5MF (WEEK 12): DORSEY’S BLOCK UNDER ATTACK, SEC VS. COINBASE, FED TEA LEAVES

Five Minute Finance
14 min readMar 24, 2023

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The 5-minute newsletter on the important stuff in finance — explaining what’s going on, and why.

Let’s see what’s going on this week:

  • Decoding the Fedspeak After 25bps Hike
  • Coming Soon: SEC vs. Coinbase
  • Xapo Forges SWIFT Alternative with USDC
  • Why GameStop (GME) Just Saw a +50% Boost
  • Jack Dorsey’s Block Under Big Hindenburg Attack

Decoding the Fedspeak

  • Will the Fed Shift Monetary Policy Amid a Banking Crisis? (link)
  • March Brings Another 25 BPS Hike Despite Worries Stemming From Bank Crisis (link)

Jerome and Janet

As expected by 86.4% of market participants, the Federal Reserve increased rates by another 25 bps (0.25%) on Wednesday. This brought the federal funds rate to the 4.75–5.00% range, making it that much more expensive to borrow capital.

Gather round, it’s time to read the tea leaves.

OK, maybe it’s not exactly on that level — but, to be fair, it seems as if our entire financial system is now reactive to the interpretation of a few words and even the body language of a select few individuals.

So with that, let’s recap what happened this past week.

First, anything outside the expected 25 bps sends a message. To put it differently, the expectation holds a power of its own to sway the Fed. Therefore, with that expectation fulfilled, it’s not just a matter of another hike itself, but how it was framed.

This is where things get interesting.

At the press conference, Powell said that both inflation and the labor market still exert inflationary pressures. The Federal Reserve uses a forecast mechanism called SEP (Summary of Economic Projections). It’s published four times per year and it combines GDP, unemployment rate, inflation, and interest rates.

The latest SEP for total Personal Consumption Expenditure (PCE) inflation is 3.3% this year, 2.5% for 2024, and 2.1% for 2025. The Fed’s inflation target is still 2%. Accordingly, Powell said that getting to the coveted percentage “is likely to be bumpy”.

By that, he could mean more hikes this year, without cuts. The projected terminal funds rate should then reach 5.1% by the end of 2023, with cuts only in 2024, when the rate should go down to 4.3%. In 2025, the rate should be at 3.1%.

In short, Powell delivered a hawkish outlook. This is supported by the fact FOMC members plotted a higher funds rate projection compared to December, at 4.3% vs. the previous 5.1%.

Image credit: Federal Reserve

But, Powell greatly diluted that hawkishness by saying this:

“…events in the banking system over the past two weeks are likely to result in tighter credit conditions for households and businesses,”

In other words, either banks will tighten conditions themselves — or the Fed will with further rate hikes.

Powell then very awkwardly compiled the following sentence:

“As a result, we no longer state that we anticipate that ongoing rate increases will be appropriate to quell inflation.”

This ‘Fedspeak’ is intentional and traditional. The indirect language signals a shift in policy but without anchoring, so that the market’s reaction is equally muted.

But it didn’t work. During the press conference, stocks soared.

Image credit: @Schuldensuehner

Likewise, the market didn’t buy Powell’s assurance of no rate cuts this year in the slightest. In fact, the futures market sees 4 rate cuts by December.

Image credit: CME Group

This is a pretty big mismatch between the market and the central bank, suggesting that the Fed’s credibility is running on fumes. Powell further eroded his credibility with this statement:

“And we are continuing the process of significantly reducing our securities holdings.”

But this is how the Fed’s balance sheet looks now, already having wiped out 64% of the QT monetary policy within two weeks.

The Federal Reserve’s balance sheet reverted to October 2022 level, having increased by $391.5 billion, instead of getting ‘tightened’. Image credit: stlouisfed.org

But it’s not solely Powell receiving this signal.

peaking of credibility, let’s explain the mystery of Janet Yellen’s effect on the market. She is the US treasury secretary and Powell’s predecessor as Fed Chair during the Obama admin.

Yellen the White vs. Yellen the Black

If you’ve been following so far, you may have noticed the critical point:

Powell singled the ongoing erosion of trust in the US banking system as the potential mechanism that will reduce a reliance on hiking alone. This is not surprising. After all, it was Powell himself who wrote this down in 2012, as a member of the Board of Governors.

