UK Chancellor Rishi Sunak, appointed to the job just over a month ago, announced the most significant set of British policy measures since the Second World War on Friday, 20 March. The sweeping package—which includes a £30 billion tax holiday for corporations and a government commitment to pay part of citizens’ wages for the first time in British history—would have been unthinkable for a Conservative administration only weeks ago. The unprecedented nature of the measures, as well as the gravitas with which Sunak announced them, drove home the reality of the economic tsunami which the coronavirus pandemic has unleashed.
The global economy, as one commentator noted, is going into cardiac arrest. Central banks from Tokyo to Zurich have slashed interest rates—but this can only do so much to alleviate the pain from millions of workers staying home, assembly lines grinding to a halt, and stock markets going into freefall.
It’s almost impossible to predict the full scale of economic damage while most of the world is still fighting to contain the virus’s exponential spread, and while so much remains uncertain. Will the virus, for example, fade thanks to a combination of strict quarantine measures and warmer weather—only to return with a vengeance in the fall, causing a devastating double dip in economic activity?
What’s almost certain is that Europe is tipping into a fresh financial crisis. “Extraordinary times require extraordinary measures,” admitted ECB chief Christine Lagarde, underscoring that “there are no limits to our commitment to the euro.” The bloc’s major economies, some of which were flirting with recession even before the pandemic, are sure to blow past 3% deficit limits. They are likely to play fast and loose with EU state aid rules, too, as hard-hit firms—particularly major airlines, including Air France and Lufthansa—may need to be nationalised to keep them from folding.
As policymakers try and keep their economies afloat during—and after—this acute phase of the pandemic, they will need every scrap of revenue. It’s outrageous, then, that some $7 trillion in private wealth is hidden away in secrecy jurisdictions, while corporate tax avoidance via offshore tax havens drains as much as $600 billion a year from government coffers. New research indicated that 40% of multinational firms’ profits are squirreled away offshore.
The Tax Justice Network has identified an “axis of avoidance”—the UK, the Netherlands, Switzerland and Luxembourg—which together account for fully half of the world’s tax evasion. The UK bears a particular responsibility for failing to crack down on the widespread financial malfeasance occurring in its overseas territories. While NHS staff on the frontlines of the coronavirus epidemic have expressed concerns that they are being treated as “cannon fodder” amidst a gross shortage of protective equipment, the world’s three most notorious offshore hideaways are British overseas territories.
The most famous is probably the Cayman Islands, which the EU placed on its tax haven blacklist earlier this year. For decades, ill-fated firms from Enron to Lehman Brothers stashed their problematic assets in the idyllic islands, while firms like mining giant Glencore allegedly funnelled bribe funds through the British Overseas Territory.
The Caymans have made a recent attempt to shed this reputation as a fiscal Wild West, pledging to reveal corporate owners by 2023—a move which would bring the island nation in line with EU directives. In the meantime, however, stories continue to emerge illustrating how unscrupulous companies are taking advantage of the Caymans’ lax regulation.
Just a few months ago, the Gulf Investment Corporation (GIC)—a fund owned jointly by the six Gulf countries—asked courts in both the Caymans and the United States to look into the “hundreds of millions of dollars” which have apparently disappeared from the Port Fund, a Caymans-based financial vehicle.
According to court filings, the Port Fund’s sponsor, KGL Investment Company, may have been involved in siphoning off proceeds from the sale of Port Fund assets in the Philippines. The GIC maintains that the Port Fund sold a Filipino infrastructure project for roughly $1 billion—but only disclosed $496 million in proceeds and disbursed a mere $305 million to the fund’s investors.
The “missing” $700 million didn’t just evaporate into the ether, of course. It seems highly plausible that the discrepancy has gone at least partly towards the costly lobbying effort which the Port Fund has mounted to spring its former executives, Marsha Lazareva and Saeed Dashti, from prison in Kuwait, where they’ve been locked up after being convicted of misappropriating public funds. The high-powered lobbying campaign has run up a tab of millions of dollars and roped in everyone from Louis Freeh, the head of the FBI from 1993 to 2001, to Cherie Blair, the wife of former British PM Tony Blair.
The sordid saga is the perfect illustration of how cunning companies can exploit the lack of regulatory oversight in fiscal paradises like the Caymans to keep cash out of public coffers. There are countless such examples. Netflix reportedly shifts money through three different Dutch companies to keep its global tax bill low. Until mere months ago, tech titan Google took advantage of a tax loophole dubbed the “Double Irish, Dutch sandwich”, channelling huge sums through Ireland to “ghost companies” in tax havens including Bermuda and Jersey, both British dependencies.
