Not too long ago there was talk that SoftBank Group Corp., along with its associated Vision Fund, was going to make a giant investment in office unicorn WeWork Cos. at a $40 billion-ish valuation. That is no longer the case: Now “SoftBank is in detailed negotiations to inject $2bn into WeWork this year,” down from $16 billion (“which would have been the largest ever in a tech start-up”), and the Vision Fund is no longer involved. Also this is weird:
The valuation of the round was still being agreed between the two sides, with one person saying that it would be split with $1bn at the existing $20bn level and the remaining cash at the $42bn valuation from the previously announced fundraising.
The New York Times elaborates:
The latest investment — which is coming from SoftBank itself, not its nearly $100 billion Vision Fund — values WeWork at $47 billion, and brings SoftBank’s total investment in WeWork to about $10.5 billion, they said. …
About $1 billion of the new investments will be used to buy shares from investors and employees, who will get a chance to cash out. Investors and employees who do sell stock to SoftBank will have their shares valued in the mid-$50s, giving WeWork an implied valuation of just over $20 billion.
On Twitter, I called this “the Uber special,” though perhaps I should have said “the SoftBank special”; in any case, it is pretty much the structure that SoftBank used to invest in Uber Technologies Inc. in late 2017. SoftBank bought a bunch of shares directly from Uber at a high valuation, and more-or-less simultaneously bought a bunch of shares from existing Uber investors at a much lower valuation. It was weird! At the time I said that, uh, it was weird, though it is hard to have a better-formed view than that. There is no natural law that says all the shares of a company—particularly a private company—need to trade at the same price at the same time. I mean I guess there is—it is called “the law of one price”—but the whole story of finance is basically just a list of violations of that law.
- buy a bunch of stock from a company at a $20 billion valuation in 2017, then
- buy some more stock from that company at a $47 billion valuation in early 2019, and
- simultaneously buy more stock from existing investors in that company at a $20 billion valuation, then
what is your stock worth? Like the stuff you bought in 2017 at $20 billion just printed a trade (with you!) at $20 billion; presumably that’s where you could sell it. But you just put in more money at more than twice that valuation. Why? The answer is of course “because none of this is a precise science, there is no liquid market for these shares, and the valuation has to do with negotiating dynamics as well as SoftBank’s own interest in supporting WeWork much more than with any objective intrinsic valuation,” but that doesn’t really give you a number.
In addition to the corporate finance weirdness: “Going forward, the company will no longer be called WeWork but rather The We Company.” (“The switch is not a legal name change,” okay.) And: “Rather than just renting desks, the company aims to encompass all aspects of people’s lives, in both physical and digital worlds,” which is—and I have spent years writing about the financial and tech industries and do not say this lightly—the very worst corporate slogan I have ever heard.
Me: What does your company do?
We: We encompass all aspects of your life, in both physical and digital worlds.
Me: Wait that’s terrifying.
We: We’re like Facebook, only you also live here.
Me: Who did you say you are again?
We: We are We.
The new company will be divided into several main business units: WeWork, WeLive, WeGrow, WeHarvest and WeFeast, wait no only the first three of those are real, but I am looking forward to when they start a line of industrial-chic funeral homes, WeDie. (Free beer at the wake!) Seriously WeGrow (real!) is “a still evolving business that currently includes an elementary school and a coding academy.” And WeWhatever’s founders once (in 2009!) “mapped out plans for everything from WeSleep to WeSail to WeBank.” I can’t keep up with this.
Blockchain depositary receipts
Here’s how a depositary receipt works:
- I buy a bunch of shares of a company.
- I put them in a box.
- I sell shares of the box to you.
- Typically I sell one share of the box for each share of the company that I have put into the box, or at least some integer multiple.
- Now you have a share of the box that is almost like a share of the company.
It’s fine! It’s useful. For instance an American depositary receipt typically consists of me buying shares of a foreign company, putting them in a box, and then selling shares of the box in America. The box shares can (sometimes) be listed on a U.S. stock exchange, which is convenient for American investors, who can trade the shares while they are awake, pay dollars for them, etc. It smoothes away some frictions, knits global financial markets together more closely, it’s a thing, whatever.
Anyway blockchain blockchain blockchain, a million blockchains:
A digital exchange opening next week will enable investors to trade in companies including Apple Inc., Facebook Inc. and Tesla Inc. outside of the U.S. even when the stock markets are closed.
DX.Exchange, which has offices in Estonia and Israel, will offer digital tokens based on share of 10 Nasdaq-listed companies with plans to expand to the New York Stock Exchange as well as in Tokyo and Hong Kong. Each digital security is backed by one regular share and holders will be entitled to the same cash dividends, even though the companies themselves aren’t involved.
