Elon Musk promised an “ecological paradise,” but his newest Gigafactory is anything but so far for those living in its shadow.

Elon Musk speaks at the Tesla Giga Texas manufacturing "Cyber Rodeo" grand opening party.

Tesla’s latest Gigafactory opened on Thursday in eastern Travis County. The company hosted a launch party dubbed a “Cyber Rodeo.” The invite-only confab saw the factory turned into a rave, complete with a light-up drone display of Tesla vehicles and the visage of doge in the night sky, food trucks and a speech from Elon Musk himself. The richest man in the world told attendees the plant is “going to be better for the environment, because we want to make the cars where the customers are.”

But while the plant promises a shiny and sustainable all-electric future as it pumps out Tesla Model Ys and, eventually, Semis and Cybertrucks, the communities in its shadow are still living in the past. And the Gigafactory could end up leaving them even further behind.

Eastern Travis County is an unincorporated area of East Austin composed of low-income households, and predominantly communities of color. Austin’s Colony, the specific community where the new Gigafactory is located, has a large Spanish-speaking population, while other nearby communities share similar demographics and are historically Black.

Even before the Gigafactory came to town, the area faced challenges, including a lack of access to clean water and poor social services. It’s a place that has essentially been cut off from the city itself, with Austin’s 1928 master plan forcing residents of color out to the east of what is now I-35. That dividing line also meant industries unwanted in the heart of Austin could flourish on its outskirts. Tesla’s Gigafactory could be the latest in the long list of polluters to call the area home.

Gigafactory construction has raised issues from noise and water pollution to clogged roadways. Austin’s Colony residents also see hypocrisy in the plant getting clean public water while theirs is private and dirty. There are also concerns that the Gigafactory’s location along the Colorado River could create an environmental catastrophe should the river overflow its banks. The tensions reflect ones playing out around the world as companies building the all-electric future, like Tesla, set up shop in low-income communities of color.

“When we heard that Tesla was considering moving into the area, there was a great deal of trepidation with what they would or would not provide,” Austin’s Colony resident and community activist Richard Franklin told Protocol. “Our thought process was: We know that they’ve had some issues; we know that they may be bad actors. But we have so many other issues [from before] they got here that it’s almost to the point of saying, ‘Well, what else could go wrong?’ Our hope is that by bringing something as huge as Tesla into this area, we would increase its profile so that people would start paying attention to all the shortcomings.”

The Gigafactory is located right behind Franklin’s house on the site of former aggregate mining operations, which have a long history in the area owing to copious sand and gravel deposits. Tesla’s entry into the community has increased property values in the area roughly 22% from 2020 to 2021, according to an analysis by real estate service firm Orchard.

But increased land values often lead to gentrification, forcing many longtime residents to leave an area. With home values in Austin skyrocketing, Austin’s Colony residents could someday have no other affordable place to turn. But even as the Gigafactory raises the risk of residents being displaced long term, it poses potential immediate environmental risks. PODER, Austin’s local environmental justice organization, has cited concerns about the Gigafactory’s proximity to the Colorado River, among other issues.

“The Colorado River Conservancy goes from the Longhorn Dam to the Travis County line, and Tesla is right adjacent to it,” PODER director Susana Almanza told Protocol. “Early on, when Tesla said that they were developing a Colorado River ‘paradise,’ we knew that they needed to be sitting at the table with us so we could know exactly what their Colorado River paradise really means for East Austin.”

Elon Musk’s so-called “ecological paradise” has so far failed to materialize. In fact, it’s been the opposite. Many residents have complained to PODER of increased traffic and noise coming from the factory, as well as a higher risk of flooding. The organization is also deeply concerned with Tesla’s water use.

Reports of orange water pouring out of sinks in communities around the Tesla Gigafactory in Austin. Photo courtesy of Brian Reyes

“Tesla consumes a lot of water, but we are not sure exactly how much water they’re going to be consuming and how much they are going to be discharging,” Almanza said.

Austin’s Colony is one of two communities in the area that rely on privatized water. The quality of that water is a huge concern, with residents reporting orange water pouring from their taps. Franklin said he has to filter it before giving it to his dog, and that it ruins pipes and appliances. But it is his hope that as more people see the contrast between Tesla’s water situation and the community’s, the more pressure it will put on the city to extend its water infrastructure into the community. PODER, too, is considering how to leverage Tesla’s clean water deal for the community.

“We are doing more investigation into how we can get these working-class communities on the city water system like they did Tesla, so they can pay lower bills as opposed to buying from private water sources,” Almanza said.

“Tesla, to me, is just another pawn in the game, another piece on the board in a chess game that involves me, my community and the kids,” Franklin said. “It’s just another piece to be moved around, and we’ve learned to use whatever we can to get what we need.”

But that could come with trade-offs. Franklin’s biggest fear is flooding: The massive Gigafactory spreads over 2,000 acres of cleared swampland. The concrete that has replaced formerly permeable surfaces has effectively removed flood buffers in an area that is next to the Colorado River. And with climate change increasing the odds of heavy rain, that makes the risks of runoff and flooding more serious than ever before.

