Tesla whistleblowers filed a complaint to the SEC in 2021, but the agency never interviewed them. Here’s what the complaint said
A Tesla Model Y on a Tesla car lot in Austin, Texas, May 31, 2023.
Brandon Bell | Getty Images
In the fourth quarter of 2021, a Tesla employee and a tech industry researcher jointly filed a whistleblower complaint to the U.S. Securities and Exchange Commission, expressing concerns that Elon Musk’s car company may have violated the law repeatedly, affecting shareholders, employees and customers.
The complaint contained a number of allegations about Tesla’s financials and its business practices, including that it improperly categorized repairs for years and that it had poor control over internal systems used for capturing business data that ultimately rolls up to financial and other company disclosures to shareholders.
In January 2022, the SEC assigned one person to look at one part of the complaint related to accounting firm PricewaterhouseCoopers’ work for Tesla, then closed that ticket a few months later, according to records reviewed by CNBC.
Agency staff have never spoken with the people who filed the complaint, those people say, and have never taken them up on their offer to review about 18,000 files they say they have for review, including internal Tesla emails, spreadsheets, screenshots, recordings and images, along with public records they gathered to support their allegations.
In response to questions from CNBC, the SEC declined to comment on the existence or nonexistence of a possible submission but said the agency evaluates all tips that are submitted. The whistleblowers could earn a financial reward if their complaint leads to the SEC taking some enforcement action and obtaining a monetary settlement or damages.
During the approximately two-year period since the complaint was first filed, Musk sold more than $39 billion of his shares in Tesla, including around $23 billion in 2022, to fund a leveraged buyout of Twitter, the social network he now owns and has rebranded X.
CNBC has reviewed a copy of the complaint — which is known as a TCR, an abbreviation federal agencies use to mean “tips, complaints and referrals” — along with follow-up correspondence to the financial regulator, public records and some of the internal Tesla materials that the whistleblowers wanted the agency to review. The identities of the people who filed the complaint to the SEC are known to CNBC, but they asked to remain unnamed and for their TCR to receive confidential treatment by the agency, citing a fear of retaliation by Musk against employees and critics, especially those who raise issues with government agencies or press. The whistleblower who was a Tesla employee no longer works there.
CNBC asked accounting, business and securities law experts to read a version of the complaint with the identities of the whistleblowers redacted to protect their privacy.
Ann Lipton, an experienced corporate and securities law trial attorney who now teaches at Tulane Law School and University of Chicago Law School, told CNBC, “Whistleblowers in general can come off like they have an ax to grind. This complaint contains a long list of concerns and some felt more serious than others — but the people who filed it sound plausible,” in part because they offered so many specific examples and records from within the company.
Some of the allegations in the redacted complaint, Lipton said, raise questions about whether Tesla has run afoul of federal securities law, including Section 13 of the Securities Exchange Act, Rule 13a-15 and Rule 15d-15, and the Sarbanes-Oxley Act. Broadly, these rules require companies and their management to maintain sufficient internal systems and processes to track and report financial and business information to auditors and shareholders, and to do so accurately and honestly and at regular intervals.
After reviewing the redacted version of the whistleblower complaint, Karen Nelson, a professor of accounting at Texas Christian University who previously served as an advisor to the Public Company Accounting Oversight Board, said the allegations about “internal control systems,” or how Tesla captures its financial and business information for eventual presentation to auditors and shareholders, were concerning.
If the information in the complaint is accurate, Nelson said, “Tesla’s information systems don’t seem to be very transparent and robust for internal people, which then leads to questions about how the auditor navigated those systems in their internal control testing, and became comfortable with using the data being produced by it.”
CNBC reached out to Tesla multiple times with detailed inquiries about this and other contentions. The company did not respond.
Here’s a detailed look at some of the more serious allegations about Tesla in the whistleblower complaint — and at the questions they raise about car quality and financial performance and why these would matter to shareholders or regulators, according to experts in the auto industry, securities and business law, and accounting.
Warranty repairs
Unlike traditional automakers, Tesla operates with a “direct-to-consumer” model meaning that it sells and services the cars it manufactures, rather than relying on franchised dealerships to do so.
When Tesla employees complete a repair, they must classify the job within broad pay type categories, including “warranty,” “extended service agreement,” “customer pay,” “rectification,” “goodwill” and others, according to internal communications, guides and policies available to employees via a Tesla intranet and reviewed by CNBC.
In their complaint, the tipsters included excerpts from Tesla policies, internal emails, customer service records and other documents to show that they believe employees have been miscategorizing repairs for years and that Tesla management has been aware of the problem.
