- WSJ Investigation
How Google Interferes With Its Search Algorithms and Changes Your Results
The internet giant uses blacklists, algorithm tweaks and an army of contractors to shape what you see
Every minute, an estimated 3.8 million queries are typed into Google, prompting its algorithms to spit out results for hotel rates or breast-cancer treatments or the latest news about President Trump.
They are arguably the most powerful lines of computer code in the global economy, controlling how much of the world accesses information found on the internet, and the starting point for billions of dollars of commerce.
Twenty years ago, Google founders began building a goliath on the premise that its search algorithms could do a better job combing the web for useful information than humans. Google executives have said repeatedly—in private meetings with outside groups and in congressional testimony—that the algorithms are objective and essentially autonomous, unsullied by human biases or business considerations.
The company states in a Google blog, “We do not use human curation to collect or arrange the results on a page.” It says it can’t divulge details about how the algorithms work because the company is involved in a long-running and high-stakes battle with those who want to profit by gaming the system.
But that message often clashes with what happens behind the scenes. Over time, Google has increasingly re-engineered and interfered with search results to a far greater degree than the company and its executives have acknowledged, a Wall Street Journal investigation has found.
Those actions often come in response to pressure from businesses, outside interest groups and governments around the world. They have increased sharply since the 2016 election and the rise of online misinformation, the Journal found.
Google’s evolving approach marks a shift from its founding philosophy of “organizing the world’s information,” to one that is far more active in deciding how that information should appear.
More than 100 interviews and the Journal’s own testing of Google’s search results reveal:
• Google made algorithmic changes to its search results that favor big businesses over smaller ones, and in at least one case made changes on behalf of a major advertiser, eBay Inc., contrary to its public position that it never takes that type of action. The company also boosts some major websites, such as Amazon.com Inc. and Facebook Inc., according to people familiar with the matter.
• Google engineers regularly make behind-the-scenes adjustments to other information the company is increasingly layering on top of its basic search results. These features include auto-complete suggestions, boxes called “knowledge panels” and “featured snippets,” and news results, which aren’t subject to the same company policies limiting what engineers can remove or change.
• Despite publicly denying doing so, Google keeps blacklists to remove certain sites or prevent others from surfacing in certain types of results. These moves are separate from those that block sites as required by U.S. or foreign law, such as those featuring child abuse or with copyright infringement, and from changes designed to demote spam sites, which attempt to game the system to appear higher in results.
• In auto-complete, the feature that predicts search terms as the user types a query, Google’s engineers have created algorithms and blacklists to weed out more-incendiary suggestions for controversial subjects, such as abortion or immigration, in effect filtering out inflammatory results on high-profile topics.
• Google employees and executives, including co-founders Larry Page and Sergey Brin, have disagreed on how much to intervene on search results and to what extent. Employees can push for revisions in specific search results, including on topics such as vaccinations and autism.
• To evaluate its search results, Google employs thousands of low-paid contractors whose purpose the company says is to assess the quality of the algorithms’ rankings. Even so, contractors said Google gave feedback to these workers to convey what it considered to be the correct ranking of results, and they revised their assessments accordingly, according to contractors interviewed by the Journal. The contractors’ collective evaluations are then used to adjust algorithms.
THE JOURNAL’S FINDINGS undercut one of Google’s core defenses against global regulators worried about how it wields its immense power—that the company doesn’t exert editorial control over what it shows users. Regulators’ areas of concern include anticompetitive practices, political bias and online misinformation.
Far from being autonomous computer programs oblivious to outside pressure, Google’s algorithms are subject to regular tinkering from executives and engineers who are trying to deliver relevant search results, while also pleasing a wide variety of powerful interests and driving its parent company’s more than $30 billion in annual profit. Google is now the most highly trafficked website in the world, surpassing 90% of the market share for all search engines. The market capitalization of its parent, Alphabet Inc., is more than $900 billion.
Google made more than 3,200 changes to its algorithms in 2018, up from more than 2,400 in 2017 and from about 500 in 2010, according to Google and a person familiar with the matter. Google said 15% of queries today are for words, or combinations of words, that the company has never seen before, putting more demands on engineers to make sure the algorithms deliver useful results.
A Google spokeswoman disputed the Journal’s conclusions, saying, “We do today what we have done all along, provide relevant results from the most reliable sources available.”
Lara Levin, the spokeswoman, said the company is transparent in its guidelines for evaluators and in what it designs the algorithms to do.
AS PART OF ITS EXAMINATION, the Journal tested Google’s search results over several weeks this summer and compared them with results from two competing search engines, Microsoft Corp. ’s Bing and DuckDuckGo, a privacy-focused company that builds its results from syndicated feeds from other companies, including Verizon Communications Inc. ’s Yahoo search engine.
The testing showed wide discrepancies in how Google handled auto-complete queries and some of what Google calls organic search results—the list of websites that Google says are algorithmically sorted by relevance in response to a user’s query. (Read about the methodology for the Journal’s analysis.)
Ms. Levin, the Google spokeswoman, declined to comment on specific results of the Journal’s testing. In general, she said, “Our systems aim to provide relevant results from authoritative sources,” adding that organic search results alone “are not representative of the information made accessible via search.”
The Journal tested the auto-complete feature, which Google says draws from its vast database of search information to predict what a user intends to type, as well as data such as a user’s location and search history. The testing showed the extent to which Google doesn’t offer certain suggestions compared with other search engines.
Typing “Joe Biden is” or “Donald Trump is” in auto-complete, Google offered predicted language that was more innocuous than the other search engines. Similar differences were shown for other presidential candidates tested by the Journal.
The Journal also tested several search terms in auto-complete such as “immigrants are” and “abortion is.” Google’s predicted searches were less inflammatory than those of the other engines.
View Interactive
Gabriel Weinberg, DuckDuckGo’s chief executive, said that for certain words or phrases entered into the search box, such as ones that might be offensive, DuckDuckGo has decided to block all of its auto-complete suggestions, which it licenses from Yahoo. He said that type of block wasn’t triggered in the Journal’s searches for Donald Trump or Joe Biden.
A spokeswoman for Yahoo operator Verizon Media said, “We are committed to delivering a safe and trustworthy search experience to our users and partners, and we work diligently to ensure that search suggestions within Yahoo Search reflect that commitment.”
Said a Microsoft spokeswoman: “We work to ensure that our search results are as relevant, balanced, and trustworthy as possible, and in general, our rule is to minimize interference with the normal algorithmic operation.”
In other areas of the Journal analysis, Google’s results in organic search and news for a number of hot-button terms and politicians’ names showed prominent representation of both conservative and liberal news outlets.
ALGORITHMS ARE effectively recipes in code form, providing step-by-step instructions for how computers should solve certain problems. They drive not just the internet, but the apps that populate phones and tablets.
Algorithms determine which friends show up in a Facebook user’s news feed, which Twitter posts are most likely to go viral and how much an Uber ride should cost during rush hour as opposed to the middle of the night. They are used by banks to screen loan applications, businesses to look for the best job applicants and insurers to determine a person’s expected lifespan.
In the beginning, their power was rarely questioned. At Google in particular, its innovative algorithms ranked web content in a way that was groundbreaking, and hugely lucrative. The company aimed to make the web useful while relying on the assumption that code alone could do the heavy lifting of figuring out how to rank information.
But bad actors are increasingly trying to manipulate search results, businesses are trying to game the system and misinformation is rampant across tech platforms. Google found itself facing a version of the pressures on Facebook, which long said it was just connecting people but has been forced to more aggressively police content on its platform.
A 2016 internal investigation at Google showed between a 10th of a percent and a quarter of a percent of search queries were returning misinformation of some kind, according to one Google executive who works on search. It was a small number percentage-wise, but given the huge volume of Google searches it would amount to nearly two billion searches a year.
