Here are some of the biggest stories of interest to treasurers from the past few weeks…
In August’s ‘In case you missed it', we explained that the Financial Stability Board (FSB) had warned the G20 that US financial institutions and large firms were acting too slowly on the LIBOR transition. On 23 August, those concerns took a fresh turn when US regulators wrote to non-financial corporates (NFCs) asking for details on their experiences of the transition – particularly in terms of which LIBOR alternatives their banks are offering them as the crunch year-end deadline looms.
Sent by the Federal Reserve and Securities and Exchange Commission (SEC) to the Association for Financial Professionals and National Association of Corporate Treasurers, the letter came in response to earlier communications from those bodies, indicating that their members were not being offered financial products based on LIBOR alternatives. As the letter states: “The official sector has consistently supported a transition from LIBOR that leads to a more stable financial system, while also meeting the needs of all the parties who will be impacted by it, including non-financial corporate and non-corporate business borrowers, consumers and investors, as well as financial institutions.”
In that light, it notes: “We agree that a smooth transition will be best supported if financial institutions offer alternatives to USD LIBOR that meet borrower needs and if this is done in a timely fashion. The transition is at a critical juncture, and we were thus concerned to hear your members report that NFCs are, in most cases, not yet being offered such alternatives despite the short amount of time left in the transition. Accordingly, we invite you to continue to share your experiences and views with us as the transition, and the dialogue with your lenders, continues.”
With fewer than four months to go before the deadline, the Fed and SEC’s fact-finding exercise makes for a concerning development – particularly when viewed alongside a recent survey from Pennsylvania-based consultancy Chatham Financial, which showed that 39% of 100 treasurers were “completely unsure” of what they had to do to prepare for the transition.
In a 26 August report that covered both the letter and the survey, The Washington Post contrasted the relatively low rate of US transition activity with that of another, key territory. “In the UK,” it said, “non-LIBOR derivatives trades surpassed those tied to the old benchmark in April for the first time. And last month, almost 60% of trading in the sterling market was in contracts tied to alternative benchmarks. That still leaves a lot of activity tied to sterling LIBOR with fewer than five months to go until it’s supposed to die. But it’s progress.”
Read the full Fed and SEC letter here.
Payments network SWIFT has issued a clarion call to stakeholders for a dramatic surge of digitisation in global trade. In a 12 August white paper Digitising Trade: the time is now, the organisation notes that while the payments industry has long discussed the multiple facets of trade digitisation, “the pandemic renders it critical and presents a series of compelling events that could create the tipping point for scalable progress”.
It stresses: “The current operating environment magnifies the fragility of international supply chains, as well as the risks and inefficiencies in manual, paper-based processes. Friction ultimately impairs access to liquidity and optimisation of financing, with knock-on ramifications for business and growth.” As such, the paper notes, the conversation has evolved beyond the scope of operational efficiency, and is “fast becoming a matter of business continuity and risk management.”
However, meeting this need will be a long-term process. As the paper points out: “Digitising a complex ecosystem involving myriad actors, rules and regulations, sprawled across both physical and financial supply chains in multiple countries and industries is a challenge. Technology alone is not enough to address the challenge.” With that in mind, SWIFT’s paper identifies three key elements that are required to facilitate effective trade digitisation around the world:
1. Legal harmonisation
2. Richer data and standards
3. Interoperability
Having identified those areas, SWIFT aims to play a leading role in drawing stakeholders together to achieve the necessary breakthroughs. “As a global, neutral cooperative,” the paper says, “SWIFT is an integral part of the financial system and a critical provider of network and mutual services internationally. We have an ambitious strategy to ensure that the future is defined by frictionless transactions. We are exploring ways in which we can support the community in the digitisation of trade.”
Quoted in the paper, Deutsche Bank head of trade finance and lending Daniel Schmand highlights how the pandemic has both opened up a greater need for trade digitisation and created a layer of resistance against it: “Looking at the impact of COVID-19 in isolation,” he says, “there absolutely should be a shift towards more convenient means of trade financing that do not rely on paper documentation. However… we are seeing a shift from a global, interconnected economy to de-globalised trade and increased uncertainty due to volatile commodity prices and geopolitical tensions. This is driving people back towards traditional documentary trade instruments. The two effects seem to be balancing each other out.”
Find out more about SWIFT’s strategy in the full paper here.
As this month’s ‘In case you missed it’ was being finalised, El Salvador became the first country in the world to legally recognise bitcoin as a national currency. According to Reuters, on 6 September – one day before the law took effect – the nation’s president, Nayib Bukele, announced that his government had acquired 400 units of the cryptocurrency – a move that triggered a price jump to $52,680. But while Bukele would no doubt have wanted the purchase to be seen as a vote of confidence, doubts over his policy’s wisdom have flared.
A Wired column noted that the initiative was implemented just 90 days after El Salvador’s parliament passed the law that would grant bitcoin the same legal-tender status within the country’s borders as the US dollar – a time frame the piece described as “eye-popping”, with little scope for discussion or debate. Indeed, the piece mused, “one wonders whether the country, and its population, would have benefitted from a longer lead-up. Or, at least, from more transparency”.
