September 09, 2021

Situational awareness: 3.2 million Americans said in August that they're not working because they're "concerned about getting or spreading the coronavirus," per the Census Household Pulse Survey. That's up from 2.5 million in July. Go deeper.

  • In this week's newsletter: How crypto can't resist the lure of regulatory arbitrage; corporate fraud; women's degrees; El Salvador; rising credit scores; and much more. All in 1,469 words, a 5.5-minute read.

1 big thing: Crypto still hasn't grown up

Illustration: Aïda Amer/Axios

Coinbase has bank envy. It wants to offer a dollar-denominated savings account — but those plans have been predictably halted by the SEC.

Driving the news: Coinbase seems genuinely surprised and upset about this. While their product looks like a heavily-regulated bank savings account, the SEC merely wants to regulate it as a security. But Coinbase doesn't even want that level of regulation.

Why it matters: Coinbase, the first major crypto company to get SEC approval to go public on a U.S. stock exchange, is about as regulator-friendly as crypto companies get — it has positioned itself as being far more in compliance with U.S. regulatory strictures than overseas rivals like Binance or FTX.

  • This week's news shows that the industry still has a long way to go before it truly comes to terms with the U.S. regulatory environment.

The big picture: All fintech is regulatory arbitrage, to some degree. In general, the greatest gains to regulatory arbitrage are found wherever there's the most regulation.

  • Banks are the most regulated part of the financial system, because they pose the most danger to ordinary citizens. It therefore comes as no surprise that many fintechs want to reinvent the bank account without the associated bank supervision.
  • Between the lines: A bank deposit (or savings account) is a loan to a bank, and if the bank can't repay those loans on demand, the damage to its customers can be enormous. That's why federal deposit insurance exists.

How it works: Coinbase explicitly framed its product in a June blog post as an alternative to bank savings accounts. (The phrase "savings account" appears five times in the first three paragraphs.) The company also said that the account was "guaranteed by Coinbase, giving you peace of mind while you earn interest."

  • Be smart: If a bank told you your savings account was guaranteed by the bank itself, that would be weird, and defeat the purpose of having a guarantee in the first place. Guarantees, in order to be meaningful, need to come from a highly trustworthy third party, like the FDIC.
  • Flashback: Coinbase should have been able to anticipate the SEC's reaction. After all, when Robinhood (which also isn't a bank, and doesn't want to be) tried to offer a product that looked like a savings account, that got shut down immediately.

What they're saying: "If the SEC wants to publish guidance, we are also happy to follow that," writes CEO Brian Armstrong.

  • The other side: "The SEC doesn't have the obligation (or the resources) to issue guidance about things that should be obvious to a baby securities lawyer," tweets Georgetown Law professor Adam Levitin. "It's really astounding that Coinbase thinks it's entitled to anything more."

The bottom line: Coinbase's comparative advantage was supposed to be that it stands comfortably in America's regulatory good graces. But now Armstrong seems to be jealous of other crypto companies that offer similar products without SEC approval, and is picking fights with regulators.

Bonus: The SEC's epic subtweet

Tweets via Brian Armstrong and the SEC

Shot: "seems strange, how can lending be a security?" — Brian Armstrong Chaser: "What exactly are bonds and how do they work?" — SEC Investor Ed

2. The fastest-revolving door

Illustration: Annelise Capossela/Axios

If you're a former regulator, you are constantly on the receiving end of job offers from crypto companies wanting help and advice on how to navigate Washington.

Why it matters: Those companies might not like what you tell them. Job security in these positions seems to be extremely low.

Driving the news: VC firm Andreessen Horowitz announced this morning that it has hired Brian Quintenz, a former commissioner of the CFTC, as an advisory partner to its crypto team.

  • Former SEC chair Jay Clayton has similarly taken on advisory roles at Fireblocks and One River Digital Asset Management.

The other side: Chris Giancarlo, formerly of the CFTC, lasted four months on the board of BlockFi. Brian Brooks, former head of the OCC, was the U.S. CEO of Binance for three months.

  • At Coinbase, Brett Redfearn, formerly at the SEC, left after just four months. A company flack told the FT that Redfearn left because they had "deprioritised digital asset securities." Maybe if he'd stayed, this week's face-egging wouldn't have happened.

The bottom line: All these departures are consistent with the ex-regulators being hired not to help the crypto companies comply with regulations, but rather to help them evade regulation. If you have a different explanation, let me know!

