Summary SoFi is under pressure following the implosion of FTX, the third-largest crypto exchange in the world. This has come as the student loan repayment moratorium is reinstated on the back of a successful legal challenge against the debt relief plan. The near-term outlook for SoFi's common shares is mixed with heightened volatility likely as the crypto's implosion plays out. Crypto is imploding and SoFi ( SOFI ) has now found itself under the crosshairs as four U.S. senators recently wrote a letter to the Fed, FDIC, and OCC, to review the company's crypto listings. The situation is serious as the blame game for the collapse of FTX (FTT-USD), the world's third-largest crypto exchange by volume plays out. For those not tuned into the cryptosphere, FTX was a $32 billion behemoth whose founder CEO expropriated consumer assets. In stark contrast to the unfettered euphoria from last year, 2022 has seen the failure of numerous crypto firms from Voyager (VYGVQ) to BlockFi. 2022 really has come to be one of the worst years for cryptos and SoFi might soon find its crypto trading business on the list of casualties. The four U.S. lawmakers are clearly looking to assess and mitigate the systematic risk posed by crypto's implosion to the broader financial system. Indeed, another letter was addressed directly to SoFi asking the company to explain how its status as a Bank Holding Company can be prudently aligned with its facilitation of what fundamentally remain unregulated securities. Crypto is still a wild west but SoFi was allowed to continue offering crypto trading for at least two years from its bank charter approval earlier this year in January. This also came with the possibility of 3 one-year extensions with the condition that it did not expand crypto trading activities. The key takeaway from SoFi's investors is that crypto trading, a largely immaterial part of the company's flywheel, was always going to come to an end. The risk is whether this happens ahead of a planned 2027 phase-down. To be clear here, crypto is immaterial to SoFi's long-term bull case. The value of their members' digital assets at $132 million as of the end of its last reported quarter. It forms a small component of what was $3.85 million in brokerage fees generated during their fiscal 2022 third quarter earnings. The other takeaways for SoFi investors will coalesce around two points. Firstly, the very public letter could fix future common share price movement of the fintech to what is fast becoming an intense implosion of the more than decade-long crypto ecosystem. Genesis , described as the Goldman Sachs (GS) for crypto, and Core Scientific ( CORZ ), the largest Bitcoin miner in North America are both teetering on the brink of chapter 11 as the contagion from the FTX collapse ripples across an industry without a lender of last resort. Further, if SoFi is moved to end crypto trading early, its platform could become less attractive to prospective new members. This would likely only be a small number of individuals but would be a further dampener on revenue growth when aggregated with the student loan pause and the fraught macroeconomic context. An Old Enemy Resurfaces The White House has extended the payment pause on student loans following a federal appeals court ruling that imposed a nationwide block on the debt relief plan. It rightfully would not have made sense to ask debtors to start paying interest on tranches of debt that would otherwise have been forgiven. This would be the eighth pause of a policy that was brought in during the early weeks of the pandemic and one that has materially shrunk what was previously one of SoFi's largest businesses. The new pause is set to expire 60 days after the legal case is settled by the Supreme Court. However, if the Supreme Court appeal fails, then repayment will restart 60 days after June 30, 2023. This sets the context for what could be the majority of next year being written off for SoFi's student loan refinancing. Student loans becoming political football has placed SoFi in a difficult position. The company will almost certainly have to revise down its revenue guidance for its full fiscal 2024 as this part of its business further strays away from being considered a legitimate contributor to the long-term bull thesis. For SoFi, When It Rains It Pours SoFi will have to work harder on growing the other parts of its flywheel with crypto likely to be out of action and with the student loan pause back on the map. There is a silver lining though, the ongoing implosion will indeed be felt by centralized exchanges and institutional participation in the space. This will filter through to less retail demand for buying and selling crypto on platforms like SoFi. Critically, it would make a future SoFi decision to end its crypto trading early less disruptive to its business as the legacy of the FTX collapse is a push for crypto self-storage and decentralized exchanges. However, whilst the end of crypto trading will be a rounding error, the student loan pause will have an intense negative financial impact on the company's roadmap for growth and will discombobulate the overall momentum of its flywheel. Hundreds of thousands of new members from early next year are now out of the question. SoFi is also unlikely to regain a high valuation with one of its core business functions being restricted. Against this, I continue to be long with the expectation that the first half of 2023 is unlikely to bring any respite for my position. Longer-term this will form a significant opportunity to buy more shares.