Just this past August, rainfall blitzed the region and left the state Capitol closed after flood waters filled hallways. Federal data shows Texas is part of a region that saw heavy downpours increase 12% from 1958 to 2016. Meanwhile, the state received a C- on the American Society of Civil Engineers infrastructure report card when it comes to its ability to handle flooding. It’s against this backdrop that the Gigafactory could create serious issues for those living in its hulking shadow and seemingly endless parking lots.

“We’re down river. This is my real fear … I’m afraid the people that live in those low-lying areas right down the river from here are going to die,” Franklin said. Tesla has not yet said anything publicly about its stormwater management policy.

Other community members are more skeptical of this perceived corporate interest to enhanced social services pipeline.

“The area has been described [by Elon Musk] in very colonial terms as this place that is essentially destroyed, that there’s not really people there, it’s just this land to be discovered and modernized and made valuable,” East Austin native Ryan Frisinger told Protocol. “In fact, it’s extremely populated.”

Frisinger lives three and a half miles from the Gigafactory. “There’s always been a history of that out there,” he said, referring to the legacy of polluting industries in the region. “Now that Tesla’s out there, a lot of that is being revealed sort of accidentally because most of the real estate in that area has now acquired value.”

He called Tesla “perhaps the scariest and largest” major company to move into the area and set up an industrial shop. “I worry that the area will become just like Boca Chica,” he said, referring to the site of SpaceX’s Starbase, “where you buy people out and then all you have to say is: We offer them more than market value for their home. There are already signs of that happening.”

Homes in Boca Chica Village near SpaceX facilities in Texas. Photo: Verónica G. Cárdenas for Protocol

The city gave Tesla a $50 million tax incentive to entice the company to put down its Gigafactory roots there instead of Tulsa, Oklahoma, which was also in the running. It’s a move that’s all too familiar as cities around the country try to woo tech companies in exchange for promised economic prosperity.

“Absolutely [the city is complicit in this]. I think that everyone’s mesmerized, and that’s usually how corporations work,” Almanza said. “They all come in dangling a carrot of ‘jobs, jobs, jobs.’ But in essence, we found that the local people don’t really get the jobs, and the jobs they’re talking about are temporary jobs — construction, cleanup — versus the higher-paying jobs and permanent jobs.”

Tesla has also faced criticism from the Texas Anti-Poverty Project for refusing to make the accommodations necessary to hire Spanish speakers in a community that is primarily Latinx. This concern follows a pattern of racial hostility. This past February, Tesla was sued by California Department for Fair Employment and Housing over allegations of creating a hostile work environment for Black employees.

Tesla did not respond to Protocol’s request for comment. The company does not have a PR team, and PODER organizers have already expressed issues with Tesla’s community outreach efforts.

“We just recently had a talk with the community engagement person, and I asked, ‘Well, how are you bringing in these 15,000 people [for the opening party]?’” Almanza said. “He said ‘Well, I don’t really know, that’s not my area.’ I think as a community engagement person, you should know this.”

The Oak Ranch mobile home gated community in Del Valle, Texas. At Oak Ranch, the sales force is regularly fielding inquiries from potential buyers hoping to land a gig at the Tesla Gigafactory. Photo: Sergio Flores/Bloomberg via Getty Images

Now that Tesla is in the community, Almanza said that it has a duty to be a good neighbor — like by using its clout to push for the community’s water rights — and it needs to sustain its relationship with the people living in close proximity.

“Tesla needs to be doing real community engagement, not having one big party and pretending that that’s community engagement,” she said.

What’s happening in eastern Travis County right now is a microcosm of a bigger story playing out around the world as we make the necessary transition to clean energy. The fight to build a better future hinges on drawing down carbon emissions. Yes, Tesla is doing good by bringing that future into existence as the most popular EV manufacturer in the U.S. — but at what cost to local residents?

Tensions regarding how we achieve a sustainable future aren’t just happening in East Austin: They’re happening in lithium flats in Bolivia, cobalt mines in Congo, coal towns in Wyoming and elsewhere.

“We’re accepting some degree of necessary evil in exchange for jobs, improved infrastructure, visibility, community investment, etc., and the overall issue with that is: Where are the examples of this?” Frisinger said. “Tesla has received public subsidies throughout the world and has rarely — if ever — delivered on the performance incentives that are required. They have never tangibly provided evidence for what they’re going to do [for our community] in exchange for all the benefits they’re receiving and the pollution that they’re going to introduce.”

Amber X. Chen is a freelancer.

How tech is tackling climate change — and reckoning with its own impact on the planet.

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The sector’s corporate venture funds won’t be sitting on the sidelines in a crypto winter.

The crypto industry has seen crypto winters before, but this one is different.