Under standard warranty accounting practices in the automotive and other industries, companies set aside a portion of each sale to cover future repairs that will be conducted under warranty, Nelson explained to CNBC. These warranty reserves show up as liabilities on a company’s balance sheet and show up on the income statement as part of the costs of goods sold. Later, when repairs are recorded as “warranty,” the costs of these repairs are counted against the warranty reserves.
The complaint does not allege that Tesla deviates from this standard industry practice. It instead alleges that Tesla has allowed employees to miscategorize repairs and thereby hide some of its warranty costs.
With a “goodwill” repair, Tesla essentially foots the bill for labor, parts or accessories given to keep a customer happy. According to Tesla’s financial statements, the cost of goodwill repairs is not counted against warranty reserves and shows up on the income statement under sales, general and administrative costs.
Meanwhile, “customer pay” repairs are booked as revenue, specifically under the “services and other” category, according to its financial filings. Here, too, the repairs are not counted against warranty reserves.
By charging customers for repair work or by designating repairs as “goodwill” when they should qualify as “warranty” repairs instead, Tesla could be misstating fundamental financial information, the whistleblowers said, urging the SEC to investigate further.
“Were Tesla to accurately categorize its ‘goodwill’ repairs as warranty repairs, it would likely need to restate earnings for every quarter since at least 2017,” the tipsters wrote in their submission. “It should also be noted that nothing has ever stopped the company from appropriately sizing its warranty reserve even as its service employees handed out too much ‘goodwill’ repair coverage.”
Indeed, Tesla’s goodwill expenses were unusually high for the industry, according to automotive industry veteran Nicholas Parks, who has owned and managed car dealerships in three states, including one in California that sold battery electric vehicles.
In just under two months in late 2021, Tesla was spending over $17 million on “goodwill” in the U.S. alone, which translated to about $70 worth of goodwill on the average repair order across approximately 247,000 repairs, according to internal Tesla dashboards referenced in the whistleblower complaint and reviewed by CNBC.
This is easily 10 times more money than traditional auto dealers would spend on goodwill per repair on average in two months, Parks told CNBC.
Nelson, the accounting professor, explained why miscategorization of repairs might be of interest to financial regulators and investors.
“Where you put stuff in a financial statement matters,” she said. “If I’m taking warranty costs out of the cost of automotive sales, and pushing them down into some other line further down the income statement, that will make my gross profit margin look higher. If I’m moving it from up above in cost of sales, and moving into other expenses, it’s also not as transparent about the quality of the product.”
Because Nelson did not review all the documentation the whistleblowers had to offer the SEC nor interview them, she would not give an opinion on whether Tesla may have run afoul of accounting requirements or securities laws. However, she did say she was “surprised” that the agency didn’t indicate more serious interest in the whistleblowers.
Inconsistent communications and policy apparently contributed to employees miscategorizing items as “goodwill” or “customer pay” that should have been billed under warranty, the filers’ complaint to the SEC said.
Tesla documents read by CNBC show that employees had to navigate a maze of directives available in internal systems, such as WARP (a Tesla-built enterprise resource planning system), intranets and group emails, to figure out how to track and classify billing for each repair.
In one internal “Goodwill Guide,” Tesla told employees that any “repair/replacement necessary to correct defects in the materials/workmanship of any parts manufactured/supplied by Tesla” should be covered by and categorized as “Warranty/Extended Warranty pay type (post-delivery).” That would apply to any customer’s car that was still under a warranty, while out-of-warranty cars would require a customer to pay for repairs.
For a specific issue — “blistering” headrests in car seats manufactured by Tesla — the company gave employees different directions about how to bill customers for service to replace the part. One internal Tesla document seen by CNBC said the blistering headrest “is not a defect, and therefore not covered under warranty” and that repairs should be offered as goodwill. Confusingly, that document linked to another page in the company intranet saying customers should have to pay to get their headrests fixed.
Tesla also treated replacement of defective tail lamps as “customer pay,” after determining that chemicals used in commercial car washes could cause stress cracks in their lenses, according to internal documents read by CNBC. But in a seemingly contradictory note, an internal e-mail in the second quarter of 2021 referencing the issue said, “First repair and replacement of parts can be covered under Goodwill – Vehicle Quality.”
The whistleblower complaint says that Tesla has been aware of inconsistencies in how employees treat repairs. During the second half of 2021, Tesla was working to improve data accuracy from its service division, according to internal records reviewed by CNBC. It set up score cards for each region to include assessments of pay type data, and goodwill and warranty costs. The company was aiming for better than 90% accuracy in service centers’ pay type data at that time, the internal records said.
