Crypto Carnage: Frozen Accounts, Wobbling Stablecoins, Layoffs
Klarna Valuation Could Drop to $15b, CFPB Wants Standardized BNPL Reporting, Brex Abandons Small Biz, CFPB on "Rent-a-Bank"
Hey all, Jason here.
This issue is coming to you from my hometown of Chicago. I’m in town for a couple of weeks to catch up with family and friends (and endure heat indices exceeding 100°, apparently.)
If you’re Chicago-based, I should be downtown a handful of days between now and the end of the month — if you’d like to grab a coffee, drop me a line, and let’s try to find a time!
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CRYPTO CARNAGE: Frozen Withdrawals, Wobbling Stablecoins, Layoffs, as Bitcoin Drops Below $20,000
Cryptocurrencies like bitcoin and ether may themselves be decentralized, but many of the companies, products, and services built atop them decidedly are not.
In the vacuum of near-zero regulation, players in the space chased quick riches by piling on leverage, derivatives, and increasingly complicated trades — all without any of the oversight or, in most cases, even disclosures, required by the traditional financial system.
Now, we’re beginning to see what happens when the “price go up” mentality abruptly reverses, and it’s not pretty.
The pain started in earnest a month ago with the collapse of the algorithmic stablecoin TerraUSD and its sister token Luna. Now, with crypto prices cratering, signs of stress across the crypto ecosystem are intensifying.
Celsius Freezes Withdrawals
At the beginning of last week, Celsius, a bank-like crypto lender that had offered ‘depositors’ yields as high as 18%, froze customer accounts in an apparent attempt to avoid the crypto-equivalent of a bank run. Celsius has over a million customers and, before the crisis, boasted in excess of $20 billion in assets — much of it from small, retail users.
One place Celsius had invested users’ crypto to generate those high yields? Anchor, the high-yield protocol that was the lynchpin of the Terra ecosystem’s rapid growth; though Celsius co-founder Alex Mashinsky said all assets were withdrawn before Terra’s collapse last month.
Still, it leaves open the question of who Celsius’ counterparties are and what parts of the crypto ecosystem could be exposed to similar risks.
For its part, Celsius has retained a law firm that specializes in financial restructuring. Potential paths forward include attempting to raise fresh funds from investors or restructuring existing financial commitments.
Given the lack of any kind of deposit insurance or investor protections, it’s unclear (and seems unlikely) that those who had invested funds with Celsius will emerge whole.
At least five state securities regulators are already investigating Celsius over the account freezes.
On Friday, Babel Finance, another crypto lender, followed Celsius’ lead and froze customer accounts. Citing “unusual liquidity pressures,” the Asia-based crypto company posted a notice to its website stating in part, “The crypto market has seen major fluctuations, and some institutions in the industry have experienced conductive risk events.”
Three Arrows Capital
Meanwhile, Three Arrows Capital, a crypto-focused hedge fund, is believed to have become insolvent. As recently as March, Three Arrows had managed some $10 billion in assets.
But, last week, as selling pressure intensified and asset prices dropped, Three Arrows was reportedly unable to meet margin calls. In turn, this resulted in counterparties, reportedly including BlockFi and Finblox, liquidating Three Arrows’ positions — putting further downward pressure on crypto asset prices.
As speculation intensified, an ominous tweet from Three Arrows’ founder Zhu Su that the firm was “in the process of communicating with relevant parties and fully committed to working this out” did little to calm the markets.
The firm has hired legal and financial advisors to assist in working out a solution for its investors and lenders; asset sales or a bailout by another firm are possibilities that are on the table.
Tron’s USDD Slips Peg
The USDD stablecoin, an algorithmic stablecoin somewhat comparable to the recently collapsed TerraUSD, slipped its peg last week. The stablecoin dipped as low as $0.958 on the dollar. A DAO associated with the project deployed reserves in an attempt to defend the USDD/USD peg, but, so far, has been unable to restore parity.
