Protocol | Fintech
The people, power and politics of fintech, every Tuesday and Friday.
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Bitcoin is crashing. Coinbase is looking beyond trading.

Coinbase reported first-quarter earnings Thursday.

Hello and welcome to Protocol | Fintech! This Friday: Coinbase's earnings, credit cards without credit scores and Elon's green turn.

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The Big Story

After the crypto crash

Coinbase released its first-quarter earnings Thursday, which, as expected, showed big jumps in revenue and profits from the fourth quarter of 2020.

The bullish numbers struck a sharp contrast with what happened in cryptocurrency markets. Selling prompted first by Tesla CEO Elon Musk's U-turn on bitcoin and then a report that the Department of Justice and IRS were investigating Binance, a major crypto exchange, pummeled major coins. Bitcoin, XRP, Ether and other digital currencies shed $365 billion in value.

Coinbase's numbers showed what can happen when price moves are favorable, drawing investors and speculators into the crypto field. Trading volume soared along with the price of bitcoin and other cryptocurrencies. Coinbase had 56 million customers, of which 6.1 million were actively buying or selling in a given month.

It wasn't just bitcoin. Ether trading increased as a percentage of total trading volume, with institutional interest growing. Coinbase's new Ethereum 2.0 product and the growth of decentralized finance products based on Ethereum also helped, Coinbase said.

Still, Coinbase acknowledges that it had benefited from the recent all-time highs in crypto prices, a market condition which already seems like it could crumble:

  • "The wind is in our sails right now, and it feels good. But crypto is a young, volatile industry and there will come a day when times are harder. We know this because we've experienced major crypto winters where financing was difficult to get, partners cut us off, and we lost large parts of our employee base. Tension gets high during these times," the company said in its quarterly report.
  • The recent crypto rout spells trouble: "As our Q1 results clearly demonstrated, our business is volatile. We have historically generated high revenue and have been profitable during periods of strong crypto asset prices and we have lost money when prices are low."

Coinbase says it aims to operate the company at "roughly break even," with results that are "smoothed out over time." New products that don't depend on trading are crucial for that.

  • Coinbase has more than 1 million customers using staking, which is a way for certain cryptocurrencies to generate yield which is similar to interest. Coinbase also now loans up to $100,000, using bitcoin as collateral. The product has seen "rapid growth in originations," Coinbase said.
  • The company also said it's courting institutional customers "ranging from hedge funds and corporate treasuries to pension funds and insurance companies."
  • Corporate customers are "expressing interest in commerce, payroll and custom white label solutions."
  • Coinbase Cloud, based on its acquisition of startup Bison Trails, lets companies send and store crypto, accept crypto payments and do their own staking. This could end being a substantial business: Imagine Coinbase as a kind of AWS for crypto.

Still, Coinbase sees challenges in the market, including increased competition. Some of this is Coinbase's fault for not keeping up with crypto trends.

  • "Our competitors are supporting certain crypto assets that are experiencing large trading volume and growth in market capitalization that we do not currently support, as well as offering new products and services that we do not offer."
  • The biggest gap in Coinbase's trading portfolio right now is dogecoin, the once-jokey currency that played a starring role in Elon Musk's recent "Saturday Night Live" appearance. CEO Brian Armstrong said Coinbase would list it in six to eight weeks.
  • Robinhood started dogecoin trading in 2018, and a host of competitors added support for the cryptocurrency last week.

Coinbase still has work to do to match investors' lofty expectations. The company's value has fallen by more than half from its peak on the day it listed its shares in April. That's another thing it has in common with crypto prices.

— Tomio Geron

A MESSAGE FROM INTEL AND MICROSOFT AZURE

Financial fraud isn't waning, and as it increases, security tools designed to protect the data in use need to get stronger to combat more complex fraud. Confidential computing is going to play a big role in the future of financial services.

Learn more

From Protocol | Fintech

The Senate voted this week to repeal the True Lender rule. The rule enables payday lenders and others to avoid state caps on interest rates.

Overheard

  • "It's not a Hail Mary. It's something that we know works." —Marianne Lake, CEO of consumer lending at JPMorgan Chase, on a plan for big banks to give credit cards to people without credit scores.
  • "Cryptocurrency is a good idea on many levels, and we believe it has a promising future but this cannot come at great cost to the environment."Elon Musk, explaining why Tesla has stopped accepting bitcoin as payment for Tesla vehicles.
    "This shift is consistent with Diem's initial strategic focus on the United States and reflects Diem's consideration of the evolving digital currency regulatory environment in the U.S."Facebook-backed Diem, explaining why it is leaving Switzerland and refocusing on the U.S.

3 Questions With...

Matt Harris, CEO, Bloom Credit

What fintech trend are you most excited about?

The growing number of fintech companies interested in the credit scores of their customers has been extremely exciting. A credit score is tied to so many huge milestones in life, yet the path to a good score can be difficult. So it's nice to see so many fintech companies step up to find creative ways to enable score improvement.

What fintech trend is most troubling for you?

While I want more fintech companies to create lending models, it definitely concerns me when companies think they can create a lending arbitrage without first attempting to create "positive selection" within their customer base. In lending, it's hard to find a good shortcut that hasn't already been explored. It's better to build situations into business models that help companies better understand their customers than to rely on a "miracle" data source that attempts to learn everything about a customer's ability to repay.

What problem in fintech would you like to see someone solve?

I'd love to see more companies get into "buy now, pay later" that focus on finding verticals, such as higher education, offering textbooks, supplies, etc.

Need to Know

  • Goldman selected 15 companies for its entrepreneur program. Launch with GS helps Black and Latinx founders grow their companies, make investor connections and meet industry experts.
  • Credit card debt is falling, and banks are worried. Americans are paying down credit debt at high rates, hitting bank revenue.
  • Stablecoins face calls for more regulation. They've grown in popularity because they help address crypto volatility, but lack disclosure and transparency.
  • Google Pay partnered with Western Union and Wise for overseas payments. It will enable people to send money to people in more than 200 countries through Western Union and more than 80 through Wise.
  • PayPal bought a returns company. The payments giant bought Happy Returns, which offers in-person return drop-offs in 2,600 locations.
  • Treasury Prime raises $20 million. The banking-as-a-service startup's series B was jointly led by Deciens Capital and QED Investors. Its bank partners include Pacific Western Bank, which also invested, and Piermont Bank.

Data Point

3.87%

That's the percentage of assets backing Tether stablecoins held in pure cash. When Tether first launched, it said it was backed one-to-one with cash, but a recent disclosure showed a mix of cash equivalents, secured loans and even bitcoin.

Thanks for reading — see you Tuesday.

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