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BIS chief says fiat currency has defeated crypto – Industry roundup: 23 February

BIS chief: Crypto has lost the ‘battle’ against fiat currency

Last year’s volatility in the digital-asset sector has ended for good any notion that crypto is an alternative to fiat currency says Agustin Carstens, general manager of the Bank for International Settlements (BIS) and former Governor of the Bank of Mexico.

“That battle has been won,” Carstens told Bloomberg TV in an interview. “A technology doesn’t make for trusted money.

“Only the legal, historical infrastructure behind central banks can give great credibility” to money, he argued, adding that crypto is a financial activity that can only exist “under certain conditions”.

Carstens expects a “strong statement” from the Group of 20 leading economies for strengthened regulation of the digital-asset sector. Their leaders are meeting in the south Indian technology hub of Bengaluru to discuss the various challenges to global economic growth and stability.

The digital-asset sector is still feeling the impact of a US$2 trillion rout and last November’s collapse of Sam Bankman-Fried’s FTX exchange, which has become one of the highest-profile corporate crime cases in US history.

Bitcoin only recently climbed back above the US$20,000 level, having peaked at nearly US$69,000 in 2021. The crypto collapse and a series of related bankruptcies undermined the claim that tokens can be relied on as stores of value and mediums of exchange.

Carstens also spoke at the Monetary Authority of Singapore, saying that central bank digital currencies (CBDC) and tokenised deposits can aid efficiency. He proposed the model of a unified blockchain under a public-private partnership where a central bank underpins trust in CBDCs.

Carstens mentioned private sector stablecoins in the speech and said that regulators must ensure stablecoins don’t harm investors and consumers or fragment the monetary system.

Goldman Sachs expects three more rate hikes from ECB

Goldman Sachs said that it now expects the European Central Bank (ECB) to raise interest rates three times this year, taking the terminal rate to 3.5% from an earlier estimate of 3.25%. Earlier this month the ECB announced a 50 basis points (bps) increase to 2.5% in its key rate.

The brokerage said that it has pencilled in more hikes in H1 2023 – a further increase of 50 bps in March followed by 25 bps rises in both May and June.

Goldman's change in expectations follow hawkish commentary last week from ECB board member Isabel Schnabel and French central bank chief Francois Villeroy de Galhau, two influential policymakers from the 26-member Governing Council.

Separately, the Financial Times reports that the markets expect the ECB to go further with its tightening, spurred on by the eurozone economy’s resilience and signs that inflation could prove tougher to rein in than expected.

Swap markets are pricing in a jump in the ECB’s deposit rate to 3.75% by September against the current 2.5%, which would match the benchmark’s 2001 peak when the ECB was still trying to shore up the value of the newly launched euro.

Markets have revised forecasts of interest rates upwards after recent eurozone data on buoyant service-sector activity and wage demands.

ECB president Christine Lagarde has said that the bank is “looking at wages and negotiated wages very, very closely” — an indication of concern that a sharp rise in salaries this year will maintain pressure on prices as companies pass costs on to consumers.

Meanwhile, New Zealand's central bank has raised interest rates 50 bps to a more than 14-year high of 4.75%, and said it expects to keep tightening further as inflation remains too high, a hawkish signal that sent the local dollar surging. The Reserve Bank of New Zealand (RBNZ) indicated that it still sees rates peaking at 5.5%.

Iraq turns to yuan to pay for China imports

Iraq aims to pay for private-sector imports from China in yuan (CNY) according to reports, injecting foreign currency into the financial system to help ease pressure on the dinar (IQD).

The Central Bank of Iraq announced plans to allow trade from China to be settled in CNY, Reuters reported. "It is the first time imports would be financed from China in yuan, as Iraqi imports from China had been financed in [US] dollars only," Mudhir Salih, the government's economic adviser, was quoted as saying.

The central bank will provide yuan to local lenders for dealings with Chinese counterparts, according to a statement published on 22 February. It will also supply the Chinese currency to final beneficiaries directly via some of the central bank’s own accounts.

OPEC’s second-biggest oil producer is joining the Middle East’s leading economies, such as Saudi Arabia and the United Arab Emirates (UAE), in exploring non-oil trade ties using currencies other than the US dollar.

Electric vehicle repair costs “outstrip higher insurance premiums”

The transition from petrol to electric vehicles is likely to push up insurance costs as the technology is costlier to fix in the event of a claim, suggests a UK report by Bloomberg Intelligence.

“Electric vehicles (EVs) made up 23% of all new UK auto sales in 2022, and while insurers charge 12% more on average is to insure them, that may not be nearly enough,” says Kevin Ryan, Senior Industry Analyst, Insurance at Bloomberg Intelligence.

“Repairing a damaged EV can cost 53% more than a conventional auto fix. EV batteries also have uniquely challenging risk profiles capable of significantly boosting insurers' third-party costs.

