
Generating $32,000 in 30 days selling a crypto-filled USB stick - patwalls
https://www.starterstory.com/cblocks
======
nicpottier
Err.. aren't these guys going to run into regulatory problems? You need a
license to sell this in the US. Not to mention selling crypto with credit
cards is a great way to go broke unless you own the keys like Coinbase does.

Also, why would you trust the keys they are sending you? Having someone else
generate a wallet for you then sending it to you via a USB key sounds very
very bad.

I don't get this.

~~~
htormey
I agree. Have these guys done any legal due diligence on any of this? Any
lawyers care to chime in? I thought you couldn’t do this in many states
without a money transmitter license.

Also, does this constitute financial advise? That’s also a big no no in the
USA. The CoinTracker guys (current yc batch who make an app for tracking
crypto) mentioned that as a reason for not offering a portfolio management
product right out of the gate.

Also doesn’t stripes terms of service basically prohibit this? I bring this up
because in the interview they say the following:

“What platform/tools do you use for your business?

Stripe for payments”

This is what Stripes TOS says:

“By registering with us, you are confirming that you will not use the Service
to accept payments in connection with the following businesses, business
activities or business practices.”

“Virtual currency that can be monetized, resold, or converted to physical or
digital products and services or otherwise exit the virtual world (e.g.,
Bitcoin); sale of stored value or credits maintained, accepted and issued by
anyone other than the seller ”

[https://stripe.com/ca/prohibited-
businesses](https://stripe.com/ca/prohibited-businesses)

I think this is a cool idea, I’m just not sure if they are going about it in a
compliant way. If they are doing the right thing they should stick a FAQ up on
their launch page ASAP.

Assuming they are doing this legally I’d also love to know how they are
handling taxes when they buy these 100 currencies. I.e when you buy alts using
eth/btc that’s a taxable event. How do they factor that into the pricing.

~~~
throw9991999
Kind of a bummer that none of the mainstream payment processors allow crypto
related businesses on their platforms. Which banks have no issue dealing with
crypto related businesses? Anyone know what banking partners Coinbase, Gemini,
Bitpay etc use?

~~~
ceejayoz
> Kind of a bummer that none of the mainstream payment processors allow crypto
> related businesses on their platforms.

Surely you're not surprised? Credit card chargebacks make it virtually
guaranteed that widespread fraud would occur.

------
dragonwriter
So, this startup is headquartered in Miami, FL, and is selling randomly
amounts of random cryptocurrencies to people who pay a defined amount of real
US currency.

That is, it looks remarkably like a private, for-profit lottery. The operation
of which, and even knowing assistance or promotion of which, is a third-degree
felony under Florida state law. [0]

[0]
[http://www.leg.state.fl.us/Statutes/index.cfm?App_mode=Displ...](http://www.leg.state.fl.us/Statutes/index.cfm?App_mode=Display_Statute&Search_String=&URL=0800-0899/0849/Sections/0849.09.html)

~~~
derefr
I'm not clear from the article that this is "random amounts" or even "of
random cryptocurrencies." They just said "random wallets", which could mean a
lot of different things.

Even if it _is_ random cryptocurrencies, though, if they're smart, the amounts
of each of said currencies should add up—at moment of sale, when converted to
USD—to a constant amount. In that case, it'd be random _ratios_ of each
currency, to fill in a crypto "instrument." (Actually, I would expect this to
be true if they have any business sense at all, since the only way to be able
to do their books is if they can track their costs, which is only _feasible_
if they have a fixed per-unit cost.)