Biz Carson ( @bizcarson) is a San Francisco-based reporter at Protocol, covering Silicon Valley with a focus on startups and venture capital. Previously, she reported for Forbes and was co-editor of Forbes Next Billion-Dollar Startups list. Before that, she worked for Business Insider, Gigaom, and Wired and started her career as a newspaper designer for Gannett.

The crypto industry has seen crypto winters before. The price of bitcoin falls, investors pull back as they retreat from losses and startups go lean (or go under) as they try to survive. A major difference with this crypto winter emerging in 2022 is that the companies feeling the frost are also the ones doing the investing.

The last few years saw crypto companies play an active part in the crypto investing explosion. FTX Ventures put aside a $2 billion fund, and Binance raised $500 million to back the next wave of blockchain startups. The challenge now is that, as many companies cut their staff and trim costs, crypto corporate venture capital will have to balance taking advantage of opportunities in a crisis while navigating the pressure to conserve cash. Investors that touted the upside of access to a corporate balance sheet are now feeling the downside pinch.

“The budget going to the venture arm of these corporates is likely going down,” said Oppenheimer analyst Owen Lau, who covers companies like Coinbase. “It’s just hard to find an argument when they’re downsizing that you’re allocating more money into this venture, which typically invests in more longer-term-duration assets and does not generate immediate return for a company.”

It’s a tricky balance between short-term cash needs and the long-term strategic plays that can end up being the “hidden value” in companies like Coinbase, as Lau calls it.

The crypto exchange has one of the most active corporate VC arms across the tech industry, at times doing more deals than well-known Big Tech firms like GV (one of Alphabet’s funds) and Salesforce Ventures. But Coinbase has also been one of the hardest hit in the last few weeks. The company went from instituting a hiring freeze to rescinding offers to new hires. On Tuesday, it announced it was letting go of 18% of its staff.

Coinbase wasn’t spared in the layoffs with at least one team member posting publicly that they were no longer working with the company. (Coinbase declined to comment on the number of folks affected on the team.) But it doesn’t mean that Coinbase will no longer invest or that its budget has been majorly slashed.

“Coinbase Ventures does exist and is still very much alive. We just had our investment committee meeting today,” said Coinbase Head of Corporate Development and Ventures Shan Aggarwal when asked if it also fell victim to cost-cutting plans. “Despite the market conditions and market turmoil, we’re still very much continuing to invest.”

That doesn’t mean it's full steam ahead for Coinbase or anyone like in the market heyday of 2021. The deal pace has slowed down, both because founders don’t need a ton of capital, having raised a ton of money, and because some investors are tightening their belts and raising the bar of what they’re going to invest in, Aggarwal said. Crypto VCs are also in a stage of price discovery as they figure out what the new normal is going to be — which is harder to do when there aren’t many public market comps out there.

The upside of a pause for price discovery is the widespread belief that this is actually a great time to find deals. At the Consensus conference last week, the mood was still buoyant, with no one even saying “crypto winter” (out loud, at any rate).

Whether it’s a crisis or a bump in the road, the market meltdown and uncertainty has some companies taking advantage of the time to go deeper in investing.

Binance Labs just raised a $500 million fund in early June, including from outside investors like Breyer Capital and DST, to fund more blockchain and Web3 companies. The investment group is looking to take advantage of the price uncertainty to get better returns, Binance.US CEO Brian Shroder told Protocol’s Benjamin Pimentel.

“Frankly speaking, Binance Labs is in a really great spot right now because the valuations for a lot of these firms will be depressed given the crypto winter, and the ones that survive this winter will thrive in a bull market period,” Shroder said. “So to the extent that investors are actually investing now, that actually has kind of the greatest amount of return from my perspective.”

Coinbase actually got its start in the last crypto winter in early 2018 when it started investing in companies like OpenSea. Aggarwal isn’t fond of reminiscing on the price swings of that time — when bitcoin fluctuated from nearly $20,000 to $3,000 in 2017 to 2018 — but the turmoil helped investors like Aggarwal find the true believers.

“I'll sound like the ‘Oh, I've been in the space for a long time’ old guy at this point, but I look back on those days and I think I cherish them a lot, because from an investing perspective, the signal-to-noise ratio was a lot higher,” Aggarwal said.

History could repeat itself this crypto winter if other firms follow Coinbase’s path. In a pullback, less-competitive deals means there could be room in the cap table for other, smaller crypto companies and new investors, said PitchBook crypto analyst Robert Le.

What makes the crypto CVC space unique in the broader VC ecosystem is that there’s much more of an openness and a willingness to accept money even from a competitor. That makes the barrier to entry for a corporate VC even lower.

“The whole ethos is a rising tide floats all boats,” Le said. “Because we're at such an early stage of the development of the crypto space, there is acceptance of new projects accepting capital from Coinbase, even though they're developing a competitive product. I think once the market matures, you’ll see less of that, but right now you’re seeing a lot of investing in competitors.”

The question now is whether the tide can rise if the ocean is frozen over.