By comparison, Facebook faced congressional scrutiny for Russian misinformation that was viewed by 126 million users.
Google’s Ms. Levin said the number includes not just misinformation but also a “wide range of other content defined as lowest quality.” She disputed the Journal’s estimate of the number of searches that were affected. The company doesn’t disclose metrics on Google searches.
Google assembled a small SWAT team to work on the problem that became known internally as “Project Owl.” Borrowing from the strategy used earlier to fight spam, engineers worked to emphasize factors on a page that are proxies for “authoritativeness,” effectively pushing down pages that don’t display those attributes.
Other tech platforms, including Facebook, have taken a more aggressive approach, manually removing problem content and devising rules around what it defines as misinformation. Google, for its part, said its role “indexing” content versus “hosting” content, as Facebook does, means it shouldn’t take a more active role.
One Google search executive described the problem of defining misinformation as incredibly hard, and said the company didn’t want to go down the path of figuring it out.
Around the time Google started addressing issues such as misinformation, it started fielding even more complaints, to the point where human interference became more routine, according to people familiar with the matter, putting it in the position of arbitrating some of society’s most complicated issues. Some changes to search results might be considered reasonable—boosting trusted websites like the National Suicide Prevention Lifeline, for example—but Google has made little disclosure about when changes are made, or why.
Businesses, lawmakers and advertisers are worried about fairness and competition within the markets where Google is a leading player, and as a result its operations are coming under heavy scrutiny.
The U.S. Justice Department earlier this year opened an antitrust probe, in which Google’s search policies and practices are expected to be areas of focus. Google executives have twice been called to testify before Congress in the past year over concerns about political bias. In the European Union, Google has been fined more than $9 billion in the past three years for anticompetitive practices, including allegedly using its search engine to favor its own products.
In response, Google has said it faces tough competition in a dynamic tech sector, and that its behavior is aimed at helping create choice for consumers, not hurting rivals. The company is currently appealing the decisions against it in the EU, and it has denied claims of political bias.
GOOGLE RARELY RELEASES detailed information on algorithm changes, and its moves have bedeviled companies and interest groups, who feel they are operating at the tech giant’s whim.
In one change hotly contested within Google, engineers opted to tilt results to favor prominent businesses over smaller ones, based on the argument that customers were more likely to get what they wanted at larger outlets. One effect of the change was a boost to Amazon’s products, even if the items had been discontinued, according to people familiar with the matter.
The issue came up repeatedly over the years at meetings in which Google search executives discuss algorithm changes. Each time, they chose not to reverse the change, according to a person familiar with the matter.
Google engineers said it is widely acknowledged within the company that search is a zero-sum game: A change that helps lift one result inevitably pushes down another, often with considerable impact on the businesses involved.
Ms. Levin said there is no guidance in Google’s rater guidelines that suggest big sites are inherently more authoritative than small sites. “It’s inaccurate to suggest we did not address issues like discontinued products appearing high up in results,” she added.
Many of the changes within Google have coincided with its gradual evolution from a company with an engineering-focused, almost academic culture into an advertising behemoth and one of the most profitable companies in the world. Advertising revenue—which includes ads on search as well as on other products such as maps and YouTube—was $116.3 billion last year.
Some very big advertisers received direct advice on how to improve their organic search results, a perk not available to businesses with no contacts at Google, according to people familiar with the matter. In some cases, that help included sending in search engineers to explain a problem, they said.
“If they have an [algorithm] update, our teams may get on the phone with them and they will go through it,” said Jeremy Cornfeldt, the chief executive of the Americas of Dentsu Inc.’s iProspect, which Mr. Cornfeldt said is one of Google’s largest advertising agency clients. He said the agency doesn’t get information Google wouldn’t share publicly. Among others it can disclose, iProspect represents Levi Strauss & Co., Alcon Inc. and Wolverine World Wide Inc.
One former executive at a Fortune 500 company that received such advice said Google frequently adjusts how it crawls the web and ranks pages to deal with specific big websites.
Google updates its index of some sites such as Facebook and Amazon more frequently, a move that helps them appear more often in search results, according to a person familiar with the matter.
“There’s this idea that the search algorithm is all neutral and goes out and combs the web and comes back and shows what it found, and that’s total BS,” the former executive said. “Google deals with special cases all the time.”
Ms. Levin, the Google spokeswoman, said the search team’s practice is to not provide specialized guidance to website owners. She also said that faster indexing of a site isn’t a guarantee that it will rank higher. “We prioritize issues based on impact, not any commercial relationships,” she said.
Alphabet’s net income
$30
billion
20
10
0
2005
’10
’15
Note: 2017 figure reflects a one-time charge of $9.9 billion related to new U.S. tax law. Alphabet was created through a corporate restructuring of Google in 2015. Figures for prior years are for Google Inc.
Source: FactSet
Online marketplace eBay had long relied on Google for as much as a third of its internet traffic. In 2014, traffic suddenly plummeted—contributing to a $200 million hit in its revenue guidance for that year.
Google told the company it had made a decision to lower the ranking of a large number of eBay pages that were a big source of traffic.
EBay executives debated pulling their quarterly advertising spending of around $30 million from Google to protest, but ultimately decided to step up lobbying pressure on Google, with employees and executives calling and meeting with search engineers, according to people familiar with the matter. A similar episode had hit traffic several years earlier, and eBay had marshaled its lobbying might to persuade Google to give it advice about how to fix the problem, even relying on a former Google staffer who was then employed at eBay to work his contacts, according to one of those people.
This time, Google ultimately agreed to improve the ranking of a number of pages it had demoted while eBay completed a broader revision of its website to make the pages more “useful and relevant,” the people said. The revision was arduous and costly to complete, one of the people said, adding that eBay was later hit by other downrankings that Google didn’t help with.
“We’ve experienced significant and consistent drops in Google SEO for many years, which has been disproportionally detrimental to those small businesses that we support,” an eBay spokesman said. SEO, or search-engine optimization, is the practice of trying to generate more search-engine traffic for a website.
Google’s Ms. Levin declined to comment on eBay.
Companies without eBay’s clout had different experiences.
Dan Baxter can remember the exact moment his website, DealCatcher, was caught in a Google algorithm change. It was 6 p.m. on Sunday, Feb. 17. Mr. Baxter, who founded the Wilmington, Del., coupon website 20 years ago, got a call from one of his 12 employees the next morning.
“Have you looked at our traffic?” the worker asked, frantically, Mr. Baxter recalled. It was suddenly down 93% for no apparent reason. That Saturday, DealCatcher saw about 31,000 visitors from Google. Now it was posting about 2,400. It had disappeared almost entirely on Google search.
Mr. Baxter said he didn’t know whom to contact at Google, so he hired a consultant to help him identify what might have happened. The expert reached out directly to a contact at Google but never heard back. Mr. Baxter tried posting to a YouTube forum hosted by a Google “webmaster” to ask if it might have been a technical problem, but the webmaster seemed to shoot down that idea.
One month to the day after his traffic disappeared, it inexplicably came back, and he still doesn’t know why.
“You’re kind of just left in the dark, and that’s the scary part of the whole thing,” said Mr. Baxter.
Google’s Ms. Levin declined to comment on DealCatcher.
(The Wall Street Journal is owned by News Corp, which has complained publicly about Google’s moves to play down news sites that charge for subscriptions. Google ended the policy after intensive lobbying by News Corp and other paywalled publishers. More recently, News Corp has called for an “algorithm review board” to oversee Google, Facebook and other tech giants. News Corp has a commercial agreement to supply news through Facebook, and Dow Jones & Co., publisher of The Wall Street Journal, has a commercial agreement to supply news through Apple services. Google’s Ms. Levin and News Corp declined to comment.)
