Central banks are exploring the idea of official digital currencies, perhaps in an effort to lose control over cryptocurrencies such as bitcoin, which continue to become more “mainstream”. Will the anti-establishment quality of these currencies be compromised if they become creatures of central banks? This article considers the field.
There is no shelter from the financial industry’s fixation on cryptocurrencies which are equally fueled by fear and greed.
The Bank of England recently made the decision to explore a digital currency backed by the pound sterling. China is already piloting a central bank digital currency (CBDC) in major cities, including Beijing, Shanghai and Shenzhen, at the same time as it is cracking down on crypto assets that are not of its manufacture. This was seen in Bitcoin’s drama slide last week.
China’s position on CBDCs is partly politically motivated: that is, expanding the social agenda to connect about a fifth of its poor rural population who remain unbanked; and align digital payment giants such as Tencent and Alibaba.
Sweden and the Bahamas were both the first to implement CBDCs. Fed Chairman Jay Powell announced that the United States was exploring a digital dollar-backed currency, no doubt fueled by the excitement over the recent IPO of the Coinbase crypto exchange.
It’s all the systems that go and a general confusion over which direction this is going.
The Bank for International Settlements estimates that around 80% of monetary authorities around the world are studying the feasibility of digital currencies with around 9,000 of them in circulation.
The question is whether the digital mainstream versions backed by central banks will eclipse the allure of these “unofficial” currencies. For the moment, everyone is guessing.
Meanwhile, individual jurisdictions are rewriting regulations to attract fintechs by devising additional secure ways for investors to use and manage these digital assets.
For wealth managers, market knowledge broadly falls into three areas: One: the accounting systems available to track crypto exchanges. Two: how people deal with these digital assets. Do they process through a centralized third-party institution or do they use decentralized peer-to-peer transactions via blockchain technology, for example. And third, what kind of custody do customers need for their digital assets? Are these so-called “hot wallets” to keep assets online and ready to be traded at all times, or “cold wallets” to store them securely with protected keys?
Easy access to trading in and out of digital and fiat currencies is an asset and the reason for the rapid innovation in the custody space.
Even though the cashless nature of the pandemic has forced central banks to step up their thinking rather than any immediate action on the use of crypto, the biggest complaint from fintechs is that regulators are simply not keeping up.
On the other hand, the Financial Conduct Authority has warned fintechs against “deceitful” clients and unfairly compares to banks in the services they provide and the level of oversight and protection they receive from regulators.
For the United Kingdom, the stakes in finding the right balance are not negligible. The UK has more than 10% of the global fintech market share, which now accounts for around £ 1 billion a year for the UK economy. In 2020, investments in British fintechs amounted to just over $ 4 billion, more than the next four European countries combined.
Chancellor Rishi Sunak unveiled plans to boost growth this spring. But what the Treasury had in mind was “too little, too late” for Jason Blick, CEO of EQIBank.
United Arab Emirates
We recently spoke with Blick about why digital private banking chose the United Arab Emirates to expand its services to target high net worth clients after reviewing more than two dozen locations around the world, including the UK and in Europe.
“Analyzed from a tax standpoint, from a regulatory arbitrage standpoint, ease of getting visas and setting up, the UAE was materially better than anyone nearby. And we were surprised by that, ”he said.
The bank is regulated in the Cayman Islands and the United Arab Emirates, and between the two centers, Blick ensures the company can serve complex HNW clients from 180 countries. Services that include “whitelisted” wallets to verify that any cryptocurrency entering and leaving the wallet is from a legitimate source, he says.
“We are one of the only banks in the world to provide stable cryptocurrencies and we are moving towards decentralized finance,” he said.
DeFi, as it is more commonly known, allows users to transact without the need for financial intermediaries such as banks and has been one of the most difficult aspects of financial innovation for monetary authorities to manage effectively.
In order for EQIBank to operate the services that customers demand, “there’s no way we can do that in London. We couldn’t do it in the EU, ”says Blick. “But that’s an integral part of what customers come in and ask us to do.” The bank provides sterling, US dollar and euro accounts, credit cards and loan services. It also allows customers to buy and sell cryptocurrencies. “They can use stablecoins to make transfers around the world and exit their crypto wallet to access accounts in USD, euros, pounds sterling or other national currencies. They can also transfer crypto. currencies on their credit cards, ”said Blick, describing part of the business.
For nomadic entrepreneurs like Blick, the problem is not a lack of technology or innovation, but the persistent reluctance of established financial centers and why some of the smaller jurisdictions are “boxing smart”.
The UK’s efforts to embrace a wider use of digital assets came into focus in February when the government released the much-anticipated Kalifa Review.
The review included a welcome review of UK listing rules to allow founders preferred dual-class share structures, as well as other incentives to boost the London IPO market, where the LSE only accounted for 4.5% of global IPOs. past five years, compared to 39 percent for the NASDAQ and the NYSE.
More informative, the review presented a new UK regime for crypto issuance and investment encouraging UK regulators to take a ‘tailor-made’ and ‘innovative’ approach, raising questions in Europe as to whether the UK is adopting the light approach he fears the most. .
For Blick, Kalifa’s recommendations were great for domestic fintechs, including a £ 1bn ‘growth fund’ to help companies get through Series B and really reach scale. The review also marked 10 UK fintech ‘cluster cities’ for further development.
But there was nothing in there in Blick’s opinion that made the UK overall attractive for Chinese or American fintechs to come here or for him to relocate.
“Sunak is really tackling the problems of 2019 and 2020,” he says. “Rather than taking a proactive view of what the future banking sectors will be like by 2025, it is really trying to fill a gap that many other jurisdictions have already very competently filled.”
In the Cayman Islands, which he describes as the global hub for hedge funds, the arrival of crypto and digital hedge funds in recent months has boosted EQIBank’s business.
“Their fundraising has been extremely successful,” but then they face the problem that the banks won’t touch them, Blick said.
“This is a very real problem that we have solved for dozens of funds over the past five or six months. They were literally looking to their existing suppliers, which are well-recognized banks, but the banks were like, “Look, we’ll keep your traditional business, but I’m afraid we can’t help you that way.
Blick spent a number of years in corporate law in the UK, specializing in financial services and insurance, before becoming Managing Director of Financial Partners Bank and then founding a commodities and derivatives exchange. in Cayman.