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D-Day for crypto market in seven days‘ time – Industry roundup: 8 September

Ethereum’s switch on 15 September a landmark for crypto

Thursday 15 September is shaping up to be a landmark date for the crypto industry, when the blockchain Ethereum is tentatively scheduled to complete a software update dubbed “the merge”.

Over the past couple of years, Ethereum developers have been rolling out test versions of the merge, to detect possible glitches and vulnerabilities in their code. A fortnightly Zoom call for “core developers” has been broadcast live on YouTube and made available to all.

Two days ago, it was reported that the merge’s final test run, known as the Bellatrix upgrade, had been activated successfully. The merge is now tentatively scheduled for Thursday of next week, although a series of complex technical factors could force a further postponement. If all goes well though “new chapters of Ethereum and crypto will begin” state reports.

The main aim is to dramatically reduce Ethereum’s energy usage and establish it as a much more environmentally friendly option to Bitcoin. However, potentia l consequences could include either a rocketing orcrash in the price of Ether (the Ethereum platform’s native cryptocurrency); encourage users to either stick to or abandon the old version of Ethereum; spur mainstream adoption or reduce confidence in crypto; and lessen some security risks or exacerbate others.

Until now both Bitcoin and Ethereum have operated without controlling bodies and instead relied on the “Proof of Work” process, in which the blockchain is operated and safeguarded by “miners,” who approve new and valid transactions by solving complex maths puzzles and are rewarded for their efforts in the blockchain’s currency.

The complexity of the puzzles is intended to deter hackers or spoilers to game the system but solving them requires huge amounts of energy. Miners have set up giant computing rigs worldwide that run 24/7, solving these puzzles while using vast quantities of electricity.

Proof of Work’s huge energy demands have drawn widespread criticism from environmental groups, especially as countries try to reduce their emissions in the face of climate change. Proof of Work also has design issues in terms of security and scalability, some engineers argue. Back in 2014 as Ethereum’s first developers started to build the network on Proof of Work, they were already examining the possibility of eventually transferring to a new, untested system called Proof of Stake.

Proof of Stake works by replacing energy-guzzling miners with watchdogs, or“validators”, who deposit a significant amount of money (32 ETH, currently worth about US$50,000) into the Ethereum network, enabling them to approve or deny transactions. Like miners, they earn money rewards for doing so. Proof of Stake requires a hacker or bad-faith actor to deposit a huge amount of money into the system in order to game it—with the risk losing that money if they are discovered and ejected.

However, work on the transition has taken core Ethereum developers several years and surmounting the various challenges has created numerous delays. Hopes are now hight that the 15 September merge will be seamless and glitch free, but significant risks remain.

Ethereum has provided the primary network for an upsurge in crypto activity over the past two years, including in non-fungible tokens (NFTs), decentralised finance (DeFi), and decentralised autonomous organisations (DAOs). If the merge does not go smoothly next week each of those applications and organizations—which collectively handle more than US$50 billion in user funds—could be jeopardised.

China agrees to pay Gazprom in roubles and yuan

Russia’s state energy giants Gazprom and China National Petroleum Corporation (CNPC) have signed several agreements on Tuesday, which Gazprom said include a requirement to on use Russian roubles (RUB) and Chinese yuan (CNY) to pay for Russian natural gas supplies to China, instead of euros or dollars.

“The new payment mechanism is a mutually beneficial, timely, reliable and practical solution,” Gazprom CEO Alexei Miller was quoted as saying in a statement following a video conference meeting with the head of China’s oil group CNPC, Dai Houliang. “I believe that it will simplify the calculations, become an excellent example for other companies, and give an additional impetus to the development of our economies,” Miller added.

The announcement came six months after a 30-year deal was signed between Gazprom and the CNPC in early February, which said Russian gas supplies would be paid in euros as Russia looked to separate itself from the US before it invaded Ukraine on 24 February.

The following month, Russian president Vladimir Putin enforced a mandate that required all Gazprom sales to Europe be paid in RUB after the US and Europe imposed a raft of international sanctions in response to the invasion. Moscow has since cut gas supplies to Germany, Denmark, Poland, Bulgaria, Finland and the Netherlands after they refused to comply with Putin’s demand.

Gazprom has steadily reduced its supplies to Europe, citing “maintenance” issues, but has now confirmed that it would not resume pumping gas until Germany energy company Siemens Energy responds to its equipment repair demands.

However, Russia has signed several gas supply agreements with China as it cuts off Europe. Gazprom says that gas from the under-developed Kovykta field will start flowing through the Power of Siberia pipeline “before the end of the year”, allowing for the “increase [in] the volume of gas deliveries to China in 2023”.

ECB turns hawkish with 0.75% rate rise

The European Central Bank (ECB) has raised its key interest rates by 75 basis points (bp) – at the higher end of expectations – and signalled further hikes, prioritising the fight against inflation over economic growth despite the growing risk of a winter recession in Europe. This pushes the ECB’s ‘main refinancing rate’ to 1.25%, up from 0.5%, while the ‘marginal lending rate’ paid by banks borrowing from the ECB goes up to 1.25%.

Analysts were divided on whether today's increase would be 0.50% bp or if the ECB would follow the more hawkish policy of the US Federal Reserve and opt for a 0.75% increase.

The ECB surprised markets on 21 July when it confirmed a 0.50% rise in its base rate, the first since 2011, as many has expected that the increase would be only 0.25%.

Ahead of today’s announcement, ING analysts Francesco Pesole and Carsten Brzeski commented: "Policymakers in Frankfurt will likely have to choose between a 50bp or 75bp rate hike this week. We think that a 75bp move would be too hard to digest for the dovish front within the Governing Council, and our call is for a 50bp move. That said, we cannot fully exclude a 75bp hike aimed at frontloading tightening before a recession hits this winter."