Meanwhile, a Financial Times editorial sketched out a series of misgivings within the upper echelons of the global financial community about the systemic effects that the policy could have upon the economies of El Salvador and its stakeholders: “The World Bank turned down a request to help advise El Salvador on bitcoin. Moody’s has downgraded the country’s debt further into junk territory. The yield on long-dated Salvadoran government debt jumped to almost 11% last month as investors fretted.”
It added: “El Salvador’s move seems odd because the country suffers none of the currency turbulence cited by crypto fans as a reason for jettisoning fiat money. Quite the opposite: the Central American nation has enjoyed low inflation and economic stability since adopting the US dollar 20 years ago.”
In its recent blog ‘Cryptoassets as National Currency? A Step Too Far’, the International Monetary Fund highlighted a host of potential negative impacts that any country could face as a result of adopting cryptocurrencies as legal tender. As well as underscoring stability issues, it noted that mining bitcoin requires significant electrical power, and is therefore bad for the environment.
The blog warned: “As national currency, cryptoassets… come with substantial risks to macro-financial stability, financial integrity, consumer protection and the environment. The advantages of their underlying technologies, including the potential for cheaper and more inclusive financial services, should not be overlooked. Governments, however, need to step up to provide these services, and leverage new digital forms of money while preserving stability, efficiency, equality and environmental sustainability. Attempting to make cryptoassets a national currency is an inadvisable shortcut.”
Cyberattacks on decentralised finance (DeFi) platforms accounted for 76% of all hacks in the first half of 2021, as found in research from online security specialists Atlas VPN. The analysis shows that last year, DeFi attacks made up one-quarter of all funds lost to hacks, with related losses totalling $129m. However, over the first six months of this year, DeFi hack losses reached $361m – surpassing the previous year’s total by a whopping 180%.
A generic term for systems that make financial products available on public blockchains, DeFi has quickly become a significant frontier in the cybercrime arena. Indeed, the analysis notes that just two years ago, the majority of financial losses from cyberattacks stemmed from phishing, ransomware and other types of hacks.
DeFi’s appeal lies in enabling buyers, sellers, lenders and borrowers to interact with each other directly, rather than via brokerages or banks. But it has already spawned two, main types of cybercrime: hacks on legitimate trading protocols from external parties, and so-called ‘rug pulls’, in which technically savvy bad actors set up what appear to be safe and secure DeFi platforms, but eventually abscond with their users’ funds. In H1 2021, rug pulls accounted for a further $113m of financial losses.
In the period’s biggest DeFi hack, a flash loan exploit attack on the legitimate PancakeBunny protocol extracted $45m of cryptoassets, driving down the value of the platform’s BUNNY token from $146 to just $6. In the biggest rug pull, the anonymous founders of DeFi venue WhaleFarm pulled $2.3m from investors after operating the platform for just a few days.
Beyond H1 2021 – and therefore not mentioned in the analysis – the crypto community was rocked by a recent $600m hack against DeFi service Poly Network, in which a vulnerability in the platform’s code enabled a hacker nicknamed Mr White Hat to transfer large quantities of crypto tokens into his own wallet. In a twist, Poly Network revealed in a Medium blog post of 17 August that it is actively taking advice from Mr White Hat on the overhaul of its security framework. He has now returned the majority of the missing assets.
Atlas VPN cybersecurity researcher William Sword said: “The crypto industry has generated a lot of excitement. However, many newcomers are unaware of the risks. Lack of regulation in the crypto industry allows cybercriminals to thrive… For DeFi to become more legitimate, it is essential to establish security and business regulations.”
On that very point, Securities and Exchange Commission (SEC) chair Gary Gensler has urged regulators around the world to make provisions for cryptoassets, saying that the industry is now too big to be left unregulated. In a 1 September FT interview, Gensler explained that while he is “technology neutral”, it is in the crypto community’s interests to be brought within public policy measures designed to safeguard investors, control wrongdoing and maintain financial stability.
“At about $2 trillion of value worldwide,” he told the FT, “it’s at the level and the nature that if it’s going to have any relevance five and 10 years from now, it’s going to be within a public policy framework. History just tells you, it doesn’t last long outside. Finance is about trust, ultimately.” Gensler also signalled his disappointment with a muted response to his recent call for crypto trading platforms to voluntarily register with the SEC, saying: “Talk to us, come in. There are a lot of platforms that are in operation today that would do better by engaging and instead there’s a bit of… begging for forgiveness rather than asking for permission.”
Reacting to the interview, Nigel Green – founder and chief executive of asset management firm deVere Group – fully endorsed Gensler’s remarks. In a statement, Green praised the most senior figure in US financial regulation for “taking a future-focused and pragmatic approach to cryptocurrencies… which are becoming an increasingly dominant part of the mainstream global financial system.”
He noted: “Cryptocurrencies – such as Bitcoin, Ethereum, Cardano [and] XRP, among others – are not going anywhere. Crypto is very much here to stay as financial assets and as mediums of exchange. Therefore, they must be brought into the regulatory tent and be held to the same rigorous standards as the rest of the financial system.”
Green added: “The best way to do this is through the exchanges. Nearly all FX transactions go through banks or currency houses, and this is what needs to happen with cryptocurrencies. When flows run through regulated exchanges, it will be much easier to tackle potential wrongdoing, such as money laundering, and make sure tax is paid.”