PitchBook’s Le expects crypto CVC to fall back roughly in line with broader VC investing. Unlike with the last crash, which a lot of CVCs sat out, Le doesn’t think any firm will choose to sit on the sidelines this time. The wild card here is that, unlike the 2018 crypto winter, this one coincides with markets tightening, rising inflation and widespread economic uncertainty.

“The broader implications of that on the funding environment are going to be very different. It could deter many founders from starting companies if they don't feel that there's sufficient investment capital for their business, and that's something that we're still trying to get our heads around,” Coinbase’s Aggarwal said. “It's very dynamic, and it's very fluid.”

Biz Carson ( @bizcarson) is a San Francisco-based reporter at Protocol, covering Silicon Valley with a focus on startups and venture capital. Previously, she reported for Forbes and was co-editor of Forbes Next Billion-Dollar Startups list. Before that, she worked for Business Insider, Gigaom, and Wired and started her career as a newspaper designer for Gannett.

Some of the most astounding tech-enabled advances of the next decade, from cutting-edge medical research to urban traffic control and factory floor optimization, will be enabled by a device often smaller than a thumbnail: the memory chip.

While vast amounts of data are created, stored and processed every moment — by some estimates, 2.5 quintillion bytes daily — the insights in that code are unlocked by the memory chips that hold it and transfer it. “Memory will propel the next 10 years into the most transformative years in human history,” said Sanjay Mehrotra, president and CEO of Micron Technology.

A kind of semiconductor, memory chips are integrated circuits made of millions of capacitors and transistors that can store data. They are the backbone of the broader digital economy — enabling everything from safer transportation to greater broadband access and a more efficient energy grid — and they play an active part in almost every aspect of our daily life. Consider automobiles, for example, “Not long ago, automobiles contained very little memory to process data,” Mehrotra said. “Today, automobiles process huge quantities of fast-moving data in support of advanced safety features.” Electric vehicles, in essence, can be likened to data centers on wheels.

The quantity of data has broader implications

The 21st century runs on chips, but right now they can't be supported. A global shortage of semiconductors, which crimped the production of everything from pickup trucks to PlayStations, has industry experts and policymakers looking for a new strategy to avoid debilitating bottlenecks in the future supply chain of microprocessors.

Semiconductors are in short supply because of several colliding factors, including spikes in demand for consumer electronic products and concurrent slowdowns in chip production caused by the pandemic. In 1990, the U.S. produced 37% of the world’s semiconductors. Today, it produces 12%. Meanwhile, 75% of the world’s chip manufacturing is concentrated in East Asia. Micron is the only memory manufacturer remaining in the Western Hemisphere, and it makes 2% of the global memory chips in the U.S.

The increasing performance demands caused by technological leaps in artificial intelligence, 5G, the industrial Internet of Things, edge computing, autonomous cars and high-performance data centers have increased demand for chips. Every major industrial company is trying to figure out how it can manage the amount of data it generates to make its business stronger. Chips are an essential part of that.

Meanwhile, foreign countries see the strategic importance of semiconductors and use government incentives to advance manufacturing while the United States government has watched it happen while sitting on the sidelines.

Take China, which is projected to have the world’s largest share of chip production by 2030 due to an estimated $100 billion in government subsidies. How much has the United States invested in essential strategic manufacturing operations like semiconductors? Zero. And, without government incentives, U.S. domestic chip production will continue to collapse.

After years of inaction, U.S. elected leaders have taken note, and are working to implement change. The House and Senate are working on legislation designed to increase global competitiveness, including the Facilitating American-Built Semiconductors Act, which aims to provide firms a 25% tax credit toward the construction, expansion or modernization of semiconductor fabrication plants and processing equipment in the U.S.

In January 2021, Congress passed the Chips for America Act. This bipartisan legislation authorized a series of programs to promote the research, development and fabrication of semiconductors within the United States. Together, the Fabs and Chip Acts are meant to renew American competitiveness in chip manufacturing, processing, packaging and design.

Large-scale investments like those the semiconductor industry are poised to make, coupled with targeted government incentives, can meaningfully benefit the U.S. economy in both the short and long term by boosting domestic manufacturing, enhancing supply chain resiliency and increasing national security. “Government support of these capital-intensive, long-term investments serve as a multiplier for advanced manufacturing across the industry, positioning the U.S. as a central figure in the fourth Industrial Revolution,” Mehrotra said. An investment in semiconductors is an investment in the foundational technology that will support innovation across sectors and industries in the United States.

Already there are hopeful signs. A billion-dollar chip factory just opened in upstate New York, and in October 2020, the Department of Defense awarded more than $197 million to help the American microelectronics companies create state-of-the-art design and manufacturing facilities. Advanced computer chips not only drive economic and scientific advancement but military capabilities. Through the Rapid Assured Microelectronics Prototypes plans, the DoD hopes to create a reliable and resilient domestic source of chips for its artificial intelligence, 5G communications, quantum computing and autonomous vehicle needs. “The microelectronics industry is at the root of our nation’s economic strength, national security and technological standing,” said Michael Kratsios, former acting undersecretary of Defense for Research and Engineering.

