Stablecoin instability spreads to DEI

Recent volatility in the crypto space, which has extended to stablecoins and caused a collapse in value of algorithmic stablecoin TerraUSD and its token sister Luna – has extended to Deus Finance’s stablecoin DEI, which operates within Deus, a decentralised finance project based on the Fantom ecosystem.

Like many of its peers, including the world’s largest stablecoin Tether, DEI is meant to maintain a 1-to-1 peg against the US dollar and even rose to a high of US$1.18 at the end of January. But this week has seen it sink as low as US$0.525299 and its market value, which was US$114.8 million at the end of last month, has more than halved to US$51.3 million.

The project uses DEUS and DEI coins and to create, or mint, 1 DEI, requires US$1 of collateral. Investors who want to redeem their tokens get 80% of their value in Circle’s USD Coin (USDC) and 20% in DEUS if USDC was used as collateral to create DEI.

Reports citing data from Deus Finance suggest the collateral ratio has fallen to 43%. Low collateral makes redemption of DEI coins difficult, since not enough capital is backing the stablecoin. Traders are said to be taking advantage of this arbitrage mismatch, buying up DEI coins and exchanging them for US$1 worth of collateral, exacerbating the problem.

Deus Finance has now attempted to stabilise the coin by suspending all redemptions.

Meanwhile Circle’s USD Coin – managed by the Centre consortium – is benefiting as circulation of Tether, the world’s largest stablecoin and its closest rival, continues to decline in a wave of redemptions, according to a Bloomberg report.

It says that TerraUSD’s recent collapse has seen investors seek sanctuary in other cryptoassets that aim to maintain a 1-1 peg with the US dollar. While the subsequent market contagion caused cryptocurrencies and stablecoins alike to wobble, Tether’s USDT briefly lost its dollar peg at the start of this week and fell to US$0.95, which has triggered US$8.5 billion in redemptions to date, according to data from CoinGecko.

Bloomberg notes that the total market capitalisations of Tether and Circle appear to be converging as investors trade from one and into the other, with Circle’s circulation rising by nearly US$3.4 billion over the same period. Other stablecoins are also benefiting, with Binance USD’s value up by US$1.2 billion.

TerraUSD, aka UST, used an algorithmic design to adjust its supply through trades with its sister token Luna, intended to help it keep a steady value of US$1. Collateralised stablecoins like Tether and USD Coin, however, rely on a reserve of dollar and dollar-equivalent assets to support their supply. Questions have previously been raised about the quality of Tether’s stockpile, although it remains the dominant quote pair on many crypto exchanges.

The fallout from Tether’s brief dip from its peg has reversed a downward trend for Circle’s USDC, the supply of which had been slowly contracting since late February, data from Glassnode show. Jeremy Allaire, chief executive of Circle, told Bloomberg on Tuesday the company had seen a flood of additional demand after Terra’s collapse. 

“There were multiple scenarios where we could see it being triggered into a death spiral, and that’s exactly what happened,” Allaire told Bloomberg TV. “We’ve seen since then a real flight to quality.”

Despite this month’s volatility, the UK’s Department of Treasury, or Her Majesty's Treasury, has reportedly decided to go ahead with legalising stablecoins as a form of payment.

The Treasury’s intent to regulate stablecoins across Britain was revealed during the Queen’s Speech on 10 May at the state opening of Parliament. During the speech, Prince Charles (deputising for Queen Elizabeth) announced the introductions of new legislation across various sectors, including measures to drive economic growth to improve living standards in the region, adding:

“A bill will be brought forward to further strengthen powers to tackle illicit finance, reduce economic crime and help businesses grow [Economic Crime and Corporate Transparency Bill].”

This followed on by an announcement on 4 April by the UK’s Economic and Finance Ministry when Economic Secretary John Glen confirmed that stablecoins will be brought into UK payments regulation.

“This places the UK financial services sector at the forefront of technology, creating conditions for stablecoin issuers and service providers to operate and invest,” the announcement stated.

Tesla ejected from S&P 500 ESG Index

Tesla’s CEO Elon Musk has Tweeted that “ESG is a scam” after the electric carmaker was ejected from the S&P 500 ESG Index because of various issues including claims of racial discrimination and crashes linked to its autopilot vehicles.