European leaders can no longer afford inaction on stamping out these financial black holes. Ibrahim Mayaki, the co-chair of a recently-created UN panel on illicit financial flows, remarked that “the money that is being hidden in offshore tax havens, laundered through shell companies and outright stolen from public coffers should be put towards ending poverty, educating every child, and building infrastructure that will create jobs and end our dependence on fossil fuels.”
Right now, it should be put towards retrofitting critical care beds, ensuring that Italian doctors treating coronavirus patients have the gloves that could save their own lives, and providing support to Europe’s small businesses so that they don’t go belly up.
The crypto currency bull run isn’t just about Bitcoin
It’s been a wild and unpredictable year in so many ways. Crypto currencies boomed with institutional investors flooding in. Bitcoin hit a new all-time high in December. Institutional investment in bitcoin was the headline news of 2020. Companies both big and small moved huge percentages of their cash reserves into bitcoin, including the likes of MicroStrategy, Mass Mutual, and Square. And if recent announcements are anything to go by, they’re only just getting started, writes Colin Stevens.
However, as exciting as it’s been to watch them pour into the space over the last year, the numbers are still relatively low. In 2021, the success, or not, of their decisions will become clear. This could motivate a whole new wave of institutional investors to follow their lead. MicroStrategy’s $425 million investment in bitcoin, for example, has already more than doubled in value (as of 18 December 2020). These are numbers that will interest any business or investor.
Furthermore, cryptocurrency and investment platforms such as Luno are already making it even easier for institutions to get involved. The recent news that the S&P Dow Jones Indices — a joint venture between S&P Global, the CME Group and News Corp — will debut cryptocurrency indexes in 2021, for example, should put crypto in front of even more investors on a daily basis.
The next big news for crypto currency will be sovereign wealth funds and governments. Will they be ready to make a public investment into crypto next year?
It’s actually technically already happened, albeit not directly. The Norwegian Government Pension Fund, also known as the Oil Fund, now owns almost 600 Bitcoin (BTC) indirectly through its 1.51% stake in MicroStrategy.
An open and public investment by such an entity would be a show of trust that could set off a frenzy of government activity. If institutional investment brought mainstream respectability to Bitcoin and other cryptocurrencies, imagine what the backing of a sovereign wealth fund or government would do?
The recent bull run has certainly started people talking, but compare the media attention in 2017 to this time around. It’s been limited, to say the least
One reason is that this bull run has been driven primarily by institutional investors. This has often meant crypto news landing on the lesser-spotted business pages. The mainstream media’s attention has also, understandably, been elsewhere – pandemics and contentious presidential elections have a tendency to dominate the news cycle.
But there are signs this is changing. December’s new historical all-time high has brought with it a significant amount of positive coverage across major publications, including The New York Times, The Daily Telegraph, and The Independent.
If the bitcoin price continues to rise - as many suspect it will - this may drive another wave of headlines and again cement cryptocurrency firmly on the front pages. This puts cryptocurrency firmly back in the public consciousness, potentially lighting a fire under consumer demand.
There are a number of reasons why this could be, but chief among them is that this bull run has been driven fundamentally by institutional demand rather than retail.
An increase in media attention would certainly change this, but perhaps even more important is that it’s now easier than ever to buy crypto currency, with the success of Luno and Coinbase, supporting customers around the world, but also the likes of PayPal and Square are seeing huge success in the US. They’re currently buying the equivalent of 100% of newly minted bitcoin just to cover the demand they’re getting from US customers.
There is another element. This latest bull run for the crypto ecosystem as a whole is proving that there is an appetite for tokens that do more than just act as a store of value (i.e., bitcoins) and now tokens with more specific and sophisticated use cases are becoming more popular.
Cryptocurrency tokens are fungible digital assets that can be used as mediums of exchange (traded) inside of the issuing blockchain project’s ecosystem. They are best described by how they serve the end user. Think of tokens as the foods that nourish blockchain-based ecosystems.
Crypto tokens, which are also called crypto assets, are special kinds of virtual currency tokens that reside on their own blockchains and represent an asset or utility. Most often, they are used to fundraise for crowd sales, but they can also be used as a substitute for other things.
The Silk Road Coin is a special-purpose token, designed for application within the global commodity trading industry. According to LGR Global’s founder and CEO, Ali Amirliravi, “there are many pain-points within the commodity trading business, including delays in fund transfers and settlements. Transparency issues and currency fluctuations work to further undermine the efficiency and speed of commodity trading transactions. Building on our vast industry knowledge, we have created the Silk Road Coin to address these issues and comprehensively optimize the commodity trading and trade finance industries.”
