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The first part of this update is available here. Bookmark it for next time the de-dollarization story reemerges.

Yes, we've left you a bit in the lurch since our recommendation to reduce risk on the rallies. Despite the relative market calm, we continue to see dark clouds forming ahead which leads us to take an unusually more cautious outlook on risk assets. Craig will write more on this later.

Short Block (SQ) Hindenburg report

In a recent report, short-seller Hindenburg Research recommended a short position on shares of Block (SQ), citing product-related concerns and lax know your client (KYC) practices attracting criminal activity. We believe that the report overlooks important aspects of the product development cycle and emphasizes the wrong user metrics. And is, perhaps, even misguided. While Hindenburg draws upon product design issues, we feel that the company's financials are a more relevant point of focus.

One of the main concerns raised by Hindenburg is the quick user registration form used by Block which may not accurately reflect the KYC endeavours of platform operators. This concern may be overstated. Financial institutions typically perform most KYC and anti-money laundering (AML) procedures when clients open accounts. Whereas, tech companies make new customer sign-ups seamless but increase scrutiny as client activity/transactions increase. At which point, users have already committed to the platform, and are more likely to comply with KYC requirements to continue sending and receiving transfers.

Overall, it comes to the same amount of legal documentation as required to open a retail bank account. But, a lower barrier to entry. Hindenburg released the report on the same day the TikTok CEO appeared on Capitol Hill to reassure lawmakers of the social media app's user data practices. That is to say, app operators know their users more intimately than most commercial banks know their clients.

Hindenburg has expressed concern about CashApp, Block's peer-to-peer payment app, and its potential use for illicit activities. However, it's unclear whether CashApp is used disproportionately for criminal activities, and Block is reportedly working with law enforcement agencies to remedy the problem.
 

What is CashApp and why's it appealing?

CashApp is a lite version of more popular payments apps, such as PayPal or Venmo, targeting a lower income user base. So what's alluring about CashApp over more established apps? User-to-user payment transfers are more anonymous – as the app name suggests, have more bearer cash-like properties. However, it is unlikely the same level of anonymity extends to CashApp users and Block.

CashApp has identified a clever product tweak to break into an already saturated payment industry, by creating the illusion of user anonymity. It is, therefore, unlikely that Block will publicly address these concerns in fear of undermining a key product feature.

Another issue raised by Hindenburg relates to fake user accounts, but this is not unique to CashApp and is an ongoing problem in social media. Hindenburg makes no suggestion that Block's financials are falsified or inaccurate, which is typically the primary motivator for a sustained short attack. Block has existed as a publicly listed company for several years. User growth metrics are unlikely to matter so much to investors as headline revenues and profitability. If anything, inflated user numbers undermine Block financials.

Block shares trade down to about a quarter of the pandemic peak, up roughly 5-10% above levels from five years ago, in line with industry peers. Hindenburg cites concerns that Block CEO and co-founder Jack Dorsey sold shares at the top. It was all public information at the time and subject to pre-approved by Block's board members. Many tech CEOs sold vested shares during 2021 which most market participants chose to ignore as a sell signal.

The Hindenburg report mentions rap lyrics with references to CashApp. We believe this is more likely the result of a smart, but aggressive, marketing ploy by the company.

While Hindenburg may have legitimate fundamental reasons to justify their short call, it's unclear whether the concerns raised in the report are significant enough to warrant such action. Block CEO and co-founder Jack Dorsey is widely regarded as a visionary individual, but also prone to squandering his early mover advantage to preserve his ideals. He seems happy enough.

In conclusion, while Hindenburg's report may have some valid points, many of the concerns miss important key details and features of product development. Most notably, an illusion of lax user controls which is often perpetuated by platform operators. Setting aside fundamentals, it makes a short squeeze in Block shares more likely.

Tech may companies pretend not to know… but they know…

(2) De-dollarization | Swiss Banking | Block (SQ) shorts | Speevr


Come on! They have more important things to do than listening in on our mundane conversations. It's only your ego talking.

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(2) De-dollarization | Swiss Banking | Block (SQ) shorts

Hindenburg’s flimsy short thesis.