The Unending Search for Transparency

Bitcoiners and other coin advocates pride themselves on the transparency of the blockchain, but is there any “there there”?

It’s a long trail of broken promises when it comes to transparency and the blockchain. Of course, as a Tether critic, I’ll be the first to point to Tether and its initial website that made this bold promise: “Our reserve holdings are published daily and subject to frequent professional audits. All tethers in circulation always match our reserves.”

Tether’s website in 2017

But the failure of the blockchain to live up to transparency started long before Tether became a risk — ask anyone who held coins at MtGox, BTC-e, or people who watched the first ICO boom after Omni was created. At the end of the day, transparency isn’t an easily solved tech problem — it’s a human issue, and in reality, a you issue. If you want transparency, you’ll need to rely on far more than the ability to follow transactions on a blockchain. Here’s some ways you can surface check businesses, charities, and individuals who you may be investing in or donating to.

Charities

Charities are a beautiful tool for scamming, and though it may sound shocking, have always been laden with financial criminals and scoundrels. There’s many an example of people doing horrible things to steal from those in the most need (see below).

You can find the Washington Post article here

This is why choosing a charity is hopefully a responsibility that takes you time, energy, and some effort. Giving is a job, and if you do mediocre work researching how a charity operates, don’t expect that your money will go where you intend.

I’ve outlined some basic methods for avoiding fraudulent charities before, but it’s worth going over again.

1. If you live in the US, ask if the charity operates as a 501(c). There are 29 different types of nonprofits in the US, each with their own outlines and benefits, the most common being 3, or 501(c)(3). This type of charity is applicable to Religious, Educational, Charitable, Scientific, Literary…(etc.) Organizations. The reason, as a donor, to ask if an organization is a 501(c) is because it will provide you with a write off for tax benefits. The reason that a charity files as a 501(c) is so they are tax-exempt. In general, this can be beneficial to both the charity and the donors because it can provide much needed transparency.
2. If no one is willing to give you an answer (red flag!) or you don’t trust the response, look yourself. The IRS provides a free charity search tool. This will allow you to view the 990 forms they’ve filed yearly — though one’s own ability to understand the forms might be a little lost in translation. If you’re familiar with accounting or well versed in finance, you have a leg up, if not, it may be worth it to learn the basics.
3. If the charity is large enough, you can find ratings and reviews via websites like GuideStar, CharityNavigator, and ProPublica, though this requires you to trust the platform with the reviews. Still, some of the information can be pivotal to whether or not you choose to donate to a charity. For instance, The American Red Cross gives 3.6% of it donations to administrators, which may sound reasonable, but means the CEO takes home a whopping $650,000 per year. Additionally, the CIO takes home an unheard of $750,000. Meanwhile, the Doctors Without Borders CEO takes home a still enormous, but more reasonable $250,000.

Red Cross financials (left) and Doctors Without Borders financials (right)

4. If you’re donating to a local charity (which I am hugely in support of), they still should be a 501(c). The beauty of donating to a local organization is that you can see in realtime how your money is being spent and decide whether or not you approve of it, plus you’ll have the ability to speak to employees and others so you can get a feel for how the charity or organization is run. This will make it easier for you to suss out a scam and likely make you feel pretty good about where your money is going.

5. Never take someone at their word or a handshake. Get everything in writing. Contractualize it. Get receipts. Your money is exactly that: your money. Charities and organizations are essentially begging for it and they should be willing to answer your questions and concerns, no matter how many you may have. Never be embarrassed to ask questions.

With the recent misadventures involving a charity (?) called “SatsForStudents” it’s necessary to note that the blockchain will do little to aid you in deciphering where your funds are going and how they’re being used. What might be beneficial is watching the wallet address where you send donations to see how the coins are being spent or if they’re being mixed, sold on exchanges, etc. These actions don’t prove scam or fraud, but are red flags and should lead to inquiry.

I have yet to see a reason to implement blockchain for charity purposes, and despite not necessarily understanding what GiveCrypto does, at least they are a 501(c) and provide tax deductible receipts upon donation. I have heard nothing of the kind about SatsForStudents.

Exchanges and Coin Companies

So your favorite trader is slanging a new ref link, or maybe you have $150k lying around and want to make a big investment in an upstart crypto company — just jump in, right? Wrong.