Ultimately, the result of the silicon resurgence — in processing power and speed as well as energy efficiency — will be to help build bold new business models, many of which we have yet to dream up. But, with the right investments in our chip-driven future, these dreams can turn into an exciting new reality and protect the future of America.

Important nuances were lost in translation when a rule commonly used to measure disparate impacts on protected groups in hiring was codified for easy-to-use tools promising AI fairness and bias removal.

Kate Kaye is an award-winning multimedia reporter digging deep and telling print, digital and audio stories. She covers AI and data for Protocol. Her reporting on AI and tech ethics issues has been published in OneZero, Fast Company, MIT Technology Review, CityLab, Ad Age and Digiday and heard on NPR. Kate is the creator of RedTailMedia.org and is the author of "Campaign '08: A Turning Point for Digital Media," a book about how the 2008 presidential campaigns used digital media and data.

Salesforce uses it. So do H20.ai and other AI tool makers. But instead of detecting the discriminatory impact of AI used for employment and recruitment, the “80% rule” — also known as the 4/5 rule — could be introducing new problems.

In fact, AI ethics researchers say harms that disparately affect some groups could be exacerbated as the rule is baked into tools used by machine-learning developers hoping to reduce discriminatory effects of the models they build.

“The field has amplified the potential for harm in codifying the 4/5 rule into popular AI fairness software toolkits,” wrote researchers Jiahao Chen, Michael McKenna and Elizabeth Anne Watkins in an academic paper published earlier this year. “The harmful erasure of legal nuances is a wake-up call for computer scientists to self-critically re-evaluate the abstractions they create and use, particularly in the interdisciplinary field of AI ethics.”

The rule has been used by federal agencies, including the Departments of Justice and Labor, the Equal Employment Opportunity Commission and others, as a way to compare the hiring rate of protected groups and white people and determine whether hiring practices have led to discriminatory impacts.

The goal of the rule is to encourage companies to hire protected groups at a rate that is at least 80% that of white men. For example, if the hired rate for white men is 60% but only 45% for Black people, the ratio of the two hiring rates would be 45:60 — or 75% — which does not meet the rule’s 80% threshold. Federal guidance on using the rule for employment purposes has been updated over the years to incorporate other factors.

The use of the rule in fairness tools emerged when computer engineers sought a way to abstract the technique used by social scientists as a foundational approach to measuring disparate impact into numbers and code, said Watkins, a social scientist and postdoctoral research associate at Princeton University’s Center for Information Technology Policy and the Human-Computer Interaction Group.

“In computer science, there’s a way to abstract everything. Everything can be boiled down to numbers,” Watkins told Protocol. But important nuances got lost in translation when the rule was digitized and codified for easy bias-removal tools.

When applied in real-life scenarios, the rule is typically applied as a first step in a longer process intended to understand why disparate impact has occurred and how to fix it. However, oftentimes engineers use fairness tools at the end of a development process, as a last box to check before a product or machine-learning model is shipped.

“It’s actually become the reverse, where it’s at the end of a process,” said Watkins, who studies how computer scientists and engineers do their AI work. “It’s being completely inverted from what it was actually supposed to do … The human element of the decision-making gets lost.”

The simplistic application of the rule also misses other important factors weighed in traditional assessments. For instance, researchers usually want to inspect which subsections of applicant groups should be measured using the rule.

To have 19% disparate impact and say that’s legally safe when you can confidently measure disparate impact at 1% or 2% is deeply unethical,

Other researchers also have inspected AI ethics toolkits to examine how they relate to actual ethics work.

The rule used on its own is a blunt instrument and not sophisticated enough to meet today’s standards, said Danny Shayman, AI and machine-learning product manager at InRule, a company that sells automated intelligence software to employment, insurance and financial services customers.

“To have 19% disparate impact and say that’s legally safe when you can confidently measure disparate impact at 1% or 2% is deeply unethical,” said Shayman, who added that AI-based systems can confidently measure impact in a far more nuanced way.

But the rule is making its way into tools AI developers use in the hopes of removing disparate impacts against vulnerable groups and detecting bias.

“The 80% threshold is the widely used standard for detecting disparate impact,” notes Salesforce in its description of its bias detection methodology, which incorporates the rule to flag data for possible bias problems. “Einstein Discovery raises this data alert when, for a sensitive variable, the selection data for one group is less than 80% of the group with the highest selection rate.”

H20.ai also refers to the rule in documentation about how disparate impact analysis and mitigation works in its software.

Neither Salesforce nor H20.ai responded to requests to comment for this story.

The researchers also argued that translating a rule used in federal employment law into AI fairness tools could divert it into terrain outside the normal context of hiring decisions, such as banking and housing. They said this amounts to epistemic trespassing, or the practice of making judgements in arenas outside an area of expertise.