Parks, the former automotive dealer, said with traditional dealerships, 99% or higher accuracy would be expected, and dealerships typically employ a number of specialists to ensure accuracy. “If dealership employees do not enter information about a repair correctly, then a claim may not get paid or you may end up having a warranty audit where the automaker comes in and charges back these claims and that’s painful,” he explained.
Questioning disclosures and data
In their 2021 complaint, the whistleblowers alleged that Tesla’s internal software and systems are constantly changing and have been rife with bugs and vulnerabilities throughout the years, and that third-party accountants or auditors may not have been given full access to, or thoroughly vetted, all of them.
The complaint said the whistleblower who had been a Tesla employee was authorized to access a wide array of records — including policies, internal emails, and sales- and service-related data — at Tesla through software and systems used daily by thousands of employees for normal work, including both custom-built and off-the-shelf programs.
CNBC spoke with one current and two former Tesla employees who corroborated that most people working for Tesla have broad access to apps and information inside the company by default. They also noted the array of apps within Tesla has grown through the years, as would be expected with a growing business in a complex industry. These people requested anonymity as they were not authorized to speak on Tesla’s behalf.
The complaint embedded images of what the whistleblowers said were emails, spreadsheets and screenshots of some of Tesla’s homegrown software and back-end systems. It said these showed that non-administrative and non-executive employees had access to read and edit data points, via a developer tool called MySQL Workbench, that could later feed into Tesla’s shareholder communications and financial statements.
In one example, the tipsters said screenshots showed other Tesla employees changed the status of material used in manufacturing from “scrap” to “work in progress.” Scrap refers to material generated from a manufacturing job that is unusable waste.
In another example, the complaint said screenshots showed Tesla employees had manually changed the status of “used” cars to “new” in a program that tracked vehicle deliveries data. This could affect Tesla’s delivery numbers, they said, though they didn’t try to estimate the overall impact and instead encouraged the SEC to investigate further.
In early 2022, the whistleblowers wrote to the SEC expanding on their initial complaint. They described multiple databases and a separate, paper-based process for auditors that had been used over time at Tesla for tracking vehicle sales and deliveries. The ever-changing systems led to inconsistent measurements and definitions of “deliveries,” they alleged.
CNBC reached out to Tesla for comment on these specific allegations in the complaint and received no response.
Deliveries are the closest approximation of sales reported by Tesla in quarterly disclosures, and one of the numbers Wall Street watches most closely. If they were recorded inaccurately, the company could have met or beat analysts’ expectations for deliveries on the basis of flawed or falsified data.
In the fourth quarter of 2021, just before the whistleblowers sent their followup email, Tesla reported that it had reached 308,000 vehicle deliveries — a number that handily beat analysts’ expectations.
Issues related to accurate tracking of deliveries would potentially merit an investigation into the reliability and accuracy of Tesla’s disclosures and financial reporting, and analysis of whether Tesla meets the standards and has safeguards in place that would be required under the Sarbanes-Oxley Act, the whistleblower complaint said.
Under Sarbanes-Oxley, a company’s management is required to disclose the efficacy of its internal controls and identify weaknesses, such as the ability of unauthorized users to access sensitive data. Sarbanes-Oxley also requires auditors to check and report on these controls, so that investors can confidently rely on the financial statements and so that companies can avoid having to restate financials later on.
Business and securities law expert Lipton told CNBC if there are weaknesses in either “disclosure controls” or the “internal controls over financial reporting” at Tesla, there could have been a “potential violation of the substantive requirement that such controls be maintained” under Section 13 of the Exchange Act, and there might have been “false statements by the company, Musk, the CFO, or PwC regarding the effectiveness of internal controls.”
“To the extent we’re talking about false statements, the kind of bottom-line trouble that might be involved depends on the level of fault,” Lipton said. “If the controls turn out to be faulty, but there was no flaw in the assessment — that is, top management and PwC reviewed everything, but the problems were too far down the chain to detect easily — then they may not be facing penalties for false statements. Obviously, matters become more serious if they intentionally or recklessly or perhaps even negligently misstated the state of the internal controls.”
Going concern
In 2022, Tesla boasted net income of $12.56 billion and cash reserves of $22.10 billion, but Musk sometimes reminisces about earlier days when the company nearly went bankrupt. The whistleblower complaint alleged that, given Tesla’s financial status in 2018, when it was ramping up production of its lowest-cost Model 3 sedan, it should have been more transparent with shareholders at the time. The complaint said Tesla should possibly have issued a “substantial doubt” statement, also known as a going concern warning, in its 2018 SEC filings, which it did not.