For the past year or so I’ve seen many a thought leader online proclaim that armchair detectives have done more harm to cryptocurrency than good, while simultaneously chanting the mantra, “don’t trust, verify.” It’s impossible to not do armchair detective work if you want your funds to avoid as much risk as possible, so though the term may be a pejorative, embrace it. Do your own research, and do as much as you possibly can. These are the most basic of basic steps you can take to ensure you don’t become a victim of fraud.

1. Check the company or exchange website. Does it look like a slapped together template? Red flag.
2. Team section without members? No names? Pretty stock photo faces? This is where a tool like TinEye comes into play. Check where the photos originated. Do they match the name? Is it from a random Instagram? Sometimes these Team sections are a dead giveaway (see below).

These team pages were presented on websites run by David Stafford, who established a company called TCA Bancorp.

3. Exchange or company, where is it located? This, of course, won’t decide whether the organization is fraudulent, but rather, may be good for you as an investor to be aware of. Infamously, individuals flew from England to stand outside MtGox headquarters with signs lamenting, “Where is our money?” At least if they had been scammed by an exchange in England they could’ve saved cash on airfare.

Photo credit — REUTERS/Toru Hanai

4. If it’s an exchange, what kind of consumer protections do they offer, if any? Is there a fiat onramp and offramp? Have the operators started previous failed cryptocurrency-related ventures? Have they been hacked? Is it easy to withdraw coins? Are they prone to outages? These are questions that should be easy enough to answer with a little digging and simple social media tools like LinkedIn. If the company is large enough it won’t hurt to check through OpenCorporates, GlassDoor, and Crunchbase to find other useful information.

5. Ask peers, and ask a lot of them. The cryptocurrency community likes to emphasize how little trust is required, but that’s just with the software — exchanges inevitably rely on trust, so you might as well accumulate more trusted anecdotal evidence. This won’t always keep you from being exposed to a fraud or a scam (many long time Bitcoiners were hurt in the Bitfinex hack, for instance), but could keep you from putting your money into an exchange that appears legitimate on paper (I haven’t heard from many veteran coiners who kept any significant amount on QuadrigaCX or WEX).

6. If the exchange provides cold and hot wallet addresses, view them. This will at least give you a semblance of an idea of what kind of funds they have — though often enough there’s undisclosed addresses that will hold additional funds. If you see large withdrawals that aren’t being funneled into a new cold or hot address, this may be reason to be wary.

As you can see, in a list of six simple ways to check on the legitimacy and transparency of the exchange/company, only one involves using the blockchain, and even this one is the least reliable of the methods listed.

Maybe One Day?

I still hope that one day Bitcoin and blockchain will be useful in the hunt for fiscal and financial transparency, but I’m not holding my breath. At this point in time, the only people who can do intensive blockchain based-investigations are using pay-to-play tools like those provided by Chainalysis or are developers. If you think you can determine whether an exchange is solvent or a charity is using funds correctly by putting wallet addresses on a spreadsheet and using a blockchain explorer, you’re probably incorrect. It doesn’t mean don’t do blockchain exploring and putting addresses into spreadsheets, because I encourage personal investigation, and you never know when someone might slip up or you’ll be the first person to see a particularly strange occurrence. Just don’t bet on it.

There could be a future where transparent exchanges fully disclose coins and wallet addresses, but this level of transparency forms new kinds of risk — mostly in regard to security — so the reality is that won’t be anytime soon. In the meantime, your best, and only real friend when it comes to your financial security will be you. Watch for red flags, don’t dox individuals even if you believe they’ve wronged you, question everything, and *BIG CLICHÉ INCOMING* do your own research.

ADDENDUM

Peers have criticized my emphasis on the fact that there is little usecase for the blockchain in regard to transparency because, at it’s core, blockchain provides a better resource for people to view finances than alternatives. I agree with them and happily concede this point.

However, I’d like to add that if coins are mixed or sold on exchanges, not only does it make blockchain explorers useless, but it doesn’t mean a charity or a business is a scam/fraud. So, while by default blockchains tend to be more open than standard cash, they don’t stand in for audited financial statements, and can quickly be obfuscated to such a degree that most people won’t be able to follow where the funds are going or what’s happened. I appreciate the criticism and believe this single reason is why blockchain may be useful for transparency purposes in the future.

Thanks for reading.

Do you have more tips or tools you’d like me to add? Reach me on Twitter at: Caspiancey