After months of legal wrangling, the SEC finally agreed to release documents that Ripple says could shed light on the agency’s thinking on crypto as it pursues a lawsuit against the crypto company. The case, over whether XRP is a security, remains closely watched, as it could set a legal precedent affecting the entire industry.

The crypto powerhouse's leadership marked the win by ripping into the regulator now widely viewed as the industry’s nemesis.

“The SEC wants you to think that it cares about disclosure, transparency and clarity,” CEO Brad Garlinghouse said in a tweet. “Don’t believe them. When the truth eventually comes out, the shamefulness of their behavior here will shock you.”

An SEC spokesperson said the agency had no comment.

The SEC and Ripple have been embroiled in a legal battle since 2020, when the agency sued the crypto company for alleged securities laws violations. The SEC has argued that Ripple failed to register roughly $1.4 billion worth of XRP, the cryptocurrency used on the Ripple network, as securities.

Ripple rejected the claim. The case, which has dragged on for more than a year and a half, centers on the SEC’s argument that most cryptocurrencies should be regulated as securities.

Ripple has hit back at this argument by citing former SEC director William Hinman’s 2018 speech in which he said ether is not a security. His comments sparked a rally in ether’s price and appeared to endorse the broad view of most in the crypto industry that digital assets aren't securities.

Hinman was a member of the SEC leadership around the time that the agency filed the lawsuit against Ripple. (He stepped down at the end of 2020 and is now an adviser to a16z.)

Ripple demanded that the SEC also release emails and other documents related to the way the Hinman speech was discussed internally. The SEC rejected that demand and appealed a federal judge’s order for them to comply.

Ripple finally prevailed last week. “Over 18 months and 6 court orders later, we finally have the Hinman docs,” Ripple general counsel Stuart Alderoty announced in a tweet.

The documents remain confidential “at the SEC’s existence,” he said, adding, “I can say that it was well worth the fight to get them.”

The potential impact of the disclosures is unclear on the case, which is expected to drag on until early next year.

Marc Fagel, a former SEC regional director in San Francisco who represented clients in the crypto industry when he moved to the private sector, said the regulator took “aggressive approach on protecting the confidentiality of its internal deliberations,” which he argued are “irrelevant to the legal merits of the Ripple case.”

“But obviously the vociferousness of its battle to withhold them suggests there may be something problematic or embarrassing within,” he told Protocol.

This story was updated to clarify Hinman's time at the SEC.

Generative AI can create more than just text and images — it’s clearly generated a hype cycle around AI companies and rabid investor interest in the space.

In a bright spot for an otherwise lackluster funding environment, two “gen tech” companies became unicorns this week after Stability AI, the company behind the wildly popular image generator Stable Diffusion, and Jasper, which makes an AI-powered system that writes marketing copy, both announced funding rounds. The launch party for Stability AI drew people like Sergey Brin, Naval Ravikant, and Ron Conway into San Francisco for “a coming-out bash for the entire field of generative A.I.,” as The New York Times called it.

The buzz spilled over onto Twitter when a market map of companies in the space went viral after Sequoia partner Sonya Huang laid out the companies (including Stability AI and Jasper) that are building in generative AI, solidifying the space as a sector and not just a handful of companies making fanciful images.

A firm believer in the “superpowers” humans can gain by working with machines — she’s used the language model GPT-3 to help write a blog post on the future of generative AI — Huang talked with Protocol about what sectors founders are building in, the looming ethical concerns, and whether the hype in AI startups is overblown or justified.

This conversation was lightly edited for length and clarity.

I don't think I've ever seen a market map go quite so viral on Twitter. Why do you think it generated — forgive the pun — so much attention when you posted it?

It’s speculative, but I think a few things. One, I would say I think the world is in dark times right now. People are looking for something to latch on to that is hope, and generative AI appears to be that. So I think part of it is just the emotional [impact] where we see so many terrible things happening in the world and [think], “Wow, what an exciting time to be in technology if you look at what's now possible.”

Then the second thing is there's been a lot of really exciting progress that's been shared publicly in terms of models getting bigger, better, and amazing images that are flying around Twitter. But it was probably new to think about this as a model versus application layer. People were thinking, “OK, these models are not only going to be super interesting things that we can play with to make a fun image, but they're actually going to drive the future of how we work and the next big application companies.” That was probably a new framing that people hadn't really thought about in that way. Those are probably a couple of the reasons it took off, but it’s speculative. I don't know what makes things go viral on Twitter. I'm not good at Twitter. [Laughs]

For me, it was interesting because I wrote a few weeks ago about how VCs were exploring whether this was a toy or the next big thing, and then there’s been this huge shift to VCs saying it's definitely going to be the next big thing. Why do you think there has been a shift? Was it just companies announcing fundraises this week?