GOOGLE IN RECENT months has made additional efforts to clarify how its services operate by updating general information on its site. At the end of October it posted a new video titled “How Google Search Works.”
Jonathan Zittrain, a Harvard Law School professor and faculty director of the Berkman Klein Center for Internet & Society, said Google has poorly defined how often or when it intervenes on search results. The company’s argument that it can’t reveal those details because it is fighting spam “seems nuts,” said Mr. Zittrain.
“That argument may have made sense 10 or 15 years ago but not anymore,” he said. “That’s called ‘security through obscurity,’ ” a reference to the now-unfashionable engineering idea that systems can be made more secure by restricting information about how they operate.
Google’s Ms. Levin said “extreme transparency has historically proven to empower bad actors in a way that hurts our users and website owners who play by the rules.”
“Building a service like this means making tens of thousands of really, really complicated human decisions, and that’s not what people think,” said John Bowers, a research associate at the Berkman Klein Center.
On one extreme, those decisions at Google are made by the world’s most accomplished and highest-paid engineers, whose job is to turn the dials within millions of lines of complex code. On the other is an army of more than 10,000 contract workers, who work from home and get paid by the hour to evaluate search results.
The rankings supplied by the contractors, who work from a Google manual that runs to hundreds of pages, can indirectly move a site higher or lower in results, according to people familiar with the matter. And their collective responses are measured by Google executives and used to affect the search algorithms.
Mixed Results
Google’s results page has become a complex mix of search results, advertisements and featured content, not always distinguishable by the user. While these features are all driven by algorithms, Google has different policies and attitudes toward changing the results shown in each of the additional features. Featured snippets and knowledge panels are two common features.
Other features
Organic search results
Featured snippet
Knowledge panel
Highlights web pages that Google thinks will contain content a user is looking for. Google says it will remove content from the feature if it violates policies around harmful and hateful content.
Information Google has compiled from various sources on the web, such as Wikipedia, that provides basic facts about the subject of your query. Google is willing to adjust this material.
search term
Organic search results
Links to results that Google’s algorithms have determined are relevant to your query. Google says it doesn’t curate these results.
Other features
Organic search results
Knowledge panel
Featured snippet
Highlights web pages that Google thinks will contain content a user is looking for. Google says it will remove content from the feature if it violates policies around harmful and hateful content.
Information Google has compiled from various sources on the web, such as Wikipedia, that provides basic facts about the subject of your query. Google is willing to adjust this material.
search term
Organic search results
Links to results that Google’s algorithms have determined are relevant to your query. Google says it doesn’t curate these results.
Other features
Organic search results
Featured snippet
Knowledge panel
Highlights web pages that Google thinks will contain content a user is looking for. Google says it will remove content from the feature if it violates policies around harmful and hateful content.
Information Google has compiled from various sources on the web, such as Wikipedia, that provides basic facts about the subject of your query. Google is willing to adjust this material.
search term
Organic search results
Links to results that Google’s algorithms have determined are relevant to your query. Google says it doesn’t curate these results.
Other features
Organic search results
Featured snippet
Highlights web pages that Google thinks will contain content a user is looking for. Google says it will remove content from the feature if it violates policies around harmful and hateful content.
search term
Organic
search results
Knowledge panel
Information Google has compiled from various sources on the web, such as Wikipedia, that provides basic facts about the subject of your query. Google is willing to adjust this material.
Links to results that Google’s algorithms have determined are relevant to your query. Google says it doesn’t curate these results.
One of those evaluators was Zack Langley, now a 27-year-old logistics manager at a tour company in New Orleans. Mr. Langley got a one-year contract in the spring of 2016 evaluating Google’s search results through Lionbridge Technologies Inc., one of several companies Google and other tech platforms use for contract work.
During his time as a contractor, Mr. Langley said he never had any contact with anyone at Google, nor was he told what his results would be used for. Like all of Google’s evaluators, he signed a nondisclosure agreement. He made $13.50 an hour and worked up to 20 hours a week from home.
Sometimes working in his pajamas, Mr. Langley was given hundreds of real search results and told to use his judgment to rate them according to quality, reputation and usefulness, among other factors.
At one point, Mr. Langley said he was unhappy with the search results for “best way to kill myself,” which were turning up links that were like “how-to” manuals. He said he down-ranked all the other results for suicide until the National Suicide Prevention Lifeline was the No. 1 result.
Soon after, Mr. Langley said, Google sent a note through Lionbridge saying the hotline should be ranked as the top result across all searches related to suicide, so that the collective rankings of the evaluators would adjust the algorithms to deliver that result. He said he never learned if his actions had anything to do with the change.
Mr. Langley said it seemed like Google wanted him to change content on search so Google would have what he called plausible deniability about making those decisions. He said contractors would get notes from Lionbridge that he believed came from Google telling them the “correct” results on other searches.
He said that in late 2016, as the election approached, Google officials got more involved in dictating the best results, although not necessarily on issues related to the campaign. “They used to have a hands-off approach, and then it seemed to change,” he said.
Ms. Levin, the Google spokeswoman, said the company “long ago evolved our approach to collecting feedback on these types of queries, which help us develop algorithmic solutions and features in this area.” She added that, “we provide updates to our rater guidelines to ensure all raters are following the same general framework.”
Lionbridge didn’t reply to requests for comment.
AT GOOGLE, EMPLOYEES routinely use the company’s internal message boards as well as a form called “go/bad” to push for changes in specific search results. (Go/bad is a reporting system meant to allow Google staff to point out problematic search results.)
One of the first hot-button issues surfaced in 2015, according to people familiar with the matter, when some employees complained that a search for “how do vaccines cause autism” delivered misinformation through sites that oppose vaccinations.
At least one employee defended the result, writing that Google should “let the algorithms decide” what shows up, according to one person familiar with the matter. Instead, the people said, Google made a change so that the first result is a site called howdovaccinescauseautism.com—which states on its home page in large black letters, “They f—ing don’t.” (The phrase has become a meme within Google.)
Google’s Ms. Levin declined to comment.
In the fall of 2018, the conservative news site Breitbart News Network posted a leaked video of Google executives, including Mr. Brin and Google CEO Sundar Pichai, upset and addressing staffers following President Trump’s election two years earlier. A group of Google employees noticed the video was appearing on the 12th page of search results when Googling “leaked Google video Trump,” which made it seem like Google was burying it. They complained on one of the company’s internal message boards, according to people familiar with the matter. Shortly after, the leaked video began appearing higher in search results.
“When we receive reports of our product not behaving as people might expect, we investigate to see if there’s any useful insight to inform future improvements,” said Ms. Levin.
FROM GOOGLE’S FOUNDING, Messrs. Page and Brin knew that ranking webpages was a matter of opinion. “The importance of a Web page is an inherently subjective matter, which depends on the [readers’] interests, knowledge and attitudes,” they wrote in their 1998 paper introducing the PageRank algorithm, the founding system that launched the search engine.
PageRank, they wrote, would measure the level of human interest and attention, but it would do so “objectively and mechanically.” They contended that the system would mathematically measure the relevance of a site by the number of times other relevant sites linked to it on the web.
Today, PageRank has been updated and subsumed into more than 200 different algorithms, attuned to hundreds of signals, now used by Google. (The company replaced PageRank in 2005 with a newer version that could better keep up with the vast traffic that the site was attracting. Internally, it was called “PageRankNG,” ostensibly named for “next generation,” according to people familiar with the matter. In public, the company still points to PageRank—and on its website links to the original algorithm published by Messrs. Page and Brin—in explaining how search works. “The original insight and notion of using link patterns is something that we still use in our systems,” said Ms. Levin.)
By the early 2000s, spammers were overwhelming Google’s algorithms with tactics that made their sites appear more popular than they were, skewing search results. Messrs. Page and Brin disagreed over how to tackle the problem.
