives on what happened such that the Japan team learned of a product launch when untranslated English appeared on an important page, etc. When I ran my own company, I looked at BigCo and wondered “What is it they do all day?” I still think there are pretty vast differences in aggregate productivity per employee, and I think that is fairly obvious to anyone who takes software seriously, but I have much more appreciation for how much effort goes into just keeping a complex organization moving. There exists a theory that much of the work involved in keeping complex organizations running either doesn’t create or actively destroys value. I think this theory is heavily overendorsed . There is value created off screen, too, but if your relationship to companies is as a user, you will not perceive it and therefore underestimate it. HR departments don’t exist to fill seats on a headcount plan; HR departments exist because as you scale you will inevitably hit predictable challenges and the simplest solution to them, well-trodden by many companies before you and with minimal execution risk relative to alternatives, is to have a HR department. You can’t continue shipping software to users if your intermediate developers leave because they see no career path. You won’t continue talking to users if your sales reps repeatedly do not actually receive the promised amount of money on the right day, or if their local government is dissatisfied about withholdings. These don’t feel like challenges when you have three people in a company but get a bit more acute when you have 3,000. (In a way, every scaling startup is an experiment in empirical microeconomics research on “What parts of the typical corporate form are necessary and which are pageantry which we only keep around due to anchoring, the sunk cost fallacy, and tradition?” Every time a startup bites the bullet and hires a VP of Sales, a lifecycle email copywriter, a retirements benefits administrator, or a cook, count that as a published result saying “Yep, we found this to be necessary.”) As Stripe scales, I find the forms of my contributions changing. I sustained 250,000 words written a year for many years while running my software companies. I feel like I still write as much as ever, but increasingly off of the public Internet. They might instead land on e.g. our Japan strategy for 2020, feedback on positioning for a new product launch, helping a colleague think through their career goals 2 years out, etc. I still do customer-visible work. One project was a customer-facing email series which, according to our A/B test, added probably $THIS_NUMBER_HAS_A_LOT_OF_DIGITS of enterprise value. Scale has its advantages. Those emails weren’t subjectively the best writing of my career; it was a meat-and-potatoes drip campaign. Most of the challenge was getting us organizationally comfortable with the notion of doing it. The important result wasn’t either the words or the observed uplift; it was producing organizational certainty that “Yep, turns out every B2B SaaS company has a lifecycle email campaign for a reason and we definitely should, too.” That’s something that I believed on day one and which many stakeholders agreed with, but there was an art to getting the organization to successfully ship it. “Stakeholder” always felt like a funny corporate word for me, but it is a useful one. A perennial problem a few years ago was that we were, generally, rubbish at doing stakeholder identification in advance. This meant that projects were frequently organized by informal social networks over Slack and email. That has some scaling challenges. We’re better at it these days, though that is a major work in progress. A recent ship had sixty identified stakeholders on it; that number simultaneously strikes my founder brain as absurdly high and my commentator brain as “Wow, that’s lower than I would have expected for novel financial infrastructure, by more than an order of magnitude.” I’ve joked for years that I orbit Silicon Valley at a distance of approximately an ocean, largely due to spending a lot of time on HN. I think I may have to deprecate that joke. Silicon Valley was a place. It has become a metonymy for a community of practice. You can find outposts of Silicon Valley in Tokyo cafes, in WeWorks in Bangalore, and on the coast of Cape Town. This predates the 2020 coronavirus-induced boom in remote working, but in many ways that is forcing acknowledgment of an existing trend. The argument for continued hyper-concentration of the tech industry in a particular location had observable fact going in its favor, and now observable fact is that many of the nodes central to the network are Zooming in from elsewhere. The Schelling point was sustainable when the talent went where the money was and the money went where the talent was, but now that everyone knows that a tech company can thrive over Zoom meetings, minutes of commute time from Sand Hill Road should no longer be a dominant driver of access to capital. This genie feels unlikely to go back in the bottle. Much of my job is being an accelerant for this change. It involves democratizing access to the folkways of Silicon Valley, both via scalably publishing about them (e.g. writing this guide about pitching a startup ) and via less public conversations. I also have spent many cycles working on Stripe’s ongoing expansion, including our acceleration of remote work and helping to make a heavily international organization a cohesive culture. Working at Stripe has caused an interesting change in my relationship to the Silicon Valley ecosystem. One way is that the domain name sometimes opens doors that the username did not. (That doesn’t feel great to me, to be honest, but is a useful observation about life, particularly to folks who are early in their careers.) I know a lot more venture capitalists, executives, etc than I did a few years ago, and am treated as a more serious professional than I was despite no obvious corresponding change in skill in the intervening time 4 . It is my perception that I will probably keep these newer advantages in the future; I wish I had understood how this part of the ecosystem worked 15 years ago. (I am aware that I am saying this from the perspective of someone who had a reasonably deep network when I joined; it turns out that there are levels here.) Working at Stripe affords me a lot more leverage to help software people than I had previously. The most direct way is by improving our products and services, and as time goes to infinity I assume that will be Stripe’s largest impact. At the margins, though, there is some benefit to being able to play a social capital marketmaker. You would benefit from meeting this investor; they have expertise in your core challenge. You should take a meeting with this startup; they’re incredibly on-thesis for you. We should reconsider a decision on this compliance edge case; it negatively affects a single startup. (I can’t provide much color commentary on that, for the obvious reasons. I will say that part of the work is doing the work, and part of the work is teaching the organization how to do the work. A major purpose of me spending an “economically irrational” amount of time working to improve one startup’s experience is to help maintain the organizational culture such that our newest employee understands that overwhelming support for startups is the default expectation.) Speaking of marketmaking, I’ll observe that I seem to be drawn to finance as a source of analogies and models of the world more than previously. Partly that is due to having my baseline business model reconfigured from a recurring revenue SaaS company to Stripe’s somewhat more complicated one (see below). Partly it is due to talking to many more investors and financially-oriented professionals than I did previously. I cannot say this enough: pick your peer group wisely because you’re giving them write access to both your conscious thoughts and your entire worldview. I mentioned two years ago that the Stripe Atlas team was the strongest one I had ever worked on. I continue to like my peer group at Stripe and the folks I interact with outside our Slack. I’ll note that a bittersweet part of this is that a combination of Silicon Valley math and having ambitious friends means that many of my close peers moved on to new adventures over the course of four years. Frequently that is for founding a company; sometimes it is for taking a career upgrade elsewhere. The salaryman part of my brain has despaired about the number of “Here’s my contact information if you ever need it” emails that I have to write, and the entrepreneur part of my brain feels the same temptation constantly. (We are given a survey every six months to measure employee engagement. One of the questions is “Do you ever think about taking a job elsewhere?” and I always answer it truthfully and then add the freeform note “I apologize because I know this answer will be scored negatively but if I weren’t constantly thinking of starting a company I would be rubbish at this job.” It’s an amusing superposition: I feel like I’ve done the best work of my career to date but that if it ever becomes the best work looking forward something went deeply off the rails.) There are many differences in being an employee versus running your own business. Most are covered adequately elsewhere. This was a surprise to me: I had never deeply considered career goals prior to having a manager who had “Make sure to talk to patio11 about career goals this quarter” on their todos. It was always “Eh, running a company now, will probably run other ones in the future, what is a career anyhow, the priority for the business this week is…” for the last decade. On having space to reflect on this, and being forced by the Stripe written culture to actually put the words to paper, I firmed up my understandings of what I want out of my career, what I hope to accomplish through the (fairly large) chunk of life that is working, how that relates to my other values, etc. I’ll spare you the whole writeup, but my career success metric is making a large improvement in the lives of a large number of software people. I encourage anyone who isn’t already planning on a 45 year time scale to try taking a stab at this and reviewing the plan every year; the weeks are long but the years fly by sometimes. At present I’m at Stripe because I think it is probably the best option available in working against those long-term goals. 15 years down; 30+ to go; still early innings. I’ll note that working in a growing startup will give you many, many ideas for companies to start. Basically every internal tool at a company capable of putting good engineers on a “boring” problem should be used across the economy at companies that can’t get that caliber of engineer on that sort of problem. Working here has also helped me better calibrate my understanding of how companies in strange countries like the U.S. actually work; I would certainly do some of our Starfighter experience differently having seen how a recruiting team works up close, for example. I thought when I joined that I had a fairly well-developed mental model of Stripe as a user. Here’s where I’ve refined that model over time: I have persistently underrated the usefulness of ambition and the amount of it that Stripe has. I have been a long-time skeptic of Silicon Valley’s “changing the world by $INSERT_HERE” memeplex and preferred running businesses which were small patches to capitalism. I retain a great love for small businesses, and have no deep regrets, but I’ve gained a strong appreciation for having an expansive view of one’s future possible impact and on moving quickly to get there. Considered in hindsight, I think my businesses would have been more successful and I would have been more fulfilled had I hit harder, bigger problems faster rather than tackling ones I was more sure that I could take on. There exists a class of errors that I think English lacks an adequate name for: one which you know about, believe yourself to have adjusted for, and are still underadjusted for. I thought I had an adequate mental model for how ambitious Stripe was rather early in its life. I believe that tweet to be underadjusted in scoping the ambition. I believe I am likely, here in 2020, still underappreciating its true scope of ambition. That probably sounds crazy. Again: my worry is not that I am crazy, it is that I am not crazy enough. I think I understand the underlying drivers of the hypergrowth graph sufficiently to understand what the sources of risk to it are. While those sources of risk are a constant, daily struggle, the market opportunity clearly does not have an asymptote close to where we are. I also have the benefit of looking back at Stripe’s extensive internal library, including the contemporaneous thoughts of many internal and external smart people at various points along the curve, and almost all of them substantially underpredicted both what would be achieved and what concrete instantiations the big ambition would take on over time. I know this sort of thinking gets widely mocked in online watering holes, including by myself many years ago, and all I can say is “Pick a peer group where ambition in the service of humanity is seen as positive and where actual progress is seen as achievable.” A huge portion of the value creation of Silicon Valley is through directly intervening on the ambition of impressionable people . I suspect one reason it echoes in culture outside of the technology industry is that this ambition effect is repeatable elsewhere. (And I suspect that one reason Silicon Valley draws such criticism is because this ambition effect is demonstrably repeatable elsewhere. Examples left as an exercise to the reader.) Set one’s operating cadence to ‘run.’ Organizations have a lot of difficulty operating at a cadence which is unlikely their default one, and that cadence tends to get slower over time as the organization’s energy gets taxed to support the organization itself. People also seem to have a set operating cadence, though theirs is more context-dependent; I’ve noticed wild swings in mine over my various jobs, mostly in conforming to local norms. Relentless execution is something of a cliche, but it is a cliche for a reason. Organizations that need to hire a Head of X to start Xing will necessarily pay a multi-month cost to start Xing; you can get a lot done in months. Many organizations will have a culture which says “Why do X in the interim when we don’t know the best practices and will inevitably throw it away?”; they will lose out on months of progress. The returns to pushing your cadence to faster are everywhere and they compound continuously , for years. Don’t send the email tomorrow. Don’t default to scheduling the meeting for next week. Don’t delay a worthy sprint until after the next quarterly planning exercise. Design control and decisionmaking structures to bias heavily in favor of preserving operating cadence. I don’t think Stripe is uniformly fast . I think teams at Stripe are just faster than most companies, blocked a bit less by peer teams, constrained a tiny bit less by internal tools, etc etc. There are particular projects which have been agonizingly long to ship; literally years after I would have hoped them done. But across the portfolio , with now hundreds of teams working, we just get more done than we “should” be able to. A stupendous portion of that advantage is just consistently choosing to get more done. That sounds vacuous but hasn’t been in my experience. I have seen truly silly improvements occasioned by someone just consistently asking in meetings “Could we do that faster? What is the minimum increment required to ship? Could that be done faster?” It’s the Charge More of management strategy; the upside is so dramatic, the cost so low, and the hit rate so high that you should just invoke it ritualistically. Most organizations operate at nowhere near the frontier of their capabilities. That is a choice, and strikes me as a valid 5 choice, but you can choose to move closer to the frontier, too. Stripe has a much better economic model than most software companies. Without spilling too much secret sauce: B2C software companies’ success scales with the count of their users. Growth in users is their primary lever in growing the business, which you can further decompose into acquisition, conversion, retention, etc. To a first approximation, no metric except those impacting growth matters. Software people use a lot of B2C software and their intuitions of the software business are overly informed by this fact. B2B software companies’ success scales with both the count of their users and those users’ success , because their pricing model will generally (unlike most B2C companies) capture a portion of the customer’s upside. They have the same incentives in growth that B2C companies do, but they have an additional lever: making the user more successful directly incrementally helps them. Additionally, they participate in underlying growth of users , similar to an equity holder. A B2B business selling to healthcare providers in the United States includes an embedded synthetic call option on U.S. healthcare. Finance-to-geek translation: “If you sell to doctors you prefer futures in which more money goes to doctors. Those are much better futures for you than futures with less money going to doctors. However, even should you find yourself in a future with less money going to doctors, you will probably still have doctors to sell to, so it is difficult to imagine that future being much worse than today, given that you have only sold to a tiny percentage of all doctors so far.” My view on Stripe’s business prior to joining was “Stripe is basically a B2B SaaS company with extremely reliable capture of upside when users succeed.” I believe that substantially underappreciates the actual business. Large portions of Stripe’s business add another loop on top of the B2B SaaS loop, where Stripe is effectively indexing on its ability to grow the count and success of customers who are themselves structurally equivalent 6 to B2B SaaS companies. Combine this model and what a former colleague dubbed Patio11’s Law (“The software economy is larger than you think, even after taking into account Patio11’s Law”) and you have my biggest surprise since joining Stripe. I believe that Stripe likely has another trick to play, which plausibly includes a loop on top of this one, where Stripe will perhaps index on the number and success of companies which index on the number and success of their customers, where those customers are structurally equivalent to B2B SaaS companies, who index on the number and success of their customers. As for the specifics of that, well, we’ll see what the next few years look like. I feel like no writeup about the last four years can avoid 2020, which: it has been the toughest year of my life. I have struggled with low-grade depression for most of my life; events this year ( *gestures* ) exacerbated that into a severe depressive episode. Props to very supportive colleagues (and a company policy which was extremely generous to employees needing extra help in 2020) for assisting me in working through this. I’ll probably write more about this sometime, but since the short version may be useful: Strongly consider talking to a medical professional; treatments exist and may help you. I’ve had a revolutionary improvement in QOL as a result of medication and daily exercise. There is still a struggle, but it’s my normal struggle and not causing nearly the degree of impact to my life that it was earlier this year. I’m broadly happy at Stripe and presently intend to be here for at least a few more years. I think the company is likely going to change about as much in the next four years as the last four, again in a compounding fashion. It is entirely possible that products the world hasn’t seen yet will be bigger than Stripe itself was in 2016, 2018, or 2020. Want to work on them, or other worthy challenges, as our company starts to exit the awkward teenage years? We’re hiring . There is still more to build. There are still more entrepreneurs to help. There are still challenges to be solved and fun to be had. IC is short for “individual contributor”, which is corporate America speak for “directly does the work rather than managing the people who do the work.” At the same time, senior ICs are also supposed to exercise a form of leadership. Capacity to do that and also “get my hands dirty” in the same day is part of the job.  ↩ I will say that growth rates at many software companies which would generally be considered to be past the hypergrowth stage have been historically unprecedented in the last few years. Microsoft—Microsoft!—has added four Microsofts— four Microsofts —since 2015. I think tech has spent far too little brainpower on figuring out how that happened. Our models of the world were shattered and we have largely slept through it.  ↩ Stripe doesn’t have a CMS yet, though we are getting around to it. Almost every page on stripe.com is an artisanally crafted .erb file.  ↩ There is a meritocracy in our class system and a class system in our meritocracy, and I feel that this is underexamined because the nuances discomfit both people who understand the nature of merit and those who understand the nature of class systems.  ↩ There is beauty, purpose, and dignity in running the neighborhood sandwich shop. Contrary to some memeplexes in Silicon Valley, I don’t think that a firm (or founder) which would sacrifice growth rates for other worthy goals is even implicitly doing something wrong.  ↩ Structurally equivalent? Just like finance people see an office building as a balance sheet and cash flows, I see an office building as a SaaS company plus some glass and concrete 7 .  ↩ I take this joke extremely seriously. How many office buildings could we find capital for in Chicago, at rent rolls of $100k a year to $10M a year? That’s about how many SaaS companies should exist. In Chicago. Office buildings aren’t venture fundable, but that doesn’t mean they’re not an investable asset class. I think non-rocketship SaaS is getting there , too .  ↩

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An update on a pre-registered result about the coronavirus

By March 22nd, I strongly suspected there was a widespread coronavirus epidemic in Japan. This was not widely believed at the time. I, working with others, conducted an independent research project. By March 25th we had sufficient certainty to act. We projected that the default course of the epidemic would lead to a public health crisis. We attempted to disseminate the results to appropriate parties, out of a sense of civic duty. We initially did this privately attached to our identities and publicly but anonymously to maximize the likelihood of being effective and minimize risks to the response effort and to the team. We were successful in accelerating the work of others. The situation is, as of this writing, still very serious. In retrospect, our pre-registered results were largely correct. I am coming forward with them because the methods we used, and the fact that they arrived at a result correct enough to act upon prior to formal confirmation, may accelerate future work and future responses here and elsewhere. I am an American. I speak Japanese and live in Tokyo. I have spent my entire adult life in Japan. I have no medical nor epidemiology background. My professional background is as a software engineer and entrepreneur. I presently work in technology. This project was on my own initiative and in my personal capacity. What follows is the observed history of the last 30 days, an explanation of how the independent research project came to be, an explanation of how we chose to distribute our work product and why, and reflections on what this experience suggests for others’ efforts against the coronavirus. During mid-March, the public consensus of domestic experts, international researchers, authorities worldwide, and the international news media is that Japan is weathering the coronavirus situation well. The narrative centers on uncertainty surrounding the timing of a sporting event. As of March 19th, the official statistics show less than 1,000 coronavirus infections in Japan. This compares extremely favorably with the experience of peer nations such as Italy and the United States, despite Japan’s first infections having occurred earlier. The public mood is that prompt early action has been successful and normalcy has been mostly restored. Some believe widespread mask use, early social distancing measures, and implementation of a cluster-based management strategy has proven sufficient to contain the coronavirus situation. Doubts have been raised. Japan’s experience to this point has been extraordinary. At this point they are mostly idle speculation. Theories exist that suggest all is not what it may seem, but many of them allege implausible conspiracies. The consensus was not correct. There were actually widely geographically distributed outbreaks of coronavirus. The situation was worsening rapidly throughout March. That fact was discoverable but not widely known. Here is a brief recap of an extremely fluid situation, for the convenience of readers who have not kept up with it. The March 22nd and March 25th entries are not widely known. Thursday March 19th : The NHK panel of experts outlines the national consensus on the coronavirus situation, what the plan is, and what the risk factors to the plan are. Archived in Japanese and in English . (This is an unofficial translation commissioned from an unaffiliated commercial translation agency.) Saturday March 21st : Governor Yoshimura (of Osaka) distributes, on live television, an official assessment of the situation in Osaka and Hyogo. Few note that this happened or understand the significance of the assessment until later in the week. Sunday March 22nd : I tweet a hash at 11:24 AM, discussed below. Monday March 23rd : Governor Koike (of Tokyo) gives a press conference, at which she claims that it may be necessary to impose a lockdown on Tokyo if there is a rapid rise in infections. She immediately clarifies that this must be avoided at all costs. Tuesday March 24th : A sporting event is postponed. Wednesday March 25th : I tweet a hash at 1:31 PM, discussed below. Later in the day, Governor Koike (of Tokyo) urges the populace to start taking voluntary social distancing measures beginning on Saturday. Thursday March 26th : The New York Times publishes Japan’s virus success has puzzled the world. Has its luck run out? . A short time later, economist Tyler Cowen at George Mason University published The coronavirus situation in Japan is probably much worse than you think , covering claims made by a “working group.” Those claims are discussed in more detail below. In other news: the government’s panel of experts formally assesses that coronavirus is likely “rampant” throughout Japan. Friday March 27th : NHK, Japan’s national broadcaster, does a segment on why “a powerful American newspaper” has such questions about Japan’s well-contained coronavirus issue. Many reporters domestically begin to ask hard questions. Saturday March 28th : The Prime Minister addresses the nation, explains there is no present need to declare a state of emergency, but explains that Japan is in “a state of national hardship (国難) such that it has not experienced since the war.” [ Correction : After re-checking the transcript of this press conference and my notes, I realized this remark was actually made on April 1st. The press conference did mark a turning point, though, both for official recognition of the crisis and for the content of reporters’ questions about it.] Sunday March 29th through Sunday April 5th: There are increasingly urgent calls from prefectural governments, the Japanese Medical Association, researchers, and others to declare a state of emergency. Monday April 6th: The Prime Minister announces a state of emergency will be declared in seven prefectures, including Osaka and Tokyo. Tuesday April 7th: The New York Times publishes Japan declared a coronavirus emergency. Is it too late? Thursday April 9th: Aichi requests that the government broaden the scope of the state of emergency to include Aichi. Thursday April 16th : Japan broadens the state of emergency to include the entire nation, and designates 13 prefectures as being of particular concern, including Tokyo, Osaka, and Aichi. There are published reports in Tokyo of hospitals turning away suspected coronavirus patients. Friday April 17th : The Prime Minister addresses the nation, imploring it to reduce human-to-human contact by 70~80%. Monday April 20th : Increasingly specific and repeated calls to strengthen social distancing measures are beginning to show some objective improvement, though the situation is incredibly complex and in different phases throughout the nation. The number of infections continues to increase rapidly. There are increasing reports of difficulties in accessing medical care. The number of acknowledged coronavirus cases exceeds 11,000. The number of acknowledged cases requiring the highest level of care is approximately 230. The National Policy Agency has reclassified several suspicious deaths, including a man who passed away on a city street in Tokyo, as having been caused by coronavirus. Tuesday April 21st : There are increasingly common warnings by experts that, given the degree of spread of the infection, it is implausible that it will be rolled back within a year. We will likely see new outbreaks and new waves. Experts warn we will likely need to institute far stricter measures than seemed reasonable a month ago, to avoid a collapse of the medical system. The situation was much worse than we thought. On March 26th at 11:13 PM JST, economist Tyler Cowen published an essay on Marginal Revolution titled “The situation in Japan is probably much worse than you think.” The essay recounts of his correspondence, over the prior several days, with an anonymous “working group”, operating in Tokyo. The Working Group (proper noun hereafter) concluded that Japan had a geographically distributed coronavirus epidemic and predicted a public health crisis in April. The Working Group had been quietly circulating its evidence with appropriate parties in policy circles. As there had been pronouncements by experts officially which were equivalent to their research’s core result, that Japan factually had a coronavirus epidemic, the Working Group published the white paper anonymously to allow the public to prepare. I instigated the Working Group and I was the primary author of its white paper. Dr. Cowen linked to a copy of the white paper. We had published it anonymously via a third-party website moments before. Our choice to be anonymous was a considered one and is discussed in more detail below. Reception of the white paper was mixed. Some people viewed it with understandable concern, given the prevailing consensus that Japan was weathering the situation well. Some organizations were moved by its claims and took high-quality actions in response to it. Some people questioned the motives of the authors and suggested it was extremely unlikely to be correct, because credible science doesn’t get done by amateurs and then anonymously pastebinned. We had circulated an earlier version of the white paper privately to several parties to check results, obtain feedback, and inform their own investigations. Dr. Cowen was one of those parties. Here is the circulated version . The circulated version matches this hash from March 25th at 1:31 JST . It is substantially identical in conclusions to the published version, with minor wording differences. The final published version of the white paper is presented below, unedited from when it was published for distribution via Marginal Revolution. I’ve lightly visually distinguished it from the rest of this essay. Commentary continues afterwards . (If you need to reference the white paper directly, you can use this link . I do not control any other published copy and cannot vouch for their integrity or availability in the future.) The governmental and media consensus is that Japan is weathering covid-19 well. This consensus is wrong. Japan’s true count of covid-19 cases is understated. It may be understated by a factor of 5X or more. Japan is likely seeing transmission rates similar to that experienced in peer nations, not the rates implied by the published infection counts. The cluster containment strategy has already failed. Japan is not presently materially intervening at a social level. Accordingly, Japan will face a national-scale public health crisis within a month, absent immediate and aggressive policy interventions. Update as of the afternoon of March 26th : The government’s panel of experts has said that infections are highly likely to be “rampant.” We concur with that assessment. We are presently unaware of published official projections consistent with the projections discussed in this white paper, with the exception of the one from Osaka, discussed below. The consensus As of March 24th at 3 PM JST, Japan has reported 1,135 cases (excluding those aboard the Diamond Princess, charter flights, and officers attending to them), of which 859 are active, 54 are critical, and 41 have resulted in the death of the patient. The government has messaged a wait-and-see attitude (検討する) with respect to proactive containment measures outside of diagnosed clusters. There do not exist official reports of material community spread outside of surveilled clusters. The current figure is likely a massive undercount. If it is an undercount, it is highly unlikely that Japan’s official position that it is correctly identifying most clusters quickly and preventing spread from them is accurate. As Japan’s strategy is built around aggressive treatment and containment of clusters, breakout from clusters is an emergency. It threatens rapid uncontrolled increase in infections, which will cause a breakdown in care (which Japan refers to as an “overshoot”) when the hospital system is overwhelmed, leading to a sharp increase in deaths. We have statistical evidence suggesting that containment failure and community spread has already happened . Reasons to doubt the consensus Japan is undercounting asymptomatic individuals, who can spread the virus. Japan has had a public policy of refusing to test asymptomatic individuals except for those having a deep degree of direct contact with an infected individual (濃厚接触者), and initially only tested individuals with contact if they also had a fever or difficulty breathing. (「濃厚接触者」については、発熱や呼吸器症状が現れた場合、検査対象者として扱う) Accordingly, we should expect this testing policy to underdetect asymptomatic infections, and indeed we have evidence suggestive of this. The Ministry of Health, Labor, and Welfare has released national statistics for patients who were diagnosed with covid-19 as a result of a PCR test on 3/10, 3/11, 3/12, 3/13, 3/14, and 3/23. These statistics include breakdowns by whether a patient was symptomatic when diagnosed or asymptomatic. Asymptomatic patients are consistently roughly 10% of all diagnoses (ranging from a low of 10.24% to a high of 11.29%). This is far less than we should expect for covid-19. Japan’s experience on the Diamond Princess is instructive of what we should see if everyone in a population were extensively tested. All passengers were tested, repeatedly, before being allowed to disembark. The National Institute of Infectious Diseases reports that 48% of infected patients were asymptomatic at the time of sample collection. If the true rate of asymptomatic infection is higher than the observed rate of asymptomatic infection, and we make the generous assumption that 100% of symptomatic patients are successfully identified, then there must be a large population of asymptomatic infectious carriers who are not counted in official statistics. They are not subject, unless they are in direct contact with an infected individual, to any restrictions, monitoring, contact tracing, or medical care. They do not consider themselves ill. They do not know they are capable of spreading the disease to others. To estimate how many asymptomatic infections are being missed, we divide the number of cases of diagnosed symptomatic infections by the estimate of the true rate of symptomatic infections (which is lower than the observed rate). This gives us an estimate for the true number of infections. The difference between this estimate and the current official count are estimated asymptomatic infections which have not been diagnosed. E.g. Using the March 22nd Ministry of Health, Labor, and Welfare data: 907 / (1 - 0.48) =~ 1,750 true infections This is approximately 70% higher than the number of detected infections on March 22nd. This also magnifies the impact of any underdetection or misclassification of symptomatic infections. For every symptomatic infection missed by the current regime, we are also likely missing an asymptomatic infection. Iceland’s chief epidemiologist, who has testing capacity to cover almost the entire population of Iceland, reports that 50% of their infections are asymptomatic. If this ratio held in Japan, it would suggest Japan has ~80% more infections than are publicly reported. A pre-print from the Journal of Infectious Diseases , by a Japan-based team, uses Japanese citizens’ experience to calculate the asymptomatic rate. Japan evacuated citizens from Wuhan and exhaustively tested them on returning to the country, catching more asymptomatic infections than the testing strategy Japan generally employs. The researchers arrive at an asymptomatic ratio of 30.8%. This suggests that Japan has ~30% more domestic cases than are currently reported, again assuming perfect identification of all symptomatic cases. A pre-print from Eurosurveillance estimates the true asymptomatic rate on the Diamond Princess at 17.9%, using more sophisticated modeling than the calculation we performed above. This again implies that Japan is undercounting cases, though not as dramatically as either of the above estimates would suggest. Japan’s reported deaths are likely caused by a larger infection count than it is reporting. A pre-print from the Center for Mathematical Modeling of Infections diseases, Using a delay-adjusted case fatality ratio to estimate under-reporting , attempts to calculate the true number of cases by reasoning from predicted case fatality ratios (CFRs). Each death observed in a country at a particular date corresponds to, probabilistically, approximately 1 / CFR infections occurring over an interval of several days prior to the observed date of death. This research estimates Japan’s detection rate to be between 15% and 35%. Accordingly, Japan is undercounting cases by a factor of approximately 3X to 6X . Countries that test people who have been in Japan find more infections than Japan does. Singapore has traced four coronavirus cases to individuals who had just been in Japan. To be conservative we’ll assume three of these infections, not four, are Japan-related, as we have no knowledge of travel of the Japanese Singaporean resident. Due to the usual course of the disease, Singaporean health authorities concluded it is likely that these individuals contracted it while they were in Japan. Singapore’s sole airport keeps statistics of inbound passengers by country . The average passengers per month over February and March in 2018 and 2019 (most recent data available) was 128,000. Over a roughly 2 week period, we would expect approximately 64,000 passengers to fly from Japan to Singapore. 