“In reality, no evidence exists for its adoption into other domains,” they wrote regarding the rule. “In contrast, many toolkits [encourage] this epistemic trespassing, creating a self-fulfilling prophecy of relevance spillover, not just into other U.S. regulatory contexts, but even into non-U.S. jurisdictions!”

Watkins’ research collaborators work for Parity, an algorithmic audit company that may benefit from deterring use of off-the-shelf fairness tools. Chen, chief technology officer of Parity and McKenna, the company’s data science director, are currently involved in a legal dispute with Parity’s CEO.

Although application of the rule in AI fairness tools can create unintended problems, Watkins said she did not want to demonize computer engineers for using it.

“The reason this metric is being implemented is developers want to do better,” she said. “They are not incentivized in [software] development cycles to do that slow, deeper work. They need to collaborate with people trained to abstract and trained to understand those spaces that are being abstracted.”

Kate Kaye is an award-winning multimedia reporter digging deep and telling print, digital and audio stories. She covers AI and data for Protocol. Her reporting on AI and tech ethics issues has been published in OneZero, Fast Company, MIT Technology Review, CityLab, Ad Age and Digiday and heard on NPR. Kate is the creator of RedTailMedia.org and is the author of "Campaign '08: A Turning Point for Digital Media," a book about how the 2008 presidential campaigns used digital media and data.

The recourse offered to consumers when their crypto is held by entities that are in trouble is slim to none, but that doesn’t mean businesses are getting away with it.

There are few protections for crypto investors.

The chaos that has wiped out tens of billions of dollars in crypto wealth has brought the issue of investor protections to the forefront. Consumers promised high returns and safe investments lost big in the UST-luna collapse, which in turn has caused DeFi entities like the Celsius Network to freeze withdrawals. Alongside the general crypto market downturn, the damage is tangible, giving urgency to efforts to regulate crypto with basic guardrails.

Celsius attracted lots of consumers because of the yields it offered, which were higher than traditional bank accounts. After Celsius paused withdrawals, swaps, and transfers between accounts last Sunday due to “extreme market conditions,” it left investors anxious about how and when access to their assets stuck in Celsius might be restored.

Regulators have been thinking about these issues for a while, but for many of the new investors drawn to crypto recently, the questions of what happens to crypto held hostage by an exchange or a DeFi lender are freshly puzzling.

In the context of DeFi lenders like Celsius, it’s unlikely consumers will be able to access their crypto deposits unless they are unfrozen by the lenders themselves. How existing investor protection laws might apply to digital assets is largely untested, and the global and decentralized nature of many DeFi entities makes it hard to figure out where to start in pursuing a claim.

“A lot of people have losses who didn’t understand the risks they were taking,” former Commodity Futures Trading Commission chairman Timothy Massad told CoinDesk, stressing that there is a need for stronger regulation especially for lenders in the crypto industry.

SEC Chair Gary Gensler has echoed similar sentiments. He highlighted how crypto markets promise high returns and don’t “give a lot of disclosure” at an event Tuesday: "I caution the public. If it seems too good to be true, it just may well be too good to be true."

Even centralized exchanges can seem unsteady given the unsettled state of crypto regulation. After Coinbase added a new disclosure in its 10-Q SEC filing in May, it caused another wave of anxiety in the crypto community.

“In the event of a bankruptcy, the crypto assets we hold in custody on behalf of our customers could be subject to bankruptcy proceedings and such customers could be treated as our general unsecured creditors,” the filing said, which wasn’t a good look on Twitter.

Chief legal officer Paul Grewal quickly clarified that the new disclosure was only to comply with new guidelines issued by the SEC, and that there would never be a situation where “customer funds could be confused with corporate assets.” Coinbase updated a user agreement to reflect that customer assets would be protected under Uniform Commercial Code Article 8.

That UCC provision is one of the few rules lawyers might try to use against crypto entities, because the usual protections that cover deposit or brokerage accounts are tough to apply. Crypto doesn’t have protections like FDIC insurance has for traditional bank accounts or SIPC coverage for brokerage accounts.

For entities based overseas, investor protection laws vary from jurisdiction to jurisdiction, but because of how new the crypto industry is, many jurisdictions have yet to come up with laws to safeguard crypto assets for consumers.

But risky behavior by crypto companies isn’t flying under regulators’ radar. A look at the ongoing investigations Terraform Labs is under after the UST-luna stablecoin collapse gives an idea of the repercussions a DeFi company can face from causing losses for investors.

In one case that predates the current crypto crash, the SEC triumphed over Terraform in establishing its regulatory jurisdiction. A judge ruled that even if Terraform is based overseas, because it was in business with U.S.-based consumers, investors, employees and entities, it could be sued here. Investigations were also opened in Terraform founder Do Kwon’s home jurisdiction, South Korea, alleging losses for about 280,000 citizens.

