Should You Be Concerned About SoFi Closing Its Crypto Business?
Taking a Look at SoFi Technologies (SOFI).
Yesterday marked a significant day for both equities and the broader macroeconomic landscape. The Federal Reserve provided insights into their interest rate strategy for 2024, indicating a pause in rate hikes and projecting three potential cuts. This announcement led to a notable rally in the stock market, as shares bounced back vigorously upon the news.
Turning our attention to this week's article, I want to circle back to SoFi Technologies (SOFI). Recently, the company has been at the center of intense debate, primarily due to the announcement of their crypto business closure. Despite the widespread speculation and heightened reactions in mainstream and social media, it appears that the impact of this decision has been greatly exaggerated. Let's dive into why the response to SOFI's latest move might be an overreaction.
Turning the Page
SoFi Technologies (SOFI) recently made headlines with its announcement to discontinue its crypto trading business. Following this news, SOFI’s shares experienced a brief drop of nearly 10%, although they have since recovered. The company has set a deadline of December 19 for its crypto clients to either liquidate their holdings or transfer them to another exchange. In facilitating this transition, the company is collaborating with Blockchain.com.
Originally established as a student loan refinancing company, SOFI has significantly broadened its range of financial services over the years. Under the leadership of CEO Anthony Noto, the company has transformed into a comprehensive financial hub, or as I like to say a “one-stop shop”, offering an array of services including checking and savings accounts, brokerage services, credit cards, loans, insurance, and even travel. Mr. Noto's ambition extends to positioning SOFI among the top 10 largest financial institutions in the United States.
However, the question arises: should investors be concerned about SOFI's decision to exit the crypto business? I believe the answer is NO. Here's my rationale:
The crypto business has been a "nonmaterial component" of SOFI's business. The decision to wind down this service is actually not entirely unexpected. Nearly two years ago, when SOFI received conditional approval for its national banking charter, it was given a two-year deadline (with possible extensions) to comply with regulatory requirements for its crypto operations. In its recent annual report filed in March, SOFI acknowledged the ongoing discussions with the Federal Reserve and hinted at the possibility of having to cease these crypto activities.
The scrutiny increased after the collapse of the FTX crypto exchange, raising concerns among lawmakers about the compliance of SOFI's crypto business with its bank license and its potential systemic risk. Despite SOFI's reassurances of compliance, the regulatory landscape for crypto remains uncertain (I’m not against crypto, this is just a fact). Recent developments, such as the anticipated approval of Bitcoin ETFs by the SEC, indicate a shifting environment, but for SOFI, the risks associated with maintaining this small part of its business outweigh the benefits of its bank charter.
Looking ahead, while SOFI could potentially “re-enter” the crypto market in the future, recent indications suggest that the company is progressing well without it. During their last earnings call for Q3 2023, crypto wasn’t even mentioned, signaling a strategic focus elsewhere. The company reported record membership growth, with a significant increase in the number of members and a steady rate of products per member. Additionally, SOFI Bank's deposits grew, and for the first time, all three of the company’s business segments reported positive contribution profits (excellent!).
On top of this, the company is on track to achieve GAAP net income profitability in the fourth quarter of 2023 (Something shorts/bears maybe don’t understand?). The upcoming Q4 results will be a crucial indicator of whether SOFI can reach this milestone, but the outlook appears promising even without crypto trading contributing to its financial success. Therefore, it's quite probable that SOFI's decision to shut down its crypto business won't have a significant effect on the company's overall operations.