However, supporters of USDD argued comparisons to Terra were unfair, pointing pointing to a high collateral ratio between USDD and its sister token TRX.
Coinbase, BlockFi Each Layoff About 1/5th of Staff
It’s not just crypto traders that are feeling the pain — employees at companies in the space are feeling the fallout as well.
Coinbase initially planned to hire some 2,000 employees this year. That first shifted to a ‘hiring freeze,’ then to ‘rescinding’ offers from new joiners who had already accepted them, and now the company is conducting a mass layoff of 1,100 employees, or about 18% of its workforce.
Many of those impacted received no notification and only realized they were impacted when they were unable to use their company-issued laptop or access company systems. Controversial Coinbase CEO Brian Armstrong blamed the cuts on a possible recession and said the company had grown “too quickly.”
BlockFi, another major US-based crypto platform, is also cutting about 20% of its workforce. The company had quickly grown from just 150 employees at the end of 2020 to some 850 before the layoffs. BlockFi CEO Zac Prince pointed to changing macro-economic conditions and their “negative impact” on growth.
Klarna Valuation Could Drop by As Much as Two-Thirds
Hard times aren’t limited to the crypto ecosystem.
Klarna, recently worth as much as $46 billion, is considering taking funding at a valuation around $15 billion, the Wall Street Journal is reporting.
The news comes less than a month after rumors that the BNPL behemoth was seeking to raise $1 billion in funding at a $30 billion valuation — highlighting the rapidly evolving environment for quickly growing but unprofitable companies seeking to raise funds.
Klarna is a bit unusual compared to other BNPL companies, in that it was founded in 2005 — making it 17 years old.
Klarna capitalized on the rapid growth in ecommerce and BNPL during the pandemic to raise fresh capital at ever-higher valuations and used the funds to power aggressive international expansion.
But that expansion came at a high price. Bad debt and losses spiked as the company sought to rapidly grow its geographic footprint and customer base.
Now, the trends that helped power Klarna’s upward trajectory may be reversing. High inflation and rising interest rates are likely to put additional stress on Klarna’s borrowers. Cost of funds are likely to increase, but Klarna has few options to pass rising expenses along to merchants or consumers.
And investors have suddenly reversed themselves, favoring a clear path to profitability over growth at any cost.
Klarna, it seems, is caught in the middle — needing to raise capital in what has become an unfriendly environment while simultaneously recalibrating its business model to respond to a suddenly changed reality.
CFPB Wants BNPL Reporting Standards, Says Data Should Live in Core Credit File
The CFPB is weighing in on credit reporting for buy now, pay later.
In a recent blog post, the consumer protection agency highlighted the importance of BNPL providers furnishing such data, arguing it helps responsible users of credit build their credit history and helps protect borrowers from becoming overly indebted (emphasis added):
“Until recently, few BNPL lenders furnished information about consumers to the nationwide consumer reporting companies (NCRCs). This lack of furnishing could have downstream effects on consumers and the credit reporting system.
It could be bad for BNPL borrowers who pay on time and may be seeking to build credit, since they may not benefit from the impact that timely payments may have on credit reports and credit scores. It may also impact both BNPL lenders and non-BNPL lenders seeking to understand how much debt a prospective borrower is carrying.”
While all three major bureaus have announced plans to support the furnishing of BNPL tradeline data, their approaches and rationales differ.
Equifax announced plans to include BNPL data in consumers’ “main” credit file, with the products identified by a new business industry code. Equifax argued that the majority of consumers would benefit from the inclusion of on-time BNPL payments, with the average borrower seeing an increase of 13 points in their FICO score.
On the other hand, TransUnion and Experian announced plans to house the data in a separate file or “specialty” bureau, where it wouldn’t be included in a consumer’s traditional credit report.
One line of argument for doing so is that it remains unclear how scoring models, like FICO and Vantage, will interact with BNPL tradeline data; in order to prevent the possibility of users’ scores being negatively effected, TransUnion and Experian chose to house this data separately from users’ main files.
