Block’s day in the sun shaded by new details of DOJ investigation

The news: Block’s Q1 earnings were supposed to be an unqualified success—the firm trounced analyst expectations and raised its full-year guidance.

• Gross profit surged 22% YoY to $2.09 billion. Net income catapulted from $98 million in Q1 2023 to $250 million.
• Cash App reported 57 million monthly transacting actives. BNPL volume from Afterpay jumped 25% to nearly $7 billion.
• Square gross payment volume (GPV) rose 6% to $50.46 billion—and rocketed 23% outside of the US. Nearly one-quarter of Square’s revenues came from banking services during Q1.
• Block also disclosed that the $220 million Bitcoin investment it made in 2020 and 2021 has ballooned 160% to $573 million. In a four-page letter to shareholders, CEO Jack Dorsey focused exclusively on the Block’s commitment to Bitcoin.

Then came another NBC report detailing the breadth of a federal investigation into potential terrorist financing on Cash App, in part through Bitcoin.

2021 called—it wants its Bitcoin strategy back: Block has approached Bitcoin recently with a zeal that rivals the halcyon days of web3.

• Block recently started letting Square sellers automatically invest some of their revenues into Bitcoin—a feature we’re skeptical of.
• Block also started building its own Bitcoin mining system, replete with custom-designed mining chips.
• Late last year, the company also debuted BitKey, a self-custody Bitcoin hardware wallet.

Block’s renewed enthusiasm is not entirely misplaced: While the price of one Bitcoin is down from an all-time high of more than $70,000 in March, it’s still higher than at any point last year as the industry enjoys something of a crypto renaissance.

The Feds are less enthused: Dorsey said the most recent NBC report doesn’t describe a new investigation—Block has been under federal prosecutors’ microscope since at least February. But the report does offer a much more detailed look into the evidence prosecutors are evaluating.

• A former Block employee reportedly gave documents to the Southern District of New York showing Block processed “multiple transactions for terrorist groups” and “thousands of transactions involving countries subject to economic sanctions” that it didn’t report to authorities.
• The former employee alleges that even after senior leadership and its board were made aware, Block failed to act in a way that would stop these types of transactions from occurring again.

Dorsey speaks—and markets don’t like what they hear: After ungracefully sidestepping any mention of the investigation last quarter, Block’s CEO tried to preempt any questions about the investigation during the company’s Q1 earnings call.

• Dorsey disputed the former employee’s claim that Block didn’t report thousands of illicit transactions to federal regulators.
• He said Block has a “robust control environment” to prevent Bitcoin transactions that finance terrorism and maintains “some of the most restrictive limits in the industry for on-chain Bitcoin withdrawals.”

When Dorsey said next to nothing about the controversy last quarter, markets rewarded him with a 20% bump to Block’s stock. Discussing the allegations unprompted failed to yield the same benefit, despite strong earnings: Block’s stock is down roughly 4% since the NBC story broke.

Our take: Block risks derailing one of its main ambitions—encouraging wealthier families to use Cash App as their primary bank—by doubling down on Bitcoin.

Even in the digital banking age, trust is a key determinant in winning over customers, per our inaugural US Banking Consumer Habits survey. It seems like Bitcoin is doing Block few favors in that department.