The exchange’s virtual stock offering will provide a test of investor appetite for products that seek to improve upon mainstream financial markets by using technology from the world of cryptocurrencies. DX will offer digital stocks, or tokens, based on actual shares bought and held by partner MPS MarketPlace Securities Ltd. The tokens will be based on the Ethereum network, with the amount corresponding to demand on the DX exchange.
Digital stocks could hold advantages over traditional shares because they can be traded even when exchanges are closed, and traders can choose to buy fractions of a share. They could also give foreign investors the ability to buy and sell U.S. shares they might otherwise struggle to access.
Blockchain! I am not particularly impressed by the stated justifications here: Stocks are already digital, and I am pretty sure that European investors could already find a way to buy Tesla stock, and 24/7 trading is not especially useful unless people are actually there to trade. There are also some legal issues; DX.Exchange claims that it will not be subject to U.S. regulation “because DX doesn’t operate there,” but I feel like some goofy American will end up buying some Tesla quasi-shares on the blockchain and get everyone in trouble.
There is another standard set of crypto-y justifications that don’t even get mentioned here because they are clearly irrelevant. This is not decentralized trustless immutable permissionless censorship-proof blah blah blah: The tokens live on the blockchain, but they have value because they represent actual shares that live in a brokerage account. You have to trust the broker not to steal them, you have to trust its security procedures to prevent hacking, you have to trust its decision-making processes in case of disputes, and you have to trust the legal regimes in the countries where it operates. This is very much a regulated centralized trusted intermediary holding your shares for you, with an overlay of blockchain.
Still, you know: It’s fine! It’s useful. It’s a thing. The way I think about this is that these tokens are effectively depositary receipts on Tesla shares, only they are not, like, European depositary receipts but blockchain depositary receipts. They let people trade Tesla shares, not in Europe, but in the Invisible Republic of Crypto.
This strikes me as a very useful thing, conditional on already thinking that crypto is a useful thing. If I live in America and want to buy stock in BP PLC, I could probably find a way to buy its ordinary shares in London, but buying its American depositary receipts is more convenient and fits in better with the rest of my financial life. Similarly, if I lived in the Invisible Republic of Crypto, I could probably buy Tesla stock—I bet a lot of Cryptonians do!—but buying its blockchain depositary receipts might be more appealing. If a large chunk of my net worth was in Bitcoins, and if I lived my financial life primarily in the crypto system, and I read some articles about how great Tesla is and wanted to buy Tesla stock, it would be annoying for me to have to take money out of crypto, turn it into dollars, and then give it to a broker. There would be many points of interaction with the traditional financial system: I’d have to go through anti-money-laundering/know-your-customer procedures to turn my Bitcoins into dollars, and there’d be more procedures to open a brokerage account, and every transaction would take three days and be done through the sorts of traditional third-party financial intermediaries that I moved to the Republic of Crypto to avoid. But if I could just go to my usual crypto exchange and trade Bitcoins directly for Tesla shares—Tesla BDRs I mean—and get back those shares immediately, on the blockchain, with my own private key, then that would be nice. Nice for the hypothetical me who lives in the Republic of Crypto, I mean, and who is already used to using crypto exchanges and private keys and so forth. Not for the actual me who finds all of this a bit exhausting. But my impression is that a lot of Cryptonians find bank accounts and brokerage firms pretty exhausting!
I think of this the way I think of stablecoins. The basic point of a stablecoin is that (1) the U.S. dollar is very useful as a store of value and a unit of account, even for people who are committed to crypto, but (2) the dollar is not a particularly useful instrument to pay for things in the crypto ecosystem. I can’t just send you dollars over the blockchain; if I want to send you dollars, we have to leave the blockchain and go to our traditional banks and send wires or write checks or otherwise rely on non-crypto mechanisms. These mechanisms are fine—imperfect, but currently better than crypto mechanisms anyway—for buying a sandwich, but they are bad for some crypto purposes. If we have a smart contract that will send money from me to you upon the occurrence of some specified event, that smart contract might have a tough time accessing my traditional bank account to send you the money. What we want is programmable, crypto-native, blockchain-y money that also has the value of a U.S. dollar.
And so people have invented stablecoins, which are just dollars, but on the blockchain. And while there are some decentralized trustless immutable-code-type algorithmic implementations of stablecoins—which seem sketchy!—there are also more popular and more straightforward implementationsthat are just, I get a bunch of dollars, and I put them in a box, and I issue shares (tokens) in the box, and each token corresponds to one dollar. I have just put a blockchain wrapper around a box of dollars. This smoothes away some frictions and knits the crypto financial markets more closely together with the dollar ones.
But this concept is broadly extensible: You can take anything from the traditional financial system, put it in a box, and issue crypto-tokens against it, moving the thing from the traditional system to the blockchain. Often, when you do this, you accompany it with bold claims that you have somehow revolutionized and democratized the thing: Finally, regular people will be able to buy real estate, or … dollars! … or … Tesla shares!