Or, to put that another way, rather than a lottery _per se_ , this might be
more of a crypto-backed Collateralized Debt Obligation issuance where people
don't get to know which tranch they're buying. (Which _is_ legal, AFAIK; if it
wasn't, the 2007 mortgage bubble couldn't have happened.)

~~~
dragonwriter
Digging deeper, the TNW article provided more info and you’re right: they are
buying $25 less than the price they charge for the package (between $75 and
$475) worth of a random _mix_ of a top 300 list of cryptocurrencies from an
exchange, so it's _probably_ not a lottery (unless some or all of the
underlying cryptocurrencies are lottery tickets, which is probably not legally
the case however much it might practically be.)

------
tlrobinson
I wouldn't recommend using this for non-trivial amounts of money for hopefully
obvious reasons

Nor would I recommend the founders continue to run it unless they've consulted
a lawyer and are aware they're likely running a money transmitter business.
See
[https://en.bitcoin.it/wiki/Casascius_physical_bitcoins#Suspe...](https://en.bitcoin.it/wiki/Casascius_physical_bitcoins#Suspension_of_sale)

Accepting credit cards as payment for cryptocurrency is also a risky
proposition, to say the least.

~~~
auston
> I wouldn't recommend using this for non-trivial amounts of money for
> hopefully obvious reasons

Hey Tom! Guy from the article here. First off, thanks for Metabase. I'm a big
fan & recommend it often.

Second, you're absolutely right. We have been capping people at $1500
purchases per month unless they were willing to provide identification & an
understanding of the risks associated with our service.

> Nor would I recommend the founders continue to run it unless they've
> consulted a lawyer and are aware they're likely running a money transmitter
> business. See
> [https://en.bitcoin.it/wiki/Casascius_physical_bitcoins#Suspe...](https://en.bitcoin.it/wiki/Casascius_physical_bitcoins#Suspe..).

Casascius very simply shut down, some of our counsel thinks we have legal
basis to not be a money transmitter while other legal counsel believes we may
be. We're currently working through that to understand how and where we stand
to adapt our offering to be within the limits of the law.

> Accepting credit cards as payment for cryptocurrency is also a risky
> proposition, to say the least.

Agreed. Mutual trust has been required, we're working on something better than
that now :D

~~~
GordonS
> We're currently working through that to understand how and where we stand to
> adapt our offering to be within the limits of the law.

Trying to claim it's an 'art collectible' (as you say in another comment),
doesn't sound like being 'within the limits of the law' \- it sounds squarely
like trying to find loopholes in the law.

~~~
auston
Quick correction: "where we stand to adapt our offering to be within the
limits of the law." should be "where we stand to adapt our offering to be
within the limits of the law if it is determined to not already be within said
limits."

------
loourr
If you guys are not a registered Money Service Business you should stop ASAP.

What your doing sounds like a jailable offense.

See the local bitcoin guy who went to prison for selling bitcoin in Florida.

~~~
exhilaration
_See the local bitcoin guy who went to prison for selling bitcoin in Florida._

Wait, selling bitcoin in one the many bitcoin meetups around the U.S. is
illegal?

~~~
vkou
If I wire you some bitcoins for a suitcase full of cash, do you think that
there may be some, ah, regulatory problems in this exchange?

What if I wire your bank account money in exchange for said suitcase of cash?

What if I'm a bank that credits your account, in exchange for said suitcase of
cash, no questions asked?

(This is precisely what KYC laws exist to prevent.)

------
angryasian
I don't get it, how did they get these sales if theres nothing on their
website

[https://www.cblocks.io/](https://www.cblocks.io/)

"Want a CBlock One? Enter your email - we'll notify you when we launch!"

~~~
comboy
I feel like too many "successful startup" stories are just part of their
marketing and are optimized for that. Well, that and trying to get some VC
funding of course.

------
m-i-l
First thought that sprang to my mind when I read the headline, which wasn't
addressed by reading the article, was "ebay ledger nano scam"[0]. I don't see
how you can be sure strangers don't have copies of your keys. Unless the keys
are generated and coins transferred automatically somehow when you first plug
in the stick, which would be cool.

[0] [https://cointelegraph.com/news/life-savings-stolen-from-
seco...](https://cointelegraph.com/news/life-savings-stolen-from-second-hand-
ledger-hardware-wallet)

------
davidsawyer
Starter Story looks like a great site! Love the metrics on this post:
[https://www.starterstory.com/blog/how-i-hustled-my-way-
from-...](https://www.starterstory.com/blog/how-i-hustled-my-way-
from-0-to-1000-email-subscribers)

~~~
patwalls
Thank you :)

------
VectorLock
Once sentence in and the part about pre-generated wallets struck me as a bad
idea. Thankfully the other HN comments revealed all the other more subtle ways
its a bad idea as well!

