Crypto Yield has been muzzled as BlockFi pulls offering in the US after settling with the SEC and states. This follows the SEC litigation threat against Coinbase’s proposed Lend product. You bet other companies offering crypto yield will be in the SEC’s crosshairs. Crypto yield offerings are both innovative and complicated. The products have provided a stable, inflation-beating return without losses to clients. However, the risks of centralized crypto yield products are significant, and companies have glossed over those risks. As a retirement savings practitioner, The Dispatch sees US consumers losing due to this regulatory action. The SEC should fine BlockFi for marketing transgressions, but why do regulators need to stop access to this innovative inflation-beating return?
It’s a holiday-shortened Dispatch #5 on February 11th, 2022. The lineup of stories follows:
- BlockFi settles for $100m with SEC and states
- Bitcoin IRA firm hacked, $36m drained from client accounts
- Producer Price Index +9.7% YoY in January
- NY Fed’s consumer inflation expectations dropped
- Food price set to rise further in 2022
- Best Super Bowl commercials
Crypto yield has been muzzled with BlockFi’s $100m settlement
This action is not a surprise because the SEC had threatened Coinbase with legal action if it were to launch a similar crypto-yield product. There are plenty of hot takes on this settlement as if it is “a watershed moment”. This article from Protocol offers a balanced view and how the SEC is likely to go after other companies offering similar products. The downside is likely to be that consumer and investors move to Defi, which is likely to prove beyond US regulators’ reach as there is no corporate entity behind many of the Defi protocols.
BlockFi is not blame-free. This article by The Defiant lays out the SEC’s case that BlockFi lied about the true nature of crypto asset lending practices. To The Dispatch, it was obvious that BlockFi’s product had significant credit risk because they were offering yields far higher than the over-collateralized rates available on blue chip Defi platforms like Aave. The SEC’s role is to protect all consumers, not a financial-insider like The Dispatch. The fine is deserved, but we don’t get why consumers won’t have access to the yield product.
From the The Dispatch’s practitioner perspective, this action is a loss for US consumers. The SEC is focusing on publicity and political points by shutting a large legitimate business. At first they went after publicly listed Coinbase’s Lend offering and now, they are going after Blockfi’s interest account. There are hundreds of crypto scams today, but where are the SEC or State regulators shutting those down? Cracking down on smaller illicit activities won’t score political points as the SEC lobby to regulate digital assets. Recall that there is NO regulatory oversight of spot crypto asset markets. The chance to tuck regulatory oversight of spot crypto markets is a large prize!
Crypto yield products offer inflation beating returns
Furthermore, crypto yield products offer an inflation-beating rate of return. They certainly carry far higher risks than bank accounts, but wouldn’t you expect that when a product offers an ~ 7-9% returns on US Dollars vs. a near-zero return on bank deposits? Crypto yield offerings carry significant credit risks and are probably better when compared to high-yield bonds. For much of 2021, high-yield bond ETFs like HYG offered a yield of 3-4%, which was below CPI inflation. In contrast, BlockFi’s US$ yield product would have provided a return above inflation, which could be an important consideration for some retirees. However, US consumers no longer have access to this CPI-beating return that BlockFi offered. Just to be clear, none of this is investment advice.
Crypto IRA firm hacked
IRA Financial, a firm offering self-directed IRA accounts to hold spot crypto assets, appears to have been hacked. This Coindesk article from February 14th reports that $36m of client funds were stolen. Clients’ digital assets were custodied at Gemini, who says the withdrawal instructions were legitimately initiated by IRA Financial’s systems.
Here’s a Tweet tread from a consumer who claims to have lost funds. This video release by the founder of IRA Financial on February 16th says the company is working with law enforcement to uncover the issue and possible heist. There’s been no additional media coverage since February 14th.
This hack illustrates the risks posed when multiple company systems are involved. Gemini’s systems might be secure, but the much smaller IRA Financial’s systems could have been more fragile. We won’t jump to conclusions and will follow this story to the end.
This is also a good reminder that large hacks will get law enforcement attention. A theft of an individual’s digital assets are unlikely to receive the same attention and follow through. On a related theme, the FBI has launched a crypto crime unit. This WSJ story suggests the focus will be an international criminal networks, but hopefully this unit will be able to assist the US Citizens’ who have been impacted by this hack.
Producer Price Index +9.7% YoY in January
The big surprise was that economists expected a 0.5% MoM increase, but PPI rose 1% MoM. Core PPI (ex food, energy & trade services) rose 0.9% MoM, well ahead of the 0.4% expectation, as CNBC explains. Think of producer prices as what’s charged at the factory gate, and these products then hit consumer prices in the coming months. The gap between CPI and PPI is often seen as impacting company margins. As an example, widget price rose 9.7% (January PPI) at the factory gate, but the consumer selling price of the widget only rose 7.5% (January CPI). In this overly simplistic example, the company’s margins would suffer.
New York Fed survey of consumer inflation expectations dropped
“Median one-year-ahead inflation expectations decreased to 5.8% in January from 6.0% in December. This is the first decline in short-term inflation expectations since October 2020.” Median three-year inflation expectations dropped 0.5% to 3.5%, according to the survey. More survey details are available in this New York Fed release.
As economist say, long-term inflation expectations are well anchored, and this should translate into few rate hikes. The PPI story above and the food inflation data below paint a less rosy picture.
Food inflation will continue to rise
While food does not impact core prices used by the Fed to set policy, there’s a good chance that we will see continued food inflation. The tweet below from fertilizer supply chain insider and this WSJ article highlight why food prices may actually accelerate in 2022. There’s little that monetary policy (raising interest rates) can do to alleviate issues cause by lagging supply. Some of the supply chain issues are likely to prove temporary (covid bottlenecks), but others such as natural gas and energy may prove more structural.
This schematic from the WSJ article illustrates the sources of 2021 inflation for a farmer in NC featured in the article.
Some of these costs, like fertilizer, could rise further in 2022. Politicians, unfortunately aren’t focusing on alleviating structural bottlenecks. With elections looming, it’s much easier to deflect higher price away from their policies. Here’s Bernie Sanders this week. Sorry Bernie, you can push hard to reduce output and then blame the companies when the price of the commodity rises.
We doubt voters in swing districts buy this line of attack. It should travel well in more liberal states like Vermont, but that’s hardly the battleground.
Top Super Bowl Ads
This past NFL postseason was the best in recent memory even though the beloved Patriots were smashed early (the only lopsided game of the post season). The Super Bowl halftime show smashed it and the ads were excellent, too. Here’s AdWeek’s list of the Top Ten along with The Dispatch’s Top Ten list, which is based on entertainment value. Both the AdWeek and Rolling Stone articles provide links to watch the ads. Coinbase clearly ran away with the most effective ad, judging by amount of discussion on Monday and the Coinbase site crashing due to traffic. It was also the most boring commercial and clearly didn’t make The Dispatch’s list!
Stay safe and do reach out if you have any questions or comments about the material in this Dispatch.
|This is not an offer or solicitation for the purchase or sale of any security or asset. While the information presented herein is believed to be reliable, no representation or warranty is made concerning its accuracy. The views expressed are those of RockDen Advisors LLC and are subject to change at any time based on market and other conditions. Past performance may not be indicative of future results.|