3 infections in that population is a rate of approximately 47 basis points, which is 5X the 9 basis points rate of infection in Japan. If one believes the government, the rate with surveilled clusters backed out be a tiny fraction of 9 basis points. This implies either that tourists are exceptionally unlucky at stumbling into exactly the wrong music shows or medical facilities or, in the alternative, that there is unsurveilled community transmission bringing Japan’s true case count to many, many times the admitted count. Why does Singapore’s airport detect more infections in people who have been in Japan than Japan detects in people who have been in Japan? It is likely because Singapore’s airport tests aggressively and Japanese medical offices do not. If we believe it is credible that tourists passing through Japan encounter clusters at the same rate as people who stay in Japan, which is unlikely, this implies the official count is understated by 5X . If tourists are only getting affected by community transmission, this implies the official count is understated by 25X or more . Where are the missing asymptomatic cases? Japan’s official position, as stated at the March 19th Panel of Experts on NHK ( 「感染拡大地域では自粛検討を」専門家会議が提言 ) as well as elsewhere, is that Japan is focusing on a cluster-based containment strategy. Japan’s testing capacity is underused, as a matter of policy. Local health offices control access to testing. The Japanese Medical Association has alleged, as reported by NHK, that doctors were denied permission to test more than 290 patients where the doctors felt the tests were medically necessary. Testing capacity (where it is used) is allocated to symptomatic individuals (preferentially to those with contact with diagnosed individuals or travel histories to epidemic-afflicted regions) and people with high degrees of contact with diagnosed individuals. The inference is thus that missing asymptomatic cases are outside of identified clusters, in the general population, potentially causing community transmission. The above statistics are strong circumstantial evidence of a very material number of non-clustered cases, which risk community transmission. We have direct evidence of community transmission as well: local Japanese governments are beginning to report it. Japan’s containment strategy is failing Japan official sources at the prefectural level are beginning to acknowledge that containment efforts locally are failing. For example, Osaka Prefecture and Hyogo Prefecture are currently epicenters of the outbreak in Japan. In a document which Gov. Yoshimura showed on TV on March 21st and is dated as having been prepared on March 16th, experts acknowledged that cluster containment was failing, as evidenced by new infections without a detected link to an existing cluster (community transmission). Quote: “It is believed that infections without surveilled chain to a cluster continue to increase and that therefore a rapid increase in infections has already begun.” (見えないクラスター連鎖が増加しつつあり、感染の急激な増加がすでに始まっていると考えられる。) Aichi Prefecture (Nagoya) has reported and unreported shortages of hospital beds suitable for high-grade infectious disease treatment (like covid-19) and generally. Asahi Shinbun reported on March 11th that over half of their capacity (161 beds) was already used. It was not generally reported at that time that they had begun triage. According to the prefecture on the 22nd , there are currently 103 hospitalized patients. 27 of them have not been tied to either of the prefecture’s known clusters. Nagoya is likely in a state of uncontrolled outbreak and medical care will likely suffer there, within days . As of March 19th, the government’s declared containment strategy remained rapid cluster identification, surging medical attention on diagnosed patients, and asking for voluntary changes in behavior from the populace. The cluster containment strategy has failed. Medical care in epicenters will be modified to adjust to a worsening reality, within days. The voluntary behavioral changes have been modest. They have been insufficient to maintain viability of the first two prongs of the strategy. We should not expect this level of behavioral change to prevent the situation from worsening. Travel within Japan is routine, central to commerce and leisure, and almost entirely unimpeded. In normal times, there are 500,000 passengers on the Tokkaido Shinkansen between Tokyo and Osaka per day . In February, usage of it was down by only 8% , per the Nikkei Shinbun. An outbreak in Osaka, Nagoya, Tokyo, or similar major metropolitan areas is extremely likely to metastasize throughout Japan absent aggressive restrictions on movement, especially public transportation. This outbreak and subsequent spread has almost certainly already happened. Japan is not materially preparing at a societal level It has been widely reported domestically and internationally that the Japanese populace is extremely cooperative, hygiene-focused, and has a culture of donning masks to prevent infecting others and/or as a precaution against seasonal hay fever. This is not a strategy . We are already observing breakout infections. We should assume, until we see persuasive evidence otherwise, that infection spread in Japan resembles that of peer nations taking minimal precautions. This requires us to believe the evidence of our eyes and our instruments, not the evidence of our hopes. The concrete action taken by Japan was suspending substantially all schooling nationwide on February 27th, two weeks before the spring holiday. Japan has discouraged large events, such as the live music event which generated Osaka’s first surveilled cluster. Aside from these measures, and individual citizens and organizations adopting very modest levels of caution, it is business as usual. By casual observation, mask wearing in central Tokyo is below 30%, including in well-attended outdoor events such as hanami (cherry blossom watching) parties. Reporters have not observed social distancing or universal mask use at press conferences about the epidemic . The government has recently released guidance that recommends masks most strongly in environments which are enclosed, with high density of people, with conversations or vocalization. This recommendation has not succeeded in closing bars or restaurants, and appears to carve out mass transit and hanami, which are economically and socially significant. It is uncertain the degree to which this carveout is warranted by medical science. Japan will face a national health crisis within a month Osaka forecasts a likelihood of 3,374 infections (including 227 severe cases) before April 3rd, compounding a rate of more than 6X per week . (This estimate was included in the document shared by the governor.) New York, with aggressive measures to slow the spread of disease, shows compounding of only approximately 2X per week. If government infection counts were accurate, but containment has failed, and we use optimistic doubling rates observed in peer nations taking aggressive measures, we would expect to see on the order of 3,000 cases, including more than 200 severe cases, in each of Nagoya, Osaka, Tokyo by the end of April . If we do not use peer nations’ experience for doubling rates, and instead rely upon the estimates of the cluster identification working group who prepared the report for Osaka, and we do not implement aggressive measures to slow the spread of disease, we could see more than ten times to one hundred times that number. These scenarios both will likely lead to a breakdown in provision of care, which Japan refers to as an “overshoot.” The experience of peer nations suggests that that would lead to patients dying in the wake of care being impeded, at a sharply increased rate, and in patients of other conditions dying as other forms of medical care are also impeded. Tokyo on March 23rd announced that it had 118 beds appropriate to safely treat high-level infectious disease patients, with plans of adding 700 beds for severely affected patients and 3,300 for those with moderate symptoms. Additionally, the bottleneck is likely not beds but rather skilled medical personnel; Japan faces an ongoing shortage of them at the best of times. Japan is likely unable to surge them from unaffected regions to epicenters. Many medical personnel already live in epicenters. Those that don’t will be equally needed to treat the likely coming uncontrolled outbreaks at home. The above scenarios apply estimates of growth rates to currently reported numbers of infections. The currently reported numbers are very likely not accurate . They are, as described above, a gross undercount. Reality is very likely worse than current guidance from official sources, and therefore the April we encounter will be worse than observers who rely on those numbers suppose. We project a true count of over 500,000 infections, including more than 5,000 severe cases, and a breakdown in provision of care (“overshoot”) in Nagoya, Osaka, and Tokyo, before the end of April. There will almost certainly be other breakdowns nationally. April is extremely unlikely to be the worst month. Accordingly, by the end of April, we will have an undeniable national public health emergency. Japan must act now As of March 19th, the government’s declared policy was that it would wait-and-see about infection spread and consider asking the public to engage in voluntary (自粛) social distancing in regions with outbreaks. Jake Adelstein reported “However, a Japanese official who gave an off-the-record briefing to Asia Times suggested that a “don’t ask, don’t tell” strategy, based on minimal testing and buttressed by information massage, has been quietly emplaced.” Governor Koike of Tokyo floated a trial balloon on March 23rd contemplating the possible lockdown of Tokyo if there were an outbreak in Tokyo, while emphasizing that a lockdown should be avoided at all costs. Governor Koike announced, on March 25th, a voluntary stay-at-home order for Tokyo starting on March 28th. Many cities in peer nations have experienced what we will soon experience. We do not believe they would advise us to delay our response. As a nation, we believe we are in a peaceful spring. We are not. We will, within the month of April, confront a crisis worse than any since the war. We must take immediate, concerted, aggressive policy steps in light of this reality. The white paper makes a large number of claims about an extremely complicated subject. A key principle of scientific investigation is that claims should be falsifiable ; one should be able to predict evidence which, if it became available, would disprove the claim. Claims which are not falsifiable are sharply less interesting because they can sound right without being right. Most claims in the white paper are designed to be falsifiable in the light of sufficient evidence. Many of them were not widely believed when written. The core result of the white paper is that there presently existed a coronavirus epidemic widely geographically distributed in Japan, which was beyond containment efforts. If one had believed that Japan factually had no such epidemic, one would have been proven unambiguously right when April failed to demonstrate thousands of geographically distributed coronavirus cases. The core result was correct. The white paper predicts that Japan would face an acknowledged public health crisis on a scale not experienced since the war, in April 2020. This prediction was correct. There are many, many more claims. I doubt every claim is exactly correct; predictions about the future, in particular, are sensitive to the future effectiveness of the response effort. We made the best possible effort to be thorough, to source our key claims to reliable official pronouncements or data sources, and to check the logic of our arguments with experts. At the same time, we were non-experts attempting a complex analysis of a fluid situation while racing against what we knew to be a developing crisis. I accept responsibility for any errors in the analysis. That is a complicated question. Different fields have different standards for what constitutes novelty and utility. The best and earliest reporting I am aware of related to this subject was Motoko Rich in the New York Times: Japan’s virus success has puzzled the world. Has its luck run out? , published late Thursday March 26th JST. This is, as far as I am aware, the first published artifact (anywhere) which goes beyond speculating that the public consensus is wrong to reporting facts which are incompatible with the public consensus. That article lays out dots that had not been connected in print before: the implications of the strategy to intentionally limit testing, the growing shortage of beds in several cities, the fact that government-affiliated experts had concluded exponential growth in infections was happening in Osaka, etc. The article is extremely good reporting. It gets the narrative essentially right. It sources key claims to official pronouncements. It gets credible experts to make very pointed observations about what those facts mean, attached to their names and reputations. The article made waves . The NHK (Japan’s national broadcaster) ran a segment on it on Friday March 27th, after which the discourse shifted markedly . Reporters in Japan began asking questions sounding like “Are we testing adequately? Really? ”, “If we have official projections for Osaka, which are disastrous… do there exist projections for Tokyo? What. Do. They. Say?”, “Experts say that the numbers presently believed to be true would represent a miracle. Has there been a miracle? ” The Prime Minister addressed the nation on the night of Saturday March 28th, explaining that Japan faced “a state of national hardship (国難) such that it has not experienced since the war.” [ correction : this comment was made on April 1st] while Japan had not yet experienced a rapid increase in cases as Europe and the U.S. had, it could do so at any time. There was uncharacteristically aggressive questioning from reporters. The NYT followed that article with other pieces. They make for excellent reading. Newspapers are not, however, formally in the business of making predictions about the future, particularly not unsourced speculative predictions. The article does not include any speculative predictions about what might come to pass in April. There are organizations in the world which are in the business of making predictions about the future, and then taking actions consistent with those predictions. Very few of those organizations adopted public postures consistent with having high certainty in correct assessment of the situation in March or predictions about April. Many reasonably calibrated people would have a guess as to which organization was most likely to understand the shape of the near future on this issue. I will broadly refrain from comment regarding that organization, for predictable reasons. May history be understanding of everyone living in troubled times and working with imperfect information… and may history arrive at the truth. To “pre-register” a prediction or conclusion is to commit to it, prior to doing the analysis or waiting for the event which the prediction is about. I pre-registered our results via, and this is jargon, “dropping a hash on Twitter.” A security researcher understands that phrase to mean: I had a sensitive document. I have demonstrated an exact time by which I possessed it. I did not publish the document publicly at that time. I expected possibly publishing it in the future. I would be able to easily demonstrate, and they would be able to easily check, that a future publication was an exact and unedited copy of that document. If you are not a security researcher, here is a primer on how this works and why the security community uses it. This technique has also been used by scientists and mathematicians to pre-register results, including by Isaac Newton. (“At present I have thought fit to register [my results] by [use of a cypher which predates modern cryptography].” page 123 ) The Working Group had their analysis substantially completed on Wednesday March 25th in the early afternoon, though wordsmithing continued. The Working Group was formed two days earlier , on the morning of Monday March 23rd. There were four members, all professionals living and working in Tokyo, from a variety of career and national backgrounds. No member has worked in medicine or epidemiology. At the point of formation, we individually had theories. We were close to convinced that there was a widely geographically distributed epidemic in Japan. We had insufficient proof to convince experts the theories were correct. We were not sufficiently convinced that we were correct to warrant a robust response effort. I do not want to tell the stories of each member of the Working Group. Perhaps they will in their own time. But I can tell you when and how I arrived at my theory. I spent February dealing with the quotidian