I think it’s market maturity. We’ve been following pretty closely these large models for the last several years, and if you look at what's possible, it is pretty mind-blowing just the rate of progress. There is some benchmark, which is human-level performance, and now that these models are just in the last couple of years starting to exceed that, only then can you have AI that really, really augments how we work. Because if it's not as good, the technology's not ready. So the first thing I'd say is, the technology is finally getting ready.

Then the second thing is just that access to these models is now available. Obviously Stability has made an incredible amount of progress and developer interest because they've just made their models completely open. And OpenAI has also made their models more publicly available as well. I think GPT-3 was in closed beta until last year, if I'm remembering correctly. So these models are finally available for people to play with, which they weren't before. Once technology becomes available for people to play with, it is very natural for step one to be very cool demos of what's possible. I almost compare it to when the iPhone came out: It was a bunch of really gimmicky stuff that came out at first, but then you've got people who are really thinking about the business applications in deep ways, and we're starting to see that.

This is obviously still a pretty nascent area, but where are you seeing most concentration of activity so far?

Image generation is a big one. Images speak to us so viscerally, and so they're a lot more fun to share on Twitter than whatever GPT-3 could spit out for me. By nature, images are a lot more viral, so we're seeing a lot there. People are moving on beyond one-shot image generation to a few different branches, whether it's “Let's make this really good for the process of interior design or product design” or “Let's make it a really, really good image generator that you can continue innovating with the machine on” or “We want to take all these images that people are doing and the community we've built, and build the next big social media platform.” People are going different directions from image generation, but I would say that's been an area of just incredible interest from both founders and from users because you need user interest for these things to work.

Then the other big category where there has been a lot has been in the text space. And in the text space, who needs to write all the time? Marketers. So there’s a lot of these marketing Gen AI companies, and some of them are really working. We're seeing it evolve, as well, where people started from shorter-form generations and now we're getting really, really long form. We're getting creative writing, we're getting scripts and novels. It’s pretty good.

And then code. Code is one that OpenAI has cultivated for a while, and I think GitHub Copilot is incredible. The stat — [that] they’re responsible for 40% of their users' code — is just mind-blowing to me. I've seen the demos from Replit — it's pretty extraordinary. And so code is the other effort where we're seeing a lot of both exciting founder development and then also user interest.

The other categories — the boxes on our landscape that are relatively sparse now — I don't think they're gonna be sparse for long. When I first put out our blog post about how the tech and how the different pieces of technology are becoming ready, I thought 3D, video, bio, they were going to take longer based on some conversations. Basically everyone wrote in to me like, “You're wrong, this stuff is happening way faster than you think it is.” And they were right. I think similar to what you saw with text and image happen where the models were a couple years back, I think you'll start to see the application space start to flourish for these other modalities as well.

Are there any areas on the map that you left off that you're excited to see happen someday? Any other to-be-discovered areas?

We organized the map by modality, which I thought was most relevant just because it's the enabling technology that is creating the application within each box. I do think that a lot of the most interesting companies will own the end user, but they will be multimodality. I couldn’t fit that in a neat space on my map, but that would be one.

Another would be this concept of an AI companion or AI copilot. It doesn't really fit neatly in the map anymore, but you have something intelligent — browse the web, stitch together all your different tools to do things for you — versus currently the map is very much focused on tools that you work with for a very specific test task.

What do you think about the hype cycle around AI right now?

Well, I would be alarmed if the hype was really high and the results weren't there. The hype is high, and I think part of that is, again, people emotionally want to attach onto something that gives them hope and optimism, but the results are there as well. You see what these models are capable of doing. You see the fundamental technology. You see the applications that people are starting to build. I’ll go back to “writing 40% of people's code” example — that is phenomenal both technological progress as well as economic value delivery. So absolutely the hype is high. I think it's absolutely justified given the results that we're seeing. My hope is actually that by putting out this landscape, we plant that seed and a lot of future founders that have been trying to figure out what to build next, I think it's wonderful to draw them to this. If I was a founder in [Y Combinator] right now, I would 100% be pointing my guns at one of these models and seeing what I can do.

What about some of the ethical concerns? I spoke with Khosla’s Kanu Gulati about this a few weeks ago and there are some real concerns around copyright and other shortcomings in the space. What do you think the role of investors should be in addressing some of these?

