September 16, 2021
Situational awareness: The Justice Department is suing to prevent the Purdue Pharma bankruptcy settlement, saying the immunity it gives to the Sackler family is unlawful and unconstitutional.
- In this week's newsletter: More companies get into financial literacy philanthropy; crypto regulation; the USDC carry trade; China's flex on Macau; and much more. All in 1,860 words, a 7-minute read.
1 big thing: The financial literacy industrial complex
You probably don't remember learning much about money or finance in high school. Now a whole industry, rife with conflicts of interest, is springing up in an attempt to change that.
Why it matters: Millions of people do badly on problematic standardized tests of financial literacy; millions of people are also poor, and struggle with their finances.
- The financial-literacy industry, funded in large part by the financial services industry, draws a direct causal line from the bad test results to debt and poverty, and tries to improve financial outcomes through education.
The big picture: Evidence that financial literacy education works is shaky; most evidence points to it being a waste of time.
- The Financial Times launched its own financial literacy charity this week, claiming that such education "can make a vast difference" and "can be transformative for individuals and families." Its executive director, Aimée Allam, tells Axios that its whole program will be based in rigorous academic research, and that "we’re not going to do anything unless we measure it."
- A 2014 meta-analysis of 169 papers and 201 studies, however, found that "interventions to improve financial literacy explain only 0.1% of the variance in financial behaviors studied" — and that low-income students had even weaker correlations.
Between the lines: Loyola Law School professor Lauren Willis, whose own recent paper concludes that "financial education does not demonstrably improve financial well-being," tells Axios that one-on-one financial counseling, of people already participating in the financial world, can be effective.
- Teaching children who don't yet need to live on their income, however, has little if any measurable effect.
- The main reason that teens get targeted is they're a captive audience for financial education campaigns, many of which come with branding from large financial services companies.
Driving the news: Charles Schwab this week launched Moneywise America, an ambitious program aimed at "making free financial education available to every school and community in the United States." Those free course materials, however, are taught by volunteer Schwab employees and carry Schwab copyright and branding.
- Financial services companies often use financial education as a marketing tool. Chime, for instance, a neobank aimed at younger customers, has hired rapper 21 Savage to front its own campaign ("level up your finances like a Savage").
- Robinhood has a similar site, Robinhood Learn, which tells potential customers that "the sooner you invest, the longer you give your money the chance to grow."
- Schwab's Casey Cortese, who was centrally involved in developing the Schwab curriculum, embraces such outreach from competitors. "People need to hear the same concept multiple times to absorb the learning," she tells Axios.
The bottom line: Financial literacy education is increasingly being created by the very companies that the students should be taught skepticism toward.
- As the FoolProof Foundation puts it: "Today's financial literacy education doesn't work because virtually all major financial literacy resources are developed or shaped by businesses that benefit when consumers make money mistakes."
- Such curricula also tend to reinforce a libertarian view of financial wellness, based on individual rather than collective action — one where poverty and debt are less a societal problem and more a consequence of bad individual financial decisions.
Bonus: Financial education in practice
To teach children about the banking system, a U.S. primary school walked its students to a local bank where each opened a savings account into which each deposited $5. Implicit in this activity is the message that the bank is trustworthy. Another bank then acquired that bank and charged all low balance accountholders a monthly maintenance fee that wiped out the children’s savings. The children may have learned a more important lesson about the financial sector than the school intended.
2. Crypto faces the regulators
Securities and Exchange Commission chair Gary Gensler pulled no punches in his Congressional testimony on Tuesday, which partly explains why the main theme of the Blockworks crypto conference this week was regulation.
Why it matters: The crypto world both hates and needs regulation in equal measure.
State of play: Few if any U.S. crypto companies can say that they are regulated by the SEC or any other national regulator. Most of them are regulated at the state level, as money transmitters.
- The SEC complains that crypto companies like Coinbase don't come to it for regulation. They should do so, says Gensler, because those companies deal every day in tokens that can be considered securities, and a thumbs-up from the SEC would confer a degree of legitimacy that would be extremely reassuring to investors both small and large.
- Coinbase has even more reason to register with the SEC: It's an actual exchange. Plus, its sheer size, and its status as a stock-market bellwether for the crypto industry as a whole, makes it a natural target for regulators.
- The crypto companies, on the other hand, complain that they can't stand still waiting for regulatory approval on the basis of decades-old securities laws, while the rest of the world leaps ahead with innovations like distributed exchanges — smart contracts where it can be hard to even find a corporate entity to regulate.