Mr. Brin argued against human intervention, contending that Google should deliver the most accurate results as delivered by the algorithms, and that the algorithms should be tweaked only in the most extreme cases. Mr. Page countered that the user experience was getting damaged when users encountered spam rather than useful results, according to people familiar with the matter.
Google already had been taking what the company calls “manual actions” against specific websites that were abusing the algorithm. In that process, Google engineers demote a website’s ranking by changing its specific “weighting.” For example, if a website is artificially boosted by paying other websites to link to it, a behavior that Google frowns upon, Google engineers could turn down the dial on that specific weighting. The company could also blacklist a website, or remove it altogether.
Mr. Brin still opposed making large-scale efforts to fight spam, because it involved more human intervention. Mr. Brin, whose parents were Jewish émigrés from the former Soviet Union, even personally decided to allow anti-Semitic sites that were in the results for the query “Jew,” according to people familiar with the decision. Google posted a disclaimer with results for that query saying, “Our search results are generated completely objectively and are independent of the beliefs and preferences of those who work at Google.”
Finally, in 2004, in the bathroom one day at Google’s headquarters in Mountain View, Calif., Mr. Page approached Ben Gomes, one of Google’s early search executives, to express support for his efforts fighting spam. “Just do what you need to do,” said Mr. Page, according to a person familiar with the conversation. “Sergey is going to ruin this f—ing company.”
Ms. Levin, the Google spokeswoman, said Messrs. Page, Brin and Gomes declined to comment.
After that, the company revised its algorithms to fight spam and loosened rules for manual interventions, according to people familiar with the matter.
Google has guidelines for changing its ranking algorithms, a grueling process called the “launch committee.” Google executives have pointed to this process in a general way in congressional testimony when asked about algorithm changes.
The process is like defending a thesis, and the meetings can be contentious, according to people familiar with them.
In part because the process is laborious, some engineers aim to avoid it if they can, one of these people said, and small changes can sometimes get pushed through without the committee’s approval. Mr. Gomes is on the committee that decides whether to approve the changes, and other senior officials sometimes attend as well.
Google’s Ms. Levin said not every algorithm change is discussed in a meeting, but “there are other processes for reviewing more straightforward launches at different levels of the organization,” such as an email review. Those reviews still involve members of the launch committee, she said.
Today, Google discloses only a few of the factors being measured by its algorithms. Known ones include “freshness,” which gives preference to recently created content for searches relating to things such as breaking news or a sports event. Another is where a user is located—if a user searches for “zoo,” Google engineers want the algorithms to provide the best zoo in the user’s area. Language signals—how meanings change when words are used together, such as April and fools—are among the most important, as they help determine what a user is actually asking for.
Other important signals have included the length of time users would stay on pages they clicked on before clicking back to Google, according to a former Google employee. Long stays would boost a page’s ranking. Quick bounce backs, indicating a site wasn’t relevant, would severely hurt a ranking, the former employee said.
Over the years, Google’s database recording this user activity has become a competitive advantage, helping cement its position in the search market. Other search engines don’t have the vast quantity of data that is available to Google, search’s market-leader.
That makes the impact of its operating decisions immense. When Pinterest Inc. filed to go public earlier this year, it said that “search engines, such as Google, may modify their algorithms and policies or enforce those policies in ways that are detrimental to us.” It added: “Our ability to appeal these actions is limited.” A spokeswoman for Pinterest declined to comment.
Search-engine optimization consultants have proliferated to try to decipher Google’s signals on behalf of large and small businesses. But even those experts said the algorithms remain borderline indecipherable. “It’s black magic,” said Glenn Gabe, an SEO expert who has spent years analyzing Google’s algorithms and tried to help DealCatcher find a solution to its drop in traffic earlier this year.
ALONG WITH ADVERTISEMENTS, Google’s own features now take up large amounts of space on the first page of results—with few obvious distinctions for users. These include news headlines and videos across the top, information panels along the side and “People also ask” boxes highlighting related questions.
Google engineers view the features as separate products from Google search, and there is less resistance to manually changing their content in response to outside requests, according to people familiar with the matter.
These features have become more prominent as Google attempts to keep users on its results page, where ads are placed, instead of losing the users as they click through to other sites. In September, about 55% of Google searches on mobile were “no-click” searches, according to research firm Jumpshot, meaning users never left the results page.
Two typical features on the results page—knowledge panels, which are collections of relevant information about people, events or other things; and featured snippets, which are highlighted results that Google thinks will contain content a user is looking for—are areas where Google engineers make changes to fix results, the Journal found.
Curated Features
Google has looser policies about making adjustments to these features than organic search results. The features include Google News and People also ask.
Other features
Organic search results
search term
Top stories
News articles surfaced as being particularly relevant. Google blocks some sites that don’t meet its policies.
People also ask
A predictive feature that suggests related questions, providing short answers with links. Google says it weeds out and blocks some phrases in this feature as it does in its auto-complete feature.
Organic
search results
Other features
Organic search results
search term
Top stories
News articles surfaced as being particularly relevant. Google blocks some sites that don’t meet its policies.
People also ask
A predictive feature that suggests related questions, providing short answers with links. Google says it weeds out and blocks some phrases in this feature as it does in its auto-complete feature.
Organic
search results
Other features
Organic search results
search term
Top stories
News articles surfaced as being particularly relevant. Google blocks some sites that don’t meet its policies.
People also ask
A predictive feature that suggests related questions, providing short answers with links. Google says it weeds out and blocks some phrases in this feature as it does in its auto-complete feature.
Organic
search results
Other features
Organic search results
Top stories
News articles surfaced as being particularly relevant. Google blocks some sites that don’t meet its policies.
search term
Organic
search
results
People also ask
A predictive feature that suggests related questions, providing short answers with links. Google says it weeds out and blocks some phrases in this feature as it does in its auto-complete feature.
In April, the conservative Heritage Foundation called Google to complain that a coming movie called “Unplanned” had been labeled in a knowledge panel as “propaganda,” according to a person familiar with the matter. The film is about a former Planned Parenthood director who had a change of heart and became pro-life.
After the Heritage Foundation complained to a contact at Google, the company apologized and removed “propaganda” from the description, that person said.
Google’s Ms. Levin said the change “was not the result of pressure from an outside group, it was a violation of the feature’s policy.”
On the auto-complete feature, Google reached a confidential settlement in France in 2012 with several outside groups that had complained it was anti-Semitic that Google was suggesting the French word for “Jew” when searchers typed in the name of several prominent politicians. Google agreed to “algorithmically mitigate” such suggestions as part of a pact that barred the parties from disclosing its terms, according to people familiar with the matter.
In recent years, Google changed its auto-complete algorithms to remove “sensitive and disparaging remarks.” The policy, now detailed on its website, says that Google doesn’t allow predictions that may be related to “harassment, bullying, threats, inappropriate sexualization, or predictions that expose private or sensitive information.”
GOOGLE HAS BECOME more open about its moderation of auto-complete but still doesn’t disclose its use of blacklists. Kevin Gibbs, who created auto-complete in 2004 when he was a Google engineer, originally developed the list of terms that wouldn’t be suggested, even if they were the most popular queries that independent algorithms would normally supply.
For example, if a user searched “Britney Spears”—a popular search on Google at the time—Mr. Gibbs didn’t want a piece of human anatomy or the description of a sex act to appear when someone started typing the singer’s name. The unfiltered results were “kind of horrible,” Mr. Gibbs said in an interview.
He said deciding what should and shouldn’t be on the list was challenging. “It was uncomfortable, and I felt a lot of pressure,” said Mr. Gibbs, who worked on auto-complete for about a year, and left the company in 2012. “I wanted to make sure it represented the world fairly and didn’t leave out any groups.”
