Crypto’s Story of Fraud, Scams, and Instability
Just last week, Bloomberg reported that more than 90% of transactions involving stablecoins – digital tokens that are usually pegged to the value of a fiat currency, like the U.S. dollar – are fake, according to a dashboard developed by Visa and Allium Labs designed to remove transactions pushed by bots or large-scale traders.
The findings come almost two years after the TerraUSD stablecoin and its companion coin Luna de-pegged, resulting in one of the “biggest failures in crypto.” And just one year ago, USDC, the stablecoin that enjoyed the best reputation, lost its peg because the corporate owner, Circle, had deposited the backup cash in the ill-fated Silicon Valley Bank.
The specter of unstable money extends beyond stablecoins into the crypto digi-sphere as a whole, a new fact sheet from Americans for Financial Reforms reveals. Crypto’s story is one of fraud, crime, scams and economic hardship. All of it underscores the need for more transparency and stronger accountability mechanisms to cut through the industry’s exaggerated claims and false promises.
Major lowlights:
The crypto crash in 2022 sent $1.8 billion in crypto asset value down the drain as investors saw the value of their investments slashed in half.
Three-quarters of people who invested in Bitcoin between 2015 and 2022 lost money – now, financial institutions are allowed to peddle ETFs that track the price of the volatile token.
In 2022, crypto-related investment fraud reported to the FBI amounted to $2.57 billion, up 183% from the previous year. In 2021, consumers and investors lost $7.8 billion to crypto scams.
2022 was also the biggest year for crypto hacking, as bad actors siphoned $3.8 billion from crypto businesses.
Wrote AFR’s Mark Hays:
“Despite this tarnished track record, the crypto industry has criticized regulators for cracking down on the industry and spent hundreds of millions of dollars lobbying Congress to create weak new rules in the name of ‘innovation’ that would fail to adequately protect consumers and investors and expose more people to the industry’s predatory practices and harms.”
BANKING AND FINANCIAL STABILITY: Exec Pay – Capital One/Discover – FDIC Harassment
CONSUMER: Junk Fees – Late Fees – Credit Card Rewards – Enforcement Actions
CAPITAL MARKETS: Stock Buybacks
PRIVATE MARKETS: Steward Bankrupt – Private Equity and Healthcare – Private Equity and Your Kids – Private Equity, Public Utility – PE Storms the Football Pitch – Other Private Markets News
CRYPTO: The CRA Against the SEC’s SAB – Robinhood – Crypto Complaints – FTX
HOUSING: Homeowners Insurance – Minnesota vs. Single-Family Landlords
CLIMATE AND FINANCE: Climate Scenarios
POLITICS AND MONEY: Cryptobros United
Feedback? Reach us at afrnews@ourfinancialsecurity.org
BANKING AND FINANCIAL STABILITY
Exec Pay.
Last week, the FDIC, OCC, and FHFA proposed a rule that would allow regulators to retroactively claw back incentive-based pay and bonuses from bank executives who take on unnecessary risk. Bank decision-makers would also have to wait longer to “cash out” until the results of their actions became clearer. This regulation would implement Section 956 of Dodd-Frank.
Unlike a previous version of the rule from 2016, this iteration targets institutions with over $50bn in assets with stricter requirements, strengthens rules related to limits on stock options, requires forfeiture and clawbacks of deferred compensation, and bans individuals from hedging their own incentive pay. (There’s a more detailed analysis at Bank Reg Blog.) Said AFR’s Natalia Renta:
“The directive from Congress to write this regulation has been in statute for almost 14 years, and while we waited, the country experienced another banking crisis last year, and misaligned incentive compensation was once again a contributing factor.”
AFR and Public Citizen also spearheaded a letter to Congress on the matter.
The SEC and Fed were both absent from the rulemaking announcement. The Revolving Door Project called that a sign of Fed Chair Powell going “soft on Wall Street.” Back in 2016, Powell actually voted in favor of a similar exec compensation rule. Now, on the back of a banking crisis and with congressional momentum, he’s hands-off.
Capital One/Discover.
An American Banker op-ed from AFR’s Alexa Philo and Patrick Woodall calls on regulators to reject the proposed Capital One/Discover merger, an anticompetitive transaction that would create the country’s largest credit card issuer in too-big-to-fail proportions. Wrote Philo and Woodall:
“Picture a new megabank with all the advantages and dangers of a ‘too big to fail’ institution. Imagine it had the market power to bully merchants through its ownership of a payment network for debit and credit cards. Finally, throw in a track record of gouging its own customers. That's exactly what we will have if Capital One succeeds in taking over Discover Financial Services.”
FDIC Harassment.
After an outside firm, Cleary Gottlieb, detailed a “patriarchal, insular, and risk-averse culture” at the FDIC, Chairman Gruenberg has faced calls for his resignation from Republican lawmakers. Other lawmakers have defended him. Sen. Warren pointed out that Gruenberg “welcomed this investigation, has made it clear that he accepts the findings and has committed to make changes at the agency.”