“We therefore contend that the 12% extra average cost to insure an EV is probably an inaccurate reflection of additional risk, squeezing margin at Admiral, Direct Line, Hastings and other [UK] auto insurers.”

The report, titled ‘UK EV-Insurance Headache’, notes the steady rise of electric vehicles (EVs) on UK roads. EVs accounted for 23% of all new sales in 2022; up from 19% in 2021, 12% in 2020 and 9% in 2019

“These are important statistics for the insurance industry, because they flag that the changing nature of vehicles on UK roads,” the report adds. “It's also noteworthy that the two most popular models in 2022 were the Tesla Model Y and the Tesla Model 3, according to the Society of Motor Manufacturers and Traders (SMMT) which accounted for 46% of EV sales. These are relatively expensive vehicles, suggesting repair costs in the event of an accident are likely to cost insurers much more.

The increase in registrations of these vehicles could potentially sap industry profitability further, with Ernst & Young predicting the industry will post a combined ratio of 115% in 2022 and 114% in 2023.

According to auto leasing firm LeasePlan, average insurance premiums for EVs are 12% higher than those of internal combustion engines (ICE) autos, indicating that UK auto insurers recognise the differences in risk. It nevertheless appears that increased premiums could be inadequate, given the very different construction of EVs, the risk this poses and repair costs when an accident occurs.

The purchase price of an average EV in the UK is significantly more than an ICE equivalent, based on Office of National Statistics (ONS) data. The average EV retailed at £36,633 in 2021 (latest figure available) compared to £29,018 for an ICE vehicle, a 21% difference. This likely reflects the array of lightweight aluminium and carbon fibre used in EV manufacture, in a bid to offset the battery's weight.

Auto leasing company Fleet Europe believes that repairing a damaged fender/front of an EV costs 26.6% more than a similar job on an ICE vehicle. This cost increases to 53.3% more for luxury EVs versus conventional autos. These figures suggest that the 12% extra average cost to insure an EV is probably an inaccurate reflection of additional risk and will squeeze margin at the UK’s main auto insurers unless premiums are adjusted.

Mastercard offers crypto payments in Web3 via USDC settlements

Mastercard has teamed with web3 tech innovator Immersve in Australia and New Zealand to help consumers make payments using cryptocurrency directly from their web3 digital wallets.

Immersve offers solutions that eliminate third party interference while holding a user’s digital assets. The solutions allow users to fully control their digital currency. The tie-up will allow consumers to use digital cash against their online purchases at merchant outlets where Mastercard is accepted. 

Immersve will collaborate with a third-party settlement provider for allowing its customers to make payment through digital dollars (USDC) for different types of purchases. Once the payment is made, USDC will be transformed into fiat currency and settled on Mastercard’s network.

Immersve will use Mastercard Identity Services and CipherTrace offerings to resolve issues related with know-your-customer and anti- money laundering (KYC/AML), blockchain analytics and detecting online fraud.

“In the past three years, the number of people using blockchain-based wallets doubled to more than 80 million,” said Mastercard’s executive vice president of products and innovation for Asia Pacific Sandeep Malhotra. “Looking ahead, digital wallets are likely to become as ubiquitous as email addresses.

“As Web2 and Web3 increasingly converge, Mastercard remains committed to partnering with like-minded organisations like Immersve to scale and secure the blockchain ecosystem to make simple, safe cryptocurrency transactions, and even payments in the metaverse, easily accessible to billions of consumers.”

Deutsche Bank rebuilds Mexico operation

Deutsche Bank said that it is once more expanding its presence in Mexico, Latin America’s second-largest economy, with an eye to tapping into international interest in the country’s manufacturing base.

The bank’s growth plans contrast with rivals such as UBS and Credit Suisse that have reduced their Mexico operations over recent years as they look to cut costs and exit non-core markets. Citigroup is selling its retail unit, Banamex, while retaining its corporate and investment banking business.

The German bank also scaled down its Mexico presence in 2016, but started rebuilding its trading unit last year, with Marliz Mejia as CEO for Deutsche Securities Mexico. Mejia said local operations, with a staff of 30, were backed by €120 million (US$128 million) of capital investment. The Mexico City office will begin serving local institutional clients such as pension funds later this year.

Christiana Riley, CEO of Deutsche Bank Americas, told Bloomberg that the bank would also be focusing on providing more foreign-exchange and fixed-income derivatives to corporate clients.

“The volume of inbound investment is driving the need for incremental foreign-exchange and risk-management solutions,” she said. Addressing job cuts facing much of the industry, the bank was focused on seeing who it might be able to hire as other firms shed staff in Mexico and the US.

Kyocera head sees manufacturing in China as no longer viable

The president of a major producer in the chip supply chain predicts that companies will soon stop relying on China to manufacture their products following the introduction in the US of the bipartisan CHPS and Science Act, which President Biden signed last August.