Google still maintains lists of phrases and terms that are manually blacklisted from auto-complete, according to people familiar with the matter.
The company internally has a “clearly articulated set of policies” about what terms or phrases might be blacklisted in auto-complete, and that it follows those rules, according to a person familiar with the matter.
Blacklists also affect the results in organic search and Google News, as well as other search products, such as Web answers and knowledge panels, according to people familiar with the matter.
Google has said in congressional testimony it doesn’t use blacklists. Asked in a 2018 hearing whether Google had ever blacklisted a “company, group, individual or outlet…for political reasons,” Karan Bhatia, Google’s vice president of public policy, responded: “No, ma’am, we don’t use blacklists/whitelists to influence our search results,” according to the transcript.
Ms. Levin said those statements were related to blacklists targeting political groups, which she said the company doesn’t keep.
Google’s first blacklists date to the early 2000s, when the company made a list of spam sites that it removed from its index, one of those people said. This means the sites wouldn’t appear in search results.
Engineers known as “maintainers” are authorized to make and approve changes to blacklists. It takes at least two people to do this; one person makes the change, while a second approves it, according to the person familiar with the matter.
The Journal reviewed a draft policy document from August 2018 that outlines how Google employees should implement an anti-misinformation blacklist aimed at blocking certain publishers from appearing in Google News and other search products. The document says engineers should focus on “a publisher misrepresenting their ownership or web properties” and having “deceptive content”—that is, sites that actively aim to mislead—as opposed to those that have inaccurate content.
“The purpose of the blacklist will be to bar the sites from surfacing in any Search feature or news product sites,” the document states.
Ms. Levin said Google does “not manually determine the order of any search result.” She said sites that don’t adhere to Google News “inclusion policies” are “not eligible to appear on news surfaces or in information boxes in Search.”
SOME INDIVIDUALS and companies said changes made by the company seem ad hoc, or inconsistent. People familiar with the matter said Google increasingly will make manual or algorithmic changes that aren’t acknowledged publicly in order to maintain that it isn’t affected by outside pressure.
“It’s very convenient for us to say that the algorithms make all the decisions,” said one former Google executive.
In March 2017, Google updated the guidelines it gives contractors who evaluate search results, instructing them for the first time to give low-quality ratings to sites “created with the sole purpose of promoting hate or violence against a group of people”—something that would help adjust Google algorithms to lower those sites in search.
The next year, the company broadened the guidance to any pages that promote such hate or violence, even if it isn’t the page’s sole purpose and even if it is “expressed in polite or even academic-sounding language.”
Google has resisted entirely removing some content that outsiders complained should be blocked. In May 2018, Ignacio Wenley Palacios, a Spain-based lawyer working for the Lawfare Project, a nonprofit that funds litigation to protect Jewish people, asked Google to remove an anti-Semitic article lauding a German Holocaust denier posted on a Spanish-language neo-Nazi blog.
The company declined. In an email to Mr. Wenley Palacios, lawyers for Google contended that “while such content is detestable” it isn’t “manifestly illegal” in Spain.
Mr. Wenley Palacios then filed a lawsuit, but in the spring of this year, before the suit could be heard, he said, Google lawyers told him the company was changing its policy on such removals in Spain.
According to Mr. Wenley Palacios, the lawyers said the firm would now remove from searches conducted in Spain any links to Holocaust denial and other content that could hurt vulnerable minorities, once they are pointed out to the company. The results would still be accessible outside of Spain. He said both sides agreed to dismiss the case.
Google’s Ms. Levin described the action as a “legal removal” in accordance with local law. Holocaust denial isn’t illegal in Spain, but if it is coupled with an intent to spread hate, it can fall under Spanish criminal law banning certain forms of hate speech.
“Google used to say, ‘We don’t approve of the content, but that’s what it is,’ ” Mr. Wenley Palacios said. “That has changed dramatically.”
Business Model
Google’s search results page has changed over the years, becoming much more ad-heavy.
Other features
Organic search results
search term
Ad
Ads
Ads in recent years claim more space at the top of the results page.
Ad
Vertical search results
Various features that present specialized results for specific topics, like hotels or places, often with photos or maps. The results in some of these features are paid advertisements.
Organic search results
As Google has placed more ads and verticals at the top of the page, organic search results have shrunk.
Other features
Organic search results
search term
Ad
Ads
Ads in recent years claim more space at the top of the results page.
Ad
Vertical search results
Various features that present specialized results for specific topics, like hotels or places, often with photos or maps. The results in some of these features are paid advertisements.
Organic search results
As Google has placed more ads and verticals at the top of the page, organic search results have shrunk.
Other features
Organic search results
search term
Ad
Ads
Ads in recent years claim more space at the top of the results page.
Ad
Vertical search results
Various features that present specialized results for specific topics, like hotels or places, often with photos or maps. The results in some of these features are paid advertisements.
Organic search results
As Google has placed more ads and verticals at the top of the page, organic search results have shrunk.
Other features
Organic search results
Ads
Ads in recent years claim more space at the top of the results page.
search term
Ad
Ad
Vertical
search results
Organic
search results
Various features that present specialized results for specific topics, like hotels or places, often with photos or maps. The results in some of these features are paid advertisements.
As Google has placed more ads and verticals at the top of the page, organic search results have shrunk.
Health policy consultant Greg Williams said he helped lead a campaign to push Google to make changes that would stifle misleading results for queries such as “rehab.”
At the time, in 2017, addiction centers with spotty records were constantly showing up in search results, typically the first place family members and addicts go in search of help.
Google routed Diane Hentges several times over the last year to call centers as she desperately researched drug addiction treatment centers for her 22-year-old son, she said.
Each time she called one of the facilities listed on Google, a customer-service representative would ask for her financial information, but the representatives weren’t seemingly attached to any legitimate company.
“If you look at a place on Google, it sends you straight to a call center,” Ms. Hentges said, adding that parents who are struggling with a child with addiction “will do anything to get our child healthy. We’ll believe anything.”
After intense lobbying by Mr. Williams and others, Google changed its ad policy around such queries. But addiction industry officials also noticed a significant change to Google search results. Many searches for “rehab” or related terms began returning the website for the Substance Abuse and Mental Health Services Administration, the national help hotline run by the U.S. Department of Health and Human Services, as the top result.
A spokesman for SAMHSA said the agency had a partnership with Google.
Google never acknowledged the change. Ms. Levin said that “resources are not listed because of any type of partnership” and that “we have algorithmic solutions designed to prioritize authoritative resources (including official hotlines) in our results for queries like these as well as for suicide and self-harm queries.”
Google’s search algorithms have been a major focus of Hollywood in its effort to fight pirated TV shows and movies.
Alphabet’s revenue, by type
Advertising
Other
$150
billion
100
50
0
2005
’10
’15
Note: Alphabet was created through a corporate restructuring of Google in 2015. Figures for prior years are for Google Inc.
Source: the company
Studios “saw this as the potential death knell of their business,” said Dan Glickman, chairman and chief executive of the Motion Picture Association of America from 2004 to 2010. The association has been a public critic of Google. “A hundred million dollars to market a major movie could be thrown away if someone could stream it illegally online.”
Google received a record 1.6 million requests to remove web pages for copyright issues last year, according to the company’s published Transparency Report and a Journal analysis. Those requests pertained to more than 740 million pages, about 12 times the number of web pages it was asked to take down in 2012.
A decade ago, in concession to the industry, Google removed “download” from its auto-complete suggestions after the name of a movie or TV show, so that at least it wouldn’t be encouraging searches for pirated content.
In 2012, it applied a filter to search results that would lower the ranking of sites that received a large number of piracy complaints under U.S. copyright law. That effectively pushed many pirate sites off the front page of results for general searches for movies or music, although it still showed them when a user specifically typed in the pirate site names.