problems of being employed with young children and aging parents. I was not more than peripherally aware of the coronavirus problem. I help people sell software; an epidemic in China and Iran didn’t seem like obviously the most important thing in the world. I said something along those lines on Twitter, got knuckle rapped by a better calibrated friend, and got a bit more up to speed. By early March I was extremely worried about the safety of my family in the United States. I was skeptical that published descriptions of the state of affairs in Japan were fully accurate but thought the likely impact locally would be low. I know the exact moment that I got worried for Japan: when I understood, from first-hand reports out of Italy, that coronavirus had non-linear impacts not just for the supply chain (which I understood) but also for the healthcare system. On March 10th, I looked around in Tokyo and imagined healthcare substantially collapsing here as well. I didn’t do anything major, for a while. I assumed everyone in a position to act had reached this conclusion . Surely, talented epidemiologists understand exponential growth and already know the shape of things to come. Surely, there is a department of people working day and night on the national response effort. Surely, all professionals understand how to parse official communications. Surely, in a hundred thousand rooms, responsible professionals have told their leadership what would soon happen. Surely, in a hundred thousand rooms, people in positions of authority have pulled out a thick red binder, steeled their hearts, and gone to work. And so I mostly focused on the situation abroad, worrying for family and friends. I tried to distract myself with work. Then, by complete happenstance, two very smart people in one day told me that they believed the public consensus . Japan was weathering the coronavirus situation well. I was lucky to be in Tokyo. Imagine how surprised you would be if someone turned into a cat in front of you. That was how surprised I was. I immediately attempted to update them on my understanding and reasoning for it, assigning an 80% probability to Japan (and Tokyo specifically) following the experience of peer nations. I suggested they orient their organizations consistently with that. And then I looked at the behavior of people in the world, really looked, and suddenly had the terrifying thought that maybe many did not know. So I wrote a memo to myself, on Sunday March 22nd, to gather my thoughts on the matter. It started from a simple thought exercise: what would I see in the world if Japan was in the midst of an uncontrolled coronavirus epidemic? And were we seeing those things? It came to the conclusion that we were. I was 90% confident that I had reached the correct result. I was far less confident that the memo would change anyone’s views unless they had an exceptionally high regard for me. I hashed the memo and published the hash on Twitter. I did not publish the memo at the time. I considered immediately publishing the memo. I did not feel that this was likely to be instrumentally effective at saving lives. I thought that risks associated with publishing could potentially cost lives or bring strong sanctions down upon myself and people close to me. I felt, while my subjective confidence was 90%, that I was likely miscalibrated. The likelihood that one non-expert, doing casual sleuthing in his spare time, had scooped not just any expert but almost all the experts and almost all the parties in formal authority felt infinitesimally small. So perhaps my internal calibration was wrong. Then I reasoned through two worlds: If I published and was living in a universe where Japan did not have a present epidemic, there was no possible gain to claiming there was one. There was some possibility of inciting a panic and diverting efforts from orderly management of a moderate public health problem. Causing any hindrance whatsoever to the containment effort would be terrible; the world had ample evidence of what uncontained coronavirus outbreaks looked like. A distant secondary consideration, but a real one, was that choosing to publish could bring down heavy sanctions, through predictable pathways. If I published and was living in a universe where Japan did have a present epidemic, it felt unlikely that publishing speculation would rapidly recalibrate the understanding of a department of people surely already considering the issue. Indeed, plausibly it would cause them to delay better, more scientific analysis. Delaying analysis delays the consequent response effort; delaying the response effort is unthinkable. Similarly, it is plausible to me that public health authorities are sometimes parsimonious with information flow to maximize the effectiveness of policy interventions. There was a high-salience political question being debated domestically about a long-time centerpiece of economic strategy. I believed that the ultimate resolution of that question was inevitable, regardless of whether Japan had an epidemic. Even supposing I were to be right, I feared that there would need to be a scapegoat for that resolution, which was inevitably going to be acutely unpopular. This might leave me right about the epidemic, ineffective or counterproductive at accelerating the response effort, and responsible for bringing severe sanctions down upon on myself or people close to me. I didn’t know what to do. So I used a trick that I have done a handful of times before, mostly regarding predicting perfidy of Bitcoin exchanges, and tweeted a hash. I had an idea on how to use the hash purposefully . I have been writing on the Internet for almost 15 years. I am broadly respected in my community. People know that I’m a congenital optimist. There was a coded, deniable way to say not just “I have discovered an interesting fact about one of my weird hobbies; tune in later and we’ll see if I was right” but “I am convinced, in my bones, that this time the sky is actually falling and that you likely don’t know that yet. If you know what I’m saying and you trust me: get out the red binder.” In a world where I was wrong, people who trust me professionally would likely think less of me. That was an acceptable risk. And in a world where I was right, it would at least have allowed some to prepare, and created a record for future investigation. I felt that some people would read between the lines of this tweet: 1) I am materially wrong about the most consequential thing I've had to have a view on in 15 years. You should probably degrade your estimate of my ability to think through complex problems. 2) We need a data point to couner "Nobody could possibly have seen this coming." Shortly thereafter, I got an email from someone I respect enormously. He understands the idiom of dropping a hash on Twitter. He has read enough of my work to have a high opinion of me and a tight bead on my interests. He assumed that the most contentious topic I was likely to have a surprising opinion on was on covid-19. He suggested I publish immediately , with the objective of saving lives by giving people time to prepare. I told him why I thought publishing what I had could be counterproductive, but that plausibly I could work harder and get something convincing enough to accelerate conclusions in policy circles. He suggested that I leverage a news organization. News organizations are more credible to policy circles than private individuals. News organizations have resources to check conclusions and strong institutional controls to avoid publishing imprudently. A deserved reputation for this allows them the ability to distribute trustworthy conclusions across many policy makers quickly, in parallel . This might accelerate policy deliberations versus briefing policy makers serially. News organizations do not fear the social consequences of getting ahead of news stories. They consider that almost uniformly positive. This strategy had not occurred to me . The only options I was actively considering were “publish in my personal capacity” or “send a memo to… I lack sufficient insight into the decision-making process here to know who it would be addressed to, actually.” As soon as he made the suggestion, the outlines of a plan fell into place: Find like-minded people. Write a better memo. Check it with a medical researcher. Brief as many organizations as would talk to us, as close to policy apparatuses as possible. I began working. Twenty minutes later, in the dead of night, three people in Tokyo had agreed to a kickoff meeting on Monday morning. Via videoconferencing, naturally. On Monday we fleshed out the goal (“Accelerate the response effort, with the goal of saving lives”), a plan of action (“Leverage high-status organizations to surface internal conclusions we think probably exist, or generate evidence sufficient to bootstrap experts to those conclusions rapidly”), and a timeframe. We also recruited our fourth and final member. We wanted the conclusions in policy circles by Friday, because policy circles might take weekends off but coronavirus does not. We knew interesting reporting in English-language media typically takes half a day to percolate among domestic bilinguals prior to being translated. This implied a publication deadline of Thursday. We assumed media organizations would need our work by Wednesday to check it and produce reporting informed by it. Why did we not produce our work in Japanese? Partly, we thought Japanese-language media outlets were less likely to bite on this shape of story coming from this shape of sources. Partly it was simple expedience. I write ten times faster in English than in Japanese, which is not an advantage to squander when every day matters. This gave us approximately 54 hours to do our research, check it with an expert, produce a credible artifact, and provide it to appropriate parties. Monday through Wednesday passed in a blur. We digested a dozen epidemiology papers. We conducted a review of two months of reporting in Japanese and English. We came up with a hypothesis why our result wouldn’t be obvious to existing efforts. We figured out which data sources and which signals were either likely underexamined or intriguing enough to suggest follow-up. We crunched numbers. We found a medical researcher to review our conclusions. We incorporated feedback from that researcher. We wrote the memo. We decided to call it a white paper, because that sounded more credible. Then we briefed a small number of organizations about it. We landed a major break on Monday, almost by accident: we found the document which Governor Yoshimura had presented on live television on Saturday. The document was written by epidemiology experts and included the conclusion that the infections in Osaka and Hyogo had escaped containment and that exponential growth had already begun. After reading this document, we moved to ~100% confidence that Japan factually did have geographically distributed outbreaks. This official assessment also excluded the possibility that we were the only team which had reached the core result. That had always felt likely, but came as an immense relief. It meant the response effort would arrive sooner. It also meant we only had to assist others in understanding the import of experts’ results, rather than convincing others that our result was equivalent. We had our research. We had checked it as well as we were capable of within our networks. We had official confirmation of the core results about the status quo. We started having conversations with appropriate parties. Some desire to remain unnamed; others may be happy to share that they spoke with us. Our goal was accelerating their ability to take appropriate actions. Some organizations quickly made high-quality decisions after being shown the white paper. In some cases, they told us that they were able to use portions of our work to inform their own work. At some point in the future, stakeholders in substantially every organization worldwide will probably inquire as to how their organization performed during the coronavirus pandemic. May all judgments be just and merciful. Some have advanced a theory which starts from the observed timeline and assumes the behavior of very many people was motivated by a sporting event. Beware of simple, narratively compelling explanations for the behaviors of complicated systems. I do not believe there was a decision made to prioritize a sporting event over public safety. I can believe that the fact of the sporting event impacted the operation of a very complicated system. These are two very different claims. Consider myself as a very small cog in a very complicated system. No one has ever told me that I should prioritize a sporting event. No one who has ever known me would accuse me of sharing that preference. Sontaku (忖度) means, roughly, to intuit the preferences of other parts of the system and act to facilitate them without ever having been explicitly instructed to do so by formal authorities within the system. Some people believe that sontaku is a uniquely Japanese phenomenon. I tend to believe that it is a useful word which describes an extremely common human behavior. A regulatory lawyer in the U.S. advising their client on the risk level of a particular course of action is likely sontaku-ing using their mental model of the regulator rather than directly asking the regulator what to do. Being good at sontaku-ing the regulator is core to the lawyer’s job. The client is plausibly sontaku-ing the lawyer at the same time! Their lawyer doesn’t have to order them to abandon an unwise course of action. Their lawyer has no authority to do that. All the lawyer has to do is say “It is my opinion as your attorney…” Sophisticated clients will understand that sentence, worded in that fashion, as a non-order. Sophisticated clients will likely follow that non-order, because getting the benefit of high-quality non-orders is why you hire regulatory attorneys. We could conclude from this that American regulatory lawyers are inscrutable. Or we could conclude that they are humans, doing something humans do in systems much bigger than themselves. This little cog sontaku-ed its way into understanding that the fact of the sporting event materially impacted parts of the calculus. There are few conspiracies in the world. There are many systems with complicated decision-making processes, internal data flows, and incentive structures for actors within them. Sometimes those systems do not produce the results the system would most profess to want or that actors within them would want. I have some speculative hypotheses. I am substantially less confident in them than I was confident in our earlier results. Call it 60% that these represent a major factor. These are offered in the hopes that future researchers can ask the right questions. Japan had, speaking inexactly, a Plan A and a Plan B. They’re described in detail by the panel of experts report in Japanese and in English (this is an unofficial translation commissioned from a commercial translation agency). Plan A revolved around aggressively containing clusters with a goal of preventing community transmission. Plan A allocated almost all testing capacity (and responder efforts! Tests don’t ask you about your social graph themselves! That’s hard, manual work!) to quickly defining the boundaries of clusters. Plan A surged medical attention on diagnosed cases, hospitalizing (and thereby sequestering) all diagnosed individuals. Plan A asked for relatively minor social distancing measures from the populace, principally avoiding holding large events in areas with known cases. Plan B is the playbook arrived upon by most Western nations. Plan B is known to be extremely unpalatable for a variety of reasons. You can call it a lockdown, you can call it putting the economy into stasis, you can call it strongly-suggested extraordinary social distancing, you can call it whatever you want, but nobody in the world is enthusiastic about instituting Plan B unless they need to . There was a designed transition from Plan A to Plan B. If one observes an explosive growth in infections, then Plan A is no longer viable, so move to Plan B. There are, similarly, various intensities available within Plan B, with predefined guidelines as to when they should be employed in an area. Given Plan A appeared to work , substantially everyone preferred it to Plan B. There were likely departments upon departments of people who were implementing Plan A, collecting data from the testing regime specified by Plan A, reporting on the success of Plan A, etc. I have no reason to believe, and do not believe, anything but that they carried out their duties to the best of their abilities. My hypothesis: it was many peoples’ job to carry out Plan A. It was in many peoples’ interests for Plan A to work. The daily updates about Plan A went to many people. They monitored Plan A’s progress under its own terms. It may not have been anyone’s job to wake up every morning, assume Plan A was no longer viable, and search for proof that that had happened. Plan A’s specified testing regime may be accidentally incapable of telling you Plan A has failed . How is that possible? Because both Plan A and Plan B were substantially written years ago , before the world understood the biology of covid-19. They may not have adapted quickly enough to what we learned early in 2020. In particular, this non-expert believes they do not sufficiently make an allowance for transmission of the infection by asymptomatic patients, and they assume that the supermajority of infection spread happens within clusters. And so they concentrate testing capacity “on and around” clusters, on symptomatic patients likely to have worse clinical experiences. By design, with the best of intentions, Plan A does not “waste” testing capacity or medical resources on asymptomatic patients or people outside of clusters. Plan A assumes most of these patients need no help and some will just need the ordinary attention of the medical system. If they happen to cause a cluster, then that cluster will be quickly detected and contained. Plan A assumes it will quickly learn if it is becoming untenable, because it will see clusters without a surveilled chain to other clusters. If you have a cluster, and you rigorously test people “close to it”, you will find approximately the correct number of symptomatic patients. You will quickly hospitalize them and give them the best medical care. Everyone involved does their job. Everyone gets feedback that they are doing their job correctly. Most patients get better. Plan A looks like it is succeeding, and considers itself succeeding, until it detects undeniable evidence of sustained community spread. The perfect storm for this strategy is: what if coronavirus is capable of causing clusters but also capable of exponential growth just through community