Theranos Fraud Holds Harsh Lessons for Crypto

While cryptocurrencies aren't companies, the Elizabeth Holmes case serves as a reminder you should ignore the charisma of founders.

AccessTimeIconMar 20, 2018 at 1:00 a.m. UTC
Updated Sep 13, 2021 at 7:42 a.m. UTC

Marc Hochstein is the managing editor of CoinDesk. 

The following article originally appeared in CoinDesk Weekly, a custom-curated newsletter delivered every Sunday exclusively to our subscribers.

"Innovators who seek to revolutionize and disrupt an industry must tell investors the truth about what their technology can do today, not just what they hope it might do someday."

That quote, from the director of the SEC's San Francisco office, Jina Choi, referred to Theranos, the blood-test company and one-time Silicon Valley darling that the agency charged with fraud last week.

But you could be forgiven for thinking it was about the cryptocurrency space, given the frenzied fundraising through initial coin offerings (ICOs) for projects with little more than grand visions, a buggy prototype, zero users and plenty of speculators betting it can work.

To be sure, a cryptocurrency is not equity in a business (at least, it's not supposed to be), and an open-source project is not the same thing as a company. But the Theranos case, in which founder and CEO Elizabeth Holmes paid a $500,000 fine and was barred from serving as a public company executive or director for 10 years, offers several sobering lessons for the blockchain community.

Some of them may seem obvious, but they bear repeating. The first two apply to investors:


For those who don't spend their days on crypto Twitter, that stands for "do your own research."

You know how Google Ventures figured out it didn't want to invest in Theranos? According to an investigative article published in Vanity Fair in 2016, Google's venture capital arm sent one of its associates to Walgreens, the pharmacy chain that had a partnership with the startup.

Supposedly, the "wellness centers" Theranos had set up in the stores were showcasing the company's technology, which it claimed could test for hundreds of diseases just by taking a tiny bit of blood from the fingertip. But, according to Nick Bilton's expose, "as the VC sat in a chair and had several large vials of blood drawn from his arm, far more than a pinprick, it became apparent that something was amiss with Theranos’s promise."

It would later turn out that Theranos was using its vaunted Edison machine in only a sliver of the tests it sold to consumers.

What's the crypto equivalent of "just go down to Walgreens and see what's up?" Well, if a blockchain network is up and running, you can start by buying a tiny amount of a coin, downloading the software and playing around with it to see if the thing works as advertised.

That's how I figured out bitcoin was legit early on, and if the cryptocurrency you're looking at is anything like bitcoin, you won't have to buy a whole unit (and if you do, well that’s a red flag right there). Better to blow $50 on initial due diligence than $10,000 on someone's assurances.

However, that "try it yourself" approach may not be sufficient if, say, the network is running on a small number of nodes manually controlled by the development team, with a promise to eventually take off the training wheels. And for a token sale that's funding a yet-to-be-built blockchain, one that theoretically could do awesome things in the future...well, the homework is going to be a lot more involved.

Ignore charisma

Holmes' Steve Jobs-style turtlenecks, Stanford-dropout backstory and change-the-world rhetoric made for great magazine copy. And like her idol Jobs, Holmes was reportedly secretive and imperious, largely forbidding even Theranos employees from communicating with each other about their activities.

Unlike the iPhone or the Mac, however, Theranos' devices didn't work the way Holmes led investors and patients to believe.

You would think that in cryptocurrency, a field whose own founder (or founders) remain unknown and where decentralization is one of the highest ideals, cults of personality wouldn't be much of an issue. But then there was Josh Garza. So don't pin your investment decisions on a single charismatic individual.

Of course, just because someone is charming doesn't mean they're a fraud, either. It just has little relevance to the merit of the project. Until some future time when we're all disembodied brains, we have to learn to discount these superficial distractions.

(On a related note, ignore "gravitas." Theranos' board included two former secretaries of state, a former secretary of defense, a retired Marine general and two former senators. Lots of gravitas. Not a whole lot of medical expertise, though. It was perhaps a more highbrow version of the celebrity-endorsed ICO phenomenon.)

The other two takeaways from this affair apply to token issuers, entrepreneurs and developers seeking to raise money in this space. And they may be even harder pills to swallow, as it were:

Tough tokens

Many may find it unfair that Holmes paid only a six-figure fine considering the size of the fraud ($700 million), especially in light of the harsh treatments given over the years to some crypto entrepreneurs who operated in good faith, simply because they did not ask for regulators' permission.

(Holmes did not admit or deny wrongdoing in the settlement agreement; according to the Wall Street Journal, a criminal investigation of Theranos is still ongoing.)

And it may well be unjust. But it shows the advantages of working within the system rather than outside it. Theranos paid millions for high-powered lawyers well before the government started investigating the company.

Even as a sham enterprise, it had resources to defend itself.

“You pay for things one way or the other, upfront or down the line,” said Joe Colangelo, a New Jersey entrepreneur and longtime bitcoin enthusiast.

The wheels of justice turn slowly

Coming nearly three years after cracks started to show in Theranos' facade, the SEC charges show that enforcement actions can take time. Just because the government hasn't gone after someone for possible violations doesn't mean it won't.

"Whatever statute of limitations you think exists, it does not," Colangelo said. "They will catch up to you eventually."

Teams who thought they could "do an ICO really fast" because there were "so many they can't possibly punish all of us" were mistaken, he said.

"You might be getting charged with crimes associated with your ICO in 2023," Colangelo added. "You have to be ready to spend the next five years thinking about this."

Ouch. That smarts worse than a needle in the arm.

Elizabeth Holmes image via Shutterstock


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