In 2019, Musk discussed Tesla’s near-bankruptcy under oath in the Delaware Court of Chancery, which the whistleblowers referenced in later correspondence to the agency. Their initial complaint also referenced internal materials pertaining to the company’s bank account balances, but the SEC did not follow up to ask for the documentation.
Accounting expert Nelson told CNBC, in general: “Management should provide an explicit substantial doubt statement in the financial statements if it is probable that the company will not be able to meet its obligations within one year from the date the financial statements are issued. However, if they have plans that will alleviate that doubt, then they should disclose those plans but do not need to make a substantial doubt statement,” following accounting standards of the Financial Accounting Standards Board that have been in effect since mid-December 2016.
Auditors’ work for other Musk companies
Tesla’s auditing firm since 2005, PricewaterhouseCoopers, has also done tax-related consulting work for Musk enterprises SpaceX and The Boring Company, according to internal Tesla materials the whistleblowers offered to the SEC. In correspondence to the agency expanding on their complaint, the whistleblowers alleged this raises questions about the firm’s independence and objectivity in judging Tesla’s financials.
Besides offering internal materials from Tesla, the whistleblowers pointed to obscure public records from the California Alternative Energy and Advanced Transportation Financing Authority that they say also showed PricewaterhouseCoopers did non-audit work for Musk companies while serving as Tesla auditor.
Although there are only four major auditing firms, there are dozens of reputable firms Musk’s privately held enterprises could have turned to for tax consulting.
Securities law expert Lipton said that generally, auditors are not supposed to do certain kinds of consulting services for their audit clients or for affiliates of their clients if “a reasonable person would question your independence.”
According to records reviewed by CNBC, the SEC assigned an employee to look into possible conflicts of interest in January 2022 but closed that ticket in April without interviewing the whistleblowers or evaluating their documentation.
PricewaterhouseCoopers declined to comment. Tesla did not respond to multiple inquiries for comment.
How the SEC handles whistleblower tips
The people behind the whistleblower complaint have followed up repeatedly with the SEC since late 2021, contacting different attorneys and other appropriate authorities within the agency to ensure they were aware of the tip.
After filing their TCR submission, the whistleblowers said, they emailed and left voicemails for multiple SEC employees, following up on the tip and emphasizing the substantial quantity of records they were making available to the SEC for review. The SEC employees they reached out to included successive San Francisco bureau chiefs for the agency, as well as other SEC attorneys and whistleblower program staff in 2023.
In October 2022, about a year after the whistleblowers submitted their complaint, the Office of the Inspector General publicly voiced concern that the financial regulator, under Chair Gary Gensler, was not properly staffed and that turnover at the senior officer level was abnormally high, over 20%. High attrition in the agency and other factors, the Inspector General’s office wrote, could result in “improper handling of TCRs” and may “impede SEC investor protection efforts.”
According to Alex Platt, a professor at the University of Kansas School of Law, whose SEC whistleblower research was published in the Yale Journal of Regulation, around 30 to 50 SEC staffers have been assigned to the office that screens tips, complaints and referrals. Platt said he believes this office is under-resourced.
Since the agency began offering a bounty for whistleblower tips in 2011, it had received about 52,400 tips and issued 216 awards as of September 2021. From the start of the program through the end of 2020, Platt’s research found, the average SEC whistleblower award amounted to around $6.2 million, with the median around $1.5 million.
“Generally, you take how much the SEC gets from its enforcement action, and the whistleblowers get between 10% and 30%, based on multiple factors, including how helpful they were,” Platt explained.
Whether a tip gets selected for investigation, enforcement, and awards depends on whether it matches the SEC’s current enforcement priorities, the professor said. Attorneys who are former agency officials have the greatest success in obtaining awards for their clients, using their unique access and insight into the agency’s priorities to pick the “right” clients and shape their submissions, Platt told CNBC.
An SEC spokesperson disputed Platt’s characterization that the agency pays more careful attention to submissions from whistleblowers who have attorneys with prior SEC experience.
The spokesperson said in an email to CNBC: “The priority of the whistleblower program is to incentivize individuals to come forward and report possible violations of the federal securities laws to the SEC. The whistleblower office encourages all individuals with information about fraud or wrongdoing involving potential violations of the federal securities laws to submit their whistleblower tips and any additional information electronically through the Commission’s online TCR portal.”