transmission by asymptomatic patients? What if you successfully reduce the incidence of clusters such that they don’t become undeniably common before you have tens of thousands of infected patients very well-distributed throughout your social graph? In that hypothetical world, you end up with… something which looks not too unlike the experience of Japan in March 2020. That is one hypothesis. Experts will thoroughly study the experience of the last few months. Many people doubted that there was a coronavirus epidemic because evidence of it should be extremely obvious . Here are three doubts one might have, and some hypotheses as to why those doubts did not point in the correct direction. Experts will eventually have much better data and more reasoned conclusions than these. “An uncontrolled coronavirus epidemic should, within a month, result in many thousands of patients. Where are the patients?” The asymptomatic ones are exactly where they would otherwise be on any given day in spring. The symptomatic ones are likely receiving care for a viral infection or shrugging it off because their symptoms are mild. If they seek care, they will likely to be told to get some rest and drink liquids. Most will do that and get better. Some will have a few very difficult days, but then get better. A small number will be hospitalized. They will get aggressive high-quality care for pneumonia, but pneumonia is much more common than coronavirus and does not trigger a test in Plan A. The testing criteria require both severe symptoms and a link to a cluster (or recent trip to a nation widely believed to have an epidemic). “You can’t have an uncontrolled coronavirus epidemic without a sharp increase in mortality. Where do we see that?” An average of approximately 3,500 people pass away in Japan per day. Who is the first person to produce an Excel analysis about this? What is their job title? At what cadence do they refresh this analysis? How many days does it take the data to flow through various organizations and stabilize, such that the number in that Excel file is complete and reliable? What is the analyst’s threshold to notice they are surprised? How quickly can they get that message to the departments in charge of Plan A? How quickly can they overcome those departments’ insistence that they’re running all the tests Plan A calls for and gotten results consistent with a well-managed public health issue? I don’t know if that stylized analyst is a particular person, a department, a process, or similar. But I am aware of one system which functions not dissimilarly to this stylized analyst. The National Institute of Infectious Diseases collects per-large-city stats on flu and pneumonia deaths. It takes weeks for this data to be available to them, and the quality and freshness of the data is not uniform over the 21 large cities they cover. Here are Tokyo’s stats . As of this writing, they show excess deaths in late February relative to the National Institute of Infected Diseases’ baseline. This was analyzed as above their model’s threshold for whether the number of excess deaths is unexpected by statistical variance. The number of excess deaths in Tokyo was approximately 50 per week for two weeks. Data for March is not yet available. The other cities in their data set either do not have any reports available or do not consistently show excess deaths above the threshold, as of the most recent statistics available, all of which are on a delay of several weeks. Tokyo is a large metropolis and one might need to put that number in perspective. One perspective: Tokyo has reported approximately 75 coronavirus deaths total through this writing. The March numbers for flu and pneumonia deaths are modeled to decrease as the flu season winds down. You may have a high-quality hypothesis as to what I believe those numbers will show once they are available. If these numbers reflected primarily seasonal flu and typical cases of pneumonia, April’s numbers would decline again from March’s. It will be very observable, in approximately six weeks, if this indeed happens. “Why did it appear to work for so long?” My leading hypothesis, again as a non-expert, would be substantial path dependence in how coronavirus spreads over social networks. We’ve seen this in cities in many countries: “bad luck” with one early patient at a well-attended wedding or funeral can quickly spiral into hundreds of patients, each of whom starts their own infection chain. Early patients may have happened to not be central to the social graph of Japan. Most people who came into contact with them got lucky. It took a few more generations for the virus to get into the densely connected part of Japan’s social graph than it did in peer nations. Coronavirus’ biology means the difference of a few generations makes a massive difference in the scale, and therefore detectability, of the epidemic. For a few days. Combine this with Plan A probably legitimately succeeding with regards to almost all the patients from almost all the early clusters. Against covid-19’s biology, “almost” buys you some number of days but does not suffice to blunt the epidemic. We spend a day every day. I think that plausibly gets you pretty close to the observed experience of March without requiring notable malfeasance, theories that Japan is dissimilar from other Western nations, a unique unobserved environmental X-factor, etc. We, humanity, are still in the early days of our response to coronavirus. We are even earlier in understanding what the last few months should tell us to do regarding future challenges. We, the Working Group, produced a novel result and we produced it relatively early. Coming forward and showing the result was early and correct enough to act upon will, hopefully, allow others to produce better results faster and give themselves permission to make correct decisions sooner. Good science and good actions informed by science will save lives. A long time ago I did a bit of work on disaster alert systems. They’re not dissimilar to fire alarms. The engineered purpose of a fire alarm is not merely to let people know there is a fire. Many will have already perceived the fire. The alarm, buttressing training delivered far before the alarm rings, gives you unquestionable and immediate permission to evacuate . We know that otherwise some people, smelling smoke and feeling uneasy, would look around the room, see other people not moving, and conclude “Who am I, to disrupt everything going on by shouting ‘Fire! Fire! Fire!’?” The history of humanity has seen far too many rooms where no one shouted ‘Fire!’ early enough. Too many people and too many organizations have passed precious days this year waiting for permission to take actions reasonable given evidence they already had . You, yes you, in your individual capacity, are not done with consequential decisions you will have to make about coronavirus. You had a decision point every day in February on whether to buy more food than usual. Perhaps you bought extra, expecting the likelihood of a lockdown or disruption in the supply chain. Perhaps not. Either way: you will be faced with that same decision again. You will have other ones, too. We will not be done with coronavirus in the next few months. You have likely not seen the final iteration of extraordinary measures in your city. You, yes you, upon whose considered judgment others rely for their safety, need to understand what has happened this year. You need to urgently adapt your internal decision-making process on the basis of available evidence. You do not have the luxury of waiting until the papers are accepted for peer review, the inquiry is finished, and the history books are written. The virus will not wait. Humanity must act faster than the disaster. We hope, in our small way, to accelerate your understanding and actions. In that spirit, some additional reflections, representing things I now believe that I would have been surprised by in January. Perhaps you can consider them more carefully and faster than I did. I think epistemic humility is invoked perhaps a bit too much. There is something of a meme going around that experts need space to do their work and that non-experts intruding onto their terrain only wastes their time. I have heard it called “epistemic trespassing.” You can see above where believing the truth of this narrative cost days of precious time. Similar concerns have delayed response efforts elsewhere. I have a great appreciation for science but am pretty ambivalent about opinions as to whether the white paper constitutes it. If one needs to call it “just lucky guesses”, fine; how do we make radically more lucky guesses this year? No professional courtesy, no personal discomfort, no preservation of modesty, no fear of repercussions should delay the response. Get a right enough answer. Make a right enough decision. Be prudent, check your work, be appropriately confident in it, but then act and act boldly. I have a renewed appreciation for speed. Covid-19 does not sleep. The disease course and doubling times absent intervention are facts which the universe offers to us. They happen to be very short. This is inconvenient for many of our institutions. The biological reality of the virus cares nothing for our convenience. Some organizations are have difficulty making decisions under uncertainty and quickly iterating on them. Some organizations are built around this feature. The second type of organization will outperform the first on a problem moving as fast as a coronavirus epidemic. We should think, very carefully, on how we design organizations, particularly organizations which are systemic chokepoints during prompt crises. They need to move faster than seems currently reasonable to hope for. Twitter is having its finest hour. If the Working Group had a fifth member it would be Twitter. Twitter put coronavirus on our radars weeks before more traditional sources. The experience of peer nations, delivered in real-time over Twitter, taught what signals would flip locally before danger was obvious. Twitter connected four professionals in a large city. This made us ambiently aware of each other sufficiently such that, in the dead of night and with no prior discussion, we knew who locally was steeped in the problem, trustworthy, and skilled. Twitter accelerated our ability to identify and contact responsible individuals at several organizations. Twitter enabled the hash-as-signal-flare tactic. This enabled the right person to offer the right advice very quickly. This advice lead to a better plan days faster than a Twitterless world. Software really, really matters. We successfully executed a fast, novel research project without ever being in the same room (for obvious reasons). Messaging apps, videoconferencing software, office suites, and similar were crucial to the effort. Very little of it existed even ten years ago , certainly not in a form usable enough for us to have hit our timeframe. Most of them will run on the phone in your pocket. Some are frequently used for frivolous ends and therefore too often considered frivolous themselves. They are not marketed or understood as tools for the advancement of human knowledge. They work. They work. They work. Because of free or cheap software (mostly already installed on our computers and phones), we spent less than 30 minutes total on booting up infrastructure for four researchers and every minute after that on achieving results. The price of infrastructure matters, too. The total spent on the project was less than $2,000. Our grant-making agency was a credit card. There is a difference between the truth of a thing, and the acknowledgment of the truth of a thing. Japan faced a coronavirus epidemic no later than early March. That is a truth; it was not an acknowledged truth until later. I would hope that, if any truth about my minor part in this is acknowledged, it is this: I am a responsible professional. I have no relevant expertise or authority. I have avoided unproductive criticism. I might have made some guesses, during a year when many people were guessing on many topics. I quietly told some people about them. Some guesses may, perhaps by happenstance, align with official guidance and credible published reporting. And should that be the truth acknowledged, and less convenient truths be quickly forgotten, that would be fine by me. If I am wrong, then I will accept any consequences. My actions were my own actions. This is a very different essay than my typical work. It may be judged to very different standards in very different quarters than usual. Please excuse my need to write more reservedly and participate less in subsequent commentary than I usually would. Some truths have social consequences, acknowledged or not. Humanity’s response to coronavirus implicates almost everyone. We live in imperfect, divided, fractious, and hurting world, as we always have. We will comfort the afflicted. We will mourn those who pass. We will learn. We will beat this thing , with high science and with hand soap. The Working Group hopes that we have been of some small service to the response effort. I’m presently sheltering at home with my family. The immediate future is unlikely to be easy, for anyone. I hope to see you here in happier times. Tokyo truly is the greatest city in the world. I wish you health, safety, and success in your endeavors.

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Dropping hashes: an idiom used to demonstrate provenance of documents

There exists an idiom called “dropping a hash” which is widely understood in the security community and not widely understood elsewhere. Somewhat surprisingly, there does not appear to be a canonical explanation. I have dropped hashes before and wrote this up to explain the significance of it to non-specialists. This explanation assumes very little familiarity with cryptography, hashing, or the sociology of security research. It is written to be broadly comprehensible to professionals, including non-technologists. You can, if you are skeptical, check these representations with any professional security researcher or cryptographer. There exist a family of algorithms called hashing algorithms, which are closely related to the field of cryptography. A useful property of a cryptographically secure hashing algorithm is that, given any bit of data, you can produce a relatively short series of letters and numbers constituting a “hash” of that data. SHA-512 is broadly considered a cryptographically secure hashing algorithm. If anyone had proof to the contrary, the global economy would be in substantial jeopardy, because much secure communication over the Internet relies upon this property. This is what a SHA-512 hash looks like: That is a hash of the phrase: “This is what a hash looks like.”, with no quotes. You could produce a SHA-512 hash of any data: a photo, a video, a document, etc. If you alter so much as a letter of the hashed data, the hash radically changes. Take off the period and the hash becomes: The definition of “cryptographically secure” rounds to “Even with hundreds of millions of dollars of computer time and the smartest mathematicians on the planet, it is impossible to produce two documents with the same hash, or to go from a hash to the document which produced it.” In simple terms: you cannot, given a hash, produce a text that matches it without first knowing the exact text. It is beyond the bounds of modern science . The computer security field abuts cryptography, and makes use of it for extremely important uses (such as securing most communication over the Internet) and less important uses, such as claiming credit for knowing things before they were widely known. In computer security, sometimes one can produce dangerous information. Perhaps one could discover, through application of one’s professional skillset, that it is possible to break into Google. To publish that information incurs a risk of enabling someone to do a very bad thing. Many researchers would choose to inform Google privately of their results. This is not optimal from a professional incentive standpoint, because it is a very professionally significant event to have discovered how to break into Google. This is an achievement in the same way that a scientific paper with an important novel result is an achievement. It could result in lucrative job offers, consulting contracts, or Hacker News karma. If you let Google fix the issue, you might not be able to credibly say “Prior to Google telling the world about the issue they fixed, I knew about it, because I did the research that uncovered this problem .” Enter cryptographically secure hashing. Write up your research in any fashion. Publish the SHA-512 hash of it, only , in a widely read forum. Inform Google of your findings privately. After Google has fixed the issue, publish your research, pointing to the earlier publication of the hash. All people professionally relevant to you will understand that they are certain, to far beyond the threshold they would need to bet their life savings on the matter, that you had the document as of the publication of the hash. Importantly, this property of cryptographically secure hashing works for anyone . It is not magic. It is not simply a shibboleth or ritual unique to the security community. It is a reproducible technology , available to anyone, that makes guarantees backed by the present limits of human understanding of the world we live in and the math which governs it. Any cryptography professor or clueful security engineer will tell you that the above is a layman’s gloss over effectively settled science, that it is secure enough to stake a material portion of the economy on, and that factually a material portion of the economy is staked on it this very second. Download the file. Calculate the hash of the file, using the same algorithm that was used to produce it. The author will generally state this or consider it sufficiently implied by the length and structure of the hash. The author will likely use a well-understood algorithm generally considered by the community to be secure for this purpose. SHA-512 is one such algorithm. Compare it to a hash previously posted someplace where the hash cannot be edited, generally a widely distributed location such as a mailing list or Twitter. For example, if you are verifying a SHA-512 hash, you can do this using a command available on every modern operating system. If you don’t know how to do this, ask a technologist. shasum -a 512 name-of-the-file.txt This will output the SHA-512 hash of that file. You can then compare it, via trivial use of the computer or visually, to the previously claimed hash. If they match, and they should match exactly , then you know the file was beyond any reasonable doubt the file the author claimed to possess at the point of dropping the hash and that it has not been altered in the interim.

