Jack Dorsey left Twitter in November 2021 to focus on his baby, already valued at billions of dollars in the midst of a pandemic: Block. A huge fintech that wanted to compete with PayPal and the banks – then invest fully in the Blockchain while the threat of Apple Pay and Google Pay was closing its way in payment. Until the parent company adopted the new name in December 2021, the company was best known as Square and for its payment acceptance solutions including Square, Cash App, and cryptocurrencies with Spiral.
Its golden age is over, the company is under attack from regulators and the very powerful investment firm focused on short selling, Hindenburg Research. Block is accused of very poor management of its customers, its compliance, and abstinence from measures in the fight against money laundering. Until accusing him of his role in the trafficking of minors and sex trafficking. Its financial results would also be shaky and would take advantage of non-regulatory measures to play with the numbers and continue to show growth.
Everything happened in less than a week, starting with a $250,000 fine received from the Bank of Lithuania, with whom it has a license for Cash App to operate in Europe. This was followed by a heavy-handed report from short seller Hindenburg Research, which ramped up accusations and criticisms of Block’s compliance, honesty and resilience.
Since Tuesday, March 21, Block lost 20% on the stock market. In one year, no less than 54% of its capitalization has gone. We are far from the + 140% growth of 2020. The company is now valued at 37 billion dollars when it was still on its way to reach 200 billion two years ago. A time when pandemic and monetary policy in the United States allowed Square to recover with a vengeance new customers, who were looking for fast service to be able to receive their emergency check received from the government.
The Square payment platform was betting on entrepreneurs who, in full confinement, were looking for a solution to continue to carry out their business. Mobile, digital solution and very low commission on transactions allowed Square to take it all. With its excellent communication, the United States, England and Canada jumped on this new fashionable means of payment and intrinsically anchored in the new era of remote work, micro-commercerespect for barrier gestures and mobile payment.
Square moved to France in October 2021 and allowed us to organize an interview.
Between 40 and 75% of fraudulent accounts
Hindenburg Research backed a rebuke from European banking authorities over retail payment app Cash App. Before Bitcoin boosted Block’s revenue in its bottom line, it was Cash App that topped Square’s revenue and its solutions for professionals. In the fourth half of 2022 alone, Cash App was grossing $850 million.
However, Cash App would aggregate between 40 and 75% of fake accounts, fraudulent accounts or duplicate accounts, belonging to a single customer. Last year, Block announced that it had 51 million users. The application also benefited from a great surge in popularity of investments in crypto-currencies, like what our neo-banks in Europe like Revolut also experienced.
Stock market trading was also a factor of popularity, with the explosion in the prices of technological stocks following a particularly attractive interest rate policy for the growth of boxes and sanitary measures forcing everyone to turn to new digital services (food, communication, payments).
Among other criticisms, the financial results. Hindenburg Research doubts Block’s financial health, its EBITDA measurement, its January 2022 acquisition of AfterPay ($29 billion), and opaque access to information like interchange fee revenue. To be able to get out of it in the green and growing, the investment company accuses Block of having used techniques that do not comply with the regulations.
Inflated user metrics, doubts about the financial results, laxity in the fight against money laundering and crime… the accusations from Hindenburg Research forced Block to answer. To defend itself, Twitter founder Jack Dorsey’s company said it would “working with the SEC and exploring legal action”against the activist investment firm, which reported that it had taken short selling positions in Block on the exchange.
short seller
Hindenburg Research is one of these investment companies also called and known under the English name of short seller. Its business model? Find companies in financial difficulty or in default in their management, reveal their weakness to the whole world and at the same time, take positions on the Stock Exchange of the “sell” type to bet on a fall in price. Unlike a “buy” position, where the investor hopes the price will go up so they can sell their more expensive stock, the “sell” position makes profits when the stock goes down.
To explain it simply, a sell position is dissected in such a way: an investor borrows a share from another investor, or from a broker, and sooner or later will have to buy them back to close his overdraft. If the stock falls, then the latter will be able to pay less than the stock given to him, and therefore obtain a profit. On the contrary, if the action rises and the short seller is forced to close his position, the losses can therefore theoretically be unlimited, because the price can also soar without limit.
