August 12, 2021
- Normally I lead off this newsletter with an attempt to provide you with some kind of novel insight or news. But this week there's only one big thing, so you'll have to scroll past a very famous and very scary chart before you reach other stories on crypto, stablecoins, lawyers, bankers, and much more. The whole thing is 1,732 words, a 6.5-minute read.
- I'll be back on September 2.
1 big thing: The only chart that matters
The hockey stick is unequivocal, and it is catastrophic. That's the verdict of the latest IPCC report, which says that we're on course to reach the Paris target of 1.5ºC above pre-industrial levels as early as 2030. That's nine years away.
- By the numbers: We've gone from 0.21 degrees above pre-industrial levels in 1968 to 1.09 degrees in 2016 — a number that's certainly higher today. That rate of 0.02 degrees of warming per year should terrify every human on the planet.
Between the lines: The world is nowhere near making emissions cuts in line with the Paris Agreement targets. Instead, it's tracking toward at least 3°C (5.4°F) of warming. And that assumes the latest emissions reduction pledges can be believed.
Go deeper: Axios' Andrew Freedman is the best person to follow on all things climate-related. Here's his article on the IPCC report; he's also written about how U.S. carbon emissions are on track to increase by 7% this year.
2. Crypto's next chapter
Cryptocurrencies are becoming part of the dollar-based financial system they once sought to displace.
Why it matters: Crypto is beloved by people who want to transact outside the reach of any government. But it's gotten mainstream enough that politicians and regulators want to co-opt it and bring it squarely within their own fields of influence — even using it to help pay for an infrastructure bill.
The big picture: As crypto assets have grown to be worth well over $1 trillion, investors and financiers have increasingly wanted to get involved in the space — without taking any kind of legal risk.
- They've been aggressively pushing for regulatory clarity, and often see their expensive compliance departments as a comparative advantage, differentiating them from the early true believers.
- Regulation, however, would defeat much of the original purpose behind the desire to create cryptocurrency in the first place — the dream of being able to create a store of value that's untouched by government interference.
Context: When bitcoin first arrived on the scene, there was a pretty good chance the U.S. government would crush it, prosecuting anyone who attempted to use any currency other than the dollar.
- Bitcoiners dreamed instead that their token would thrive under the benign neglect of the government. They mostly just wanted to be left alone.
- They got their way, in some form or another, for many years, with most prosecutions centered on fraudsters. But those days are coming to an end. (See, for example, this week's $100 million fine on BitMEX for running an unregulated crypto exchange.)
- Cryptocurrency's future may be as an integral part of the existing financial system, regulated just as much as any other financial product.
Driving the news: SEC chair Gary Gensler — who has taught a course on cryptocurrencies at MIT — gave an important speech last week laying out a maximalist vision for the degree to which his agency can and should regulate the asset class.
- FTX, the fastest-growing crypto exchange, last valued at $18 billion, wants to become a regulated stock exchange where stocks can be traded on the blockchain.
- Ethereum, the upstart rival to bitcoin, is in the process of moving to a more centralized system that transfers power to the largest holders of the currency, including its founder, Vitalik Buterin.
- Stablecoins, which by their nature are inextricably linked to TradFi, or traditional finance, have already started to dominate crypto trading and quell its more anarchic fringes.
How it works: A more regulated system would help solve problems like the difficulty of buying a home using the proceeds of crypto sales, or customers of NBA TopShot being unable to transfer their money to banks, including JPMorgan and Wells Fargo.
The bottom line: We're now clearly at the beginning of the end of cryptocurrency as an anarcho-libertarian Utopia.
- Most crypto activity continues to take place outside the U.S., often in unregulated (and very risky) venues. But when the U.S. wants to regulate global financial activity, it generally finds it very easy to do so.
Go deeper: Yahoo's Roger Parloff has a big profile of FTX's Sam Bankman-Fried that examines in much more detail the regulatory tightrope he's walking.
3. How Circle could create a U.S.-backed digital currency
Crypto giant Circle has announced its intention to become a bank, fully regulated by the Federal Reserve, the Office of the Comptroller of the Currency, and the FDIC.
Why it matters: We're still a very long way from this happening. But if it does, Circle's USDC stablecoin could become a de facto central bank digital currency.
How it works: Circle's dream is to become a narrow bank — one that eschews fractional-reserve banking entirely, and instead places all deposits on reserve at the central bank.
- Only banks can open accounts directly at the central bank, which credits them with pure money.
- In Circle's case, the "depositors" would be holders of USDC, and the collateral backing up USDC would be the money on deposit at the Fed. Circle would pocket for itself the interest that the Fed pays on bank reserves.