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The Working Group's White paper on Japan and covid-19

Author’s note: This is a copy of the white paper of the Working Group, a group of four pseudonymous professionals in Tokyo. I, Patrick McKenzie, was the primary author. It was distributed quietly during the week of March 25th, 2020. I have written an essay describing how this document came to be and demonstrating its provenance . The covid-19 situation evolves very quickly. The white paper is presented unedited, as a historical document. You can rely on this URL not changing if you need to cite this white paper specifically; the Working Group does not directly control any other copy on the Internet. The governmental and media consensus is that Japan is weathering covid-19 well. This consensus is wrong. Japan’s true count of covid-19 cases is understated. It may be understated by a factor of 5X or more. Japan is likely seeing transmission rates similar to that experienced in peer nations, not the rates implied by the published infection counts. The cluster containment strategy has already failed. Japan is not presently materially intervening at a social level. Accordingly, Japan will face a national-scale public health crisis within a month, absent immediate and aggressive policy interventions. Update as of the afternoon of March 26th : The government’s panel of experts has said that infections are highly likely to be “rampant.” We concur with that assessment. We are presently unaware of published official projections consistent with the projections discussed in this white paper, with the exception of the one from Osaka, discussed below. The consensus As of March 24th at 3 PM JST, Japan has reported 1,135 cases (excluding those aboard the Diamond Princess, charter flights, and officers attending to them), of which 859 are active, 54 are critical, and 41 have resulted in the death of the patient. The government has messaged a wait-and-see attitude (検討する) with respect to proactive containment measures outside of diagnosed clusters. There do not exist official reports of material community spread outside of surveilled clusters. The current figure is likely a massive undercount. If it is an undercount, it is highly unlikely that Japan’s official position that it is correctly identifying most clusters quickly and preventing spread from them is accurate. As Japan’s strategy is built around aggressive treatment and containment of clusters, breakout from clusters is an emergency. It threatens rapid uncontrolled increase in infections, which will cause a breakdown in care (which Japan refers to as an “overshoot”) when the hospital system is overwhelmed, leading to a sharp increase in deaths. We have statistical evidence suggesting that containment failure and community spread has already happened . Reasons to doubt the consensus Japan is undercounting asymptomatic individuals, who can spread the virus. Japan has had a public policy of refusing to test asymptomatic individuals except for those having a deep degree of direct contact with an infected individual (濃厚接触者), and initially only tested individuals with contact if they also had a fever or difficulty breathing. (「濃厚接触者」については、発熱や呼吸器症状が現れた場合、検査対象者として扱う) Accordingly, we should expect this testing policy to underdetect asymptomatic infections, and indeed we have evidence suggestive of this. The Ministry of Health, Labor, and Welfare has released national statistics for patients who were diagnosed with covid-19 as a result of a PCR test on 3/10, 3/11, 3/12, 3/13, 3/14, and 3/23. These statistics include breakdowns by whether a patient was symptomatic when diagnosed or asymptomatic. Asymptomatic patients are consistently roughly 10% of all diagnoses (ranging from a low of 10.24% to a high of 11.29%). This is far less than we should expect for covid-19. Japan’s experience on the Diamond Princess is instructive of what we should see if everyone in a population were extensively tested. All passengers were tested, repeatedly, before being allowed to disembark. The National Institute of Infectious Diseases reports that 48% of infected patients were asymptomatic at the time of sample collection. If the true rate of asymptomatic infection is higher than the observed rate of asymptomatic infection, and we make the generous assumption that 100% of symptomatic patients are successfully identified, then there must be a large population of asymptomatic infectious carriers who are not counted in official statistics. They are not subject, unless they are in direct contact with an infected individual, to any restrictions, monitoring, contact tracing, or medical care. They do not consider themselves ill. They do not know they are capable of spreading the disease to others. To estimate how many asymptomatic infections are being missed, we divide the number of cases of diagnosed symptomatic infections by the estimate of the true rate of symptomatic infections (which is lower than the observed rate). This gives us an estimate for the true number of infections. The difference between this estimate and the current official count are estimated asymptomatic infections which have not been diagnosed. E.g. Using the March 22nd Ministry of Health, Labor, and Welfare data: 907 / (1 - 0.48) =~ 1,750 true infections This is approximately 70% higher than the number of detected infections on March 22nd. This also magnifies the impact of any underdetection or misclassification of symptomatic infections. For every symptomatic infection missed by the current regime, we are also likely missing an asymptomatic infection. Iceland’s chief epidemiologist, who has testing capacity to cover almost the entire population of Iceland, reports that 50% of their infections are asymptomatic. If this ratio held in Japan, it would suggest Japan has ~80% more infections than are publicly reported. A pre-print from the Journal of Infectious Diseases , by a Japan-based team, uses Japanese citizens’ experience to calculate the asymptomatic rate. Japan evacuated citizens from Wuhan and exhaustively tested them on returning to the country, catching more asymptomatic infections than the testing strategy Japan generally employs. The researchers arrive at an asymptomatic ratio of 30.8%. This suggests that Japan has ~30% more domestic cases than are currently reported, again assuming perfect identification of all symptomatic cases. A pre-print from Eurosurveillance estimates the true asymptomatic rate on the Diamond Princess at 17.9%, using more sophisticated modeling than the calculation we performed above. This again implies that Japan is undercounting cases, though not as dramatically as either of the above estimates would suggest. Japan’s reported deaths are likely caused by a larger infection count than it is reporting. A pre-print from the Center for Mathematical Modeling of Infections diseases, Using a delay-adjusted case fatality ratio to estimate under-reporting , attempts to calculate the true number of cases by reasoning from predicted case fatality ratios (CFRs). Each death observed in a country at a particular date corresponds to, probabilistically, approximately 1 / CFR infections occurring over an interval of several days prior to the observed date of death. This research estimates Japan’s detection rate to be between 15% and 35%. Accordingly, Japan is undercounting cases by a factor of approximately 3X to 6X . Countries that test people who have been in Japan find more infections than Japan does. Singapore has traced four coronavirus cases to individuals who had just been in Japan. To be conservative we’ll assume three of these infections, not four, are Japan-related, as we have no knowledge of travel of the Japanese Singaporean resident. Due to the usual course of the disease, Singaporean health authorities concluded it is likely that these individuals contracted it while they were in Japan. Singapore’s sole airport keeps statistics of inbound passengers by country . The average passengers per month over February and March in 2018 and 2019 (most recent data available) was 128,000. Over a roughly 2 week period, we would expect approximately 64,000 passengers to fly from Japan to Singapore. 3 infections in that population is a rate of approximately 47 basis points, which is 5X the 9 basis points rate of infection in Japan. If one believes the government, the rate with surveilled clusters backed out be a tiny fraction of 9 basis points. This implies either that tourists are exceptionally unlucky at stumbling into exactly the wrong music shows or medical facilities or, in the alternative, that there is unsurveilled community transmission bringing Japan’s true case count to many, many times the admitted count. Why does Singapore’s airport detect more infections in people who have been in Japan than Japan detects in people who have been in Japan? It is likely because Singapore’s airport tests aggressively and Japanese medical offices do not. If we believe it is credible that tourists passing through Japan encounter clusters at the same rate as people who stay in Japan, which is unlikely, this implies the official count is understated by 5X . If tourists are only getting affected by community transmission, this implies the official count is understated by 25X or more . Where are the missing asymptomatic cases? Japan’s official position, as stated at the March 19th Panel of Experts on NHK ( 「感染拡大地域では自粛検討を」専門家会議が提言 ) as well as elsewhere, is that Japan is focusing on a cluster-based containment strategy. Japan’s testing capacity is underused, as a matter of policy. Local health offices control access to testing. The Japanese Medical Association has alleged, as reported by NHK, that doctors were denied permission to test more than 290 patients where the doctors felt the tests were medically necessary. Testing capacity (where it is used) is allocated to symptomatic individuals (preferentially to those with contact with diagnosed individuals or travel histories to epidemic-afflicted regions) and people with high degrees of contact with diagnosed individuals. The inference is thus that missing asymptomatic cases are outside of identified clusters, in the general population, potentially causing community transmission. The above statistics are strong circumstantial evidence of a very material number of non-clustered cases, which risk community transmission. We have direct evidence of community transmission as well: local Japanese governments are beginning to report it. Japan’s containment strategy is failing Japan official sources at the prefectural level are beginning to acknowledge that containment efforts locally are failing. For example, Osaka Prefecture and Hyogo Prefecture are currently epicenters of the outbreak in Japan. In a document which Gov. Yoshimura showed on TV on March 21st and is dated as having been prepared on March 16th, experts acknowledged that cluster containment was failing, as evidenced by new infections without a detected link to an existing cluster (community transmission). Quote: “It is believed that infections without surveilled chain to a cluster continue to increase and that therefore a rapid increase in infections has already begun.” (見えないクラスター連鎖が増加しつつあり、感染の急激な増加がすでに始まっていると考えられる。) Aichi Prefecture (Nagoya) has reported and unreported shortages of hospital beds suitable for high-grade infectious disease treatment (like covid-19) and generally. Asahi Shinbun reported on March 11th that over half of their capacity (161 beds) was already used. It was not generally reported at that time that they had begun triage. According to the prefecture on the 22nd , there are currently 103 hospitalized patients. 27 of them have not been tied to either of the prefecture’s known clusters. Nagoya is likely in a state of uncontrolled outbreak and medical care will likely suffer there, within days . As of March 19th, the government’s declared containment strategy remained rapid cluster identification, surging medical attention on diagnosed patients, and asking for voluntary changes in behavior from the populace. The cluster containment strategy has failed. Medical care in epicenters will be modified to adjust to a worsening reality, within days. The voluntary behavioral changes have been modest. They have been insufficient to maintain viability of the first two prongs of the strategy. We should not expect this level of behavioral change to prevent the situation from worsening. Travel within Japan is routine, central to commerce and leisure, and almost entirely unimpeded. In normal times, there are 500,000 passengers on the Tokkaido Shinkansen between Tokyo and Osaka per day . In February, usage of it was down by only 8% , per the Nikkei Shinbun. An outbreak in Osaka, Nagoya, Tokyo, or similar major metropolitan areas is extremely likely to metastasize throughout Japan absent aggressive restrictions on movement, especially public transportation. This outbreak and subsequent spread has almost certainly already happened. Japan is not materially preparing at a societal level It has been widely reported domestically and internationally that the Japanese populace is extremely cooperative, hygiene-focused, and has a culture of donning masks to prevent infecting others and/or as a precaution against seasonal hay fever. This is not a strategy . We are already observing breakout infections. We should assume, until we see persuasive evidence otherwise, that infection spread in Japan resembles that of peer nations taking minimal precautions. This requires us to believe the evidence of our eyes and our instruments, not the evidence of our hopes. The concrete action taken by Japan was suspending substantially all schooling nationwide on February 27th, two weeks before the spring holiday. Japan has discouraged large events, such as the live music event which generated Osaka’s first surveilled cluster. Aside from these measures, and individual citizens and organizations adopting very modest levels of caution, it is business as usual. By casual observation, mask wearing in central Tokyo is below 30%, including in well-attended outdoor events such as hanami (cherry blossom watching) parties. Reporters have not observed social distancing or universal mask use at press conferences about the epidemic . The government has recently released guidance that recommends masks most strongly in environments which are enclosed, with high density of people, with conversations or vocalization. This recommendation has not succeeded in closing bars or restaurants, and appears to carve out mass transit and hanami, which are economically and socially significant. It is uncertain the degree to which this carveout is warranted by medical science. Japan will face a national health crisis within a month Osaka forecasts a likelihood of 3,374 infections (including 227 severe cases) before April 3rd, compounding a rate of more than 6X per week . (This estimate was included in the document shared by the governor.) New York, with aggressive measures to slow the spread of disease, shows compounding of only approximately 2X per week. If government infection counts were accurate, but containment has failed, and we use optimistic doubling rates observed in peer nations taking aggressive measures, we would expect to see on the order of 3,000 cases, including more than 200 severe cases, in each of Nagoya, Osaka, Tokyo by the end of April . If we do not use peer nations’ experience for doubling rates, and instead rely upon the estimates of the cluster identification working group who prepared the report for Osaka, and we do not implement aggressive measures to slow the spread of disease, we could see more than ten times to one hundred times that number. These scenarios both will likely lead to a breakdown in provision of care, which Japan refers to as an “overshoot.” The experience of peer nations suggests that that would lead to patients dying in the wake of care being impeded, at a sharply increased rate, and in patients of other conditions dying as other forms of medical care are also impeded. Tokyo on March 23rd announced that it had 118 beds appropriate to safely treat high-level infectious disease patients, with plans of adding 700 beds for severely affected patients and 3,300 for those with moderate symptoms. Additionally, the bottleneck is likely not beds but rather skilled medical personnel; Japan faces an ongoing shortage of them at the best of times. Japan is likely unable to surge them from unaffected regions to epicenters. Many medical personnel already live in epicenters. Those that don’t will be equally needed to treat the likely coming uncontrolled outbreaks at home. The above scenarios apply estimates of growth rates to currently reported numbers of infections. The currently reported numbers are very likely not accurate . They are, as described above, a gross undercount. Reality is very likely worse than current guidance from official sources, and therefore the April we encounter will be worse than observers who rely on those numbers suppose. We project a true count of over 500,000 infections, including more than 5,000 severe cases, and a breakdown in provision of care (“overshoot”) in Nagoya, Osaka, and Tokyo, before the end of April. There will almost certainly be other breakdowns nationally. April is extremely unlikely to be the worst month. Accordingly, by the end of April, we will have an undeniable national public health emergency. Japan must act now As of March 19th, the government’s declared policy was that it would wait-and-see about infection spread and consider asking the public to engage in voluntary (自粛) social distancing in regions with outbreaks. Jake Adelstein reported “However, a Japanese official who gave an off-the-record briefing to Asia Times suggested that a “don’t ask, don’t tell” strategy, based on minimal testing and buttressed by information massage, has been quietly emplaced.” Governor Koike of Tokyo floated a trial balloon on March 23rd contemplating the possible lockdown of Tokyo if there were an outbreak in Tokyo, while emphasizing that a lockdown should be avoided at all costs. Governor Koike announced, on March 25th, a voluntary stay-at-home order for Tokyo starting on March 28th. Many cities in peer nations have experienced what we will soon experience. We do not believe they would advise us to delay our response. As a nation, we believe we are in a peaceful spring. We are not. We will, within the month of April, confront a crisis worse than any since the war. We must take immediate, concerted, aggressive policy steps in light of this reality.