The big picture: Existing players in the crypto space have experienced extreme volatility in the price of crypto assets, and concomitant huge speculative gains and losses. They've also seen a large amount of fraud, theft and other crime. Today's crypto investors don't generally think of the asset class as a safe place to park funds, and don't feel that they need any kind of regulatory hand-holding.
- A safe and trusted financial system, however, is the destination that many crypto companies claim to be moving towards, especially with the rapid growth of stablecoins linked to the dollar.
- Of note: The SEC's most recent action, aimed at Coinbase, came in response to an attempt by Coinbase to create a beacon of safety in the crypto world — a guaranteed savings account denominated in dollars.
The bottom line: The bigger the money, the more the demand from conservative investors for clear rules and regulations. “The DeFi guys want the TradFi money, but they don’t want the rules," Ledger's Joel Edgerton said at the Blockworks conference, contrasting crypto-based decentralized finance with dollar-based traditional finance. "It doesn’t work like that.”
3. The crypto carry trade
The combination of stablecoins and yield farming — a way to earn interest on crypto assets — means that there are now high-yielding currencies that claim to have no risk of depreciating against the U.S. dollar. The ingredients for an enormous carry trade are in place.
The big picture: The carry trade is the lifeblood of the FX markets. You borrow cheaply in one currency, invest at a higher interest rate in another, and so long as your funding currency doesn't devalue too sharply against your target currency, you make easy money.
How it works: Coinbase issued $2 billion of dollar bonds this week, paying 3.375% on the seven-year tranche and 3.625% for the 10-year.
- The pricing was expensive by U.S. corporate bond standards, and even expensive by junk-bond standards: Coinbase ended up paying about 0.65 points more than most other companies carrying the same BB+ credit rating. But by crypto standards, the funding was dirt cheap.
By the numbers: Coinbase in June promised to pay a 4% yield on USDC, the dollar-linked stablecoin it's associated with. Other companies pay much more: BlockFi, for instance, pays as much as 8% interest on USDC, which is roughly what Gemini pays on its Gemini dollar.
Between the lines: The people borrowing dollar-proxy coins at 8% are doing so because the traditional banking system is still very uncomfortable lending against crypto assets. (All crypto lending is over-collateralized and set up with automatic margin calls; according to the lenders, that makes it very safe and minimizes any credit risk.)
- For players with access to fiat borrowing markets, such as Coinbase, that sets up a very simple carry trade: Borrow U.S. dollars, lend USD stablecoins, and make free money on the spread between the two.
Be smart: There's no such thing as a free lunch. There are all manner of risks involved in such a trade, and in fact there's no indication that Coinbase is going to lend its dollars out in the form of USDC, rather than putting them to any number of alternative corporate uses.
The bottom line: The spread between USD and USDC yields is incredibly large at the moment. If that spread starts to narrow, that'll be a good sign crypto is succeeding in maturing as an asset class.
4. China flexes on Macau
Macau casino stocks imploded Wednesday on news that gaming companies on the island are now squarely in China's regulatory crosshairs.
Why it matters: Macau historically operated at arm's length from Beijing, and developed a reputation as a Wild West not only for casino gambling but also for money laundering and loan-sharking. This week's news was taken as a sign that the Chinese Communist Party wants to rein in Macau's excesses even more than it already has.
Driving the news: Gaming licenses in Macau, which will expire in June 2022, are undergoing an expected renewal process. What was unexpected was Macau officials announcing a review of how the gaming industry is regulated.
- Between the lines: China is unlikely to do to Macau gamblers what it did to teen gamers. There are still going to be casinos on the island — and they are still going to be owned largely by foreign companies.
The bottom line: Investors are acutely aware that the Chinese government sees capitalism and profit as a means to an end, rather than a goal in itself. The CCP has already made it a lot harder for Chinese people to gamble in Macau. This week's announcements suggest that process is far from over.
5. Coming up: The Fed meets
The Federal Open Market Committee meets next Tuesday and Wednesday (which happen to be the last day of summer and first day of fall), writes Axios' Hope King.
Why it matters: Fed officials will likely again debate the timing of tapering. Some voting members have been open about starting the taper this year — without agreeing on exactly when that might happen.
6. Building of the week: Leeum Museum 2
Jean Nouvel's Leeum Museum 2, in Seoul, is a study in paradoxes — a huge, heavy steel building seemingly floating above the trees; a solid mass encompassing an exhibition hall with no supporting columns.
- Most obviously, the main material for the museum is itself a paradox: Rusted stainless steel.
- Boxes made of the metal house permanent exhibitions of artists such as Damien Hirst, Andy Warhol, Donald Judd, and Andy Warhol.