Bank earnings kick off this week with reports from J.P. Morgan and Goldman on Tuesday, and…oh wait I just fell asleep.
Listen, it’s not that each of these companies doesn’t have a fascinating story to tell. For instance, I really hope Wells Fargo, on Wednesday, can better explain its decision last week to suddenly shut down personal lines of credit. But after chatting with my brilliant friend–a computer science Ph.D. who works in the crypto world–last week, I’m wondering how the big banks will be able to compete with the two-pronged challenge of low rates and the rise of “decentralized finance, or “deFi.”
Here’s what I mean: my friend is about to move a bunch of his funds from Chase to Coinbase, which just launched a 4% savings account. And this is relatively conservative (and trustworthy) in the crypto world; you can easily get yields upwards of 8% if you go a bit more on the fringes to platforms like Celsius. If Celsius offered the equivalent of FDIC insurance, he’d probably move all of his funds there.
Of course, risk is inherent to any platform that can offer yields that gobsmackingly high at a time when the “risk-free” 10-year Treasury is yielding a pitiful 1.35%. But the difference with crypto assets is that they can also offer higher yields for reasons ranging from platforms lending those assets out to short-sellers to “dividends” earned from traders paying fees to access the platforms.
The promise is clear: the end game is to own enough crypto to be able to live off the yield alone. It’s a bit like the “4%” rule for 401(k)s–you need a big enough lump sum that you can live off of the 4% you withdraw each year. Or think of it as an updated version of the “passive income” play with traditional real estate. You know those guys who quit their traditional jobs and now just own a bunch of rental properties? The crypto guys are trying to do the same thing, but with crypto now, and without having to be landlords.
So it’s hard to get worked up about the traditional banks these days. Because the new money is going onto crypto platforms, and as such that’s where the attention of regulators and commentators and the media should be. The real question as it relates to the banks is whether they’ll simply end up driving more customers to these emerging “high-yield” platforms because their own offerings are so dismal.
Can you even imagine how quickly cash would move if the big U.S. banks started charging depositors, like some in Europe have started to do? It’s not a far-off scenario. Short-dated Treasury bill yields have already gone negative, hence why floods of bank cash are being parked at the Fed for its measly 0.05% return (a.k.a. the “reverse repos”). Banks can only pay interest to customers at all to the extent that they can earn it elsewhere, and return prospects are looking worse by the day.
Oh, and Coinbase also offers a 4% crypto rewards card. So let’s see, which would you rather? Get 4% on your cash, and 4% on your spending, via Coinbase, or 0.5% from Goldman’s Marcus? (And that’s about the highest rate available on savings in the traditional banking landscape.) You might think there’s no way I’d put my money with Coinbase, but it’s a well-regarded custodian in the industry, so plenty of others are.
The real question I’d ask the banks this week is how they plan to compete with “DeFi” going forward. Because no matter how many new platforms blow up in the process, this feels like the future of finance. And the Fed might think it’s winning the battle by keeping rates down in this environment, only to be losing control over the financial system.
See you at 1 p.m!