The CFPB argues in its blog post that the bureaus and BNPL providers should adopt a standardized approach to furnishing and that the data should live in users’ main files (emphasis added):
“The CFPB believes that when BNPL payments are furnished it is important that lenders furnish both positive and negative data. We would also like to see the industry adopt standardized BNPL furnishing codes and formats appropriate to the unique characteristics of the product. Such standardization would in turn facilitate the consistent and accurate furnishing of BNPL payment information.
Furthermore, consumer reporting companies should incorporate the BNPL data into core credit files as soon as possible and ensure that BNPL data are accurately reflected on consumer reports. Finally, we’d expect scoring companies and lenders to build and calibrate models that account for BNPL loans’ unique characteristics.”
Brex Abruptly Abandons Smaller Businesses
Buzzy business spend management startup Brex is abruptly abandoning the customer segment it first launched to serve: small businesses.
Confused customers took to Twitter to complain about being notified their accounts would be forcibly closed in one month’s time:
Brex historically has derived most of its revenue from interchange income — not unlike a SMB-version of Chime or Varo.
But, earlier this year, Brex announced it was making a “big push” into software, even acquiring financial planning software startup Pry for $90 million. Brex has also placed greater emphasis on moving upmarket and began targeting enterprise customers.
Still, it’s decision to drop startups and small businesses feels like it was a rushed one. The company rolled out major ad campaigns as recently as a year ago targeting its at-the-time core SMB market.
How quickly times have changed. As shockwaves have rippled through public and private markets in recent weeks, presumably Brex has chosen to trim costs and focus on its more profitable (or, at least, less unprofitable) larger customer segment.
CFPB Official Takes Aim At “Rent-a-Bank Schemes,” But Lacks Ammo
CFPB Deputy Director Zixta Martinez took aim at fintech-bank lending partnerships in a keynote address she gave at the Consumer Federation of America’s 2022 Assembly.
Referring to the partnerships as “rent-a-bank schemes,” Martinez said (emphasis added):
“One specific area of interest is understanding how the small dollar credit market is evolving. Over the last several years, we’ve seen a rise in installment and lines of credit lending, including by lenders who also make payday loans. A number of installment lenders are engaged in relationships with banks. Some lenders attempt to use these relationships to evade state interest rate caps and licensing laws by making claims that the bank, rather than the non-bank, is the lender.
Some lenders employing rent-a-bank schemes have unusually high default rates, which raise questions about whether their products set borrowers up for failure. And our complaints database reveals a range of other significant consumer protection concerns with certain loans associated with bank partnerships.
Advocates — including many of you here — have raised concerns about the rise of these “rent-a-bank” schemes in the installment space. I want to assure you: CFPB hears you, we share your concerns, and we are taking a close look at this issue.”
Such bank partnership arrangements are common among non-bank fintech lenders, including companies like Affirm, Best Egg, Prosper, Avant, and plenty of others.
However, consumer advocates’ (and thus regulators’) attention tends to be concentrated on when such arrangements are used to originate loans above 36% APR — the business of companies like OppFi, NetCredit, Rise, and others.
By partnering with a bank, often in a favorable jurisdiction like Utah, fintechs can originate loans nationally while “exporting” the bank’s home state interest rate cap — Utah, where popular partner banks WebBank and FinWise are located, has no usury cap.
Still, the CFPB’s power to disrupt these arrangements is limited. The CFPB typically lacks direct supervisory authority over both the fintechs and the banks in these arrangements. Such arrangements are under the purview of the banks’ prudential regulators, who are certainly aware of them and have implicitly or explicitly approved them.
Other Good Reads
State of the Union: The Credit Bureaus (Fintech Takes)
How Markets Work (Net Interest)
Apple Pay Later, Affirm & Stripe, Goldman “in talks” with FTX (Fintech Brainfood)
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