Fintech Headlines: March 20 - 26, 2023

Short seller Hindenburg claims Block inflates Cash App metrics, Coinbase receives Wells Notice from the SEC, expects the agency to go after staking service, Robinhood sees rapid growth in Cash Sweep

March 26, 2023

Stock Market Update

The Federal Reserve raised the federal funds rate by 25 basis points to 4.75% - 5.00% on Wednesday. The FOMC statement released after the meeting indicated a change in the Committee’s position with respect to future rate increases. Thus, the wording in the statement changed from “ongoing increases in the target range will be appropriate” to “some additional policy firming may be appropriate.” While the hiking cycle might be nearing its end, “rate cuts are not in our base case,” stressed Fed’s Chairman, Jerome Powell, during his press conference. The next FOMC meeting is scheduled only for May 2-3, 2023.

🟢 Shares of payments company Fleetcor Technologies (NYSE: ) advanced 7.28% this week on the news that the company reached “an agreement with activist shareholder D. E. Shaw Group.” Thus, the company committed to refreshing its board and considering selling parts of its business. Fleercor is primarily a B2B payments company; however, it also has lodging and EV-charging units.

🔴 Shares of Square’s and Cash App’s parent company, Block (NYSE: ), declined 17.98% during the week after short seller Hindenburg Research accused the company of inflating Cash App's active user numbers and facilitating fraudulent transactions. Hindenburg Research is primarily known for shorting EV company Nikola and, most recently, Indian conglomerate Adani Group.

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Markets in Crypto Assets

The European Union’s Markets in Crypto Assets Regulation (MiCA) is scheduled for a discussion in the European Parliament on April 18, 2023, and is expected to go into the final vote on April 19, 2023. The proposed regulation, which will become the law for the 27 EU member countries, will bring regulatory clarity to the “issuers of unbacked crypto-assets, and so-called “stablecoins”, as well as the trading venues and the wallets where crypto-assets are held.” In February 2023, the UK Government also announced its plans to “regulate a broad suite of crypto asset activities” and position “the UK as a safe jurisdiction for crypto asset activity.”

In the meantime, Coinbase received a Wells Notice from the U.S. Securities and Exchange Commission. Wells Notice is “a formal notice from the SEC informing a recipient that the agency is planning to bring enforcement actions against them.” As per the comments from Coinbase, the Wells Notice is related to the SEC’s investigation into the assets listed on the platform and the company’s staking service, Coinbase Earn. “Instead of developing a regulatory framework for crypto, the SEC is continuing to regulate by enforcement only,” wrote Coinbase on their blog. Regulatory uncertainty is forcing Coinbase to explore a non-US venue for its institutional clients. Perhaps, Europe could become a home for this venue?

Short Seller Hindenburg Claims Block Inflates Cash App Metrics, Facilitates Fraudulent and Criminal Activity

Hindenburg Research, a short seller famous for its bets against EV manufacturer Nikola, and, most recently, Indian conglomerate Adani Group, published an investigation into Block, Inc (NYSE: ), the parent company of Square and Cash App. Hindenburg, which simultaneously with the publication disclosed a short position, accused Block of inflating Cash App user growth, understating customer acquisition costs, facilitating fraudulent and criminal transactions, as well as “disregarding Anti Money Laundering rules.” Hindenburg’s research involved “dozens of interviews with former employees”, as well as listening to a lot of hip-hop music (the company even made a video compilation of Cash App mentioned in hip-hop songs, which, they argued, proves fraudulent and even criminal usage).

Cash App, which started as a peer-to-peer payments app, but over time broadened its offering to provide a full range of financial services, experienced mind-boggling growth since its launch in late 2013. Thus, Cash App reported 51 million monthly transacting active users in December 2022, as well as contributed $2.86 billion in revenue and $848 million in gross profit to Block’s Q4 2022 top-line results (Cash App also overtook Square in terms of gross profit contribution). For the full year 2022, Cash App contributed $10.63 billion in revenue and $2.96 billion in gross profit. Cash App is a critical growth driver and a focus area for Block, as it wants the service to become the “primary bank account” for its users. The company refuted Hindenburg’s allegations, but the stock was still down almost 18% during the week.

Coinbase Receives Wells Notice from SEC, Expects Agency to Go After Staking Service

As mentioned above, Coinbase (NASDAQ: ) received a Wells Notice from the Securities and Exchange Commission, which indicates that the agency is planning to bring enforcement actions against the company. While the detailed scope and consequences of such enforcement actions are not clear at the moment, Coinbase revealed that the Wells Notice is related to the SEC’s investigation into the “undefined portion” of assets listed on the platform, as well as the company’s staking service, Coinbase Earn. Earlier in the year, the Chair of the agency, Gary Gensler, suggested that “the returns token holders see from staking indicate that those tokens are securities and would need to be registered as such under U.S. law.”

While the fight between Coinbase and the SEC has far-reaching consequences for the crypto industry as a whole (at least in the U.S.), on a more practical level, SEC’s investigation puts multiple components of Coinbase revenue at risk. The first one is the transaction revenue related to tokens that the agency will deem to be securities (and will require delisting), and the second is the revenue from staking services. Thus, in 2022, the company reported $2.36 billion in transaction revenue, of which 29% came from Bitcoin trading, 22% from Ethereum trading, and 49% came from trading in other tokens. The company also reported $0.79 billion in “Subscription and services revenue”, of which $0.28 billion came from staking services. Last month, Kraken discontinued its staking services for U.S. customers to settle SEC charges.

Robinhood Customers Keep Depositing Money, Sweep Balances Quadruple Over Twelve Months

Last week, Robinhood (NASDAQ: ) reported operating results for February 2023. The company reported 23.1 million in Net Cumulative Funded Accounts, 12.0 million in Monthly Active Users, and $74.7 billion in Assets Under Custody. All three metrics remained almost unchanged since January 2023. Net Deposits were $1.5 billion in February, which brings the total Net Deposits over the last twelve months to $16.9 billion. Finally, notional trading volumes for equities were $57.3 billion (up 25% MoM and 1% YoY), volumes for options were 89.4 million contracts (up 8% MoM and 24% YoY), and volumes for crypto were $3.5 billion (down 7% MoM and 52% YoY).

Margin Book declined from $5.3 billion in February 2022 to $3.3 billion in February 2023, while the Cash Sweep balance increased from $2.1 billion in February 2022 to $8.0 billion in February 2023. Margin Book represents loans made to customers “for the purchase of securities, supported by a pledge of assets”, while Cash Sweep represents “uninvested brokerage cash swept to partner banks” (sweeping allows distributing cash between multiple partner banks to ensure protection by the FDIC insurance). Margin Book and Cash Sweep generate interest income, which accounted for 13% and 2% of the company’s total 2022 revenue respectively ($177 million in margin interest, and $22 million in Cash Sweep net interest).

In Other News

Cover image: Microsoft Bing Image Creator, Powered by DALL·E, prompt “men in suits are listening to hip-hop music, cubism”

Disclosure & Disclaimer: I own shares in several companies that I write about in this newsletter, as I am bullish on the transformation in the financial services industry. However, the information contained in this newsletter is intended for informational purposes only and should not be considered financial advice. You should do your own research or seek professional advice before making any investment decisions.