Those claims are often silly, but I am not sure that they are essential. The essential thing is that you find something useful, or at least appealing, about the crypto ecosystem; this can be philosophical (decentralization, immutable code, non-discretionary monetary policy, etc.) or practical (easier to buy drugs, etc.). Once you decide that the crypto ecosystem is good, then extensions that bring the rest of finance into that system are also good, even if they are not particularly interesting—or even particularly crypto-y—on their own. A stablecoin, or a Telsa blockchain depositary receipt, is not censorship-resistant, is not controlled by immutable code, relies on trust in a centralized intermediary, and generally is not going to revolutionize the financial system. But it is useful in the crypto system: You can transfer it on the blockchain, or trade it easily for Bitcoins, or write smart contracts that make use of it. And if crypto is going to revolutionize the financial system, then giving it useful add-ons—like dollars, or Tesla shares—can’t hurt.
Elsewhere: “Crypto Exchange Takes on Behemoths With Physical Bitcoin Futures.” Cash-settled Bitcoin futures—the kind offered by the big regulated U.S. futures exchanges, which are settled by paying the dollar value of Bitcoin at the maturity of the futures contract—are sort of the opposite of stablecoins; while stablecoins are a way to capture the value of a dollar, but on the blockchain, Bitcoin futures are a way to capture the value of a Bitcoin, but in the dollar system. If you’re a traditional financial system user who happens to think that the price of Bitcoin will go up, buying cash-settled Bitcoin futures is a good way to express that view. (That view is, presumably, weaker than “Bitcoin will become the world’s only currency”; if you think that then you shouldn’t mess around with dollar-settled futures.) But if you live in the crypto ecosystem and happen to want to buy Bitcoin futures for some reason (the reason is leverage), then why have them settle in dollars? What you want is a Bitcoin-settled Bitcoin futures contract, and crypto exchanges are working to provide it.
A simple model of financial technology is that there is stuff that banks do that could be done better with better technology, and there are bankers who know what that stuff is and how to do it and programmers who know how to make the technology better, and the bankers run banks and the programmers run fintechs, and the question of who will ultimately win is just: Is it easier for banks to hire programmers, or for fintechs to hire bankers? I am not sure that there is an obvious answer; my bias is that it’s easier for the banks, but we are in a cultural moment in which tech startups are cooler than banks. In any case here’s a Financial Times article about how a bunch of former big-shot bankers are now working for little fintechs and having the time of their lives:
Antony Jenkins, who was forced out as Barclays chief in 2015, is similarly full of the joys of his new life even though his fintech 10x Future Technologies recently lost out on a big contract with Virgin Money.
The former Barclays boss says his new job is “essentially brilliant”; he relishes being more hands on with his 200 staff and was “never concerned with all the status and resources that went with” running a bank with 120,000 employees and operations all over the world.
There are some downsides though:
Sometimes bankers have to learn humility, at least in the early days. Nick Hungerford, a former Barclays wealth manager who founded the UK online wealth manager Nutmeg in 2011, says the biggest wake-up call for him in Nutmeg’s early days was realising he had gone from being a “high achiever in a big bank . . . to suddenly going to be the guy who is by far the most useless person in the company”.
“All the people who were building the product and coding the tech, very quickly I discovered that they were the ones who were critical and my job was making sure that they could do their work. I was the one who was buying lunch and cleaning the bathroom and fixing the office,” he says.
It does feel like if the results of the fintech industry are (1) cheaper, faster and more comprehensible financial services for everyone and also (2) former big bank CEOs cheerfully cleaning bathrooms, then there’s a lot to like there.
I sometimes mention the two fundamental laws of tax that my tax professor in law school, Michael Graetz, imparted to my class: It is always better to make more money than less money, and it is always better to die later than sooner. These are laws of tax, not of life, though the joke is of course that they make for reasonably good laws of life too. The first law is particularly useful in understanding how marginal tax rates work. The second law has a few rare exceptions—sometimes dying earlier can minimize your taxes, so people do—but it mostly holds up pretty well and has surprising explanatory power. For instance here is an argument from Nikolay Zak that the oldest human being who ever lived, Jeanne Calment of France, who lived to be 122 years old, was actually a synthetic hybrid construct assembled to defer taxes. Specifically the hypothesis is “that Jeanne’s daughter Yvonne acquired her mother’s identity after her death in order to avoid paying inheritance tax and that Jeanne Calment’s death was reported by her family as Yvonne’s death in 1934.”
I do not know if this is true, but it is beautiful. Here we have a story of someone reaching the absolute outer limits of human potential, coming as close as any human being ever has to living forever, and—it’s a tax arbitrage. It just seems right, you know? Why shouldn’t the greatest peaks of human achievement be the results of tax structuring? “You can do anything you can imagine,” I once wrote—about companies incorporating in Luxembourg in order to colonize the moon—“as long as you first get the tax treatment right.” If you care badly enough about minimizing your taxes, maybe you can live forever.
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