To begin, LGR Global is focused on optimizing cross-border money movement and will then expand to digitizing end-to-end trade finance using emerging technologies like Blockchain, Smart Contracts, A.I. and Big Data Analytics. “The LGR platform was launched in the Silk Road Area (Europe-Central Asia-China)”, explains Amirliravi, “an area which represents 60% of the global population, 33% of the world’s GDP, and posts incredibly high & consistent rates of economic growth (+6% p.a.).”
The LGR Global platform aims to safely and successfully complete money transfers as quickly as possible. It achieves this by removing the middlemen and transferring the money directly from sender to receiver. The Silk Road Coin fits into the LGR ecosystem as the exclusive mechanism for fee payments incurred by traders and producers who use the LGR platform to conduct large and complex cross-border money movement transactions and trade finance operations.
When asked what 2021 will look like for LGR Global and the Silk Road Coin, Amirliravi stated, “we are incredibly optimistic for the new year; industry and investor feedback for the SRC and digital trade finance platform has been overwhelmingly positive. We know we can make a big difference in the commodity trading industry by digitizing and optimizing processes, and we are excited to showcase successful pilot projects beginning in Q1 & Q2 of 2021.”
Industry-specific tokens and blockchain platforms have garnered significant interest from institutional investors – it’s clear there is an appetite for forward-thinking solutions that solve concrete issues.
McGuinness presents strategy to deal with Non-Performing Loans
The European Commission has today (16 December) presented a strategy to prevent a future build-up of nonperforming loans (NPLs) across the European Union, as a result of the coronavirus crisis. The strategy aims to ensure that EU households and businesses continue to have access to the funding they need throughout the crisis. Banks have a crucial role to play in mitigating the effects of the coronavirus crisis, by maintaining the financing of the economy. This is key in order to support the EU's economic recovery. Given the impact coronavirus has had on the EU's economy, the volume of NPLs is expected to rise across the EU, although the timing and magnitude of this increase is still uncertain.
Depending on how quickly the EU's economy recovers from the coronavirus crisis, banks' asset quality – and in turn, their lending capacity – could deteriorate. An Economy that Works for People Executive Vice President Valdis Dombrovskis said: “History shows us that it is best to tackle non-performing loans early and decisively, especially if we want banks to continue supporting businesses and households. We are taking preventive and coordinated action now. Today's strategy will help contribute to Europe's swift and sustainable recovery by helping banks to offload these loans from their balance sheets and keep credit flowing.”
Mairead McGuinness, the commissioner responsible for financial services, financial stability and the Capital Markets Union, said: “Many firms and households have come under significant financial pressure due to the pandemic. Making sure that European citizens and businesses continue to receive support from their banks is a top priority for the Commission. Today we put forward a set of measures that, while ensuring borrower protection, can help prevent a rise in NPLs similar to the one after the last financial crisis.”
In order to give member states and the financial sector the necessary tools to address a rise of NPLs in the EU's banking sector early on, the Commission is proposing a series of actions with four main goals:
1. Further developing secondary markets for distressed assets: This will allow banks to move NPLs off their balance sheets, while ensuring further strengthened protection for debtors. A key step in this process would be the adoption of the Commission's proposal on credit servicers and credit purchasers which is currently being discussed by the European Parliament and the Council. These rules would reinforce debtor protection on secondary markets. The Commission sees merit in the establishment of a central electronic data hub at EU level in order to enhance market transparency. Such a hub would act as a data repository underpinning the NPL market in order to allow a better exchange of information between all actors involved (credit sellers, credit purchasers, credit servicers, asset management companies (AMCs) and private NPL platforms) so that NPLs are dealt with in an effective manner. On the basis of a public consultation, the Commission would explore several alternatives for establishing a data hub at European level and determine the best way forward. One of the options could be to establish the data hub by extending the remit of the existing European DataWarehouse (ED).
2. Reform the EU's corporate insolvency and debt recovery legislation: This will help converge the various insolvency frameworks across the EU, while maintaining high standards of consumer protection. More convergent insolvency procedures would increase legal certainty and speed up the recovery of value for the benefit of both creditor and the debtor. The Commission urges the Parliament and Council to reach an agreement swiftly on the legislative proposal for minimum harmonisation rules on accelerated extrajudicial collateral enforcement, which the Commission proposed in 2018.