U.S. state regulators have also stepped up in the Celsius case. Securities regulators in Alabama, Kentucky, New Jersey, Texas and Washington are reportedly probing Celsius about the withdrawal and transfer freeze, stating that the investigation was a “priority” because of concerns over consumer access to financial accounts.

With the introduction of the Responsible Financial Innovation Act in Congress and Biden’s executive order outlining how federal agencies should be working together for a regulatory framework for the crypto industry, federal legislation and regulations could be expected in the next few years.

In the meantime, SEC Commissioner Hester Peirce, a frequent critic of the agency’s scant rulemaking on crypto, gave one piece of advice to consumers back in May. “I think no matter what you're doing with your money as an individual, you need to be using your own brain, first and foremost. You need to be looking out for red flags,” she told Protocol.

Expanding from tech startups to mom-and-pop shops created a dilemma for the financial software company. The result: a painful decision to “offboard” many of the smaller customers it had recently courted.

Brex co-CEO Henrique Dubugras has had to "offboard" customers as the company focuses in on VC-funded companies.

Benjamin Pimentel ( @benpimentel) covers crypto and fintech from San Francisco. He has reported on many of the biggest tech stories over the past 20 years for the San Francisco Chronicle, Dow Jones MarketWatch and Business Insider, from the dot-com crash, the rise of cloud computing, social networking and AI to the impact of the Great Recession and the COVID crisis on Silicon Valley and beyond. He can be reached at bpimentel@protocol.com or via Google Voice at (925) 307-9342.

It’s been a rough week for Brex co-CEO Henrique Dubugras as he dealt with the fallout from a business fumble.

Brex had sent emails to tens of thousands of small businesses, telling them that the financial services company would no longer be able to serve their needs. After expanding its business from tech startups to traditional small businesses, including mom-and-pop shops, Brex had decided to pull back to its original core customers.

But the emails led to confusion, sparking harsh criticisms online. “This Brex account closure sucks,” one Twitter post read.

“It’s obviously a tough, painful day,” Dubugras said.

He explained what happened in an interview with Protocol, discussing why Brex had first moved to expand its reach to more traditional businesses and why it eventually decided that it had to withdraw from a “huge” market.

This interview has been edited for brevity and clarity.

Start with telling us what happened. Some people interpreted this as a move away from startups.

Let me share a little bit of historical context. We started a company in 2017 focused on serving startups. We could underwrite them based on cash balances. We gave them a credit card based on it. It did super well.

Then in late 2019, early 2020, we’re like, “OK, how do we expand from here? What's the next phase of products?” Brick-and-mortar small businesses seemed like a good way to go. So we built a lot of our systems to be able to onboard them.

I'd say we were pretty surprised by the sheer amount. There are tens of thousands of startups in the U.S. versus tens of millions of small businesses. The scale that that took was very, very big. We thought it was going to be fine; we'll just invest more to give them exceptional service.

At the same time, there was another effect that was happening. Our core customers, the startups, they were starting to grow. As they grew, they started having all these new needs. They’re like, “Look, we need you to solve these new needs that I have around spend management and global [expansion].”

What we realized was we couldn't do both at the same time. We couldn't serve millions of small businesses around the U.S. and create products for the needs of our best and growing companies.

We made the painful decision to exit that kind of traditional, small brick-and-mortar business in order to focus on startup businesses. Our startup customers require us to be able to grow with them for a longer period of time.

How do you define a startup and the businesses you’re planning to continue serving?

It's not a perfect definition. Our definition is anyone who received any kind of funding from either venture capital, angels, accelerators, any kind of professional funding. That’s the startup that we remain deeply focused and committed to.

These are mainly tech startups, right?

How big did the traditional SMB segment grow for your business?

I would say that the amount of companies that we onboarded every month multiplied by 25. So think of that and how that impacts a company.

What typically are these companies? Restaurants or retail shops?

Restaurants, retail shops, bakeries, florists, hairdressers, small design agencies. Small professional services, two-people design firms, things like that.

And if I am a business owner in those industries and was a customer, what do I have to do?

You need to move your bank account to a different provider.

You will no longer be serving my business needs.

Correct. Again, the reason we're doing this is so we can focus more on our core customer. We would love to be able to serve everyone and do a great job for everyone. But we made a tough choice of focusing on where we started.

What percentage of your total business will be affected?

I don't think we have any numbers to share there.

Are these hundreds of businesses, or thousands of businesses?

That we're offboarding? It's definitely in the tens of thousands.

Obviously, there’s been some confusion. Can you comment on how the plan was discussed and executed?

Yeah, absolutely. Look, it's something that honestly, for the longest time, we tried not to do. Our original plan was: We're going to do both. We as an organization are very capable. We have a lot of people. We have a lot of resources. We're just gonna pain it out and do both. Both are amazing markets. These are great business opportunities. We tried that for the majority of 2021.

Then by the end of 2021, it got to a point where we started questioning: What do we do from here? Do we sacrifice experience for our core customer? Do we allow our best customers to leave because we're not serving their needs? Do we build more products for everyone? Do we double the workforce? What do we do?