In the latest periodic review by S&P Dow Jones Indices, the sustainability index added Twitter and oil refiner Phillips 66, while Delta Airlines and Chevron Corp were dropped in addition to Tesla. The changes to the S&P 500 ESG index are effective from the start of this month.

Controversy over the index changes reflect a wider debate about the metrics used to judge corporate performance on environmental, social and governance (ESG) issues, which are increasingly influencing investors’ choices.

Tesla has become the most valuable auto industry company by pioneering EVs and expanding into battery storage for electric grids and solar-power systems. However, Margaret Dorn, S&P Dow Jones Indices' head of ESG indices for North America, said that a further issue leading to Tesla’s ejection from the index was a lack of published details related to its low carbon strategy or business conduct codes.

Although Tesla's products help reduce planet-warming emissions, Dorn said, its other issues and lack of disclosures relative to industry peers should raise concerns for investors looking to judge the company across ESG criteria. “You can't just take a company's mission statement at face value, you have to look at their practices across all those key dimensions,” she added.

Tesla’s immediate response was limited to Musk’s comments on Twitter, but the company has previously described ESG methodologies as “fundamentally flawed”. Musk tweeted that “Exxon is rated top 10 best in world for ESG by S&P 500, while Tesla didn’t make the list! ESG is a scam. It has been weaponised by phony social justice warriors.”

Among other major ESG ratings agencies, MSCI gives Tesla an “average” ESG rating, while the Sustainalytics unit of Morningstar Inc gives Tesla a “medium risk” rating, according to the firms' websites. Dorn said Tesla’s ESG score on the S&P 500 had declined slightly from the 22 awarded last year. At the same time the average score among other automakers improved, pushing Tesla out of the ESG index because of a rule against including lowest-quartile performers.

South Africa warming to digital rand

South Africa would benefit from a digital rand, which could cut the high cost of cross-border payments for banks, but its introduction still several years away according to a senior central bank official.

However, regulation of crypto assets is in the offing and might come into force in the first half of 2023, South African Reserve Bank (SARB) Deputy Governor Kuben Naidoo told Reuters in an interview.

A 2021 World Bank report found that it costs 13% of a transaction to remit money from South Africa to another country, more than double the average of the Group of 20 (G20) leading global economies, while sending money to South Africa costs 6.2%.

Most of the world’s leading economies are at various stages of introducing a central bank digital currency (CBDC). Last October the Central Bank of Nigeria (CBN) introduced the eNaira, the first digital currency launched in Africa, for use by ordinary citizens.

South Africa has conducted small-scale experiments with a wholesale CBDC and participated in a cross-border pilot with the central banks of Malaysia, Australia and Singapore. The next stage is for regulators to test the digital rand at a bigger scale and develop rules for its use. “We’re still learning, we’re still experimenting,” Naidoo said.

He added that in the meantime SARB wants regulation of crypto assets to prevent theft, money laundering and undermining of monetary policy and hopes it will be in place in the next 15 months. “If crypto assets were to become a very ubiquitous currency, you could undermine the authority of the central bank.”

Cryptocurrency is “portfolio kryptonite” says PGIM

Cryptocurrency could offer opportunities in the broader ecosystem but is a poor choice for long-term investors – as once more demonstrated by this month’s sharp falls in value, suggest analysts at PGIM, the US$1.4 trillion global investment management of Prudential Financial.

In its just-issued Megatrends paper, Cryptocurrency Investing: Powerful Diversifier or Portfolio Kryptonite?, investment professionals from across PGIM’s fixed income, equity, real estate, private debt and alternatives businesses review the most common pro-cryptocurrency arguments. Their report concludes that direct investment in cryptocurrencies offers little benefit to an institutional investor while adding considerable volatility and risk.

Examples of “cryptocurrency myths” that are dismissed in the paper include:

Cryptocurrency is not an effective hedge against inflation: In 2021, the price of bitcoin and other cryptocurrencies moved with inflation only for a brief time before falling sharply. Gold, on the other hand, has demonstrated since the 1970s that it can be an effective and reliable inflation hedge.

Bitcoin does not function as a safe-haven asset: Bitcoin, the most prevalent cryptocurrency, was not a steadying force in early 2020 when global asset prices spiraled downward due to worldwide COVID-induced shutdowns. It held far less of its value than conventional safe-haven assets.