3. Support the establishment and cooperation of national asset management companies (AMCs) at EU level: Asset management companies are vehicles that provide relief to banks that are struggling by enabling them to remove NPLs from their balance sheets. This helps banks refocus on lending to viable firms and households instead of managing NPLs. The Commission stands ready to support member states in setting up national AMCs – if they wish to do so – and would explore how co-operation could be fostered by establishing an EU network of national AMCs. While national AMCs are valuable because they benefit from domestic expertise, an EU network of national AMCs could enable national entities to exchange best practices, enforce data and transparency standards and better co-ordinate actions. The network of AMCs could furthermore use the data hub to co-ordinate and co-operate with each other in order to share information on investors, debtors and servicers. Accessing information on NPL markets will require that all relevant data protection rules regarding debtors are respected.
4. Precautionary measures: While the EU's banking sector is overall in a much sounder position than after the financial crisis, member states continue to have varying economic policy responses. Given the special circumstances of the current health crisis, authorities have the possibility to implement precautionary public support measures, where needed, to ensure the continued funding of the real economy under the EU's Bank Recovery and Resolution Directive and State aid frameworks Background The Commission's NPL strategy proposed today builds upon a consistent set of previously implemented measures.
In July 2017, finance ministers in the ECOFIN agreed on a first Action Plan to tackle NPLs. In line with the ECOFIN Action Plan, the Commission announced in its Communication on completing the Banking Union of October 2017 a comprehensive package of measures to reduce the level of NPLs in the EU. In March 2018, the Commission presented its package of measures to tackle high NPL ratios. The proposed measures included the NPL backstop, which required banks to build minimum loss coverage levels for newly originated loans, a proposal for a Directive on credit servicers, credit purchasers and for the recovery of collateral and the blueprint for the set-up of national asset management companies.
To mitigate the impact of the coronavirus crisis, the Commission's Banking Package from April 2020 has implemented targeted “quick fix” amendments to the EU's banking prudential rules. In addition, the Capital Markets Recovery Package, adopted in July 2020, proposed targeted changes to capital market rules to encourage greater investments in the economy, allow for the rapid re-capitalisation of companies and increase banks' capacity to finance the recovery. The Recovery and Resilience Facility (RRF) will also provide substantial support to reforms aimed at improving insolvency, judicial and administrative frameworks and underpinning efficient NPL resolution.
COVID-19 reveals the shortcomings of a paper-based trade system
According to a recent report by the International Chamber of Commerce, as COVID-19 reveals the shortcomings of a paper-based trade system, financial institutions (FIs) are finding ways to keep trade circulating. It states that the problem being faced today is rooted in trade’s single most persistent vulnerability: paper. Paper is the financial sector’s Achilles heel. The disruption was always going to happen, the only question was, when, writes Colin Stevens.
Preliminary ICC data shows that financial institutions already feel they are being impacted. More than 60% of respondents to the recent COVID-19 supplement to the Trade Survey expect their trade flows to decline by at least 20% in 2020.
The pandemic introduces or exacerbates challenges to the trade finance process. To help combat the practicalities of trade finance in a COVID-19 environment, many banks indicated that they were taking their own measures to relax internal rules on original documentation. However, only 29% of respondents report that their local regulators have provided support to help facilitate ongoing trade.
It’s a critical time for infrastructure upgrades and increased transparency, and while the pandemic has caused a lot of negative effects, a potential positive impact is that it has made clear to the industry that changes do need to be made to optimize processes and improve the overall functioning of international trade, trade finance, and money movement.
“I think it comes down to integrating new technologies in smart ways. Take my company for example, LGR Global, when it comes to money movement, we are focused on 3 things: speed, cost & transparency. To address these issues, we are leading with technology and using things like blockchain, digital currencies and general digitization to optimize the existing methodologies.
"It's quite clear the impact that new technologies can have on things like speed and transparency, but when I say it’s important to integrate the technologies in a smart way that’s important because you always have to keep your customer in mind - the last thing we would want to do is introduce a system that actually confuses our users and makes his or her job more complicated. So on one hand, the solution to these problems is found in new technology, but on the other hand, it’s about creating a user experience that is simple to use and interact with and integrates seamlessly into the existing systems. So, it’s a bit of a balancing act between technology and user experience, that’s where the solution is going to be created.
"When it comes to the broader topic of supply chain finance, what we see is the need for improved digitalization and automation of the processes and mechanisms that exist throughout the product lifecycle. In the multi-commodity trading industry, there are so many different stakeholders, middlemen, banks, etc. and each of them have their own way of doing this - there is an overall lack of standardization, particularly in the Silk Road Area. The lack of standardization leads to confusion in compliance requirements, trade documents, letters of credit, etc., and this means delays and increased costs for all parties. Furthermore, we have the huge issue of fraud, which you have to expect when you are dealing with such disparity in the quality of processes and reporting. The solution here is again to use technology and digitalize and automate as many of these processes as possible - it should be the goal to take human error out of the equation.