In recent months the industry has gotten more cooperation from Google on piracy in search results than at any point in the organization’s history, according to people familiar with the matter.
“Google is under great cosmic pressure, as is Facebook,” Mr. Glickman said. “These are companies that are in danger of being federally regulated to an extent that they never anticipated.”
Mr. Pichai, who became CEO of Google in 2015, is more willing to entertain complaints about the search results from outside parties than Messrs. Page and Brin, the co-founders, according to people familiar with his leadership.
Google’s Ms. Levin said Mr. Pichai’s “style of engaging and listening to feedback has not shifted. He has always been very open to feedback.”
CRITICISM ALLEGING political bias in Google’s search results has sharpened since the 2016 election.
Interest groups from the right and left have besieged Google with questions about content displayed in search results and about why the company’s algorithms returned certain information over others.
Google appointed an executive in Washington, Max Pappas, to handle complaints from conservative groups, according to people familiar with the matter. Mr. Pappas works with Google engineers on changes to search when conservative viewpoints aren’t being represented fairly, according to interest groups interviewed by the Journal, although that is just one part of his job.
“Conservatives need people they can go to at these companies,” said Dan Gainor, an executive at the conservative Media Research Center, which has complained about various issues to Google.
Google also appointed at least one other executive in Washington, Chanelle Hardy, to work with outside liberal groups, according to people familiar with the matter.
Ms. Levin said both positions have existed for many years. She said in general Google believes it’s “the responsible thing to do” to understand feedback from the groups and said Google’s algorithms and policies don’t attempt to make any judgment based on the political leanings of a website.
Mr. Pappas declined to comment, and Ms. Hardy didn’t reply to a request for comment.
Share Your Thoughts
Does Google give you what you expect in search results? Join the discussion below.
Over the past year, abortion-rights groups have complained about search results that turned up the websites of what are known as “crisis pregnancy centers,” organizations that counsel women against having abortions, according to people familiar with the matter.
One of the complaining organizations was Naral Pro-Choice America, which tracks the activities of anti-abortion groups through its opposition research department, said spokeswoman Kristin Ford.
Naral complained to Google and other tech platforms that some of the ads, posts and search results from crisis pregnancy centers are misleading and deceptive, she said. Some of the organizations claimed to offer abortions and then counseled women against it. “They do not disclose what their agenda is,” Ms. Ford said.
In June, Google updated its advertising policies related to abortion, saying that advertisers must state whether they provide abortions or not, according to its website. Ms. Ford said Naral wasn’t told in advance of the policy change.
Ms. Levin said Google didn’t implement any changes with regard to how crisis pregnancy centers rank for abortion queries.
The Journal tested the term “abortion” in organic search results over 17 days in July and August. Thirty-nine percent of all results on the first page had the hostname http://www.plannedparenthood.org, the site of Planned Parenthood Federation of America, the nonprofit, abortion-rights organization.
By comparison, 14% of Bing’s first page of search results and 16% of DuckDuckGo’s first page of results were from Planned Parenthood.
Ms. Levin said Google doesn’t have any particular ranking implementations aimed at promoting Planned Parenthood.
View Interactive
The practice of creating blacklists for certain types of sites or searches has fueled cries of political bias from some Google engineers and right-wing publications that said they have viewed portions of the blacklists. Some of the websites Google appears to have targeted in Google News were conservative sites and blogs, according to documents reviewed by the Journal. In one partial blacklist reviewed by the Journal, some conservative and right-wing websites, including The Gateway Pundit and The United West, were included on a list of hundreds of websites that wouldn’t appear in news or featured products, although they could appear in organic search results.
Google has said repeatedly it doesn’t make decisions based on politics, and current and former employees told the Journal they haven’t seen evidence of political bias. And yet, they said, Google’s shifting policies on interference—and its lack of transparency about them—inevitably force employees to become arbiters of what is acceptable, a dilemma that opens the door to charges of bias or favoritism.
Google’s Ms. Levin declined to comment.
DEMANDS FROM GOVERNMENTS for changes have grown rapidly since 2016.
From 2010 to 2018, Google fielded such requests from countries including the U.S. to remove 685,000 links from what Google calls web search. The requests came from courts or other authorities that said the links broke local laws or should be removed for other reasons.
Nearly 78% of those removal requests have been since the beginning of 2016, according to reports that Google publishes on its website. Google’s ultimate actions on those requests weren’t disclosed.
Russia has been by far the most prolific, demanding the removal of about 255,000 links from search last year, three-quarters of all government requests for removal from Google search in that period, the data show. Nearly all of the country’s requests came under an information-security law Russia put into effect in late 2017, according to a Journal examination of disclosures in a database run by the Berkman Klein Center.
Google said the Russian law doesn’t allow it to disclose which URLs were requested to be removed. A person familiar with the matter said the removal demands are for content ruled illegal in Russia for a variety of reasons, such as for promoting drug use or encouraging suicide.
Requests can include demands to remove links to information the government defines as extremist, which can be used to target political opposition, the person said.
Google, whose staff reviews the requests, at times declines those that appear focused on political opposition, the person said, adding that in those cases, it tries not to draw attention to its decisions to avoid provoking Russian regulators.
The approach has led to stiff internal debate. On one side, some Google employees say that the company shouldn’t cooperate at all with takedown requests from countries such as Russia or Turkey. Others say it is important to follow the laws of countries where they are based.
“There is a real question internally about whether a private company should be making these calls,” the person said.
Google’s Ms. Levin said, “Maximizing access to information has always been a core principle of Search, and that hasn’t changed.”
Google’s culture of publicly resisting demands to change results has diminished, current and former employees said. A few years ago, the company dismantled a global team focused on free-speech issues that, among other things, publicized the company’s legal battles to fight changes to search results, in part because Google had lost several of those battles in court, according to a person familiar with the change.
“Free expression was no longer a winner,” the person said.
—Keach Hagey, Andrea Fuller, Rob Copeland, Jim Oberman and Mythili Sankara contributed to this article.
—Illustrations by Martin Tognola
—Graphics by Elliot Bentley and Kara Dapena
Write to Kirsten Grind at kirsten.grind@wsj.com, Sam Schechner at sam.schechner@wsj.com and Robert McMillan at Robert.Mcmillan@wsj.com
Justplainbill's Weblog 
War on Currency and your savings, by Daren Fonda (Barron’s reporter)
[With stablecoin, my position on blockchains has changed. The following is why everyone with more than $600 in savings should be subscribing to both The Wall Street Journal and to Barron’s. Bill]
Barron’s
TopicsMagazineDataAdvisorPenta100 Years
William
Inside the Coming War Over Digital Currencies—and What It Means for Your Money
By
Daren Fonda
Updated September 18, 2021 / Original September 17, 2021
BARRON’S NEWSLETTERS
Hi William, get the latest from The Barron’s Daily
A morning briefing on what you need to know in the day ahead, including exclusive commentary from Barron’s and MarketWatch writers.
SIGN UP
Illustration by Glenn Harvey
Text size
Listen to article
Length18 minutes
The war over money is heating up: For the first time in more than a century, the dollar’s supremacy is being challenged. The rise of cryptocurrencies and “stablecoins” has spurred a rethinking of what a currency is, who regulates it, and what it means when it’s no longer controlled by a national government. The dollar itself may be getting an overhaul, transformed into a digital currency that can travel instantly around the world, holding up against Bitcoin or any other token.
The old battle lines between national currencies are being redrawn by an onslaught of crypto insurgents. These privately issued currencies are fragmenting monetary systems, banking, and payments. The landscape calls to mind the “wildcat” money era of the mid-1800s, when a scrum of banks supplied their own notes—prompting the Federal Reserve to establish a national currency. Commerce doesn’t run as efficiently without a “no questions asked” currency, and governments risk losing control over fiscal and monetary policies if multiple currencies vie for economic activity.