Republican presidential nominee and former U.S. President Donald Trump gestures at the Bitcoin 2024 event in Nashville, Tennessee, U.S., July 27, 2024.
Kevin Wurm | Reuters
With the levers of power in Washington, D.C., about to change hands, a raft of pro-crypto legislation is expected from Congress and the Trump administration. To date, there’s been less focus on the cybersecurity side of the political effort, which could be an issue for crypto in relation to its popularity among a wary U.S. population.
Cryptocurrency, which includes not just bitcoin but ethereum, dogecoin, and others, has a faithful following among American adults. According to the Pew Research Center, 17% of American adults have traded in crypto, but that market share of American wallets has remained virtually unchanged since 2021. Meanwhile, according to a poll Pew conducted shortly before the election, 63% of adults say they have little to no confidence in crypto investing or trading, and don’t think cryptocurrencies are reliable and safe.
The incoming Trump administration has been touting its crypto bona fides, with a focus on the industry rather than the consumer.
“The No. 1 most important priority for the industry is to make sure they have a regulatory framework so that they can do business,” said Dusty Johnson (R-South Dakota), who helped author the Financial Innovation and Technology for the 21st Century Act (FIT21) that addresses the treatment of digital assets under U.S. law. The law passed in the House with bipartisan support but has not been taken up by the Senate.
FIT21 did contain specific crypto-cybersecurity provisions, which Johnson predicts will be built upon in the new administration.
Glenn “GT” Thompson (R-Pennsylvania), Chairman of the House Committee on Agriculture and a co-author of FIT21, says the cybersecurity provisions in the bill are still key in the upcoming administration.
“FIT21 requires important cybersecurity safeguards for financial intermediaries engaging with digital assets,” Thompson said in a statement to CNBC, adding that FIT21 includes explicit provisions to ensure that regulated firms take steps to evaluate and mitigate cyber vulnerabilities to protect both the services they offer and assets they hold on behalf of their customers.
“These cybersecurity requirements are critical for protecting digital asset markets and market participants,” Thompson said.
Some experts, however, doubt that there will be as much action on the security side of the legislation, given that crypto proponents are closely advising the Trump administration.
“Personnel is policy,” says Jeff Le, vice president of global government affairs and public policy at Security Scorecard and a former assistant cabinet secretary in the California governor’s office. The top ranks of the incoming economic team, made up of SEC Chair-designate Paul Atkins, Commerce Secretary Howard Lutnick, and Treasury Secretary-designate Scott Bessent, “have had a track record of supporting cryptocurrencies,” Le said.
Among other major posts in his second administration, President-elect Trump has appointed venture capital investor David Sacks to be his AI and crypto “czar.”
Crypto industry’s role in political realignment
The crypto industry donated significant sums to the 2024 election cycle, contributions that were not limited to the GOP, but focused more broadly on lawmakers with an industry-friendly view of crypto regulation. It’s likely that will continue to influence political calculations. The pro-crypto and bipartisan super PAC Fairshake and its affiliates have already raised over $100 million for the 2026 midterm elections, including commitments from Coinbase and Silicon Valley venture fund Andreessen Horowitz, an early backer of Coinbase. Top Andreessen Horowitz executives have been tapped for roles in the Trump administration.
“We have the most pro-crypto Congress ever [in] history, we have an extraordinarily pro-crypto president coming into office,” Faryar Shirzad, chief policy officer at Coinbase, recently told CNBC.
“It is rare to see cryptocurrency proponents advocate for increased regulation in the space, regardless of reason,” said Jason Baker, senior threat intelligence consultant at GuidePoint Security.
Baker says the anonymity and independence of cryptocurrency are often cited as primary benefits that legislation would curtail, and cryptocurrency’s decentralized nature makes it hard to regulate in a traditional sense.
“Given current signaling from the incoming administration and the interests of cryptocurrency proponents influential to the administration, we do not anticipate significant advances in cryptocurrency regulation within the next four years,” Baker said.
If there isn’t much action on regulation, there are some obvious ramifications for cybersecurity, he said, driven by the correlation between a pro-crypto Washington, D.C., and bullish bets by investors on digital assets.
“Cybercrime is often driven by benefits from increasing cryptocurrency value. In ransomware, for example, ransoms are commonly demanded in USD, but payments are made most frequently in bitcoin. When the value of bitcoin increases, cybercriminals will benefit,” Baker said.
The value of bitcoin has risen significantly over the past three months in what has been a risk-on market environment.