------
tluyben2
Besides that they might be breaking laws in other ways, there is a normal
(used by card perso bureaus) procedure for the concern about them generating
the private keys. I doubt they use that, but he. It would be a closed system
which automatically, using an HSM usually, generates all required secrets and
adds them on the stick and then destroys them. To make it be more robust, it
would include a procedure which, again automatically and not accessible (by
procedural regulation; this is all not technical really) by humans, generates
a keypair, somehow provides the private key to the user (email? preferably the
user would generate the keypair but if you have to buy these sticks we cannot
expect them to?) before destroying it and encrypt the stick content with the
pubkey. Some auditor would review the process, software and hardware and put a
stamp on it to close off that liability. In this case, the empty usb sticks go
into the blackbox (regulatory and possibly also technically) and come out with
unreadable content, so who handles them after is no longer relevant for
security.

If these guys sit behind their normal work laptops, connected to the
interwebs, generating these sticks and sending them off unencrypted, you
probably will have a lot of issues if someone comes to look at your operation.

------
gtsteve
If this website looks blank it might be because Privacy Badger is blocking
contentful.com, whatever that is. I'm not sure what to make of that really,
any ideas?

~~~
Karunamon
Looks to be some kind of dev-centric publishing tool that also does CDN
duties.

[https://www.contentful.com/faq/about-contentful/#what-is-
con...](https://www.contentful.com/faq/about-contentful/#what-is-contentful)

------
rileyphone
Nice to see a startup in Miami getting some press, but I wish it were a little
more...impactful. Props to them though.

~~~
paulie_a
> impactful

Or legal

------
45h34jh53k4j
Really awful idea. N00b users who buy this will fail to transfer the funds to
their own wallets. The startup could retain the sold keys and steal the funds
back -- Oh sorry n00b you got robbed, better luck next time. Fundamental rule
of cryptocurrency that they do not teach is: "Generate your own private keys"

And they are probably acting as unlicensed money transmitters too, which will
incur regulatory actions.

------
jason_slack
For those that don't know about a money transmitter license:
[https://en.wikipedia.org/wiki/Money_transmitter](https://en.wikipedia.org/wiki/Money_transmitter)

I had to do look myself to understand why selling a crypto filled USB stick
would fit into the definition.

------
burritofanatic
I immediately questioned how they got around the fact that they're doing the
work of money transmitters.

------
spelunker
I don't understand. Who wants to pay for a random crypto? Am I missing
something?

~~~
brk
Yes. You are missing the viewpoint of a large part of the public who has heard
that cryptocurrencies are the hot new investment. These same people have no
clue where to start, how to get a wallet, etc. This looks like a turn-key way
for them to make a small purchase and suddenly be "in the crypto game".

It is probably confusing from a business perspective to many on HN because it
makes little sense. But think about it from the perspective of your
aunt/grandma/etc. They get a USB drive (something they have a rough
understanding of) that comes with "a bunch of cryptocurrencies". Some of these
people probably think this is the next Beanie Baby. Buy it, set it on a shelf
and wait 15 years, at which point it will certainly be worth enough to pay for
their kids' college. (/s).

------
mwnivek
[https://www.fincen.gov/enforcement-actions-failure-
register-...](https://www.fincen.gov/enforcement-actions-failure-register-
money-services-business)

------
letitgrowx
I wonder if instead the usb sticks had empty wallets, would this business be
legal? Going a step further, in addition to the empty wallet, if the seller
offered a credit/iou of any crypto of the buyers choice (a bit like a visa
gift card), where the seller could choose to excersise or claim the credit at
any time (or never), I wonder if structuring it like that would still require
a msb license etc..

------
therein
I have a feeling 4-5 months from now we will be hearing about their post-
mortem and the mistakes that were made from a legal perspective.

------
raresp
The article's title sounds like a scam, but the story is quite awesome. Good
work!

------
UncleEntity
> It wasn’t until we actually had strangers paying us money that we designed
> the CBlock.

Weird world we live in.

No prototype, no feasibility study, just some "marketing guru" writing up copy
and seeing how many fools easily part with their money.

------
icedchai
What happens if someone orders these sticks, copies off all the data, and
returns them for a refund?

------
IAmGraydon
Is $32,000 your gross or your net?