READ THESE TOO
Illustration by Glenn Harvey
What kind of upheaval will the new currencies wreak? No one knows. And there are plenty of legitimate use-cases for cryptos and applications built on top of blockchain networks. But the technology is so disruptive that it’s triggering calls for a cascade of new regulations, and it’s spurring governments around the world to think about digitizing their currencies, at least partly to remain relevant and maintain control over their economic interests. The Fed itself is expected to weigh in with its own report in coming days.
“The advent of digital currencies may allow people and businesses to get around banks,” says Thomas Hoenig, a former president of the Federal Reserve Bank of Kansas City. “If cryptos become a substitute for the dollar, they could create a separate money environment that would make monetary policies more difficult to implement.”
Cryptos are now worth $2.1 trillion, doubling in value this year alone. Bitcoin, worth nearly $900 billion, recently became legal tender in El Salvador—a controversial monetary shift in the country, but one that may pave a path for other developing nations. Capital is flooding into companies that are building everything from trading platforms to exchanges for trading new digital assets like non-fungible tokens, or NFTs. Investors are also trading tokens on decentralized exchanges like Uniswap, and they’re earning high yields by “staking” their tokens to network operators.
RELATED MARKET DATA
Currencies
Cryptos and other tokens aren’t (yet) close to denting the $19.4 trillion U.S. money supply or the 50% of international trade that’s invoiced in dollars. One measure of the dollar’s hegemony—its share of central bank reserves—has been declining for 25 years, but at 60% it remains three times that of its closest rival, the euro. Vast markets of global commodities are priced in the dollar. Trillions of dollars in sovereign and commercial debt are pegged to the “risk free” rate of Treasuries.
But challenges to the dollar posed by blockchain technologies aren’t so easy to dismiss.
Cryptos, stablecoins and NFTs are becoming the native tokens of gaming and e-commerce platforms. Virtual-reality platforms are being designed to incorporate NFTs or other private currencies. As economic activity shifts to these walled gardens, banks and government-backed money could wind up on the outskirts.
The Trillion Dollar ClubCryptocurrencies have surged in value, led by Bitcoin and EthereumMarket Value of CryptosSource: CoinMarketCap
billionOct. 2019Sept.05001000150020002500$3000
Challenging the Incumbents
Big money is at stake, especially for banks and other companies that effectively charge “rents” for moving dollars around. North American banks, card networks, and nonbank “fintechs” earn huge sums for payment and credit-card services—$500 billion a year, according to data from consultancy McKinsey. That amounts to an estimated 2% toll on U.S. gross domestic product—much of it in credit card fees.
Many banks and financial companies, including Visa (ticker: V) and JPMorgan Chase (JPM), are working to integrate cryptos and stablecoins, aiming to capture fees on brokerage, custodial, and payment services. But they face technologies that threaten their revenues—and, perhaps more important, access to data.
Solana, for instance, is a relative newcomer in crypto. Developed by a former software engineer at Qualcomm, the network claims to handle 65,000 transactions per second at a cost of $0.00025 per transaction, making it far faster and cheaper than bigger rivals like Ethereum. It’s taking off for stablecoins and NFTs—new digital playthings for art, video, and music. Solana’s blockchain network is also attracting high-frequency trading firms that see it as a platform for ultrafast data feeds and trading applications for cryptos, stocks, and other securities.
BTIG analyst Mark Palmer calls Solana the “biggest blockchain breakout of 2021,” noting that it’s powering a much-anticipated “metaverse” game called Star Atlas that uses NFTs for in-game assets. “The speed that Solana’s architecture facilitates is a literal game-changer in the NFT gaming world,” he wrote in a recent report. The network crashed this past week as usage surged, pulling its token down. But its fall may also reflect some profit-taking after a 9,166% rally this year, pushing the token from $1.50 to $139, giving it a $41 billion market value.
The Battle for a Digital Dollar
One of the biggest financial-policy battles that’s shaping up in Washington is over digitizing the dollar—turning it into a token that may be issued directly to consumers by the central bank. A much-anticipated report is expected soon from the Fed, outlining its perspective on a central-bank digital currency, or CBDC. Other countries, led by China, have already launched CBDCs in pilot programs, putting pressure on the Fed to develop a rival.
A digital dollar could take many forms. The basic idea is that the central bank would issue a new digital instrument for transactions and deposits, alongside physical cash or entries on a bank ledger (essentially deposits). Payments could settle in real time, proponents argue, and fees could fall sharply since the Fed doesn’t have a profit incentive. That could be a huge win for the 6% of the population that’s “unbanked” and pays steep fees for check-cashing. People sending money overseas could also pay much lower fees for “remittances,” cutting out middlemen like Western Union (WU) and MoneyGram.
International pressure is building as China and other countries take the lead in CBDCs. “The time has passed for central banks to get going,” said Benoît Coeuré, head of innovation at the Bank for International Settlements, in a speech in September. “We should roll up our sleeves and accelerate our work on the nitty-gritty of CBDC design.”
Fed officials seem split on the idea, however, let alone the specifics. Governor Lael Brainard, who may be in line for Chairman Jerome Powell’s job next year, has indicated support for a CBDC. But governor Christopher Waller is a skeptic, describing a digital dollar as a “solution in search of a problem.” As he sees it, commercial banks and the Fed are already developing real-time settlement; stablecoins may put pressure on banking fees, he argues, and most of the unbanked don’t even want accounts, according to surveys. “The government should compete with the private sector only to address market failures…and I don’t think that CBDCs are the case for making an exception,” he said in a speech last month.
Politicians, not Fed officials, are likely to have the final word. A bill backed by Sen. Sherrod Brown (D., Ohio) envisions the Fed offering “digital dollar wallets.” Commercial banks would maintain the wallets, entitling owners to a share of the bank’s reserves held at the Fed. For consumers without access to branches, he sees the Postal Service turning into a digital-dollar bank.
None of this appeals to bankers, of course, who worry that the Fed could siphon away their deposits and undermine lending. “The drawbacks appear to be more pronounced than the benefits, at least in the U.S.,” says Rob Morgan, a senior vice president with the American Bankers Association.
JPMorgan is calling for “minimally invasive CBDCs,” according to a recent report by Joshua Younger, head of U.S. fixed-income strategy. CBDC deposits that are limited to $2,500 would mitigate the potential for the Fed to “cannibalize” deposits, he argues. He also says that U.S. banks are already “partially nationalized,” with 15% of their assets held as Fed reserves and Treasury securities, levels that may increase if the Fed got into commercial banking.
Taming the Crypto Wild West
Regulators aren’t sitting idly as digital currencies plant roots. Federal and state agencies are working on rules to keep tabs on the industry. Gary Gensler, the new chairman of the Securities and Exchange Commission, laid out an expansive agenda to regulate crypto tokens, trading, and lending platforms in a Senate hearing this past week. “Large parts of the field of crypto are sitting astride of—not operating within—regulatory frameworks,” he said. Automated exchanges could be in for more scrutiny, along with lending platforms like BlockFi, where investors can earn high yields on crypto deposits.
Congress sees plenty of opportunity to raise revenue by taxing crypto. Democrats in the House have included “digital assets” in their $3.5 trillion reconciliation bill, including a provision that would subject cryptos to “wash sale” rules, which prevent investors from claiming a tax loss if they buy the same security within 30 days (before or after) of the sale. That measure alone could raise an estimated $16 billion over a decade.