The big picture: If the dream were to become reality, then Circle would effectively be issuing a cryptocurrency backed by the Fed itself — for all intents and purposes, a central bank digital currency, or CBDC.
- If Circle were allowed to do such a thing, then presumably other banks would be, too, and they would rapidly start competing with each other to pass through most or all of the interest that the Fed pays on reserves.
- Buying those stablecoins would be tantamount to having money on deposit directly at the Fed.
Between the lines: A would-be bank called TNB has tried to do narrow banking in the U.S. and has gotten nowhere. The Fed doesn't like the idea, for reasons well-glossed by Bloomberg's Matt Levine in 2019.
- Fractional-reserve banking is the engine that powers money creation and even modern capitalism. Full-reserve banking risks messing with that model in a way that could prove dangerous.
Be smart: Circle chief strategy officer Dante Disparte tells Axios that the company hasn't yet even properly initiated the process of applying to become a bank; it's just announced its intention to do so. Disparte says they're willing to do "whatever the policymakers want."
- That might mean giving up on the dream of having 100% of assets in the form of Fed reserves — even though that's something all other banks are allowed to do.
The bottom line: Most assets at most banks are loans that can, in theory, default. That's also true of Circle's assets, right now — they're mostly commercial paper and other low-risk loans.
- Moving to a no-risk system would create a back-door CBDC. It seems unlikely the Fed would let that happen without being extremely deliberate about it.
4. M&A lawyers' gender problem
It's the most prestigious role on the most prestigious deals at the most prestigious companies in the most prestigious profession. In other words: the job of lead counsel on big-ticket M&A transactions. That position is still overwhelmingly held by men, 30 years after women became roughly half of all law students.
Why it matters: The asymmetry is hardly confined to the legal profession. CEOs, boards of directors, M&A investment bankers — all are dominated by men. But a new study has released quantitative data on just how male the senior lawyers involved are.
What they found: UC Davis law professor Afra Afsharipour examined the 100 biggest deals in which U.S. companies were acquired in each year from 2014 to 2020. Overall, women served as lead partners on just 10.5% of those deals. That's about half the rate at which women make partner at law firms.
- What they're saying: "These are all large 'bet the company' type transactions that are predominantly led by lawyers who have the most significant clout and power in a large law firm," writes Afsharipour.
Between the lines: In general, the representation of women in law firms decreases the further up the ranks you look. That doesn't stop when they become partner — the most senior partners are much more male-dominated than partners generally.
By the numbers: Davis Polk touts its “commitment to developing, retaining and promoting women” and has won the Gold Standard award from the Women in Law Empowerment Forum eight times. For six successive years, however, not a single woman from Davis Polk served as lead counsel on a major M&A deal.
- At Wachtell, the top M&A law firm in the world, six women led 13 deals between 2014 and 2020 — an average of just 2.2 deals per woman over seven years. By contrast 40 men led 299 deals between them, or 7.5 deals per male partner.
The bottom line: As one American Lawyer article put it: “If having a strong female mentor in a position of authority, such as the lead on a deal and the owner of a client relationship, is paramount to facilitating other women into that position, you first need to have enough women in those prominent roles. There are not.”
5. Wage inflation on Wall Street
Even the lowliest investment banker now earns six figures. That's the clear message from Sarah Butcher, who has the latest on entry-level investment banking salaries.
- By the numbers: Most banks have raised their pay for first-year associates to $100,000 from $85,000 — an increase of 17.5%.
- Evercore remains at the top of the pack, after giving its first-years a $25,000 bump to $120,000.
6. Coming up: Back to school
By the time Axios Capital returns from hiatus, September will be here, which means most students will be back at school, Axios’ Hope King writes.
Why it matters: Economists expect the labor shortage problem to improve once schools reopen. Americans have cited lack of childcare as one of the top reasons for not working, with over 7.5 million people saying so in the Census' mid-June Household Pulse Survey.
- What to watch: The rising number of coronavirus cases has parents concerned once more about sending their children back in person.
7. Building of the week: Virchow 6
Vircho 6 is a laboratory building by the great Portuguese architect Álvaro Siza, part of the grand Novartis headquarters campus in Basel, Switzerland.
- The project — both building and campus — is extremely Swiss: Very expensive, very clean, very orderly.
- Siza's contribution — there are many other starchitects involved, from Frank Gehry to Rafael Moneo — borders the Rhine, and indeed almost cantilevers over it.
- It's distinguished by its sheer glass curtain wall, which overhangs the building footprint, and also by its idiosyncratic corner placement of the main entrance.