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Welcome to the On the Margin Newsletter, brought to you by Ben Strack, Casey Wagner and Felix Jauvin. Here’s what you’ll find in today’s edition:

• As many ponder the recent Sahm rule triggering, Felix chatted with Sahm herself.
• A look at the Fed’s latest enforcement action against a crypto-friendly bank.
• After the Ripple-SEC case order, some are asking, “Wen XRP ETF?” Spoiler: It might be awhile.

Breaking down the Sahm rule with Sahm herself

This week I was fortunate enough to sit down with Claudia Sahm, inventor of the Sahm rule that everyone is talking about.

The Sahm rule signals the start of a recession when the three-month moving average of the national unemployment rate (U3) rises by 0.50 percentage points or more relative to the minimum of the three-month averages from the previous 12 months.

After the ice-cold jobs report from last Friday that posted the U3 at 4.3%, the rate’s rise by 0.53 percentage points triggered the Sahm rule.

The Sahm rule was originally conceived as a highly accurate trigger for a fiscal response from Congress to the economy being in the very early stages of a recession.

At its core, the Sahm rule tries to capture a signal based on the fact that the unemployment rate (UR) is an economic indicator that trends with high momentum. Simply put, when UR goes in one direction, it tends to continue in that direction.

Further, the UR typically rises slowly in the lead-up to a recession, and then accelerates at the tail-end of a recession. If policymakers were to wait until the UR had already accelerated, it would likely be too late and would lead to an unnecessarily bad recession.

Now, the big debate at hand is whether the Sahm rule triggering is justified or not.

On one side of the debate — which Claudia Sahm herself sits on — we are close to recession. But due to idiosyncratic increases in labor supply, which artificially increases the unemployment rate, the Sahm rule has triggered a false positive. In Claudia’s view, the post-COVID economy has broken the Sahm rule as many who withdrew from the labor force have returned and increased the labor supply.

On the other side of the debate is the perspective shared by Bill Dudley, former head of the New York Fed, who published a column this week emphasizing policymakers not to fade the Sahm rule trigger:

Source: Bloomberg

As surmised in this chart from Mike Green, we can see there are structural increases in the UR that are attributable to job losers, not just new entrants:

So where do we go from here? Well, we need to look at the data in aggregate (and the trends of the data) to derive a signal on whether we’re on the verge of falling into a recession or not.

The Sahm rule is just one of many components to look at, as Sahm emphasizes in our interview.

— Felix Jauvin

$12.7 billion

The amount FTX and Alameda Research must pay to settle their civil lawsuit with the CFTC. A federal judge in New York signed off on the agreement Wednesday evening.

The payment breakdown is roughly $8.7 billion in restitution and an additional $4 billion in disgorgement. FTX last month had proposed a $4 billion settlement. The CFTC’s total claim was $52 billion.

Customers needs to up its customer protection, Fed says

The Federal Reserve Board is going after Customers Bancorp and its subsidiary Customers Bank, alleging “significant deficiencies” in the firm’s risk management and anti-money laundering programs.

The Fed specifically mentioned the bank’s digital asset dealings in the Thursday enforcement action. Indeed, Customers Bank became a crypto-industry favorite after Silvergate and Signature collapsed.

Shares of Customers Bancorp lost as much as 22% Thursday following the announcement.

The company now has 60 days to submit a proposal to the Fed Board outlining plans to beef up its risk management practices when it comes to crypto. The bank also must submit a new AML compliance program plan.

Customers Bank largely came out on top last year. As one of the only crypto-friendly banks without exposure to FTX (making it a “last man standing” of sorts after Silvergate and Signature shut its doors), it held a pretty solid position until now.

The firm offers banking services to many digital asset companies, the Fed Board wrote in the written agreement, and operates an instant payments platform for commercial clients to make tokenized payments.

It does for now, at least.

Given Customers Bank was already wary of its reputation as “crypto’s bank,” today’s enforcement action could push execs to distance itself from the industry.

Representatives from the bank did not immediately return Blockworks’ request for comment.

The agreement marks the central bank’s 24th enforcement action so far in 2024. In 2023, the Fed filed 48 enforcement actions. That’s a far cry from the 784 actions the SEC filed last year.

— Casey Wagner

XRP ETF incoming? Not so fast.

You’ve probably heard the Ripple Labs lawsuit news by now. One result: A segment of crypto Twitter (X, if you prefer) has started asking when XRP ETFs are coming.

When thinking about whether the SEC could indeed greenlight such a fund, it’s hard to say these days that something just can’t, or won’t, happen.

After all, the host of The Apprentice was elected president…and is in a dead heat to win back the office. Going back to crypto, BTC and ETH funds have already hit US exchanges this year. VanEck and 21Shares have US spot solana ETF proposals in front of the SEC.

So yeah, many things are possible.

Let’s take a quick step back to Ripple in case you’re still getting up to speed: A federal judge on Wednesday ordered the company to pay $125 million in its lawsuit with the SEC. The agency had sought a $2 billion payment, while Ripple requested a maximum penalty of $10 million.

Judge Analisa Torres ruled last year that while Ripple’s institutional sales of XRP counted as an unregistered securities offering, programmatic sales did not. Many considered that a partial victory for the XRP issuer.

The ETF Store’s Nate Geraci told Blockworks that while he believes firms could file for XRP ETFs, the current SEC is unlikely to seriously entertain their approval.

ETF.com senior analyst Sumit Roy believes even XRP ETF filings are unlikely for now, given the SEC could appeal the Ripple court decision.

“Even if Ripple’s legal woes are completely extinguished, there are no regulated futures associated with XRP,” Roy added. “I think that’s a deal breaker when it comes to approving an XRP ETF.”

This remains the obstacle for solana ETFs as well, Roy and others have said.

Like Roy, Geraci expects CME-traded futures contracts existing on the underlying crypto asset to be a prerequisite for approval. Other ways US XRP ETFs could see the light of day would be a change in SEC leadership, or Congress drawing up a framework that clearly spells out which crypto assets are commodities and securities, he added.

To the point about an SEC leadership change, the filings for SOL products could be viewed as a bet on Trump winning the presidency in November. Indeed, the former president said he would, if elected, fire SEC Chair Gary Gensler “on day one.”

While some of the more crypto-focused asset managers could opt to file for XRP funds in the near-term, a giant like BlackRock seems to be good with just its bitcoin and ether ETFs for now.

With many more traditional investors still learning about BTC and ETH, some more time before the next wave of crypto ETFs might not be a bad thing.

— Ben Strack

Bulletin Board

• Bitcoin inched close to $60,000 Thursday, standing at roughly $59,500 at 2 pm ET — nearly 8% higher from 24 hours prior. ETH’s price had gained more than 10% over that 24-hour span, hovering around $2,590 at 2 pm.
• Franklin Templeton made available its OnChain US Government Money Fund on Arbitrum in a bid to quicken the integration of DeFi into TradFi, the company said Thursday. The product became the first US-registered fund to use a public blockchain to process transactions and record share ownership when it debuted in 2021. It had $420 million assets under management, as of July 31.
• US spot bitcoin ETF net inflows resumed on Wednesday (totaling $45 million) after three straight days of net money exiting the category (amounting to about $550 million of combined outflows).