“Future de-emphasis on cryptocurrency regulation may positively signal that cybercrime operations in bitcoin remain viable and unlikely to suffer government disruption to operators in the space,” Baker said.
Cybercriminals have also been changing tactics to evade legislation and scrutiny, Baker added, switching to more under-the-radar cryptocurrencies like Monero.
Ransomware’s potential role in Congressional action
Baker predicts regulation centered on organizations issuing cryptocurrency payments — whether in the form of a ransom payment or for other purposes — is more likely achievable and palatable in the current regulatory environment.
“This could include, for example, increased requirements for reporting ransom payments when made, a policy which has been floated without gaining substantial traction in recent years,” Baker said. This approach can be argued as regulating end users and purposes rather than the underlying cryptocurrency itself.
In addition to ransomware payments to restore access to technology systems, there are other reasons why payment in cryptocurrency is common in digital extortion schemes, including to protect the identity and operational security of the criminal. Private organizations may also opt to use crypto to purchase leaked data or credentials which have been made available on illicit forums.
There could also be situations where private individuals attempt to report and receive payment for discovered vulnerabilities under a “bug bounty” program — whether voluntary or coerced (so-called “beg bounty”). They may request payment in cryptocurrency out of personal preference or general desire for privacy, and private organizations may or may not oblige.
“While there are doubtless other options for organizations to use cryptocurrency in some form, these are the primary forms we see on a regular or more frequent basis,” Baker said. “Though such actions would almost certainly have downstream impacts on cryptocurrency value by virtue of their impact on transaction volume,” Baker added.
Steve McNew, global leader of blockchain and digital assets at FTI Consulting, thinks some cyber-crypto legislation may happen, especially governing when a company victimized by a ransomware pays their attackers in cryptocurrency.
“There’s more than just public policy at issue,” said McNew. If a company has been compromised in a cyberattack and is required to make public disclosure of the ransoms it paid out, it can result in the company becoming a bigger future target for other criminal enterprises, McNew said. While it might make sense, on one hand, to provide disclosure as to where funds are going and what cryptocurrencies were used in a payment, doing so can put the company (and by extension its customers, employees and partners) in harm’s way.
“So, any policy decisions around cryptocurrency disclosures in this context will require balancing the need for transparency around the use of cryptocurrency in criminal matters alongside the risks such transparency might exacerbate,” McNew says.
Though FIT21 passed the House with broad bipartisan support, it did not address these issues specifically.
Le expects some legislation action that may attempt to address this topic. “The next Congress could see more traction for proposed legislation like Cryptocurrency Cybersecurity Information Sharing Act of 2022, which allows companies to share information regarding cybersecurity threats with the federal government and with one another,” he said.
Le said Congress may also revisit the work of outgoing Financial Services Chair Patrick McHenry (R-North Carolina) and Rep. Brittany Pettersen (D-Colorado) and the Ransomware and Financial Stability Act of 2024, which aimed at “strengthening the resilience of the U.S. financial system against ransomware attacks, establishing clear protocols for ransom payments, and ensuring that such payments, including those involving cryptocurrencies, are made within a controlled and legally compliant framework.”
But he added that it is unclear if the Trump administration will continue the Biden administration’s leadership role in the International Counter Ransomware Initiative, a 68-country coalition aimed at preventing the payments of ransomware.
The broader bitcoin governance battle
McNew says that many basic parameters surrounding crypto, even down to its definition, could hamstring legislation, even aspects of it intended to foster innovation and adoption of the industry.
“U.S. lawmakers have work to do in determining roles, responsibilities, and basic parameters for how the industry will be governed before any meaningful legislation can take hold,” McNew said. As an example, establishing a designated authority for digital assets is an imperative that has yet to be addressed.
Basic governance structure was a major sticking point during the Biden administration, and a primary reason Securities and Exchange Commission Chair Gary Gensler was a thorn in the side of the crypto industry.
“Lawmakers must decide whether responsibility will fall under the SEC, the CFTC, or another body. Issues around taxation and broker-dealer definitions for digital assets markets will also need to be defined and provided with a set of clear rules for legislation to be effective,” McNew said, adding that given how closely divided the House will be in the next session, it may be tough to craft an agreement.
Jakub Porzycki | Nurphoto | Getty Images
Before Jack Nader started posting beauty videos on TikTok in 2023, he was working as a Starbucks barista in Chicago and living at home with his parents.