Advocacy group Better Markets pointed out the obvious interest of the bank lobby and Republicans in getting rid of Gruenberg, namely to stall the Basel Endgame capital rules. The group noted that, while internal change is necessary, the report was “materially incomplete and misleading” and failed to address the failures of former Republican Chair McWilliams and Republican Vice Chair Travis Hill. House Financial Services Ranking Member Waters raises a similar point, saying it only blames the current chair, a Democrat “under whose leadership the agency received the most favorable ratings from its employees” without coming down on predecessors.
CONSUMER
Junk Fees.
WSJ sums up how surprise junk fees are widening the gap between the price on the tag and the price consumers end up paying, highlighting the CFPB and Biden administration’s push against them. TL;DR: Consumers end up paying more when they’re hit with deceptive, hidden fees!
Late Fees.
Last week, Mark Pittman, a federal judge in the Northern District of Texas, agreed to an industry request to issue an injunction against the CFPB’s credit card late fee cap – a rule that would have saved consumers $10bn a year. The case has drummed up plenty of judicial drama in the preceding weeks, from a fight over the industry’s forum-shopping to Pittman’s own conflict of interest.
Speaking of: Sen. Warren lambasted a federal judicial ethics panel’s decision to allow that judge, who has shares in major credit card issuer Citi, to continue hearing the suit.
Credit Card Rewards.
A new report from the CFPB spotlights issues with credit card reward programs. Consumer frustration with these programs include vague or hidden conditions that prevent consumers from receiving rewards, issues redeeming rewards, sudden increases in the amount of points needed to redeem rewards, and unfair expiration policies. The CFPB cites action against American Express and Bank of America. Dept. of Transportation Sec. Buttigieg joined CFPB Director Chopra at an event with consumer groups last Thursday to discuss how the issue relates to airline reward programs.
Enforcement Actions.
Chime. Chime Financial, a company that partners with banks to provide financial services such as checking accounts and processing payments, was the subject of CFPB action last week for failing to give consumers their money back in a timely manner. Consumers who had closed accounts waited for weeks and months according to the CFPB, inducing financial harm to those trying to make ends meet. Chime is to pay $1.3mn in redress to consumers, and $3.25mn into the CFPB’s victim relief fund.
LendUp. Fintech company LendUp has been ordered to pay $40 million to over 100,000 consumers by the CFPB for misleading practices. The company, a “payday lender alternative,” claimed that by paying loans back on time, consumers could move up a ladder and receive lower rates in the future. In reality, they were charged equal or higher rates.
CAPITAL MARKETS
Stock Buybacks.
Since the Fifth Circuit Court of Appeals, a venue that chronically sides with the industry, struck down an SEC rule enhancing disclosure around stock buybacks last year, Sens. Baldwin and Rubio have called on the agency to re-propose the rule.
PRIVATE MARKETS
Steward Bankrupt.
Steward Healthcare filed for bankruptcy last week, the culmination of the PE-backed company’s tumultuous financial saga. Thirty creditors are owed more than $500mn according to court documents, a debt that could make Steward’s the largest hospital bankruptcy in American history.
In the crosshairs is the relationship Steward has with its landlord, Medical Properties Trust, which was forced by Steward’s PE owner Cerberus to put up almost half a billion in cash to get Steward out of debt. Cerberus then promptly sold its shares of Steward to the hospital system’s CEO for a profit, and the CEO received a bonus.
Sens. Warren and Markey of Massachusetts, which has eight Steward hospitals, called for a “serious reexamination” of PE’s role in health care and for Steward’s executives to be held responsible for the profit-over-patient approach that has brought issues to the state’s health care system. They also announced a push to help keep facilities open during the bankruptcy period.
Related: Another report from the Private Equity Stakeholder Project shows how private equity is responsible for the surge in U.S. healthcare bankruptcies. Twenty one percent of healthcare companies that filed for bankruptcy were private equity owned, and another fifteen percent were venture capital backed. PESP also noted that ninety three percent of companies in “distress” were PE-backed.
Private Equity and Healthcare.
Analysts at the private markets data research firm Pitchbook suggest that private equity’s investment in the healthcare sector has started to slow, thanks to scrutiny from state governments and federal regulators.
Private Equity and Your Kids.
Private equity firms own 8 of the 11 largest childcare chains in the country, representing a huge stake in an industry already “on the brink” of collapse. The private equity playbook of saddling its portfolio companies with debt only heightens the risk, suggests childcare expert Elliot Haspel. Haspel pointed to an Australian case where the world’s largest childcare provider – ABC Learning – crumpled under a mountain of debt and left the Australian government to provide a bailout. While there are efforts to put guardrails on investor-backed chains, New America highlights the industry’s immense lobbying power.
Private Equity, Public Utility.
Global Infrastructure Partners, an energy-focused private equity platform in talks to be bought by the behemoth asset manager BlackRock, has moved in on a $6.2bn purchase of Minnesota-based public utility company Allete. Some shareholders have raised “transparency concerns about a private company owning a public utility.” Public Citizen’s Tyson Slocum flags that if Allete goes private, the public will lose “enormous amounts of financial detail” typically required of publicly traded companies.