~~~
ceejayoz
It's the downpayment on the legal fees for running an illegal lottery (random
amounts of random currencies?) and an illegal money transmitting business.

~~~
stale2002
It is not a lottery.

They are giving random RATIOS of cryptocurrency, that add up to the amount of
USD that you pay.

So if you pay 200 dollars, you could get 100$ of litecoin and 100$ of
ethereum. OR you could recieve 25$ of doge + 175$ of Bitcoin. (both add up to
200$ USD. Minus their fee obviously)

That's not a lottery. It is a fixed amount of USD value.

~~~
ceejayoz
By the time you get it in the mail, it might be double. Or half.

I wouldn't want to have to try to explain the volatility of altcoin markets to
a grumpy Florida lottery regulator looking to charge you with something.

~~~
stale2002
Cryptocurrencies are treated exactly the same as commodities, legally.

So it would be the same thing as if you shipped bars of gold and silver to
someone.

It really isn't complicated.

~~~
JonDav
Have you personally dealt with receiving commodities like gold from CME group
or something? My understanding is it is not simple at all. But would love to
hear a person's first hand experience.

------
shiado
If you didn't generate the keys you don't own the crypto. It is that simple.

------
latenightcoding
> We are big fans of the Lean Startup

of course they are.

I hope they change their ways before they end up in Jail.

------
pkaye
What does it mean crypto filled USB sticks? What is the contents?

~~~
dboreham
Money. "Crypto" has now been hijacked to mean "Crypto Currency" by the kids.

------
Palomides
nice, a classic "shovels during a gold rush" business

edit: misread it, thought they were just selling empty setups w/ software

~~~
bpicolo
They're selling the currency. The delivery method just happens to be a USB
drive.

~~~
jermaustin1
I had originally skimmed the article and thought they were just selling empty
wallets, and I thought, that is cool, an intro to crypto, I'll probably pay
for that.

Then I realized they were selling crypto wrapped in wallets wrapped in a USB,
and figured they would be out of business fairly quickly, and purchase will
never arrive.

------
alacombe
Obligatory question nobody's ask: who is generating the wallets, and what
realistically, prevent them from keeping a copy of the said wallets ?

~~~
desertrider12
They are, and nothing. Nothing is preventing them from keeping every single
private key and then emptying all the wallets after a month.

~~~
pxmpxm
The headline next week: "Generating $64,000 in 30 days selling ..."

------
iggg
Why is everyone assuming he is running a lottery? Where did he say he put
funds in the wallets? All he said was he generated wallets, encrypted them,
and put them on a usb.

~~~
mwnivek
> PK (my other co-founder) had recently sold his friend a preloaded ledger of
> cryptocurrencies and walked over to us and told us we should “sell people
> wallets preloaded with random cryptos”.

> We thought that there was no way people would pay us for this kind of
> service, but we spiked out a site over the weekend and launched that
> following Monday.

------
glorkk
Is this just a clever way to dodge regulations?

~~~
dragonwriter
I think it's more of a not-so-clever way to run straight into the mouth of the
law than a clever way to dodge anything.

------
HenryBemis
A pop-up advertising window for Quickbooks? Really? No disrespect to QB, they
got some fantasstic product.. but.. pop-up window??

Dear Stratechery, you were just added to my adblock list.

~~~
solarkraft
You may enjoy this. [https://addons.mozilla.org/en-US/firefox/addon/in-page-
pop-u...](https://addons.mozilla.org/en-US/firefox/addon/in-page-pop-up-
reporter/)

