Jun 10

10 min read

5MF: APPLE JUMPS INTO BNPL, CITADEL APES INTO CRYPTO, NO MORE PFOF?

The 5-minute newsletter on the important stuff in finance — explaining what’s going on, and why.

Let’s see what’s going on this week:

Apple Jumps into BNPL: Perfect Timing?
No More PFOF? SEC Proposes Transparent Auction to Replace Routing
Citadel Securities to Launch Crypto Marketplace: Good or Bad?
New Bill to Clarify Crypto’s Status as a Currency, Security, or Commodity
Ethereum 2.0: Inching Closer to Crypto’s Biggest Merge

Apple: From Big Tech, to Big FinTech

Apple Pushes into Fintech with Buy-Now-Pay-Later (BNPL): Could Crypto Be Next? (link)
Apple’s ‘Pay Later’ is the Latest Plea for Your Loyalty (link)

Apple Adds “Fin” to its Already Substantial Tech Footprint

Three years after Apple launched its Apple Card, the Big Tech giant is moving into buy-now-pay-later (BNPL), with it’s ‘Apple Pay Later’. The BNPL market reached $179.5 billion this year, with forecast to grow to $3.2 trillion by 2030.

But — if you can buy things upfront without paying for them, isn’t this just credit, for which Apple already has a credit card? While the new Apple Pay Later service is a type of credit, there are several key differences to consider:

To get a credit card, some vetting involved, which includes your income and your credit score. This is not the case with BNPL, although there could be limitations imposed on specific merchant purchases.
Credit card debt can be carried into subsequent months. In contrast, BNPL repayments are split into four installments.
Credit cards charge a variety of fees, while BNPL only charges late payment fees.

Apple’s version of BNPL is even more significant than Apple Card because it’s the company’s first foray into direct financial affairs. So far, Apple relied on third-party credit processors, such as Goldman Sachs, for its Apple Card. Conversely, when the new iOS 16 integrates Pay Later into Apple Pay, the company transitions to both Big Tech and Big FinTech.

Suffice to say, FinTech startups who tried to hop on the BNPL bandwagon are terrified of this development. With over one billion iPhone users, and an extremely loyal customer base, Apple is poised to overshadow even the likes of PayPal.

Apple’s customer loyalty soars high above all other competitors. Image credit: Apple Insider

It is also not a coincidence that Apple is tapping into that loyalty this year. Despite Americans seeing slightly higher interest rates in their savings accounts, the personal savings rate — the average amount of disposable income people save — remains at 4.4%, the lowest since the Great Recession of 2008.

In other words, rampant inflation and a soaring cost of living are eating away at people’s savings. This time, there are no stimulus checks on the horizon. Will consumers turn to BNPL as an easier way to access credit? Apple seems to think the answer is a clear yes.

Is PFOF (Actually) Coming to an End in the US?

How Commission-free Stock Brokers Could Be Affected By SEC’s Proposed PFOF Rule Change (link)
Robinhood Executive Attacks SEC’s Plans to Shake Up Stock Trading Rules (link)

‘Democratize Finance’ Pioneers Dislike Transparent Trade Auctions

Pioneering zero-commission trading was the prime reason Robinhood became the most popular retail stock trading app. However, Robinhood’s mission to “democratize finance” was soured when a large group of stonk-chasing apes discovered that it sells customer order flows to market makers. This not-so-secret ingredient — called payment-for-order-flow (PFOF) — made zero-commission trading possible in the first place.

The catch is, sometimes, those market makers, like Citadel Securities, may have a vested interest which is contrary to the interest of Robinhood’s customers: Retail traders (the average Robinhood account size is $3,500). The GameStop short squeeze was the biggest fallout from the controversial PFOF business model, which by the way, is illegal in the UK, Australia, and Canada.

It looks like the US will follow suit. The Securities and Exchange Commission (SEC) is proposing to overhaul retail trading. The new proposal includes sending trade orders to transparent auctions, so market makers can compete for the best price.

This alone would be devastating for Robinhood, which gained 72% of its YTD revenue from routing orders to contracted market makers. For stock routing alone, which would be affected by the new SEC rule, Robinhood’s revenue could decline by roughly 12%.

Predictably, the hint of the overhaul already had a devastating effect on Robinhood (HOOD) stock, having lost -17.53% in value over the last five days.

Hood reached an all-time low since the broker went public, having peaked at $70.32 in August ’21. Image credit: Trading View

Robinhood’s Chief Legal Officer, Dan Gallagher, isn’t a fan of the new proposal. According to Gallagher:

“It is a really good climate for retail, so to go in and muck with it right now, to me, is a little worrisome.”

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Double-edged Sword: Financial Industry Giants to Launch Crypto Trading Platform

Citadel, Charles Schwab, Fidelity Join Forces to Build Cryptocurrency Trading Platform (link)
Citadel Securities is Building a Crypto Trading Marketplace with Virtu Financial: Sources (link)

Legacy Embraces Digital Assets

Remember when Ken Griffen called cryptocurrencies a “jihadist call” against the dollar last October? Well, it appears it’s all water under the bridge now. As the Citadel (hedge fund) and Citadel Securities (market maker) founder, Griffin is teaming up with other financial power brokers to enter the crypto space.

Together with Virtu Financial, Fidelity Investments, and Charles Schwab, Citadel Securities announced plans to launch a crypto trading platform. Additionally, venture capital (VC) firms Sequoia Capital and Paradigm will lend a hand. Combined, these veteran market makers and trading brokers have dozens of billions to bring to the table.

Fidelity Investments alone made $24 billion in revenue last year. In contrast, the two largest crypto exchanges, Coinbase and Binance, made $27 billion in revenue combined. In other words, we are seeing legacy giants entering the stage where finance meets emerging technology.

