Crypto Bloodbath: TerraUSD Collapses, Tether Breaks Peg, Bitcoin Plummets
Dave & MoneyLion Quarterlies, One-Click Drama Continues, CFPB Beefs Up Enforcement
Hey all, Jason here.
I’m wrapping up writing this on Friday (the 13th!), so that I can enjoy a birthday weekend trip to Brussels. Hopefully nothing further blows up before I publish this on Sunday!
I’m looking forward to Money2020 Europe next month — if you’ll be in town (or know where the cool parties are), feel free to drop me a line.
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Quicktake: Dave & MoneyLion Quarterlies
It’s quarterly earnings season, and that means it is time to check in on two of my favorite US consumer fintechs: Dave and MoneyLion.
First up, Dave. The good news, as it were, is that Dave is sticking with its guidance of $200 - $230 million in adjusted revenue for the year (down from a projection of $377 million in the company’s SPAC materials.)
Additional highlights from its Q1 2022 statement include:
Added 340,000 Net New Members, bringing the total to 6.4 million Total Members
1.45 million Monthly Transacting Members
4.4 Transactions Per Monthly Transacting Member
GAAP operating revenues, net of $42.6 million, compared to $34.4 million in the first quarter of 2021
Non-GAAP operating revenues* of $43.7 million, compared to $35.5 million in the first quarter of 2021
Non-GAAP variable profit margin* of 41%, compared to 64% in the first quarter of 2021
Net loss of $34.8 million, compared to net income of $3.9 million in the first quarter of 2021
Adjusted EBITDA* of $(18.3) million, compared to $(8.0) million in the first quarter of 2021
$302.3 million of cash and marketing securities as of March 31, 2022
While these KPIs sound positive(ish), when you add context around the user numbers, the picture is less rosy.
While the generously-defined “total users” rose to 6.4 million, the number of Dave customers actually using the service each month dropped from 1.51 million to 1.45 million — a decline of ~4% quarter over quarter. The proportion of active users is heading in the wrong direction, dropping from ~25% to ~23% over the same period.
The average number of transactions per active user edged down slightly, from 4.5 to 4.4 transactions per month (vs. a reported 40 monthly transactions at competitor Chime.)
As of Thursday close of market, Dave is trading at $2.34 per share, giving it a market cap of $870 million:
Ok! What about MoneyLion?
MoneyLion’s numbers are a bit harder to parse and compare to its historic performance, owing to its acquisition of Even Financial for “up to $440 million.”
The $440 million number was based in part on MoneyLion’s SPAC share price of $10 — meaning the actual consideration paid for Even was substantially lower, given the performance of MoneyLion’s shares since they began trading:
But I digress!
With the acquisition of Even Financial, a CreditKarma-like marketplace, MoneyLion is working hard to reposition itself as serving both “enterprise” and consumer markets:
In its SPAC presentation, MoneyLion projected $258 million in revenue in 2022; it’s now forecasting $325 - $335 million. Improved revenue projections, though, wouldn’t be possible without the Even acquisition. “Enterprise” revenue (eg, affiliate commissions) drove 31% of MoneyLion’s revenue in Q1; the company is targeting a 50/50 split between this enterprise revenue and its consumer products.
If you assume 69% of MoneyLion’s revenue comes from its consumer business, that would account for about ~$228 million this year — about $30 million less than shown in its SPAC presentation for 2022.
While Even boosts the revenue outlook, there are reasons to be skeptical of this strategy. MoneyLion’s own customer base skews low income and subprime — limiting the amount of affiliate offers they can be cross-sold. I recently received an affiliate promotion from MoneyLion declaring “$6495 is Available to you!,” which, in reality linked to a potentially deceptive education lead-generation site.
MoneyLion seems to be maintaining Even Financial’s site and network, which powers offers that appear on publishers across the web. Affiliate networks can be really good businesses — but, macro headwinds (inflation, interest rates, risk of recession) are likely to negatively impact this business line, at least temporarily.
Bloodbath: Terra ‘Stablecoin’ Collapses, Tether Drops As Low As $0.95. Bitcoin & Other Major Cryptos Plunge.
It has certainly been an interesting week in crypto world.
Activity across DeFi and NFT markets has been slowing for months. Bitcoin, Ether and other “L1” cryptocurrencies have dropped significantly as the Fed began the fastest rate hike cycle in more than 20 years.
But the big story driving panic in much of the crypto ecosystem — and intensified scrutiny from regulators — is the catastrophic collapse of the TerraUSD (UST) algorithmic stablecoin and, along with it, the entire Terra ecosystem. TerraUSD was the third largest stablecoin, with over $18 billion worth of the coin in circulation when the chaos began last week.
As of writing, TerraUSD — which is supposed to always be worth $1 US dollar — is worth just $0.18. And, in fact, trading in it has been suspended on popular exchanges and the Terra blockchain itself has been suspended — making the tokens effectively worthless.
It’s worth noting that Terra took a relatively novel approach to constructing its stablecoin. While collateralized stablecoins like USDC or Tether purportedly hold dollars or dollar-denominated assets backing the stablecoins they issue, Terra did not (until recently, when it began purchasing large quantities of bitcoin as an emergency backstop.)
Instead, Terra’s “algorithmic” stablecoin relied on an ecosystem of multiple, interlinked tokens, incentives, and arbitrageurs to balance supply and demand of TerraUSD such that it maintained its peg to the US dollar. If you want to dive into the details, Matt Levine explains the conceptual framework quite clearly here and a recent episode of the Odd Lots podcast discusses relevant related topics, like DeFi yield farming.
At this time, it’s not entirely clear what caused TerraUSD to de-peg, though a popular theory is that it was the lynchpin in an elaborate plan to short bitcoin.