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Tether: The Story So Far

A friend of mine, who works in finance, asked me to explain what Tether was. Short version: Tether is the internal accounting system for the largest fraud since Madoff . Read on for the long version. The dominant use case for cryptocurrency is speculation. Speculators want to put value into the system, somehow have it become greater, and then take more value out of the system than they put in. The cryptocurrency community includes many exchanges, each a group of affiliated companies, but it is sometimes clearer to view it as an single entity. It would have a series of ledgers, some mechanism for exchanging between the ledgers (taking a cut for each ledger hop and sometimes for bookkeeping within a ledger), and onramps and offramps to traditional currencies (which the community calls “fiat”). From the point of view of the ecosystem, it doesn’t matter which company has those ramps, because value flows unimpeded within the ecosystem. The ecosystem is not a single entity with unified control. Cryptocurrency is not Liberty Reserve . It has, however, recapitulated Liberty Reserve’s architecture of a network of peer “exchangers” with a shared ledger between them to enable hawala -like transfers of value. In cryptocurrency’s case, those shared ledgers are blockchains rather than a single traditional database kept by an organizing entity. Most exchanges do not have fiat onramps and offramps, but the ecosystem has to have them. Because the cryptocurrency community largely does not sell products or services other than speculation, there is no extrinsic sort of funding like you see in other businesses (e.g. no material revenue from customers). Every dollar that goes out to buy the clichéd Lambo is a dollar that went in from a speculator. Having fiat onramps and offramps is extremely lucrative for an individual exchange, because retail traders largely use exchanges which give consumer Internet quality money movement capabilities. Professionals follow their volume. (To, ahem, rip their eyeballs out.) Conceptually speaking, all that you need to have a cryptocurrency onramp/offramp is a banking relationship and some glue code. This is quite complicated for Bitcoin exchanges, because of anti-money-laundering (AML) and Know Your Customer (KYC) regulations. The cryptocurrency ecosystem’s purported raison d’être is building permissionless money, and (descriptively) large sums of money flow between pseudonymous identities without any Compliance Department having asked any questions about them. Financial institutions, which are extremely heavily regulated by a global consensus that AML/KYC are core responsibilities for their industry, are extremely reluctant to bank cryptocurrency exchanges, even ones which (by the standards of the industry) are aboveboard. But some cryptocurrency exchanges have an attitude towards compliance which is best described as “Bond villain.” Bitfinex, founded in 2012, became the largest international cryptocurrency exchange after Mt. Gox imploded in 2013/2014. It has the sort of complicated backstory you’d expect of a Bond villain cryptocurrency exchange. The most relevant fact in the backstory: in 2016, Bitfinex suffered what Matt Levine describes (facetiously but not inaccurately) as the inevitable fate of Bitcoin exchanges : they lost $70 million of Bitcoin (~120k bitcoins) to hackers. Bitfinex was insolvent as a result of this hack. The cryptocurrency community has an interesting understanding of the word “insolvent”; here it means “Their balance sheet shows greater liabilities to depositors than they have physical assets they could immediately satisfy the depositors with.” They owed more bitcoins (per their database) than they actually controlled on the blockchain. Bitfinex conducted a “bail-in” to forestall the collapse of their firm. In the ordinary course, a financial institution keeps a ledger of how much money it owes which depositors. The liability to the depositor increases as the depositor deposits more money (or earns interest) and decreases as they withdraw money (or pay fees, etc). Financial institutions routinely have customers which have balances in several currencies (or denominated in other things of value, like e.g. shares of Apple); conceptually, they work in the same fashion. Bitfinex unilaterally decided that, since they could not satisfy all liabilities for Bitcoins anymore, they would apply a 36% “haircut” to all balances (bitcoin-denominated and otherwise) on the platform. In exchange for the haircut, they invented a new unit of account, the BFX token, which tracked dollar-denominated losses to the haircut. (At least one counterparty, Coinbase, has been reported as having not been haircut. Presumably their lawyer said the word “ conversion ” and that was the end of that discussion.) BFX tokens were tradeable on Bitfinex (of course), and after initially falling substantially below par, Bitfinex offered the option of redeeming them for equity in Bitfinex (which they arbitrarily decided was worth $1 per share). Eventually, they repurchased them at $1 per token. But Bitfinex developed a problem with dollars. (You can verify representations made in this section from Bitfinex’s lawsuit filed against Wells Fargo. ) At the time, Bitfinex (theoretically a Hong Kong entity but whose location, like a Bond villain, changes moment-to-moment to fit the needs of the scene) was banking in Taiwan at Hwaitai Commercial Bank, KGI Bank, First Commercial Bank, and Taishin Bank. Taiwanese banks do not have direct access to the U.S. financial system; they engage via correspondent banking relationships. These banks corresponded through Wells Fargo. Wells, in the wake of publicity about the Bitfinex hack, told the banks they would no longer clear USD wires to or from Bitfinex. This meant that customers could no longer move money in or out of the casino, and a casino which can’t get money in or out can’t collect a rake. So Bitfinex a) sued Wells, fruitlessly and b) intensified their use of a company they had purchased (and, until the lawsuit, had prevaricated about being related to): Tether. Blockchain blockchain blockchain, blah blah blah. Tether builds a USD/etc-denominated ledger on top of a collection of slow databases (Bitcoin, Ether, Tron, etc). They promised that entries in that ledger correspond to demand deposits held in reserve, meaning that customers can rely that one Tether is worth 1 USD (or one Tether euro is worth 1 EUR, etc). You buy tethers from someone who has bought them from Tether, generally a cryptocurrency exchange or OTC desk. After buying them, you can use a client (or your exchange’s software) to send them to another address on the blockchain. Similar to Bitcoin, with the promise of less price swings due to the capability for redemptions and the promised reserve. Tether is a “stablecoin.” Stablecoins are conceptually similar to a money market fund: a place to park money with minimal market risk. A money market fund is backed by short-term commercial paper; this genre of stablecoins were supposed to be backed by… well, that was cagey, but the answer rounded to “money in a bank.” Why have stablecoins? They give cryptocurrency exchanges and their users a USD-denominated ledger to handle inter-exchange money movement and ease onramps and offramps between value in the cryptocurrency economy and value in the regulated economy, by causing the transaction (seen by a Compliance Department at a regulated financial institution) which moves money in or out of the ecosystem to occur at remoteness to the cryptocurrency exchange. This is not the messaged purpose of stablecoins. Those are: The community extremely underestimates the degree to which the designed intent and best use case of Tether is facilitating money laundering. Specifically, it allows socially established individuals/firms trading at reputable OTC desks or exchanges to function as the bankers for the rest of the industry. The cryptocurrency ecosystem largely believes that “If it’s all crypto, then YOLO”, requiring nowhere near compliant levels of KYC or AML for customers who transact only in cryptocurrencies. A representative example, from Tether in 2015 : You can fund your account with bitcoins and convert to Tethers to stabilize your bitcoins and (sic) without having to undertake KYC. Their customers prefer this, some because they would prefer to not have their identifying documents leaked when their cryptocurrency exchange is inevitably hacked, some because they philosophically disagree with regulation, some because they are evading taxes, and some because their business is international narcotics smuggling. Since people believed Tether’s representations that a Tether was as good as a dollar, and could be surrendered for a dollar at any time, it quickly became the unit of account for most of the cryptocurrency community. At the point Bitfinex/Tether lost access to high-quality banking, there were about $55 million of Tethers in circulation. Tether claims there are now more than $4 billion. Tether’s claim about reserves was a lie. Tether has routinely not had actual control of hundreds of millions of dollars of their purported reserves. They have lied repeatedly about this fact. While they promised their customers that Tether was backed by “traditional currency held in our reserves”, their reserves were actually accounting fictions; receivables from money launderers like Crypto Capital Corp, receivables from related parties such as Bitfinex, and cryptocurrencies. This is a pretty robust accusation, but Tether has admitted to it in court . Tether has, in the words of Bitfinex CFO Giancarlo Devasini, “ banked like criminals .” After losing useful banking in Taiwan, Tether shuffled their reserves through a series of shell corporations, periodically getting them frozen when banks realized that they were banking a cryptocurrency exchange which was lying to them about their actual business. Tether eventually found a bank willing to bank it: Noble Bank, in Puerto Rico. Noble’s board was against banking Tether: [Recent articles came] to the attention of the board, and there is a concern that if not managed correctly, that [our relationship with you could] cause blowback on Noble, and could negatively affect our relationship with BNY Mellon. BNY Mellon is a large, NYC-based custodial bank. One of their functions is holding assets for banks from outside the U.S. inside the U.S.’ financial system. They don’t bank money launderers. Noble’s board was worried that BNY Mellon might fire Noble as a customer over the Tether relationship (and, broadly, the sort of controls environment and risk appetite that the relationship would be evidence of). If that happened, it would kill Noble. Tether got Noble over the hump leading a $2 million Series A investment in Noble. (As an aside: there is a reason that professionals say “the e in email stands for evidence .”) (“Was Noble a bank?” That gets into a fascinatingly deep tangent; suffice it to say that they were a regulated financial entity operating with high-quality access to the US financial system, which is close-enough-to-a-bank for Tether’s purposes.) Tether then deposited minimally hundreds of millions of dollars into Noble, which intrepid analysts noticed when the Puerto Rican financial regulator reported that balances at International Financial Entities increased by almost 5X virtually overnight. Tether warned customers to not talk about the banking details they were exposed to when onramping or offramping USD, because they were worried about their business coming to the attention of BNY Mellon. Someone talked . This instigated a predictable series of responses, ultimately killing Noble and forcing Tether to find another banking partner. Tether moved their reserves to Deltec Bank, and ramped up their usage of Crypto Capital Corp. Crypto Capital Corp is not a bank. Crypto Capital Corp is not kinda-sorta-bank-like if you squint at it. Crypto Capital Corp is not even a Bond villain. Crypto Capital Corp is a money launderer. Tether was their largest client. Other clients included Quadriga, the largest Canadian Bitcoin exchange, and Kraken. One of these two has collapsed due to the founder looting it. The other is trying to put this chapter behind them . Several governments, including Poland , believe the Colombian drug cartels were also clients. This implies that Tether (and, by extension, the cryptocurrency ecosystem) played the part of the nail salon and Colombian drug cartels that of Jesse Pinkman in Breaking Bad’s famous discussion of how money laundering works. (Though in this situation the nail salon is also money laundering, but they’re the kinder, gentler, acceptable-at-the-best-parties sort of money launderers.) CCC’s modus operandi was identifying banks with poor compliance controls and opening shell entities which it represented were engaged in real estate transactions, shuffling money in and out until the bank closed the account, then doing it again. Tether purported in a recent court filing to be shocked, shocked that their money launderer might have lied to them about the ownership structure of the shell corporations they directed customers towards; Crypto Capital was only supposed to lie to the banks . […] Crypto Capital never disclosed that several of the bank accounts to which Bitfinex’s customers transferred fiat funds were actually held and controlled by Spiral and Reggie Fowler, and not by Crypto Capital or any of its related entities. Bitfinex makes a pedantic distinction that only authorized customers (like Bitfinex) can deposit money with Tether and only those authorized customers can redeem it, a distinction they adopt or discard whenever the plot requires it. Bitfinex is Tether. This distinction is shell games within shell games. When a customer would want to deposit money with Bitfinex, they would contact Crypto Capital Corp, who would give them the name, account number, and bank of a shell corporation (with names like “Global Trade Solutions A.G.”), with instructions to wire the shell corporation money with a lie designed to not rouse suspicion from their banks. (The lie in their support documentation was: “ Treasury transfer back to my own account ”). It bears repeating at this point: Bitfinex knew that these were the instructions it should pass to customers, and explicitly instructed customers to not reveal the wire instructions they were given, for fear of drawing official attention to the crimes they were committing. [Do not share these instructions] except with your financial institution. Divulging this information could damage not just yourself and Bitfinex, but the entire digital token ecosystem. Accordingly, you are cautioned that there may be severe negative effects associated with this information becoming public. CCC would then increment Bitfinex’s balance with CCC, and provide Bitfinex with confirmation that they had received the wire. Bitfinex would then credit the customer with a Tether-denominated receivable on their books or with actual on-the-blockchain Tether. When a customer wanted actual money in return for Tethers, they’d run the process in reverse. The customer would send Tether to Bitfinex. Bitfinex would make a “transfer” (accounting entry) on CCC’s books, using their online system, decrementing the amount CCC owed Bitfinex and incrementing the amount they owed Tether. CCC would then launder a wire to the customer, lying to their banks, and tell Bitfinex they had done it, then decrement the amount they owed Tether. No, they did not. CCC’s principal architect, Reginald Fowler, was skimming 10% of all deposits in the system for his personal uses. This is corroborated by information contained in the Master US Workbook indicating that scheme members set up a “10% Fund” from the client deposits. Those personal uses included, probably, funding a football league which, and this is a quote, “ made a deal with the devil ” and promptly collapsed when Fowler did what he has done many times before . This was likely the primary way he was compensated. Bitfinex claims to have believed, per their court filings , that CCC subsidized their services through net interest. [B]esides a nominal fee for each deposit or withdrawal, Crypto Capital charged no fee for these services to [Bitfinex] because it was able to earn substantial interest on the funds it held on [our] behalf in its accounts. This would make sense for a financial institution , but it doesn’t make sense for a money launderer, because risk-free assets generate very little interest (1% of a billion dollars doesn’t pay for the minimum viable financial institution ) and because most ways to do this at scale require negotiating rates. During the course of that negotiation, the bank is going to ask a question like “Wait, this only makes sense for me if you keep those assets deposited long-term, but you’re a real estate company. Why would you want that? Why would you want that from me ? The thing you should want from me is a loan. I can do this on your assets if you bring me some of your loan business, which is clearly going to be an order of magnitude larger than your long-term deposits, because you are a real estate company. What projects are you working on right now that you expect to borrow about $10 billion for?” Crypto Capital didn’t and couldn’t select banking partners on the basis of interest rates. They selected for extremely inattentive (or corruptable) compliance departments. Because Bitfinex and other customers did not want to know the internal operations of their money launderer, they didn’t notice that CCC was routinely siphoning off their funds. This could have gone on for quite a while. Think of a distinction the cryptocurrency community uses a lot: hot wallets (where an exchange keeps cryptocurrency for day-to-day use, connected to the Internet) and cold wallets (airgapped storage which isn’t connected to the Internet). They do this because they’re worried about getting the hot wallet taken by adversarial action (hackers). Bitfinex was using CCC, and not Deltec, to move money around because frequent wires draw adversarial attention; CCC is the hot wallet. In an environment where more money is flowing into the hot wallet than flowing out, if you don’t audit the cold wallet, you wouldn’t notice adversarial action against the cold wallet . In separating the two for your security, you’ve played yourself. (Sound unlikely? It happened at Mt. Gox; the cold wallet had a leak in it. The Wizsec broke the fraud and has a 40 minute presentation ; here are my notes . It’s glorious. ) A function of Tether is to encourage far more actual money to