Cryptocurrencies clash with ESG objectives: A single transaction on the bitcoin blockchain is equivalent to two million transactions on the Visa network, or roughly the same energy needed to power the average American home for over two months. From a governance perspective, the anonymity and difficulty in tracing identity of owners makes it a preferred medium of exchange in illicit activity — such as the potential for skirting sanctions in the wake of Russia’s invasion of Ukraine.

“Cryptocurrency may be a heroic quest to build a viable, decentralised peer-to-peer payment system, but its pricing is based on speculative behaviour, rather than a fundamental thesis around its value or utility,” says PGIM Head of Thematic Research Shehriyar Antia. “Furthermore, with little evidence to support it as an effective inflation hedge or safe-haven asset, we see no reason for cryptocurrencies to be a part of institutional portfolios.”

Taimur Hyat, chief operating officer for PGIM, adds: “Cryptocurrency gets all the breathless hype, but it’s the underlying technology where we find the most interesting investment opportunities.”

Firms that enable real-world blockchain applications like clearing and settling transactions, preventing fraud, and tokenising real assets offer significantly greater creation of value over the next decade. The old axiom applies — when there’s a gold rush, invest in shovels and pickaxes.”

Private blockchains and smart contracts: Distributed ledger technology and smart contracts can revolutionize elements of financial services, logistics, and supply chain management, as they eliminate the need for counterparty and trade verification as well as transaction and record reconciliation.

Next-generation securitisation: The tokenisation of real estate and infrastructure assets could substantially reduce costs from transactions and servicing, increase liquidity, simplify transactions, enhance price transparency, and allow more granular portfolio construction.

The infrastructure and ecosystem supporting blockchains and future central bank digital currencies: Collateral innovation in areas such as fraud prevention, regulatory compliance and other key enablers of the broader crypto ecosystem has the potential to generate attractive returns for owners of the companies that provide these services.

EU produces €300bn plan to escape Russian gas

The European Commission (EC) has announced a €300 billion (£254bn/US$315bn) plan to wean the continent off Russian gas by boosting the amount of renewables generation.

The plan aims to rapidly find alternative sources of energy while ramping up energy savings and renewables. It promises to benefit renewables companies as well as investors in fossil fuel assets like liquefied natural gas (LNG) plants.

The RePowerEU strategy increases the headline target for renewables production from the current 40% to 45% from 2030, and pledges to speed up the approvals process for projects, setting new targets for domestic solar, wind and hydrogen production.

Russia’s invasion of Ukraine has highlighted how dependent the EU is on imported fossil fuels from the country, EC president Ursula von der Leyen said. The commission estimates that imports from Russia cost EU taxpayers almost €100bn a year.

“Today we’re taking our ambition to yet another level to make sure that we’ll be independent of Russian fossil fuels as quickly as possible," said von der Leyen. “REPowerEU will help us to save more energy, to accelerate phasing out of fossil fuel and most importantly to kick start investment on a new scale. This will be the speed charging of our European Green Deal.”

REPowerEU is made up of a package of documents, including legal acts, recommendations, guidelines and strategies, that fleshes a basic outline published in March. It is based on four pillars: saving energy, substituting Russian gas with other fossil fuels, boosting green energy and financing new infrastructure like pipelines and LNG terminals.

Much of the funding will come from the EU’s Recovery and Resilience Facility. the region’s pandemic recovery programme. The EC said that countries could access the unused €225 billion in facility loans. An additional €20 billion in grants would come from selling 250 million CO2 emission permits on the EU’s. Emissions Trading System. Countries will also have the right to transfer up to 12.5% of their cohesion policy funds and 7.5% of agricultural funds to RePowerEU projects.

Ukraine invasion “derailed UniCredit-Commerzbank tie-up”

Italy’s UniCredit and Germany’s Commerzbank are interested in a potential merger and had planned a meeting to start talks before abandoning the idea due to the war in Ukraine, says the Financial Times.

The FT reported that UniCredit CEO Andrea Orcel had arranged to meet his Commerzbank counterpart Manfred Knof so they could discuss a possible tie-up. Russia’s invasion of Ukraine on 24 February, however, forced Orcel to instead focus on managing the bank’s exposure to Russia, which UniCredit is trying to divest.

