Random Musings: Fed Vice Chair Talks Crypto—Is Now The Time To Buy Public Fintech Stocks?
Fed Vice Chair Lael Brainard Talks Crypto Economy @ BofE Symposium
I’ve been reading Lael Brainard’s speeches on fintech and crypto for years—probably since she got to the Federal Reserve in 2014. To me, she seems to be one of the most knowledgeable regulators on fintech and crypto so it’s always interesting to hear her thoughts.
The whole speech, which was given at a Bank of England Symposium, is worth reading: she alludes to a ton of different topics going on in crypto right now, like the Terra and 3AC collapses. But I wanted to highlight a few sections which I think warrant a deeper look:
“..we should start by ensuring basic protections are in place for consumers and investors. Retail users should be protected against exploitation, undisclosed conflicts of interest, and market manipulation—risks to which they are particularly vulnerable, according to a host of research. If investors lack these basic protections, these markets will be vulnerable to runs.”
It might sound a little lame to you but my wife and I spend a ton of time talking about crypto regulation. The landscape is still so murky and so much of crypto’s mainstream adoption depends on clear regulation, so it’s important for investors and builders to to understand the lay of the land.
Brainard’s language here is really telling: consumers and investors need to be protected. Consumer protection is usually enforced by the CFPB (the Consumer Financial Protection Bureau), and investor protections are usually enforced by the SEC. To me, this reads as a Fed Vice Chair saying that these two regulatory bodies have more work to do. In particularly, if the Fed is concerned with investor protections—which would make sense considering how much money was lost with Terra and 3AC (and Blockfi’s “acquisition” and everything else that happened in crypto)—which falls squarely with the SEC. While most of Crypto Twitter (and most crypto VC’s) are advocating for crypto to be considered a commodity, it’s looking more likely that regulators will start saying that a lot of cryptocurrencies are a security.
She also addressed another area that needs more attention: the structure of crypto companies themselves.
“Second, since trading platforms play a critical role in crypto-asset markets, it is important to address noncompliance and any gaps that exist. We have seen crypto-trading platforms and crypto-lending firms not only engage in activities similar to those in traditional finance without comparable regulatory compliance, but also combine activities that are required to be separated in traditional financial markets. For example, some platforms combine market infrastructure and client facilitation with risk-taking businesses like asset creation, proprietary trading, venture capital, and lending.”
Remember a few weeks ago when I wrote about FTX’s strategy on buying up distressed crypto assets on the cheap? Well one thing that came to mind when I was thinking of that article was how their corporate entities all work—do they do all this from the same balance sheet? It seems like the Fed is thinking a lot about this too.
Historically there have been a lot of regulations around separating different areas of banking—most notably the Glass-Steagell Act in 1933 that separated commercial banking from investment banking and insurance (which was then largely repealed in 1999.) So there’s precedent for this kind of thinking. But apply the same thinking to crypto makes some sense—things are too closely linked together, and there’s way too much potential for conflicts to arise when that’s the case. Something to think about as we see FTX, Binance, and other crypto conglomerates continue to get larger and more complex.
For Long Investors, Maybe Time To Buy Public Fintech Stocks?
Two things in the past week caught my eye: 1) Kate Clark at The Information published a great piece about how VC’s are going bargain hunting…in the public markets. She noted that Andressen Horowitz bought 1 million shares of Block (the artist formerly known as Square) at $135—the fund’s first investment into the company (which, given the fact that Block is trading around $63 right now, isn’t exactly a steal, but I digress.)
And 2) a new Citi Wealth Management report I got sent over on “Investing In The Afterglow Of A Boom,” which has a few pages on investing in publicly traded fintech companies.
The report reads “While pressing macroeconomic and geopolitical challenges are unlikely to be fully resolved anytime soon, we believe fintech’s longer-term underpinnings are robust. The pandemic has accelerated the already-powerful shift toward digital payments, online wealth management and digital lending, with user trust growing further.”
One of the biggest mistakes I made in my 20’s (and I made a lot, so listen up) was not investing for the long term gainz. If I’m a crypto degen that’s 22, I would definitely put some money into holding a stock like Block or high margin businesses like Nubank and Nerdwallet, or Toast (this isn’t investment advice, as I’m not an investment advisor, so please act on your own accord.) And simply hold it for 5-10 years without touching it.
Citi writes that “Particularly for investors who are underweight or have no fintech exposure, we believe current levels represent a potentially attractive entry-point…Ultimately, however, we believe the greatest risks for investors arise from not having long-term exposure to this unstoppable trend and from having excessive exposure to its likely victims.”
It’s clear that both VC’s and banks are thinking a lot about a buy-and-hold strategy, particularly when it comes to fintech. Therefore, us average investors should probably be thinking about it too. These prices represent a massive discount from peak valuation, and there’s a lot of enterprise value that’s still yet to be explored (Block’s Cash App is probably the largest US neobank and still hasn’t integrated Afterpay’s buy now pay later technology yet.)
VC firms are betting they can use this downturn and their understanding of the technology industry to catapult them into the next Coatue—to become a crossover fund that does more than just general venture investing but also has a public investment vehicle as well. While I think it’s much harder to build a crossover fund from the “bottom up” (from venture investing to public market investing) it’s an interesting strategy that will probably pay off. For VC’s, the question is how big the payout is going to be—for average retail investors, we should probably ride these coattails and see some gains over the next few years.