Absolutely. I agree with the ethical concerns. The copyright concerns are a problem that's really important and hasn't been solved yet. There isn’t a legal framework for this stuff. Ideally, this is a constructive dialogue between all folks on all sides of the table because until there is that clarity, I think it's very hard to make progress. I think our role would be helping ensure that whatever rules are crafted are clear so that once you have that clarity, everybody can innovate on all sides of the spectrum, and hopefully everybody feels good.

If I was a founder in [Y Combinator] right now, I would 100% be pointing my guns at one of these models and seeing what I can do.

One of my favorite responses to your map was if it was truly generative AI, it'd be able to generate a market map itself. Are we gonna get to that point anytime soon?

[Laughs] Actually, I’ll tell you how I created the map in the first place: I went into GPT-3.

Before even the map, we put out this blog post of what was going to happen. It wasn't clear in my head even how to define generative AI. There was some stuff on the internet that wasn't that good, and so I literally put it in OpenAI, “the difference between classical AI and generative AI,” and it started spitting out amazing stuff. So that became a lot of the base for our article. It wasn't just a joke that the article was co-written with GPT-3; it actually was. And then, I'm not the most creative person, and I was having trouble brainstorming what the applications will be, so I typed into GPT-3, “the potential applications will be …” and then it started spitting out things, and I was like, “and then 10 more of them will be …” and it just kept on going, which is amazing. And then I'd be like, “Specifically for image generation, you can think of it as ….” That human-machine iteration loop I hadn't experienced before, and it was very much how we created both the blog post and landscape.

It’s cool to see how the point of generative AI is that it can generate things that you don't think about. It’s a new frontier for a lot of tech companies.

What I would have loved is if we have eight companies in a bucket on the map somewhere, I would have loved to have a natural way for having a machine that would browse the internet and find companies that sound similar and suggest them for my map. There isn't a great product encapsulation for that yet, but as we dream about how this might play out, I would guess it’s probably not that far out.

I'm very curious if I can train a model on my newsletter and have it write my newsletter and then submit it to my editor to see if my editor can tell the difference of who wrote it. Although maybe I shouldn't do that because I'd be out of a job one day.

I’ve had it write some investment memos for me and I swear it was as good as what I can write. [Laughs] To your point about being out of a job, I realize it was said in jest, but there's the knowledge and the craft of being able to work with the machine and I think that is a new skill that we need to learn. But I think once you master it, you're better than before, right? You're more productive, you're more creative, whatever it is, if you can really really embrace the machine. I don't think there's a world where the machine fully replaces us. We have to train how we work with the machines, but I think the result really is we are superpower humans as a result of being able to work with these machines.

Image: Sequoia

BlocPower’s Civilian Climate Corps program has an ambitious dual aim: expand the green workforce while advancing racial and climate justice.

That program just got a big infusion of cash from New York City that could help it reach even more communities. Mayor Eric Adams announced Thursday that the city is investing $54 million into the Precision Employment Initiative, the city’s name for the program.

The scaled up program will train up to 3,000 New Yorkers and connect them to job opportunities in the green economy, including solar and heat pump installation and EV charger maintenance. BlocPower primarily focuses on electrifying buildings.

The program serves New Yorkers in communities affected by gun violence and aims to reduce unemployment and increase public safety. BlocPower’s work to electrify buildings also means that residents in those neighborhoods will save money on utility bills and live in more comfortable homes.

“If we want less crime on our streets, we must make sure people are employed and they see the opportunities of the future,” Mayor Adams said at a press conference at BlocPower’s Bedford-Stuyvesant training center. “Green jobs are going to bring green dollars into communities and really put people on a pathway of success.”

The program is open to residents in five neighborhoods with the highest rates of gun violence: East New York, Flatbush and East Flatbush, Far Rockaway, Harlem, and Melrose. The majority of current and prior participants were previously underemployed or unemployed and part of “Black and brown communities that have been historically left out of the emerging profitable green sector,” Adams said.

This is the second year of the program, which began in 2021 under the de Blasio administration. The original program was funded by a $37 million contract administered by the Mayor’s Office of Criminal Justice, using money from the Cares Act.

Out of the 1,300 participants who have gone through the Civilian Climate Corps, 30% have been placed in full-time green jobs, and 62% of them have passed Occupational Safety and Health Administration training, which is critical to securing most of those jobs.

“Growing up not too far from here in Brooklyn, I remember learning about two forms of waste that were happening in the community,” BlocPower founder and CEO Donnel Baird said at the press conference. “One was the waste of fossil fuels and energy in our homes. … The other waste was a waste of human potential.”