“Meanwhile, we look like we are blowing a fixed-income duration bubble right across the credit spectrum that will result in big losses when rates come up down the road. You can almost say that that is our strategy.”

Indeed, asset bubble suppression is an effective way to douse inflation, with a forecast of recession as the ultimate cold shower. And guess what happened to Silicon Valley Bank? Exactly that.

So, banking confidence erosion, which delivers “tighter credit conditions”, is — at the end of the day — just another tool in the Fed’s toolbox to lower inflation.

The problem is, Powell has to be in sync with his colleague, Treasury Secretary Janet Yellen. All the tools have to be in sync to deliver a ‘soft landing’. And she essentially fumbled that this past week.

You see, when you have the FDIC insuring $9 trillion worth of deposits with $125 billion worth of assets, your confidence game has to be at its peak. You would have to be a master spellcaster to imbue the aura of confidence needed. Yellen miscast the spell.

Just after Powell’s press conference, at the Senate subcommittee, Yellen said this:

“I have not considered or discussed anything having to do with blanket insurance or guarantees of deposits,”

Reminder, the FDIC announced on March 12 that ALL deposits of failed Silicon Valley Bank and Signature Bank were insured. Down the line, the bank run contagion transferred to US regional banks. For instance, the First Republic Bank (FRC) was injected with $70 billion.

The day before, on Tuesday at the American Bankers Association, Yellen said that “similar actions could be warranted if smaller institutions suffer deposit runs that pose the risk of contagion,”

But the next day, following the market’s freefall, Yellen reset her tune to Tuesday’s, saying that tools are there to secure banks’ deposits.

Image credit: @zerohedge

It’s difficult to say whether Yellen’s spellcasting skills are intentionally inverse. She came up with the notion of “transitory inflation” at a time of historic +39% increase in M2 money supply. Yellen also remarked in June 2017 that “I don’t believe we’ll see another financial crisis in our lifetime.

Regardless, the bedazzled spellcasting is exerting a heavy toll on the US banking system, reflected in the stocks of regional banks throughout March:

The month’s performance of First Republic (FRC), PacWest (PACW), Western Alliance (WAL), Zions Banks (ZION) and Comerica (CMA). Image credit: Trading View

SEC vs. Coinbase on the Horizon

  • Coinbase Shares Fall 11% in Premarket as SEC Action Looms (link)
  • SEC Sues Justin Sun, Cohort of Celebrities For Touting Crypto “Securities” (link)

Coinbase in the SEC’s Sights

On Wednesday, the Securities and Exchange Commission (SEC) delivered a ‘Wells notice’ to Coinbase, the largest US crypto exchange by trading volume. This type of formal letter was named after John Wells, the SEC Chair in the 1970s who established the procedure.

A Wells notice implies that the SEC has concluded an investigation into a company, and enforcement action will commence if certain conditions are not met.

This is extraordinary for multiple reasons. Let’s set up the proper framing to better understand what’s going on:

  • The SEC Chair, Gary Gensler, met personally with Sam Bankman-Fried (SBF) multiple times.
  • Gary Gensler, a former Goldman Sachs banker, also worked under Glenn Ellison at MIT. Glenn is the father of Caroline Ellison, SBF’s top Alameda lieutenant.
  • During those meetings with SBF, Gensler failed to spot giant red flags regarding FTX. Instead, he actually approved a deal between FTX US and IEX, which is an SEC-registered exchange.
  • Under Gensler, the SEC didn’t object to FTX acquiring the assets from the bankrupt Voyager Digital.
  • But when FTX went bust, the SEC argued against Binance acquiring the same assets. The bankruptcy judge both dismissed the SEC’s objection and admonished the commission.

Keeping all of that in mind, the SEC is now going after Coinbase, the single most regulated, publicly traded company in the crypto space. So, the SEC acted in good faith this time around, right?

According to Coinbase, the agency’s behavior has been markedly aberrant:

  • The accusation is that Coinbase lists certain cryptocurrencies which constitute unregistered securities.
  • But the SEC has declined to say which ones.

“At no point in this investigation has the SEC told us a single specific concern about a single asset on our platform.”

The SEC also declined to respond to multiple Coinbase proposals regarding their registration.

“We met with the SEC more than 30 times over nine months, but we were doing all of the talking.”

Brian Armstrong, Coinbase CEO, tapped into a sports metaphor to paint the recent SEC behavior.

