Morgan Stanley sees higher odds of a crypto exit for SoFi after lawmaker letters

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By Sam Boughedda

Reacting to news that lawmakers have called for a regulatory review of SoFi Technologies Inc. (NASDAQ:SOFI) crypto activities, Morgan Stanley analysts said the company is now a Bank Holding Company, and it cannot directly generally engage in crypto activities.

The analysts, who have an Equal Weight rating and $7 price target on SoFi, explained today that four Democratic lawmakers on the Senate Banking Committee issued letters to SoFi and banking regulators (the Fed, FDIC, and OCC), calling for a review of SOFI's crypto trading activities.

SoFi shares declined more than 4% following the news.

However, the analysts added that while bank holding companies cannot directly generally engage in crypto activities, following the bank charter approval in early 2022, SoFi was allowed to continue offering crypto to retail customers for two years (with the possibility of 3 one-year extensions thereafter), as long as it did not expand its crypto activities.

"In today's letters, lawmakers raised concerns about: 1) SOFI's apparent expansion of crypto services despite the agreement not to do so (by allowing deposit customers to invest a portion of direct deposits into crypto), 2) capital requirements for SOFI's crypto activities, and 3) investor protection concerns related to at least one "high-risk" token offered by SOFI," the analysts wrote.

They added: "Later in the day, SOFI released an 8K. The company stated it takes its regulatory and compliance commitments seriously, including its non-bank operations within the digital assets space. SOFI also noted it believes it has been fully compliant with the mandates of the bank license and all applicable laws, and maintains consistent, constructive dialogue with federal and state regulators."

They said that specific point may be "intended to effectively argue that regulators were in fact aware of SOFI's plans."

"Crypto a very small piece of SOFI's revenues, but we see higher odds of 1) crypto exit and 2) potential regulatory scrutiny on the bank. Crypto is an immaterial part of SOFI's revenue base today, embedded within the brokerage line which is less than 1% of SOFI's total revenues (or as high as 3% back in 2Q21 when crypto valuations and trading volumes were much higher). Before today we believe investors were already discounting lack of growth in SOFI's crypto revenues from here, but not a complete exit of the business. Today's news would seem to increase odds of an eventual exit from crypto, such as when the conformance period ends in Jan 2024, or perhaps even sooner," the analysts concluded.