By attacking the TerraUSD peg, the theory goes, whoever was behind the plan would force Terra to quickly sell bitcoin into the market to defend the peg — driving down the price of bitcoin. Some in crypto world are pointing their finger at favorite capitalist villains — Citadel Securities and BlackRock — though there is no evidence for this and the firms deny any involvement.
Such an attack against a currency is not without precedent in the fiat world. George Soros famously made over a $1 billion by massively shorting the Great British Pound, ultimately forcing a devaluation of the currency when the central bank lacked adequate forex reserves to defend the attack.
Bitcoin, Other Cryptos Plunge; Tether Breaks Its Peg
Amid the week-long chaos, the value of bitcoin, already down significantly from highs reaching almost $70,000 last November, dropped further, reaching below $27,000.
Tether, the world’s largest stablecoin, with a some $83 billion in circulation before the crisis, broke its peg. It traded as low as $0.95 before recovering to $0.9978. While Tether is backed by assets, the quality (and even existence) of those assets has long been under a cloud of uncertainty and suspicion.
No One Could Have Foreseen This… Except Everyone Who Did
At the beginning of the year, I made six predictions for 2022. Here are two them:
1. A currency-linked stablecoin experiences a “run,” causing it to break its peg (eg, redeem below par) or collapse altogether (most likely Tether).
2. A major established cryptocurrency like Bitcoin or Ethereum experience a significant 50%+ correction in price. Innumerable factors could impact established cryptos’ prices in 2022: macro factors, like inflation and interest rate policies; increasing scrutiny or crackdowns from regulators; competition from new cryptos offering greater utility; or a ‘run’ or collapse of a stablecoin linked to the sector, for example.
Now, certainly I haven’t been the only one expressing intense skepticism about some stablecoins. Banking regulators have been sounding the alarm about the sector for a while, and plenty of voices in the crypto community were skeptical an uncollateralized, algorithmic stablecoin could ever be workable.
Never Let a Good Crisis Go To Waste
Is this collapse a big enough warning to drive legislators and regulators to act?
Treasury Secretary Janet Yellen, who happened to already be scheduled to testify before Congress this week, told the House Financial Services Committee (emphasis added):
“I wouldn’t characterize it at this scale as a real threat to financial stability, but they’re growing very rapidly and they present the same kind of risks that we have known for centuries in connection with bank runs.”
The collapse of Terra gives Yellen and fellow regulators more ammunition to push for regulation. The recent President’s Working Group report recommends bank-like regulation of stablecoin issuers, calling for legislation:
“To address risks to stablecoin users and guard against stablecoin runs, legislation should require stablecoin issuers to be insured depository institutions.
To address concerns about payment system risk, in addition to the requirements for stablecoin issuers, legislation should require custodial wallet providers to be subject to appropriate federal oversight. Congress should also provide the federal supervisor of a stablecoin issuer with the authority to require any entity that performs activities that are critical to the functioning of the stablecoin arrangement to meet appropriate risk-management standards.
To address additional concerns about systemic risk and concentration of economic power, legislation should require stablecoin issuers to comply with activities restrictions that limit affiliation with commercial entities. Supervisors should have authority to implement standards to promote interoperability among stablecoins. In addition, Congress may wish to consider other standards for custodial wallet providers, such as limits on affiliation with commercial entities or on use of users’ transaction data.”
Still, advocates for crypto are likely to pushback on expansive regulation, arguing the failure of Terra, which lacked 1:1 backing assets, shouldn’t be generalized to other stablecoins.
One-Click Drama Continues: Bolt Misled Customers, Investors
Bolt founder and, until recently, CEO Ryan Breslow was happy to lob accusations of ethically questionable business behavior at others in Silicon Valley: Stripe, Y Combinator, Sequoia.
Now, it seems the chickens are coming home to roost. The New York Times is reporting a pattern of questionable behavior at the startup, including misleading customers and investors. While a certain amount of “fake it ‘til you make it” is common in the Valley, unfounded claims have a way of catching up with you, if you don’t eventually deliver.
According to the New York Times:
“In a rush to show growth, Bolt often overstated its technological capability and misrepresented the number of merchants using its service, some of the people said. In presentations to investors, it included the names of customers before verifying whether those merchants were able to use its technology. For a time, a fraud detection product it was pitching to merchants was more dependent on manual review than Mr. Breslow implied, according to a former employee.”
Bolt saw its valuation balloon to $11 billion as it raised money from bluechip investors like Peter Thiel’s Founders Fund and BlackRock. Now, Bolt’s fortunes are reversing just as the fundraising climate cools. It instituted a hiring freeze to preserve cash. Existing investors are looking to dump their shares. And it’s being sued by its biggest customer.
Competitor Fast recently collapsed under the weight of unfulfilled promises; whether Bolt can avoid the same fate remains to be seen.
CFPB Beefs Up Enforcement Staff
The CFPB is hiring an additional 20 enforcement attorneys, American Banker is reporting. The staffing push shows the agency is putting its money where its mouth is, so to speak. Rhetoric out of the consumer regulator has become markedly more aggressive under Director Chopra, with targets ranging from perennial favorite punching bags like the credit bureaus to Big Tech and BNPL.
According to American Banker:
“Eric Halperin, the CFPB’s enforcement chief, told staff at an all-hands meeting last week that the enforcement team received the go-ahead to add 20 more full-time employees, most of them attorneys. The bureau confirmed the hires were part of its latest budgeting process.
The recent hiring comes as the CFPB is building out its capacity for data collection related to fair-lending exams as well as artificial intelligence and machine learning processes.”
Other Good Reads
New Innovations—Including Crypto Cards—Energizing The ‘Dying’ Credit Card Market (Ron Shevlin/Forbes)
Crypto Could be Contagious (Money Stuff)
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