Image credit: Twitter

It looks like Coinbase will go to court to dispute the matter. Coinbase’s Chief Legal Officer, Paul Grewal, is preparing accordingly.

Image credit: Twitter.

This would make for another protracted legal battle, in the shadow of the still unresolved SEC vs. Ripple Labs case. For US customers, it’s another sign that the fiat-to-crypto rails are coming off track.

Interestingly, although Coinbase (COIN) stock took an expected dive, Bitcoin followed suit but rapidly recovered. Just like during the banking crisis, it’s a reflection of Bitcoin’s self-custodial decentralized resilience, which investors are clearly turning to amid a growing lack of trust in both banks and financial regulators.

Image credit: Trading View

White House on the Lookout for Bitcoin CEO 👀

Speaking of Bitcoin and sovereign assets, the White House issued an anti-digital assets paper, in tandem with the SEC. Published on Monday, the 513-page “Economic Report of the President” devoted an entire chapter on digital assets, dubbed “Digital Assets: Relearning Economic Principles”.

Bitcoin was mentioned 75 times. Although the report didn’t recommend future legislation, it did paint the crypto space as failing to bring any benefits, dismissing it as an alternative.

Instead, blockchain tech should be used to support the existing central banking system via CBDCs.

The Federal government is aiming for the ‘middle ground’. Image credit: White House

If you want to judge the White House’s level of understanding at display, this extraordinary gem is enlightening.

“Despite Ethereum’s switch to proof-of-stake, Bitcoin has not announced plans to make a similar change.”

Predictably, this sparked a mocking spree on Twitter.

Image courtesy of Twitter.

Xapo Bank Circumvents SWIFT via Stablecoins

  • Xapo is Now First Fully Licensed Bank to Offer USDC Withdrawals and Deposits (link)
  • ‘Inundated with Requests’: Digital Currency Firms Look to Swiss Banks after Crypto-friendly Lenders Fail (link)

USDC Holding the First Stablecoin Banking Bridge

What’s a US crypto company to do with Silvergate and Signature gone?

They were the pillars of crypto exchanges.

Well, here’s one response so far: Having your own custodial business outside of the US.

In the case of Coinbase, the exchange acquired Xapo bank’s institutional businesses in August 2019. The Gibraltar-based Xapo was absorbed into Coinbase Custody, back then having over $7 billion in Assets Under Custody (AUC).

Given the anti-crypto climate in the US getting warmer by the day, Coinbase is now leveraging this relationship. On Wednesday, the exchange announced that Xapo is doing a 1:1 conversion from USDC to USD.

As jointly issued by Circle and Coinbase, USD Coin (USDC) is now arguably a superior payment rail to SWIFT. On the latter’s legacy banking network, payments could travel for days, or even weeks. And in some cases, they may be flagged for whatever preemptive reason.

The Xapo-USDC rail completely circumvents SWIFT near-instantaneously, in addition to automatically converting all USDC deposits to USD, 24/7. The bank also offers a 4.1% annual interest rate on deposits.

Although a fully licensed private bank, Xapo is not in the business of lending. Instead, Xapo delivers its yields via short-term liquid asset investing.

US citizens are not eligible to apply for Xapo membership, which comes with an annual price tag of $150. In the meantime, crypto firms are seeking refuge in Swiss private banks for their banking needs.

“Over the past weeks as the current banking industry events have unfolded, we have seen a significant increase in onboarding enquiries from various international locations,”

-Dominic Castley, Chief Marketing Officer at Switzerland’s Sygnum bank, specializing in digital assets.

The US crypto exodus might have just begun.

Regional Bank Stocks Plummet While $GME Soars +57%

  • GME Stock Rockets on GameStop’s First Profit Since 2021 (link)

Meme Stock Surprise

In the aftermath of GameStop’s short-squeeze, who could have predicted that the legacy video-gaming retail chain would become more solvent than US regional banks?

It appears that’s exactly what happened. On Wednesday, GME stock went up +57.3%, eventually stabilizing at +35.32% for the week.

Image credit: Trading View

To say this is unusual would be an understatement. Compared to S&P 500 companies, GameStop outperformed 486 of them, year-to-date, at +31.28%.

The culprit is the first profits quarter since 2021, at $48.2 million for Q4 2022. In the same period the year prior, GameStop ran a $147.5 million loss. So, how did the dying brick & mortar pull it off?