"And here is the really exciting thing about bringing digitalization and standardization to supply chain finance: not only is this going to make doing business much more straightforward for the companies themselves, this increased transparency and optimization will also make the companies much more attractive to outside investors. It’s a win-win for everyone involved here.”
How does Amirliravi believe these new systems can be integrated into existing infrastructure?
“This is really a key question, and it's something that we spent a lot of time working on at LGR Global. We realized you can have a great technological solution, but if it creates complexity or confusion for your customers, then you’ll end up causing more problems than you solve.
In the trade finance and money movement industry, that means that new solutions have to be able to plug in directly into existing customer systems --using APIs this is all possible. It’s about bridging the gap between traditional finance and fintech and making sure that the benefits of digitalization are delivered with a seamless user experience.
The trade finance ecosystem has a number of different stakeholders, each with their own systems in place. What we really see a need for is an end-to-end solution that brings transparency and speed to these processes but can still interact with the legacy and banking systems that the industry relies on. That’s when you’ll start to see real changes being made.”
Where are the global hotspots for change and opportunities? Ali Amirliravi says that his company, LGR Global, is focusing on the Silk Road Area - between Europe, Central Asia and China - for a few main reasons:
“First, It’s an area of incredible growth. If we look at China for example, they have maintained GDP growth of over 6% for the last years, and central Asian economies are posting similar numbers, if not higher. This kind of growth means increased trade, increased foreign ownership and subsidiary development. It’s an area where you can really see the opportunity to bring a lot of automation and standardization to the processes within the supply chains. There is a lot of money being moved around and new trading partnerships being made all the time, but there are also a lot of pain points in the industry.
The second reason has to do with the reality of currency fluctuation in the area. When we say Silk Road Area countries, we are talking about 68 countries, each with their own currencies and the individualized value fluctuations that come as a by-product of that. Cross-border trade in this area means that the companies and stakeholders that participate in the finance side have to deal with all kinds of problems when it comes to currency exchange.
And here is where the banking delays that happen in the traditional system really have a negative impact on doing business in the area: because some of these currencies are very volatile, it can be the case that by the time a transaction is finally cleared, the actual value that is being transferred ends up being significantly different than what might have been agreed to initially. This causes all kinds of headaches when it comes to accounting for all sides, and it’s a problem that I dealt with directly during my time in the industry.”
Amirliravi believes that what we are seeing right now is an industry that is ready for change. Even with the pandemic, companies and economies are growing, and there is now more of a push toward digital, automated solutions than ever before. The volume of cross border transactions has been growing steadily at 6% for years now, and just the international payments industry alone is worth 200 Billion Dollars.
Numbers like that show the impact potential that optimization in this space could have.
Topics like cost, transparency, speed, flexibility and digitization are trending in the industry right now, and as deals and supply chains continue to become more and more valuable and complex, demands on infrastructure will similarly increase. It’s really not a question of “if”, it’s a question of “when” - the industry is at a crossroads right now: it’s clear that new technologies will streamline and optimize processes, but parties are waiting for a solution which is secure and reliable enough to handle frequent, high volume transactions, and flexible enough to adapt to the complex deal structures that exist within trade finance. “
Amirliravi and his colleagues at LGR Global see an exciting future for the b2b money movement and trade finance industry.
“I think something that we are going to continue to see is the impact of emerging technologies on the industry “he said. “Things like blockchain infrastructure and digital currencies will be used to bring added transparency and speed to transactions. Government-issued central bank digital currencies are also being created, and this is also going to have an interesting impact on cross-border money movement.
"We’re looking at how digital smart contracts can be used in trade finance to create new automated letters-of-credit, and this gets really interesting once you incorporate IoT technology. Our system is able to trigger transactions and payments automatically based on incoming data streams. This means, for example, that we could create a smart contract for a letter of credit which automatically releases payment once a shipping container or a shipping vessel reaches a certain location. Or, a simpler example, payments could be triggered once a set of compliance documents is verified and uploaded to the system. Automation is such a huge trend - we’re going to see more and more traditional processes being disrupted.
"Data is going to continue to play a huge role in shaping the future of supply chain finance. In the current system, a lot of data is siloed, and the lack of standardization really interferes with overall data collection opportunities. However, once this problem is solved, an end-to-end digital trade finance platform would be able to generate big data sets that could be used to create all kinds of theoretical models and industry insights. Of course, the quality and sensitivity of this data means that data management and security will be incredibly important for the industry of tomorrow.
"For me, the future for the money movement and trade finance industry is bright. We’re entering the new digital era, and this is going to mean all kinds of new business opportunities, particularly for the companies that embrace next generation technologies.”
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