And this is the only solution that we could come up with. We weren't willing to sacrifice the quality of our service for our core customer. Especially in this macroeconomic environment, our core customer was pushing us to go even faster. They were saying, “Hey, I need to hire more people globally. Can you build more global stuff? I want to control more of my spend. Can you build more controls and more spend-management things?”

They were pushing us to go faster in a lot of things. It was just really hard to do both at the same time.

And we’re like, “We have to do this. We're going to do it once. So we're not going to start offboarding a little bit now and a little bit two months from now, a little bit three months from now. We're gonna do it all at once, one clean cut and make it very clear everyone knows where we're focused on.

On the execution, I would say that, probably if I were to go back, I would have been more clear about the distinction between startups and small businesses and what qualifies each one. Looking back, I still think it is the right decision for our core customer.

What did you mean, there should have been a clear definition?

Did we misclassify any company? Probably. It's a lot of customers. We're not perfect. If we figure out we made a mistake there and they do fit our definition, we will support that. So it is reversible. We will support them.

But that being said, I think that when we say small businesses, I think some people interpreted it as startups as well, which is very bad for us because we're doing this in order to support startups even better. That’s the complete opposite message that we were trying to send.

There are a lot of gray areas. You talked about design firms that could be serving tech startups.

That's why we use venture funding as the criteria. If any kind of professional investors invest in your company, that's our criteria.

It will be puzzling for some that you have all this demand, customers who want your service, and you're saying, “No, we can't serve you.”

The needs of these customers are actually quite different. It wasn't that they were asking us for the same thing, right? The startups were asking, “Hey, can you help us hire globally faster? Can you help me control my spend through software?” The smaller customers are asking, “Hey, can you give me a line of credit to weather the storm? Can you advance my receivables? Can you give me a lease financing?”

It was completely different needs.

But aren’t their needs, in a way, simpler? Why couldn't you sustain that segment of the business given the size of the SMB market?

It's huge, yeah. It's a great business. It's not simpler, actually. It's not more complicated, either. It's just different. When we're onboarding a startup, we can have white-glove service for them, talk to all of them on the phone, help them through everything. With a small business, it's not economical to do because there's so many of them. There's tens of thousands, even millions, so you need to have all your systems extremely automated, extremely perfect. You can't be hand-holding. Everything needs to be super, super scalable. We could get there eventually, but we have to invest a lot of resources in getting there right to be able to keep scaling.

Fintech lenders targeting traditional small businesses emerged because traditional banks were saying it’s too expensive to address their needs.

It's true. There are amazing companies that are focusing just on this. If you look at Square, their whole thing is doing this in a super scalable way that's cheaper. That's their business. Our business has a nuance. Our customers, they grow really quickly.

With Square, if their core customer is the restaurant or the coffee shop, they're not saying in two or three years, “OK, now we're Starbucks. I need all these new things.” Our customers in three years are like, “I need all these new things because I grew,” right? The fact that they grow makes us have to keep up with them.

The story now is you're abandoning the mom-and-pop shops, the restaurants, the retail stores and all those companies that make up a huge chunk of the SMB sector. How do you reflect on that?

You get this advice when you're a founder that focus is very important. When we started the company, we were 20 people, and we were like, “Hey, we built this product with 20 people. Why can't we just build all these other things with another 20?”

You think you can do all these things at the same time. I think that the reflection and the learning for me is you can do fewer things at the same time and you need to focus, otherwise you won't do either one or the other really well.

Again, it is really painful. Because we do understand the amount of stress that we're putting on a lot of small businesses, especially during this time. But we hope that you know people understand this is in order to serve our core customer.

And we wouldn't be able to serve these small businesses well because we're not building the new products that they need. And there's so many amazing companies out there and fintechs that their entire focus is serving them so they probably are better off betting on a partner that is focusing exclusively on that.

What are the next steps for you, given this change?

I think the most urgent thing is first reinforcing to our core customers that they are safe. We're not going to exit their market. And all of this was for them. That's probably No. 1. Second thing is being extremely supportive and using the majority of our resources over the next two months for the customers that do need to transition.

I wonder if you had any conversation with a restaurant owner or a retail shop owner or any small business owner who, during the pandemic, signed up with you and now you're saying, “We can't serve you anymore.”

I have, yes. And it's painful, because we did ask them to bet on us back then. And now we're offboarding them. So it's really painful for both us and for them. So we're super empathetic to it and we're going to do as much as we can to help them to transition.

Benjamin Pimentel ( @benpimentel) covers crypto and fintech from San Francisco. He has reported on many of the biggest tech stories over the past 20 years for the San Francisco Chronicle, Dow Jones MarketWatch and Business Insider, from the dot-com crash, the rise of cloud computing, social networking and AI to the impact of the Great Recession and the COVID crisis on Silicon Valley and beyond. He can be reached at bpimentel@protocol.com or via Google Voice at (925) 307-9342.

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