But after Nader, who’s now 21, started taking his videos seriously in April of that year, his TikTok account blew up. With more than half a million followers, he was able to generate enough income through brand sponsorships and his share of ad revenue that he quit his coffee shop gig and got his own apartment.
“This is my 9-to-5 job,” Nader, who said he makes between $1,000 and $12,000 per month as a creator, told CNBC. “This is what I do to make a living. This is how I pay for my groceries. This is how millions of small businesses make their money.”
Nader’s new reality, however, is far from stable. TikTok, which is owned by China’s ByteDance, is nearing a Jan. 19 deadline by which it has to be sold, or it faces a ban in the U.S. Like many other creators who have come to rely on TikTok, Nader has been urging his fans to find him on other social media apps before he potentially loses them altogether and the substantial income stream that they represent.
“Not everyone from my TikTok following is going to come over, and that’s really sad,” Nader said.
The TikTok risk has been present for years, but was amped up in April, after President Joe Biden signed a law that requires ByteDance to divest the short-form video app this month. If ByteDance fails to sell TikTok in time, Apple and Google will be forced by law to ensure their platforms no longer support the app in the U.S.
President-elect Donald Trump, who favored a TikTok ban during his first administration, has since flip-flopped on the matter. Late last month, he urged the Supreme Court to intervene and forcibly delay implementation of Biden’s ban to give him time to find a “political resolution.” His inauguration is Jan. 20.
Trump’s rhetoric on TikTok began to turn after he met in February with billionaire Jeff Yass, a Republican megadonor and a major investor in ByteDance who also owns a stake in the owner of Truth Social, Trump’s social media company.
The Supreme Court heard oral arguments from both sides on Jan. 10. During the more than two-hour session, justices peppered TikTok’s head lawyer with questions about the app’s ties to China and appeared generally unconvinced by TikTok’s main argument, that the law violates the free speech rights of its millions of individual users in the U.S.
On Thursday, businessman Frank McCourt’s internet advocacy group Project Liberty announced it had submitted a proposal to buy TikTok from ByteDance. Calling it, “The People’s Bid for TikTok,” the group said it would restructure the app to exist on an American-owned platform and prioritize users’ digital safety, though it didn’t disclose terms of its bid.
Jack Nader, 21 of Chicago, is a full-time TikTok creator who has begun moving his content from the Chinese-owned app onto Meta’s Instagram Reels and Alphabet’s YouTube Shorts.
Courtesy of Jack Nader
A ruling could come at an point. Nader isn’t waiting for a resolution to figure out what’s next.
He’s currently downloading four or five of his TikTok videos each day to save them as he migrates his content to Meta’s Instagram Reels and Alphabet’s YouTube Shorts. After downloading the videos, Nader re-edits them, optimizing the clips for each app.
“It took me over a year and a half to build the following that I have right now on TikTok to make it my full time job,” Nader said. “Now it’s kind of about rebuilding that entire brand on another platform, which is not ideal.”
Nader said he isn’t yet making any money from Reels or Shorts.
‘This isn’t just a silly app’
Danisha Carter, 27, is in a similar spot. A resident of Los Angeles, Carter has been a full-time creator since 2021, posting social commentary and lifestyle videos. Although she’d known about the TikTok ban for months, she said she had a wake-up call in the middle of the night in November.
“I need to start taking this seriously before I lose access to the platform that I built and the followers that I built,” Carter said, recalling her panicked realization. “I need to not waste any more time.”
Carter, who previously worked in luxury retail, has ended her TikTok videos by telling her followers that they can find her on YouTube, Instagram and Patreon.
“This isn’t just a silly app that people have been using to post dance videos,” said Carter, who makes about $4,000 per month on average from her TikTok activity. “It’s been remarkable in terms of changing people’s lives, changing people’s businesses.”
Danisha Carter, 27 of Los Angeles, is a full-time TikTok creator who has begun ending her videos by asking her fans to follow her on YouTube, Instagram and Patreon before the Jan. 19 law banning the Chinese-owned app takes effect.
Courtesy of Danisha Carter
TikTok could still find a way to stay operational in the U.S., but if the app does get suspended, YouTube, Facebook and Instagram are poised to be the biggest winners in the fallout, experts predict.
TikTok has about 115 million monthly active users in the U.S., well behind YouTube at 258 million and Facebook at 253 million, according to market intelligence firm Sensor Tower. Instagram has 131 million. Short videos, the kind that mimic clips on TikTok, are gaining viewership across those apps, accounting for about 41% of user time on Instagram, Sensor Tower data shows.