Still, it won’t be easy for regulators to tax or police the entire industry. Crypto brokerages outside the U.S. handle much of the trading volume. Exchanges like Uniswap use protocols and “smart contracts” to process transactions, operating independently of any centralized entity like a bank or brokerage firm. “The underlying protocol is operating on its own, and users can still trade the assets, irrespective of the SEC,” says Anthony Georgiades, a crypto investor with Innovating Capital. “It’s sufficiently decentralized so that even if they try to delist the assets, they couldn’t.”
Tokenizing the WorldThe number of cryptos has jumped almost140% in the past two years.Source: CoinMarketCapNote: In Oct. 2020 CoinMarketCap removedinactive cryptocurrencies from the totals.
2020’21200030004000500060007000
Washington still can’t agree on whether to classify cryptos as a currency, security, or commodity. The Internal Revenue Service calls cryptos “property,” while the Commodity Futures Trading Commission has oversight over the crypto futures market, and a patchwork of agencies oversee the banks and exchanges.
A few states aren’t waiting around for more federal rules. BlockFi is in trouble with regulators in New Jersey and Texas, states where it could soon be illegal for residents to open an account with the company. BlockFi CEO Zac Prince says uniform federal banking rules are needed. “It’s gonna come down to federal regulators…creating a path for this type of activity to happen,” he said at a conference this past week.
Stablecoins pose perhaps the biggest regulatory conundrum. The tokens have a fixed value of $1, typically pegged to the dollar. More than $110 billion are in circulation, primarily in Tether and USD Coin. Investors use the coins as dollar substitutes to transact on exchanges; they’re also gaining traction for international payments and peer-to-peer, or P2P, transactions.
A game-changing “stablecoin” may be coming from Diem, a consortium of 26 companies, originally conceived by Facebook (FB). Diem is trying to launch a “regulatory friendly” version, says Christian Catalini, chief economist of the Diem Association. Its underlying network, backed by companies including Uber Technologies (UBER), Coinbase Global (COIN), and Spotify Technology (SPOT), will levy fees expected to be less than 0.10% per transaction, far below what banks and card networks now charge.
Diem could be a blockbuster. The token could quickly gain traction for things like Uber fares, Gucci bags on Farfetch (FTCH), or subscriptions on Spotify—cutting out payment middlemen with lower transaction fees. The network is also designed for P2P transactions, including remittances, and the underlying blockchain technology could move programmable digital assets in the future. The Diem coin itself, however, might be short-lived if a digital dollar launches. “We’ve committed to phasing out the token when there is a digital dollar,” Catalini says.
Diem has pledged to hold high-quality assets as reserves for its coins, backed at least one-to-one by cash or Treasuries. It might not have much choice: Regulators are starting to view stablecoins as a source of financial instability, and they may be close to issuing new rules on capital and reserve requirements for issuers.
The concern is that coin issuers aren’t backing their tokens with 100% cash reserves, using proxies like commercial paper, bank “repo” agreements, and other securities. That might be fine in normal market conditions, but it could be destabilizing in a crisis. Money-market funds have experienced runs that spilled over into other areas, prompting the Fed to stabilize the market, most recently in March 2020. “It’s a central problem that the Fed worries about from a stability point,” says Morgan Ricks, a law professor at Vanderbilt University and former Treasury official.
Tether, the largest stablecoin, has run into legal trouble over its reserves, agreeing last February to more disclosure in a deal with the New York attorney general. But its reserve composition remains opaque. Tether, backed by the Bitfinex exchange, holds only 3.9% of the coin’s reserves in cash and 2.9% in T-bills, according to its latest disclosure, with 65% in commercial paper. Tether says its tokens are “always 100% backed by our reserves.”
The Treasury Department recently convened a task force to develop a framework for regulating stablecoins. Some leading economists say it’s overdue. “Policy makers may view stablecoins as an up-and-coming financial innovation that does not pose any systemic risk,” wrote Yale University economist Gary Gorton in a recent paper co-authored with a Fed attorney, Jeffery Zhang. “That would be a mistake because this is precisely when policy makers need to act.”
The Dollar Won’t Go Away
The dollar won’t go down easily. It has deflected multiple threats since President Richard Nixon ended its peg to gold in 1971, turning it into a free-floating “fiat” currency. A bout of inflation in the 1970s, the rise of the Japanese yen in the 1980s, and the euro’s ascent in the early 2000s all failed to knock it down.
A common marketing case for Bitcoin, the largest crypto, is that it’s “digital gold” with a fixed supply of 21 million tokens; by design, it can’t be increased, unlike fiat currencies that may be depreciated by governments for political or economic gains. Central banks have embarked on a money-printing spree—the Fed’s balance sheet has ballooned to $8.3 trillion from $1 trillion in 2008. Crypto backers argue that the dollar’s purchasing power will diminish due to inflationary forces tolerated by central banks, while cryptos will hold more of their value.
Taking a CutBanks and payment companies reap trillions of dollars for moving money aroundGlobal Payments RevenueSource: McKinsey
trillionEstimateAsia-PacificNorth AmericaEMEALatin America20102014201820192020E0.00.51.01.52.0$2.5
Yet for all the carping about currency “debasement,” or an erosion of purchasing power in the dollar, the economics are far more complex. Inflation hasn’t proved deeply problematic in North America since the early 1980s. Before the pandemic, it was so low that policy makers worried about deflation. Rising labor costs and global supply-chain disruptions pose near-term inflationary threats, but their persistence isn’t assured. The forces that have kept a lid on inflation—including aging populations in developed economies and productivity gains from technology—aren’t going away.
History is also on the dollar’s side in the sense that governments have never allowed rival currencies to usurp their authority. Technologies make the job tougher but not insurmountable, and the greater the success of currencies like Bitcoin, the more governments may try to kill it.
What It Means for Investors
What’s the impact for investors in crypto-infrastructure stocks and currencies? For now, not much. Crypto stocks and prices for digital currencies have climbed for months, despite tighter regulatory scrutiny. Capital is flooding into the industry as use-cases for cryptos, stablecoins, and decentralized-finance, or DeFi, networks expand. New rules will take months or years to be written and implemented by regulatory agencies. A digital dollar could become a partisan battle that gets bogged down in Congress.
Clarity from regulators may be welcomed, since they could open the floodgates to investment products and services, expanding the market with advisors and institutional fund managers that oversee trillions of dollars in global assets. Banks also want a level playing field to cut down on “regulatory arbitrage” that may now give pure-play crypto companies an advantage.
The crypto industry, for its part, is also becoming a lobbying force. The industry exerted its influence in August as lawmakers added tax-reporting requirements on crypto companies to the Senate infrastructure bill. The lobbying blitz failed, but the battle isn’t over—it will probably shift to regulatory agencies.
As for the dollar, the very currencies that are nipping at its heels could help preserve it. Cryptos and other tokens haven’t been tested in a crisis when investors dump anything with a whiff of risk. The diciest currencies fall the hardest during panics, and cryptos could follow precedent. “If there is a crisis, all these parallel currencies will take flight into the sovereign,” predicts Hoenig. Digital or not, the dollar will live to fight another day.
Write to Daren Fonda at daren.fonda@barrons.com
[Explains why gold, silver, and copper haven’t risen as they should. With stablecoins not being supported by trimetalicism or necessary fungible commodities, but by debt and tradable assets, the implication is a currency bubble that may lead to a bust, as all bubbles do, and market downturn, as these assets are sold to redeem stablecoins, but the attack on liberty and freedom, as shown by the Harris/Biden cabal’s pushing the IRS to have complete access to all bank accounts over $600 w/o the restrictions of the Vth Amendment or Probable Cause will lead to a Chinese style of global tyranny. Consider, we will all live in the world of Terese Xu of Beijing (WSJ Weekend 9/18-19-2021 p A8). And, of those who died incarcerated in their apartments in Wuhan to prevent the spread of the PLA-Fauci COVID bio-weapon.
Justplainbill]