The financial industry power-quartet will focus on strict-regulatory adherence, deep liquidity, and crypto security. Legacy companies tend to break the remaining psychological barriers to novelty digital assets, suggesting this move is positive overall for the evolution of the digital asset space.

Will these legacy companies be able to pull off this significant transition, though? The move would require the acquisition of serious talent and builders. Where does the talent in this space want to work though — for Citadel Securities?

We’re at an interesting crossroads here. Legacy Wall Street wants to jump into crypto. Their pockets are quite deep. But is the true talent of the crypto space just after money? Probably not. Does legacy Wall Street have enough resources to execute this mission? Probably.

The consequences of this move could be substantial. If Citadel Securities pulls this off, cryptocurrencies are likely to become fully embedded into the legacy financial system. Does that mean digital assets will lose some of their appeal? Certainly. But, for the mainstream validation of digital assets, this sort of ‘sacrifice’ is inevitable.

Currencies, Securities, or Commodities?

US Cryptocurrency Bill Proposes Treating Bitcoin as a Commodity (link)
Bitcoin’s Correlation With Gold and US Bonds Surges as Market Downturn Continues (link)

Bitcoin — Commodity with Potential for Currency

Bitcoin started off as a replacement currency. A peer-to-peer electronic cash system to counter the Federal Reserve’s money supply itself. Over the years, as it attracted investors, it began to strongly correlate with the stock market. Most recently, with the price activity of a high-growth tech stock, similar to the Nasdaq 100 index.

Yet, in 2015, the CFTC classified Bitcoin not as a stock or a currency, but a commodity. Just like gold, grain, or oil, commodities are best understood as interchangeable goods. But wait — isn’t currency also an interchangeable good?

Yes, if the currency is used to trade against other assets based on price fluctuations. Herein lies the problem. For Bitcoin to rise above commodity, its price would have to stabilize in order to serve as an effective medium of exchange — a currency. But in becoming so, it would cease to be an exciting commodity delivering wild gains.

Are there more double and triple-digit gains on this table or losses? Image credit: Unfolded

For this reason, it makes sense to treat all digital currencies as commodities, under the CFTC’s supervision. At least, that is the intent of the latest bipartisan crypto legislative proposal.

This would be a massive improvement over the SEC’s view to treat most digital assets as securities. Such a treatment is costly and burdensome, set to stifle the DeFi ecosystem. Yet even if the bill will not see approval, we may see some of it used later on in other bills.

In the meantime, Bitcoin still strongly correlates with tech stocks, while also dipping into short-term correlation with gold.

This is interesting, as gold serves as a go-to risk-off asset in the current market selloff environment.

Depending on market conditions, investor behavior bounces between risk-on and risk-off. Image credit: Kraken

In other words, as institutional investors exit Bitcoin (whose activity largely contributed to Bitcoin’s correlation to tech in the first place), Bitcoin returns to its default risk-off asset behavior — digital gold.

Patchworked Ethereum Soon to Reach a Lifetime Fork

Ethereum-Based Funds Hit $357M in Net Outflows YTD: Investors Prefer BTC (link)
Ethereum, “The Merge”: What Developers Are Saying (link)

Ethereum Carries Web3 on its Back

It’s make or break time for Ethereum in the coming months. By going from proof-of-work (PoW) to proof-of-stake (PoS) consensus, the second largest blockchain by market cap is expected to reduce its energy consumption by 99.98%. This alone will be warmly welcomed by ESG-minded investors.

Ethereum managed to position itself as the king of dApps despite multi-year delays to ETH 2.0. If more significant delays occur, there are plenty of alternatives now — Fantom, Avalanche, Solana, Near, and others.

These alternatives launched as PoS from the get-go, offering negligible fees and speedy transactions. On the other hand though, Ethereum has a massive first mover advantage, as most NFT marketplaces and blockchain games are hosted on Ethereum, or on its sidechains such as Polygon.

Because of this, the current state of Web 3.0 depends on Ethereum to thrive. However, in anticipation of more delays, investor activity suggests a bit of fear, as $357 million worth of ETH in digital funds has been withdrawn from the Ethereum ecosystem.

Surely other events are responsible for such for though. Besides the economic climate, Terra embarrassed the entire DeFi ecosystem. So, it’s understandable that Bitcoin inflows increased at half a billion year-to-date.

Image credit: CoinShares

After the Ropsten testnet docks with Beacon Chain (the new Ethereum PoS), this will be the last stop before the main docking of the entire network to PoS. According to Vitalik Buterin, the quirky co-founder of Ethereum, this should happen some time in August. If successful, without major code exploit embarrassments, we may be looking at a re-energized crypto market.

Tweets of the Week

The median monthly payment of a 30-year mortgage is up 56% year-over-year

@MikeZaccardi

Potential outcomes of tomorrow’s CPI report:
1. Inflation higher than expected and $SPX falls on more hawkish Fed
2. Inflation as expected and $SPX falls as 8+ rate hikes ahead
3. Inflation lower than expected and $SPX falls on recession fears
The Fed has destroyed markets.

@KobeissiLetter

U.S. falls behind other countries in terms of underclass of people who spend their lives cycling thru low-paid jobs, rarely accumulating savings … nearly 1/4 of U.S. workers are classified as having low pay (10% higher than ⁦@OECD⁩ & European averages)⁦

@Bloomberg

@LizAnnSonders

When food is priced in the local currencies of poor countries that are not oil exporters, and food importers, prices are rising a lot more than what we see in dollars.
It was less of a rise in food prices in 2011 that kicked off the Arab Spring.

@biancoresearch