While TikTok has a smaller userbase in the U.S. and lower share of total ad dollars than its top rivals, it’s the dominant platform for creators, particularly those focused on short-form content.
Influencer marketing platform HyperAuditor defines a creator as a user with over 1,000 subscribers. TikTok has nearly 8.5 million people in the U.S. who fit that category, compared with about 5.2 million on Instagram and 1.1 million on YouTube, according to HyperAuditor.
Meanwhile, TikTok accounts for 9% of digital ad spend on social media platforms in the U.S., according to Sensor Tower, compared to 31% for Facebook, 25% for Instagram and 21% for YouTube.
Should TikTok go away, “this equates to billions of dollars potentially up in the air for competitors to seize,” Sensor Tower told CNBC in an email. Emarketer estimates that Meta and YouTube could grab about half of the reallocated dollars should a ban go into effect.
That type of market shift has taken place elsewhere. India banned TikTok in June 2020, when the app had about 150 million monthly users in the country. A year later, Instagram’s monthly active users in India had increased by 20% while YouTube’s had gone up 11% year-over-year, according to Sensor Tower estimates.
“That’s when we saw the biggest jump in Reels utilization ever,” said Meghana Dhar, a former Instagram executive who was at the company at the time of the India ban. “Should TikTok get banned and creators have to scramble, between YouTube Shorts and Instagram, a lot of creators are already hedging their bets.”
At Meta, leaders within Instagram scheduled numerous impromptu meetings on Friday after listening to the oral arguments before the Supreme Court, a person familiar with the matter told CNBC. Though many within the company had long expected TikTok would remain active in the U.S., leaders at Instagram began directing their teams to prepare for a potential influx of users should the ban go through, said the person, who asked not to be named due to confidentiality.
(L-R) Sarah Baus of Charleston, S.C., holds a sign that reads “Keep TikTok” as she and other content creators Sallye Miley of Jackson, Mississippi, and Callie Goodwin of Columbia, S.C., stand outside the U.S. Supreme Court Building as the court hears oral arguments on whether to overturn or delay a law that could lead to a ban of TikTok in the U.S., on January 10, 2025 in Washington, DC.
Andrew Harnik | Getty Images
Need to diversify
Kristina Nolan, vice president of media services at marketing agency DMi Partners, said the TikTok situation is the latest example of why social media creators should always be diversifying their followings.
“We’re consistently reminding them to create audience depth on other platforms,” said Nolan, whose agency works with more than 50,000 creators.
In recent weeks weeks, DMi has seen more of its creators start to migrate followers elsewhere in a variety of ways, Nolan said. But they have to be careful. Nolan said that some creators worry that TikTok will “shadow ban” them, or reduce their exposure to users, if the technology recognizes that they’re promoting profiles elsewhere.
Some creators will suggest followers find them on “fbook,” for example, rather than writing out Facebook. Others will bleep out just enough words to get the message to their followers while hoping to avoid TikTok’s detection, Nolan said. Some creators are teaming up with brands to incentivize users by holding prize giveaways for users who follow them on other apps, she added.
“They’re obviously not saying, ‘Come over to Instagram,'” Nolan said. “They’re like, ‘Go follow me on’ and they’re mouthing it.”
After working on a horse farm, Nealie Boschma, 27, was able to move to Los Angeles and live full-time as a creator after starting to post videos to TikTok in 2022.
Courtesy of Nealie Boschma
Even with multiple other options for finding large audiences, creators are worried about trying to rebuild their business and whether enough followers will migrate with them.
“Whatever is going to happen is going to happen, and we’re just going to make the most of it,” said Nealie Boschma, 27 of Los Angeles, who has been living as a full-time creator since 2022. “That’s just how I have to look at it, so I don’t panic.”
Despite the potential upheaval, Boschma, said she views the potential ban as an opportunity to expand her career and get more creative.
Boschma started making TikTok videos after quitting her job working on a horse farm, choosing to live off of her savings while experimenting as a creator. Boschma’s bet on herself worked and she’s earned enough to live in Los Angeles, paying for her own place and a car.
Now she’s making sure her TikTok fans see the links to her other profiles so they can find her on other apps, including YouTube. If the ban goes through, Boschma said she plans to make a video specifically asking her fans to follow her elsewhere.
It’s going to be quite a lift, as she currently has 2 million TikTok followers compared to just 278,000 on YouTube. But Boschma said she is going to try her hand at making longer-form videos, something she’s always wanted to explore.
“Whether TikTok goes away or not, I do think something will work out” Boschma said. “I’ll find my footing in other places, like I did on TikTok.”
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