3. The bezzle grows

Illustration: Eniola Odetunde/Axios

As the first Theranos trial begins, there have never been fewer incentives to uncover or prosecute corporate fraud.

Why it matters: There was a brief crackdown on white-collar crime at the end of last year, as Republican prosecutors negotiated deals before a new administration was sworn in. Now, however, there's no such urgency.

The big picture: Hedge funds and other short sellers normally have a financial incentive to uncover fraud at companies. Nowadays, however, shorting is extremely dangerous even when the fundamentals are on your side.

  • Private companies, of course, can't be shorted at all. Given that most startups fail anyway, VCs also have little interest in worrying about fraud at their portfolio companies. If they do find it, they often have reputational reasons to want to cover it up rather than expose it.
  • Theranos was exposed by a journalist, John Carreyrou of the WSJ, and was exceptional in many ways — not only in the size and brazenness of the fraud, but also the sobering litany of real-world victims in the form of people who received dangerously erroneous lab reports. Anything smaller or less tragic might not have set Carreyrou on his multi-year Odyssey.

Context: That fraud is rampant is all but certain, given the exuberance of the markets in general and the crypto markets in particular. "During times of irrational exuberance," says Yale Law professor Jonathan Macey, "we see upticks in the success rate that people have in prying people from their money."

The bottom line: The current wealth effect — the optimism that people feel because they are richer than they've ever been — is magnified by an unknown quantum of fraud — what the great economist J.K. Galbraith called "the bezzle." Don't hold your breath waiting for it to be uncovered.

4. The college gender gap

Data: NCES; Chart: Sara Wise/Axios
Data: NCES; Chart: Sara Wise/Axios

Douglas Shapiro, executive director of the research center at the National Student Clearinghouse, told the WSJ that in the next few years, two women will earn a college degree for every man.

5. El Salvador enters the bitcoin arena

Data: FactSet; Chart: Axios Visuals
Data: FactSet; Chart: Axios Visuals

It was a rocky start: Bitcoin suffered a disorderly sell-off on Tuesday, alongside most other cryptocurrencies, to mark the day on which it officially became legal tender in El Salvador, alongside the more widely accepted U.S. dollar.

Why it matters: While a 17% daily swing is far from unprecedented for bitcoin, it's not the kind of thing most citizens want from their currencies. Neither is having a payments mechanism that can be unplugged by the government at will.

Between the lines: Chivo, the app that El Salvador developed for its citizens to transact in bitcoin, was unavailable for much of the day; President Nayib Bukele said the government had "temporarily unplugged it" in order to deal with demand, per Reuters.

  • The bitcoin story is also a handy distraction from the fact that Bukele is dismantling the country's democracy.

Go deeper: I explained in June why this move could be great for criminal enterprises.

  • The Guardian's Sophie Elmhirst has a rollicking read about the implosion of a different crypto-fueled pipe dream, this one involving an 800-foot cruise ship designed by Renzo Piano.

6. The creditworthiness boom

Source: Experian; Chart: Axios Visuals
Source: Experian; Chart: Axios Visuals

Average credit scores are still rising — to the highest in 13 years, Axios' Courtenay Brown reports from new Experian data.

Why it matters: America saw the worst recession on record (albeit the shortest). But stay-at-home orders limited what consumers could spend, and stimulus funds went toward paying down debt.

  • Details: The median score rose 10 points to 707.

Go deeper.

7. Coming up: The iPhone 13

Illustration: Aïda Amer/Axios

Apple is expected to announce its newest iPhone on Tuesday, Axios' Hope King writes.

Why it matters: The iPhone is by far Apple's single most important product.

  • For the past several years, iPhones have made up about 40% to 60% of quarterly revenue.
  • Demand for the devices is still high. First quarter iPhone sales growth was 66% year-over-year.

8. Building of the week: St. Michael's Church, Ljubljana

Photo: Jure Makovec/AFP via Getty Images

St. Michael's Church is one of the many buildings that the great Slovenian architect Jože Plečnik built in Ljubljana between the wars. (Construction began in 1937, and ended in 1939.)

  • Built in a marsh, on wooden piles, the church had a very limited budget: its four supporting pillars are made from concrete sewer pipes, while the interior is made of wood donated by local peasants.
  • Plečnik's works in Ljubljana were recently added to Unesco's World Heritage list as a great example of human-centered urban design.
  • The agency praised "his personal, profoundly human vision for the city, based on an architectural dialogue with the older city while serving the needs of emerging modern 20th century society."