Separately: A proposed deal by California’s PG&E to sell off a portion of its business to KKR has been rejected by the state’s Public Utilities Commission.
PE Storms the Football Pitch.
American private equity has made its way across the pond by buying stakes in football clubs, much to the chagrin of many British soccer fans. Many of the groups and owners come from the financial sector and have faced criticism from fans on being more keen on making money than upholding British footballing tradition. The trend is growing, with several teams in the top and lower divisions being bought out. A helpful chart from AFR’s Brian Carss highlights how the soccer heads made their money:
Other Private Markets News.
The Other Football. The NFL may soon allow private equity firms to buy as much as 30% of team franchises, with individual firms allowed to scoop up 10%.
Movies and Shows. Paramount Global, the entertainment conglomerate behind the likes of Spongebob, CBS News and MTV, will begin talks with a group of investors led by Sony Pictures Entertainment and the private equity megafirm Apollo Global Management.
High-Tech Stationary Bikes. Several private equity firms are reportedly interested in buying out exercise tech company Peloton, as the video-enhanced stationary bike company struggles to grow sales amid tapering demand and high expenses.
Making the Grades. Bain Capital is interested in a $6bn acquisition of K-12 education software provider PowerSchool, putting the firm in reach of 55 million students across more than 17,000 school districts.
CRYPTO
The CRA Against the SEC’s SAB.
When the SEC published its Staff Accounting Bulletin 121 (SAB 121), it asked custodians of digital assets to mark them as both liabilities and assets on their balance sheets, accounting for crypto’s inherent risks. Banks and crypto groups have both pushed back against the non-binding guidance. And now House lawmakers have given in, using a Congressional Review Act resolution to overturn the SAB last week. Ahead of the vote, Waters spoke in opposition to the CRA:
“The collateral damage caused by this CRA resolution would be far reaching, causing significant harm to investors, consumers, public companies, and the safety and soundness of our capital markets. This bill takes a sledgehammer to fix an issue that may merely need a scalpel, and it does so because my colleagues on the other side of the aisle are not only interested in doing the bidding of special interest groups, they are also interested in attacking and undermining the SEC in every possible way.”
Robinhood.
The SEC sent a Wells Notice to online brokerage Robinhood last week, warning it of a decision to recommend charges against the firm’s crypto arm, related to operating an unregistered broker-dealer and clearing agency.
Crypto Complaints.
Crypto has used AI to launch a tsunami of complaints against a pending tax rule to ensure greater compliance within the industry. While most rules get around a few dozen comments, the tax compliance rule has received 125,000 comments. The method of protest has turned heads, as many begin to worry what the future of AI may mean for the public comment process. Agencies are required to view all comments, and one person with an AI bot could use up valuable resources.
FTX.
The customers who lost money in the collapse of FTX – the failed crypto exchange whose disgraced founder was imprisoned for defrauding users out of billions – are likely to get all their money back plus interest, according to the company’s bankruptcy lawyers.
HOUSING
Homeowners Insurance.
AFR and 19 allies want the National Association of Insurance Commissioners (NAIC) to provide more information about current data collection efforts surrounding the property and casualty insurance market. The letter urges NAIC to be more transparent about the scope of the data call – which states will participate, from which insurance companies they’ll pull data, and what data will be collected. The coalition also calls for the complete dataset to be made publicly available and that it be converted into an annual collection, expanded to include housing developers, condos, renters and condo insurance, force-placed insurance and residual market policies.
Minnesota vs. Single-Family Landlords.
Last week, Minnesota Attorney General Keith Ellison announced a settlement with several landlords over their failure to properly maintain over 600 single-family homes and failure to follow through on maintenance promises in North Minneapolis, which is predominantly Black. Tenants have been found to have elevated levels of lead in their blood. Under the settlement, Progress Residential, HavenBrook Homes (a Progress affiliate), and Pretium Partners (the PE owner of Progress), must sell their properties to affordable housing entities, pay restitution to the victims, and forgive debts.
CLIMATE and FINANCE
Climate Scenarios.
Last week, the Fed unveiled the result of an exercise in which it subjected six of the biggest banks – BofA, Citi, Goldman Sachs, JPMorgan, Morgan Stanley and Wells Fargo – to climate scenario analyses which modeled complex and uncertain risks over various time horizons. Most of the banks relied on existing credit risk models to estimate physical and transition risks, assuming that historical relationships would hold true during climate uncertainty. Many reported data and modeling challenges when it came to estimated climate-related financial risks, including a lack of consistent data related to insurance coverage. They flagged that insurance played a key role in mitigating risks for consumers, businesses and banks, and banks needed to monitor changes across the insurance industry.
POLITICS and MONEY
Cryptobros United.
Public Citizen details how super PACs backed by the crypto sector have raised more than $102mn this election cycle, the third-most of all super PACs involved in the 2024 election. More than half of the treasure trove came from direct corporate expenditures, with the rest drawn from billionaire crypto execs and venture capitalists. Four of the eight corporate donors have settled or are facing charges by the SEC. And of the six primaries where the PACs stepped in, only one crypto-backed candidate lost.