GameStop optimized its inventory and cut costs, according to Matt Furlong, the company’s CEO. This included the unpopular move to lay off staff to “keep things simple and operate nimbly with the right talent in place”.

Simultaneously with the cuts, GameStop boosted its higher-margin businesses — toys and collectibles. To keep the meme stock train churning in the right direction, Furlong intends to wind down more stores in Europe, on the road to “full-year profitability.”

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Hindenburg Research Strikes Again, This Time Blasting Dorsey’s Block

  • Block Responds to Hindenburg’s Allegations, Will Explore Legal Action (link)

Block a Predatory and Decietful Company?

After toppling Gautam Adani from the 4th spot on the Forbes billionaire list to 24th, Hindenburg Research assassins are targeting none other than Jack Dorsey.

The founder of Twitter also made his name in small business payment rails, through Square (SQ).

Just after he left Twitter, in December 2021, Dorsey rebranded Square to Block, as the umbrella corporate brand for Square and CashApp. Block was supposed to push the envelope of frictionless payments for the unbanked.

If you recall, Block’s latest Q4 2022 report came in strong, beating revenue estimates by $60 million, at a total $4.65 billion. Representing the total volume of payments processed, Block also reported a +15% increase in Gross Payment Volume (GPV), at $53 billion.

Image credit: @EconomyApp

Hindenburg Research now frames much of that as smoke and mirrors, and put Dorsey in the role of using Block to block business transparency. If true, Hindenburg Research delivered some mighty blows to let sunshine through:

  • The 2-year investigation revealed Block’s business to be ripe with fraud, including predatory loans and fees.
  • Block “wildly overstated” its customer growth, while understating its customer acquisition costs. Interviewed former employees placed the fake account percentage in the 40%-75% range.
  • Block’s “Wild West” approach to regulatory compliance led to onboarding of criminals, including its use for sex/minor trafficking.
  • Criminal usage of CashApp reached such highs that a Baltimore gang named itself “Cash App”, responsible for numerous deaths via fentanyl distribution.
  • Block created fake user metrics on CashApp via misleading “transacting active” metric, ripe with double and fake accounts.
  • Block’s $29 billion acquisition of buy-now-pay-later (BNPL) Afterpay led to massive fees if users’ payments were late, as high as 289% equivalent to interest APR.
  • Block then marketed these predatory innovations as FinTech breakthroughs, including insiders cashing out over $1 billion.

Accounting for all of these and other factors in the Hindenburg Research report, the group is placing a 65% to 75% downside to Block (SQ) shares. So far, that hasn’t happened, as Block (SQ) is only down -17% over the week.

Image credit: Trading View

Despite having 6.5 million followers, Jack Dorsey hasn’t issued any response on Twitter yet. Instead, the company’s representatives framed the report as “inaccurate and misleading”.

“Hindenburg is known for these types of attacks, which are designed solely to allow short sellers to profit from a declined stock price. We have reviewed the full report in the context of our own data and believe it’s designed to deceive and confuse investors.”

Square is now exploring legal action against Hindenburg Research, while cooperating with the SEC. However, delivering a scathing report based on interviews and documents vs. shorting the same company is not mutually exclusive. The latter doesn’t invalidate the former.

In the coming weeks, Dorsey has his work cut out for himself in disproving the allegations.

Tweets of the Week

BREAKING- U.S. banking system’s use of the Fed’s new Bank Term Facility Program (BTFP) grows by over $40 Billion.

$53.6 Billion in BTFP loans as of yesterday (up from $11.9 Billion last week)

Primary credit (“the discount window”) shrinks to $110 Billion, however

@JackFarley96

This is outrageous: the Fed — which is now insolvent to the tune of a $42BN operating loss if it was in the UK — will be paying large US banks like JPM and foreign banks like HSBC $700MM in interest every single day, as the bank run in regional US banks hits $550BN (per JPM)

@zerohedge

“The problem is that the US relies on the depth and capillarity of the banking system to provide the lifeblood (in the form of funding) to the US economy. And most of that heavy lifting is done by small / mid-sized banks.”

@GoingJGalt

CENTRAL BANK DIGITAL CONTROL != CBDC

Fednow is central bank digital control, even if it’s not technically central bank digital currency.

I strive to be precise. So, let me make some important clarifications about FedNow

@balajis

The real reason why the banking crisis will lead the stock market lower

Tighter bank lending standards will accelerate the recession

A thread 🧵

@GameofTrades_

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