A Reuters report, citing a person briefed on the matter who spoke on condition of anonymity, added that the two CEOs met earlier this year as part of Orcel's regular talks with peers at rival lenders, but given the Ukraine conflict, did not touch on mergers and acquisitions.

UniCredit, which has German insurer Allianz as a leading investor, had considered a Commerzbank acquisition under previous CEO Jean Pierre Mustier, but the deal encountered political resistance. Commerzbank is 15.6% owned by the German government, which bailed it out in 2009 when it was a major lender to the shipping industry, and it has undergone a long restructuring.

Milanese broker Equita SIM told Reuters that any UniCredit-Commerzbank deal would carry high execution risks because it would need €1.5 billion (US$1.58bn) in cost cuts to boost earnings per share (EPS) given fragmentation and low profitability in the German banking market.

In 2021 UniCredit abandoned a deal with Italy's Treasury to buy state-owned rival Monte dei Paschi as the government deemed capital demands excessive after Orcel said he would only consider an acquisition that boosted EPS by 10%.

Commerzbank, whose market value is less than half that of UniCredit, has long been seen as a potential target for UniCredit, which is present in Germany through its HypoVereinsbank unit.

Orcel, who was previously head of investment banking at Swiss bank UBS, has said UniCredit is constantly reviewing M&A opportunities and is open to deals that boost value for investors and strengthen its franchise in markets where it already operates.

The Ukraine crisis, however, forced UniCredit to set aside €1.2 billion against possible losses in the first quarter, limiting the bank's excess capital and hitting its share price.

Santander uses in-house cloud tech to digitise core banking

Banco Santander has announced that it will be transforming its core banking platform with in-house software Gravity’s cloud technology to improve service and efficiency.

The Spanish bank says the transformation will allow “easier and faster” access to data, more simplicity and faster time-to-market, making it possible to deliver new capabilities “in hours, instead of days”. In addition, it will also reduce the cost of running the core banking platform.

“Gravity will help transform Santander into a ‘digital-native’ company, with the agility and capabilities to offer the best customer experience, while continuing to provide the solid security for data and assets we’ve always delivered our customers,” said Dirk Marzluf, chief operating and technology officer at Banco Santander.

He adds that the initiative is an “important next step” in the bank’s transition to a common tech stack that is utilised across the group.

Santander also claims that its cloud programme reduces its energy consumption for the IT infrastructure by 70% and contributes to the group’s responsible banking targets. It expects to complete the transition in all its core markets and businesses over the next two to three years.

Surecomp launches RIVO trade finance platform

Canadian trade finance software specialist Surecomp has announced the launch of RIVO, a collaborative trade finance platform that brings together an “ecosystem of corporates, financial institutions and fintechs”.

The cloud-based solution is described as a digital hub through which participants can speed up the processing of any trade finance application to seize new business opportunities, improve efficiency and drive sustainable, global trade.

In a release, the company added; “The first of its kind, RIVO is an innovative, API-based platform designed to connect the industry. The solution accelerates the issuance and monitoring of all trade finance instruments, enabling companies of every size to finalise finance agreements and execute even the most time-critical trade finance transactions within hours. Accessed via an intuitive interface with unrivalled convenience, participants can benefit from a range of scalable subscription packages to meet current and future needs, including a free plan to get started.

Corporates can collaborate with any financial institution for centralised visibility of credit lines and utilisation across multiple jurisdictions. Financial institutions can manage all finance requests and deliver a superior customer service to multiple corporates not limited to their existing customer base. The solution scope is further enhanced by access to other value-adding fintechs in the trade ecosystem, enabling paperless processes, ensuring superior data quality and bridging the interoperability challenge.”

“We are extremely excited and proud to bring RIVO to the market,” says Guy Perry, President and CEO at Surecomp. “The platform was designed in full cooperation with industry-leading banks, corporates and other financial institutions, who will continue working with us to ensure it remains fully aligned to market needs. We are committed to helping drive seamless and sustainable global trade and feel strongly that RIVO will play an integral role in removing barriers and facilitating collaboration. By bringing everyone together, we hope that the trade finance process will be immeasurably improved, reducing enormous overhead costs for financial institutions while unlocking liquidity and improving visibility for corporates.”