New York has a target of net zero greenhouse gas emissions by 2050. Two-thirds of those emissions come from buildings, which means electrification and increasing energy efficiency are critical if the city wants to reach that target. New York has taken some steps to get there, including a gas ban in all new construction by 2027, as well as passing Local Law 97, which requires most buildings over 25,000 square feet to start lowering emissions drastically or start ratcheting up fines. The city is also retrofitting public housing with window heat pumps, which don’t rely on fossil fuels for heating or cooling.

All that work requires trained labor, and right now, there’s a shortage. The Civilian Climate Corps could help fill that gap while also ensuring that disadvantaged communities aren’t getting left behind in the rush to electrify everything. Instead, they could be helping lead it.

Other cities, including Ithaca and Menlo Park, have also announced ambitious new climate targets and partnerships with BlocPower to help them achieve the building decarbonization parts of them. Menlo Park is also exploring the creation of its own green jobs training program, which could launch early next year.

Baird said BlocPower is actively working on duplicating this program in other cities to help them address the labor shortages in their communities while preparing the local workforce for green economy jobs. “There’s a lot of excitement. We do think it is a model for different cities across the country,” he said.

Carbon removal will likely play some role in reaching net zero. But doing so will require huge amounts of energy. It takes around 1,200 kilowatt-hours to remove a ton of carbon from the sky using direct air capture. That could be a barrier to widespread use, according to MIT Energy Initiative’s senior research engineer Howard Herzog.

The carbon removal industry expects to scale to capture billions of tons per year. That could put it in direct competition with renewable needs for other purposes like, say, keeping the lights on. (For reference, the average American home uses a little less than 900 kilowatt-hours of energy per month.) Capturing “just” 1 billion tons would essentially require all of the carbon-free energy that’s available today, including nuclear.

The high energy use also hides carbon removal’s true cost, according to Herzog, who did the energy use analysis and is skeptical the industry can reach its target price point of $100 per ton.

• Even the lowest-carbon fossil fuel, natural gas, generates almost half a ton of carbon dioxide for every ton that is taken out of the atmosphere via DAC, according to his estimates.
• In that scenario, if a DAC company says it can perform the capture for $100 per ton, that’s really the gross capture cost. The net cost is actually double that amount.
• What that means is that, for DAC to be economically feasible, the energy powering it has to be carbon-free. (Which also makes sense, because if you’re trying to pull carbon dioxide out of the air, it kind of defeats the purpose if you’re adding carbon dioxide to the atmosphere in the process.)

DAC’s high energy use points to the value of decarbonizing everything as fast as possible. One ton of carbon that doesn’t make it into the atmosphere today is one less to remove tomorrow. And that means less conflict over future renewable energy.

A version of this story appeared in Protocol’s Climate newsletter. Sign up here to get it in your inbox twice a week.

Good morning, and welcome to Protocol Fintech. This Friday: the CFPB under siege, Apple Pay’s unhappy 8th birthday, and the worst regulatory advice we’ve heard lately.

Off the chain

Apple Pay turned 8 yesterday. Already intrigued by Square Wallet (RIP), I was an early and enthusiastic adopter: No more slipping a credit card into my running belt in case I wanted a coffee! (The Starbucks app was still months away at that point.) But vanishingly few American consumers have embraced Apple Pay: While it has 44% of the share of mobile wallet payments in stores, those account for 2.4% of total transactions, according to PYMNTS. Apple has persuaded many iPhone users to sign up for Apple Pay, but it struggles to get them to use it. That may explain why Apple’s keen on pushing the Apple Card and developing a savings account; getting deeper into the flow of funds may help Apple offer meaningful incentives to use the system. “It’s new” isn’t enough of a proposition to change shoppers’ habits, and at 8 years old, Apple Pay isn’t even that new anymore.

Who watches the watchdog’s funding?

A federal appeals court struck a major blow against the Consumer Financial Protection Bureau with a finding that its funding mechanism is unconstitutional. The decision is likely to be challenged, setting up a major fight for the future of the top U.S. consumer-finance watchdog. That battle could introduce significant uncertainty for the many fintech businesses that fall under the agency’s purview.

The CFPB has faced legal challenges before. But the ruling from a three-judge panel of the New Orleans-based 5th Circuit Court of Appeals on Wednesday, finding that the CFPB’s funding structure violated the Constitution’s separation of powers doctrine, could be the most serious threat yet.

• As set up under the 2010 Dodd-Frank Act, the CFPB is funded by the Federal Reserve rather than congressional appropriations. That way, in the Obama administration’s view, the agency could avoid political influence. But Republicans have chafed at what they view as anti-business practices and a lack of oversight.
• Other courts have found the CFPB’s funding to be constitutional, a point the Wednesday ruling acknowledged. But the panel of Trump-appointed judges said the CFPB’s setup is different from other self-funded agencies, calling the system “a double insulation from Congress’s purse strings that is ‘unprecedented’ across the government.”
• The CFPB has faced several challenges to its existence over its 11 years in business. In 2020, the Supreme Court ruled that restrictions on when its leader can be removed were unconstitutional, but rejected a plea to strike down the agency as a whole.