flow into the ecosystem than flows out (“Why withdrawal all the way to a bank account when you can just withdrawal to Tether? It’s easier to invest back in, a much faster round-trip, and why would you trust banks .”), and so to the extent Tether’s balance was going up, the fact that it was being repeatedly siphoned off would not be noticed unless you were either a) the thieves or b) asking to get more money than inflows would cover. That liquidity crisis happened in 2018, after regulators froze some CCC’s shell corporation bank accounts. By August 2018, CCC couldn’t pay outflows out of inflows and had exhausted their cash on hand. They explained that this was because they had some temporary liquidity problems caused by regulators. That was a lie; CCC had liquidity problems, alright, but a major part of it was that the money they had embezzled was illiquid. Word of this liquidity crisis got out. Quoting chat logs by a senior Bitfinex representative, who has not learned Stringer Bell’s dictum on the wisdom of keeping notes on a criminal )%#)(ing conspiracy: We are seeing massive withdrawals and we are not able to face them anymore unless we can transfer money out of [CCC]. By October 2018, rumors were circulating that Tether was insolvent. It faced a bank run . The rumors were, bluntly, accurate; their reserves were a receivable from a money launderer who had stolen a portion of the money and gotten more of it frozen. Some people in the cryptocurrency community expect that, after Bitfinex has convinced the regulators that Crypto Capital Corp was their money launderer and that Crypto Capital Corp owned Fictitious Real Estate Firm, LLC that regulators will give FREF, LLC’s money back to Bitfinex. Hahahahahahahahaha. Let’s review precedent here to see whether that is a reasonable belief. Mt. Gox created a U.S. subsidiary, Mutum Sigillum, LLC, directly to receive funds from U.S. customers and effect value transfers to/from the mothership. It did not complete a required money services business registration. Its accounts were seized . Mt. Gox’s bankruptcy administrator got in touch with the U.S. government and, because they were feeling merciful, the government offered a deal. The government would give back half of the $5 million back in return for Gox surrendering any claim to the rest. The administrator wisely took the deal . You are welcome to your estimate of how likely it is that regulators will show mercy on Bitfinex. My estimate: the frozen money is gone . That is an interesting theory, for which we have extremely little evidence, other than Tether’s claims and our estimation that they would not lie. My competing theory: it was backed some of the time in the fashion they described, until it was backed some of the time by cryptocurrency, until it was backed some of the time by cryptocurrency and accounting shenanigans, until it was backed none of the time. My theory keeps looking better and better as more evidence comes to light. When your fraud has an operational hiccup, you have to fraud harder, or your fraud will be discovered! Lying for Money is the best book about financial fraud I’ve ever read. It explains why this is a recurring pattern in frauds: every fraud has a monetary hole in it. That is the very essence of fraud, it purports to have value where no value exists. Any operational hiccup being brought to light would expose the hole, and the fraud. This necessitates a new fraud to keep the old one running. This digs the hole deeper and accelerates the fraud to collapse, both because the fraud needs more victims, because the fraud naturally promises higher-than-achievable growth rates, and because it gets operationally more complicated to execute on. We’ve seen this before in cryptocurrencies many, many times. Take Mt. Gox. Karpelès bought an exchange which was insolvent the day he bought it, due to a prior hack. To paper over the insolvency, he bought bitcoin with imaginary money while paying out very real money to sellers. This buying pressure increased the price of bitcoin, which deepened the dollar-denominated hole the fraud was in. The increased price of bitcoin both brought new dollars to the market and necessitated that he buy bitcoin faster to stay in place. This distracted him from key other responsibilities of running a fraudulent Bitcoin exchange, like counting your bitcoin periodically to ensure they aren’t going to the hackers who already hacked you insolvent. (Again, see the Wizsec presentation.) Bitfinex spent months spinning plates to satisfy just enough withdrawal requests to avoid being undeniably insolvent. Their tactics included: Satisfying withdraw requests with cryptocurrency. “I can’t give you $1 million for 1 million tether but I can give you $1.01 million in Bitcoin.” The user accepts this because they could get cash at a banked exchange or OTC desk; note how this dynamic makes them (and their contra) an instrumentality of the fraud. Satisfying withdraw requests using money mules. Their lawyers describe this mechanism: (bolding mine) As explained to [New York’s] attorneys by [Bitfinex’] counsel: Bitfinex and Tether have also used a number of other third party “payment processors” to handle client withdrawal requests, including various companies owned by Bitfinex/Tether executives, as well as other “friends” of Bitfinex - meaning, human being friends of Bitfinex employees that were willing to use their bank accounts to transfer money to Bitfinex clients who had requested withdrawals. Satisfying Tether withdrawal requests with Bitfinex customer funds. In October 2018, Bitfinex had customer (and corporate) funds at Deltec Bank, the last bank they could find which would work with them directly. Tether preferred to believe it had customer funds with Crypto Capital Corp. They did not; some money is gone, and more is frozen. Bitfinex swapped their actual money (at Deltec) for Tether’s imaginary money (at CCC) and wired out ~$625 million to people demanding that Tether redeem their claims. This converted Bitfinex customer funds into claims against a money launderer who does not have the money . Bitfinex changed the messaging with respect to reserves, several times, from being “fully backed by traditional currency” to “sufficiently backed by USD [with] assets always [exceeding] liabilities” to the current: Every tether is always 100% backed by our reserves, which include traditional currency and cash equivalents and, from time to time, may include other assets and receivables from loans made by Tether to third parties, which may include affiliated entities (collectively, “reserves”) Incredibly, this worked for a little while, but the New York Attorney General’s office caught on and asked questions. Five months after actually sending the money to Tether redeemers, Bitfinex concocted documents purporting to have Tether “loan” Bitfinex money, secured by Bitfinex equity. This is another shell game. As of April 30th, Bitfinex’s attorney claimed that they had cash and short-term securities which would cover ~74% of outstanding tethers. Here’s what their general counsel swore to the court, shortly before April 30th, 2019. As of the date I am signing this affidavit, Tether has cash and cash equivalents (short term securities) on hand totaling approximately $2.1 billion, representing approximately 74 percent of the current outstanding tethers. In May 2019, Bitfinex was running low on liquid valuable things again, and organized a bailout via selling $1 billion of a “utility token” ( unregistered securities offering ). Bitfinex received principally Tether and other cryptocurrencies in this offering. It’s important to understand what this did, and in lieu of a series of balance sheets, let’s make it a hypothetical user story. Bitfinex has been “burning” the equity periodically via repurchasing it. They have messaged an intention to continue doing this as their business generates income and as they are vindicated by the judicial process against the regulators who froze CCC’s shell corporations’ bank accounts. The cryptocurrency community largely chooses to believe that Bitfinex is repurchasing this equity with their own money. Running a Bitcoin exchange is, after all, a figuratively license to print money. Bitfinex has pinky sworn never to use their other figurative license to print money without it being backed. This time, the thinking goes, they are telling the truth. Why would anyone buy a billion dollars of this equity? Participants in the ecosystem understand that if they don’t hang together, they will hang separately. Bitfinex is intimately involved in their businesses. One way to suborn a bank is to buy the bank. Bitfinex has done this; it resulted in them (partially) owning the bank(s). Another way to suborn a bank is to involve the bank in illegal activity; this results in a similar ownership of the bank, since the bank’s continued survival is at your pleasure. Much of the cryptocurrency community is exposed here. This includes firms and individuals who are in the part of the community which aspires to being legitimate. Expect many of them to get questions of the form “As someone who is very financially sophisticated, who went through mandatory compliance training most recently on XX/YY/ZZZZ, and who is very obviously bound by our AML regulations: explain this wire transfer to me .” or “At what date did your exchange cease doing business with Bitfinex? What due diligence did you run on them? When did you stop and why? Interesting. How many suspicious activity reports did you file about that?” Another reason for the ecosystem to back Bitfinex is that it keeps the music playing. The Cryptocurrency Credit Bubble unwinding would depress prices and volumes. Exchanges need prices and volumes to run their businesses. “Credit bubble?” Yes, there can no longer be serious doubt about this: people bought Bitcoin with money that didn’t exist, pushing up the price of Bitcoin. A lot of people currently think they are richer than they are. This is a reprise of Mt. Gox, where the Willy Bot (Karpelès) bought Bitcoin with imaginary money, paying out the sellers with real money, and deepening the insolvency of the exchange. The only remaining argument is how much this happened and how intentional it was. I expect we’ll get material updates as litigation progresses, but the hole is lower bounded at hundreds of millions of dollars. Tether should introduce the cryptocurrency community to the concept of systemic risk : after something is infrastructure, it gets into everything . When you withdrawal the infrastructure suddenly, a bunch of things break all at once, even ones that don’t look exposed, because of the transitive nature of the dependency graph. An example of this in real life: money market funds, which have many surface similarities to Tether, likewise are critical load-bearing economic infrastructure. Just one money market fund “ broke the buck ” (declining to 97 cents) during the global financial crisis. And the real economy, which has many things in it which aren’t money market funds, and which has many money market funds to choose from, and which has high-quality options for backstopping money market funds, went into barely restrained panic . Why? If you believe the asset is riskless for long enough it will find itself in the infinite variety of structures which need a riskless asset, and when those structures suddenly have a hole where their riskless asset should be, calamity quickly follows. There was the prospect of companies missing payroll, financial structures unwinding due to sudden unanticipated insolvency, etc. And so there was a massive outflow from money market funds as a class which put such strain on the commercial paper market that it nearly broke. The liquidity crisis’ downward spiral was only broken when the government guaranteed money market funds. Where is Tether critical, load-bearing infrastructure? Lots of places. It represents most of the liquidity for many “altcoins” (cryptocurrencies which are less popular than the main ones, like Bitcoin/Ether). It is the unit of account and the internal reserve of many of the less-banked exchanges. It very probably functions as the credit supply which keeps liquidity in the system. It remains to be seen whether there will be a lender of last resort who steps in to make Tether holders whole if and when the reserves vanish. Reggie Fowler, who appears to have been the primary architect of Crypto Capital Corp’s money laundering apparatus, was arrested in the U.S. A co-conspirator is at large. Ivan Manuel Molina Lee, who was the President (likely a paper relationship), was extradited from Greece to Poland on suspicion of having engaged in money laundering for drug cartels . Oz Yosef, who Bitfinex’s senior executives dealt with directly (he’s the one they begged for money), was just indicted in New York. Bitfinex maintains they are an innocent victim in all of this, and publicly professes that they believe that multiple regulators will return to them money seized from their money launderer’s shell corporations’ bank accounts. Bitfinex and its principals have not yet been indicted by the U.S. Attorney for the Southern District of New York, but crucially, not in the same sense that you have not been indicted by the U.S. Attorney for the Southern District of New York. Many of these facts have been rumored for years. They gradually came to light by the usual process of journalism: listening carefully to what people say, taking notes, asking questions of people who would know, and reviewing documents. Interestingly, very little of the journalism was originally done by people with press cards. Most credit here belongs to a loosely connected group of Internet journalists / analysts, who some might be inclined to call trolls, but for them having scooped all the professionals. A partial list: Bitfinexed , Jakal , Cas Piancey , Bennett Tomlin , and Bitmex’s research team . I’ve included citations in-line when facts were eventually confirmed by government, admission by the guilty parties in court, or traditional or (the more reputable end of) cryptocurrency-enthusiast media. Are more shoes going to drop? Very likely. I don’t hold any position in cryptocurrencies. I continue to believe that they’ve produced substantially no value in the world. I’m not philosophically opposed to shorting them to zero, but the mechanics of doing that are non-trivial. Example of the complexity: The best way to bet against Bitcoin while not having counterparty risk (if the cryptocurrency ecosystem vanishes in a fireball, will someone still be willing and able to pay you?) is via the futures markets, but to the extent that I had market-superior information here, the prediction would be “Bitcoin will quickly whipsaw up as people exchange tethers for the safe asset, and then decline”, and I have no confidence in that trade making enough money to pay for the liquidation risk and opportunity costs. (The instrument I really wish existed is put options on a Bitcoin ETF, but I’m conflicted in wanting that. If that ETF ever gets to market, it would improve the shortability of Bitcoin, but it would be terrible for the retail investors who bought into it.) My intense skepticism of cryptocurrencies is probably the issue on which I am most in disagreement with many close friends, professional acquaintances, and some of the smartest people I know. That is part of the reason why the hobby of peeling back onion layers here is so engrossing: people really, passionately believe that there is something here. I’m intellectually curious. The thing people have told me exists should smash my interest buttons: programmable money ! How could I not look!? I have looked, quite a bit. I have not found a good use case yet, or the revolutionary technology advances that my friends tell me exist, but I have found some frauds. And, for better or worse, fraud is also one of my weird hobbies. I did some similar investigation regarding Mt. Gox prior to it collapsing and had proof of the insolvency. People on HN doubted that I had done the work prior to the news dropping, and I really care about earning my Internet points, so I posted some hashes to the blockchain. Just kidding, to Twitter. If you’re unfamiliar with this practice: it should be extremely difficult for me to cause a hash collision with an arbitrarily chosen value. (If not, sell all your crypto and get off the Internet because we’re all in for a very bumpy ride.) Accordingly, if I publish a hash to someplace I can’t edit and whose timestamps you trust, like Twitter, that proves that I had possession of the associated text as of that timestamp. You can verify the hashes yourself, and should (or you’ll get stagemanaged like that time Craig Wright convinced the Economist and a Bitcoin core developer that he was Satoshi). For your convenience I’ve provided the command line; feel free to ask a trusted friend if you want to verify that. I don’t think I got everything right, but you can check for yourself; I self-graded to save you some trouble. January 31st, 2018 : My predictions . SHA-1 hash: 65b3ad9af56704ee0150819bbbf166ec6eb8d4ae Command line which will reproduce that hash: Really short version : Tether is basically solvent but laundering (right at that time); named some jurisdictions (partially right); mechanism is FBO accounts with attorneys (I think that was right once but didn’t describe them CCC or their Noble/Deltec accounts); predicted freezing of bank accounts (right); predicted liquidity crisis (right); predicted Kraken fails first (probably wrong; they were my guess at the time for who was most mixed up with Tether due to being an accessible onramp/offramp in the U.S.). March 15th, 2019 : My predictions . SHA-1 hash: 938d939059a23aa84ce493db0c4d542748f849a7 Command line which will reproduce that hash: Really short version : Tether is insolvent (right). They collateralized with cryptocurrency (right). They’re insolvent because the market moved against them (uncertain; that shoe hasn’t dropped yet; prediction didn’t mention theft/freezing except to incorporate by reference the earlier prediction that did). May 15th, 2019 : My predictions . SHA-512 hash: 92e78ff9c8817bdaed2c7a3b6281d4aa419580e38bb3de590142428923a897eaadf145944b0336fc782915201a9e4597099fc05d591dca2b60361f998a111d8e Command line which will reproduce that hash: Really short version : The world’s biggest cryptocurrency hedge fund is a fraud. This is a materially different story from the evidence on record today. I’m long popcorn futures for the coming litigation. I remain annoyed with how complicit our industry has been in enabling cryptocurrency scams.

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