“The business model of producing in China and exporting abroad is no longer viable,” Hideo Tanimoto, president of Kyocera, told the Financial Times, although manufacturing for the Chinese domestic market would still be possible. He cited worsening relations between Washington and Beijing: “Obviously with all that’s happening between the US and China, it’s difficult to export from China to some regions.”

The FT reports that newly passed regulations are a problem for Japan-based Kyocera, which has 70% market share of the ceramic components in the tools used to make chips. Tanimoto blamed US controls, at least in part, for the company’s decision to slash its forecasted full-year operating profit by 31%.

In addition to regulation, last October the Biden administration imposed tough export controls on China, limiting the sale of advanced chips and chipmaking equipment to the country’s chip industry. Japan and the Netherlands—whose companies manufacture the equipment needed for the most advanced chips—are also moving to bar exports of this technology to Chinese companies.

Tanimoto said that Japanese companies are being “asked not to ship their non-cutting-edge tools,” implying that even lower-end technology are running afoul of geopolitical strife.

In its recent earnings reports, the company also blamed a drop in demand for smartphones and inflation for its downward revisions to income. Kyocera reported US$846 million in operating profit in its most recent quarter, down 3.9% decrease from the year before.

Separately, Japanese trading house Sumitomo Corp has announced plans to supply rare earth elements for electric vehicles (EVs) without involving China, the world's biggest supplier of rare metals that are key to the production of clean-energy systems, such as EVs and wind turbines.

Nikkei Asia reports that Sumitomo will substitute US and Southeast Asian companies for rare earth element production, which involves a long and complex process from mining to smelting. The group currently relies on Chinese smelters to extract rare earth elements, such as neodymium and praseodymium, from ores mined by MP Materials.

US developing crypto regulation “behind closed doors”

The United States Congress needs to take control of crypto legislation and make it a more “open process” where the entire marketplace is looked at “comprehensively,” suggests Kristin Smith, CEO of the crypto industry’s non-profit body the Blockchain Association.

In a Bloomberg interview, Smith said the industry needs US lawmakers to lead crypto legislation despite it making the process “very slow,” with regulators “stepping in” in the interim.

Despite regulators “moving very quickly,” progress on legislation is happening “behind closed doors,” indicating the need for more industry involvement in an “open process,” which would involve Congress.

Smith believes the issue with regulators leading legislation with enforcement actions and settlements relates to “very specific facts and circumstances.”

She explained it’s a difficult position for Congress, as many in Washington DC. who “were close” to former FTX CEO Sam Bankman-Fried and FTX feel “burned” and “betrayed” over the collapse of the cryptocurrency exchange last November.

Smith is hopeful that stablecoin regulation will soon happen in the US, as Congress has been looking at it “since 2019” and the “work has been done.” She said it “came close” to happening last year before the collapse of FTX.

She added that crypto risks differ from traditional financial services, so regulators must spend more time looking at market regulation and “tailor to those risks.”

Smith suggested that stablecoin and “market side” regulation should be a higher priority than focusing on legislating crypto-related criminal activity, saying that public ledgers make it “much more transparent” than we see in the traditional financial system.

A week ago the Blockchain Association’s chief policy officer, Jake Chervinsky, took to Twitter stating that no matter how many enforcement actions the Securities and Exchange Commission and Commodity Futures Trading Commission bring, they are “bound by legal reality,” adding that “neither” has the authority to “comprehensively regulate crypto.”

BlackRock issues metaverse thematic ETF

Investment management giant BlackRock has become the latest US exchange traded fund (ETF) issuer to launch a thematic equity fund aimed at companies around the world that are shaping the evolution of the metaverse. The expense ratio of the NYSE Arca-listed iShares Future Metaverse Tech and Communications ETF is 0.47%.

An ETF is a collection of securities that can be traded on the stock market. It combines the traits of conventional shares and mutual funds as it is a group of securities dispersed across companies, much like a mutual fund, but it can also be traded as a package on the stock market, just like shares.

While still in its early stages, the metaverse has already attracted billions of dollars in investment from major technology companies, and new virtual applications for it are constantly being developed. A recent report by McKinsey predicts that by 2030, the metaverse could attract up to US$5 trillion in annual revenue and command a market value of US$800 million.

BlackRock’s belief in the metaverse as the next major investment opportunity reflects society’s growing interest, although it compares the immersive virtual-world concept to the internet in the early 1990s. BlackRock asserts that it is already aware of how the metaverse will alter “work and play,” with virtual conferences, golf outings, and music events all being transformed by metaverse technologies.

BlackRock’s fund is the seventh thematic ETF in the US to focus on the evolution of the metaverse; those already available ranging from the US$430 million Roundhill Ball Metaverse ETF, which has a 0.75% expense ratio, to the US$10 million Fidelity Metaverse ETF, which has a 0.39% expense ratio.

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