The CFPB is expected to challenge the ruling. A CFPB spokesperson said the agency “will continue to carry out its vital work enforcing the laws of the nation and protecting American consumers.”

• To that point, the CFPB issued new guidance to credit-reporting agencies Thursday about omitting what it called “junk data” from credit reports.
• An analysis from the law firm Ballard Spahr noted that the 5th Circuit’s decision applies only to federal district courts in Texas, Louisiana, and Mississippi. But “because it is an appellate court ruling, it might be given weight by district courts outside of the Fifth Circuit considering challenges to CFPB enforcement actions.” That means the impact could spread far beyond the agency’s payday lending rule.

In the meantime, fintechs face uncertainty. The CFPB under Biden-appointed director Rohit Chopra has taken a more aggressive stance toward the financial industry than predecessors during the Trump administration.

• That includes a growing focus on fintech products such as algorithmic lending and “buy now, pay later” arrangements. Chopra has also promised scrutiny over the way large technology companies are expanding into financial services.
• But the agency is also taking up initiatives with fintech industry support, including finally setting up open-banking rules to guide data-sharing between financial institutions and tech companies.
• “If you don’t know what the rules are, it is hard to innovate,” said Melissa Baal Guidorizzi, a partner with the law firm Orrick and former senior CFPB enforcement attorney. “Legal uncertainty can cause considerable friction, particularly for innovators.”

What the ruling means for the fintech industry remains to be seen. Should it hold up long term, a lack of resources could hamper the CFPB’s pledge to supervise a broader group of fintech businesses. While regulators and companies can occasionally come into conflict, the agencies also serve an important role in providing rules of the road and certainty for business models. If the decision casts further uncertainty around CFPB’s existing regulation, that’s probably bad for business.

— Ryan Deffenbaugh (email | twitter)

Protocol Special Report: Securing the Enterprise

There’s no let-up in the surge of cyberattacks against businesses. But shutting down the hackers will require many enterprises to evolve their strategy. Presented by At-Bay.

Read Protocol’s Special Report

On the money

On Protocol: Inside Molly White’s campaign against crypto.

Stripe has been slowly reducing its workforce. While not technically layoffs, Forbes reports that some senior leaders are asking managers to start giving lower ratings on performance reviews to edge employees out.

Fidelity is expanding its crypto team. The Fidelity Digital Assets workforce could grow by at least 100 over the next six months.

The CFTC has been busy with crypto enforcement. About 20% of the futures market regulator’s enforcement actions involved digital asset companies, according to its annual report.

Amazon is going insurtech in the U.K. The tech giant has launched a home insurance comparison site in the country.

Gary Gensler’s agenda is wearing some employees down. An SEC inspector general report said agency managers were concerned that the uptick in rulemaking activity is stretching staff thin.

​Overheard

Forget agility, now you need “porosity,” maybe? “The porosity we have allows us to reach more distant places and offer services where there are none. We are in every Mexican state,” Asensio Carrion, director general of Mexican neobank Spin, told Reuters. (Spin is owned by convenience store chain Oxxo, which is where it gets those pores.)

Our colleague Veronica Irwin got an earful at TechCrunch Disrupt. Former FTX US president Brett Harrison described his brief stint at the crypto exchange as “the longest year and a half of my life.” That good, eh? And Mary-Catherine Lader, COO of Uniswap Labs, offered what is probably the worst advice ever for fintech founders facing regulation: “I think the simplest rule of thumb is if you had to go before a judge and explain why what you’re building is good for the world and good for a user, do you feel like you can do that? And if you can, you shouldn’t worry too much.” Given reports the SEC has been looking into Uniswap, we’re not sure we’d turn to its leaders for advice.

The chart

DeFi hackers have had a shaky year as the crypto market reeled from a severe crash. The number of hacks is still down from its peak in March. But the total value of DeFi hacks soared to more than $718 million this month, the highest for the year.

A message from At-Bay

“If money were not an issue, the first thing I would do is move all of our customers to the cloud. As an insurer, we know that moving your business systems, data, and services to established cloud environments can dramatically reduce your attack surface and improve security controls, while reducing the time and cost to recover in the event you’re hit with an attack.” - Rotem Iram, Co-founder and CEO at At-Bay

Learn more

Thanks for reading — see you Monday!