The commentary continued with a focus on the recent weakness of the euro against the US dollar: "We expect the energy story to return firmly to the driving seat for EUR/USD after the post-ECB reaction. Barring a very hawkish surprise, this should keep EUR/USD below parity and prevent it to reconnect with the more supportive rate differential. The 0.98-0.99 area could prove to be a near-term anchor for EUR/USD, but a further worsening of the energy crisis and/or further dollar strengthening can trigger a drop to the 0.96-0.97 area.".

The ECB said that the eurozone economy has suffered a ‘substantial’ slowdown, as the energy crisis hits growth. Policymakers have cut their growth forecasts to 0.9% in 2023 - against 2.1% previously - and 1.9% in 2024, from 3.1% this year.

“Very high energy prices are reducing the purchasing power of people’s incomes and, although supply bottlenecks are easing, they are still constraining economic activity,” the ECB commented. “In addition, the adverse geopolitical situation, especially Russia’s unjustified aggression towards Ukraine, is weighing on the confidence of businesses and consumers.”

China corporate bond boom propels it past the US

China has edged ahead of the US for corporate bond deals in its yuan (CNY) credit market over the summer months, a rare shift that highlights the deepening impact of the two countries’ diverging monetary policies.

CNY-denominated bond issuance by non-financial firms exceeded that in the greenback in both July and August, a first for two consecutive months, according to Bloomberg-compiled data.

The momentum is attributed to the countries’ diverging central bank policies and started building in March as the US Federal Reserve kicked off its tightening cycle. Sales of yuan notes, almost entirely by Chinese firms, totalled CNY2.04 trillion ($306 billion based on exchange rates at the time of deals) between April and August, versus US$283 billion of dollar debt worldwide. Debt sales in USD are running at their lowest in 11 years, reports Bloomberg.

“The rise of yuan corporate debt reflects the divergence of monetary policy between the US and China, and more importantly, liquidity is king,” commented Gary Ng, a senior economist at Natixis SA. “But the yuan is still far from challenging the dollar supremacy as most of the yuan bonds are still issued by Chinese firms.”

Trade finance platform Contour acquires we.trade assets

Blockchain-based trade finance platform Contour is set to acquire the rulebook and other legal documents from the defunct fintech we.trade. Financial details of the deal have not been disclosed.

The move forms part of plans to launch a digital open account trade finance offering, folding we.trade’s bank payment undertaking (BPU) digital finance tool into the new platform.

Contour says that the inclusion of we.trade’s rulebook, which covers the use of smart contract data sets that allow banks to enter into BPUs, means that will be able to “accelerate plans to bring to market an improved, Uniform Rules for Digital Trade Transactions (URDTT)-compliant digital open account proposition”.

We.trade closed its doors three months ago after failing to secure further investment to continue as a going concern. The venture – “the world’s first enterprise-grade blockchain-enabled trade finance platform” – was set up in 2017 by 12 banks, who are shareholders. They include CaixaBank, Deutsche Bank, Erste Group, HSBC, KBC, Nordea, Rabobank, Santander, Société Générale, UBS and UniCredit. It was commercially launched in 2019.

Based on Hyperledger, we.trade’s offer was to connect small and medium businesses (SMBs) to banks by streamlining traditionally paper-based transaction tasks such as letters of credit and the financing for cross-border and international trade.

Co-created in Singapore in 2018, Contour is backed by eight banks including ING, HSBC, BNP Paribas and Standard Chartered and bids to digitise and modernise the trade finance sector.

AFP partners with J.P. Morgan on awareness initiative

The US Association for Financial Professionals (AFP) said that it will join forces with J.P. Morgan to empower college students and young professionals interested in treasury and finance careers, as part of AFP’s diversity, equality and inclusion (DEI) awareness initiative for treasury and finance.

A release stated: “J.P. Morgan will work with AFP in helping aspiring young professionals from diverse backgrounds lead rewarding careers in treasury and finance, through professional development, skills building, ongoing training and continuous learning. As part of the initiative, AFP offers scholarships for its Certified Treasury Professional and Certified Corporate Financial Planning and Analysis (FP&A) Professional certifications. AFP also provides resources to help employers bolster their own DEI programs.

“The corporate treasury and finance profession will only grow stronger when there is a diverse set of skills, backgrounds and viewpoints at the table,” said Jim Kaitz, president and CEO of AFP. “At AFP, we are committed to working with our partners to provide individuals from diverse backgrounds with the tools and opportunities they need to become the leaders that will drive the profession forward.”

“Diversity and inclusion are critical to the success and growth of our industry, both for us as a firm, and for our clients,” said Lori Schwartz, managing director and global head of liquidity and account solutions, J.P. Morgan. “Treasury and finance is a very exciting space, and we will need talent from all backgrounds to create the best financial and technology solutions together for the future.”

Malaysia’s Maybank introduces framework to support green finance

Malayan Banking Berhad, aka Maybank, announced that it has designed its own sustainable product framework (SPF) – which it says is the first by a Malaysian bank – “to enable greater development of green, social and sustainable products.”

Maybank, which also operates in Singapore and Indonesia, said that the framework will support the group’s commitment of mobilising 50 billion ringgit (RM) (£9.7 billion/US$11.1 billion) to sustainable finance by 2025 and was introduced at the start of this month across Islamic and conventional products.

In keeping with best practices adopted by global peers, this framework covers products offered “under corporate lending, debt and equity capital markets, trade financing, retail financing, insurance, asset and wealth management, derivatives and deposits.”

The main aim of the SPF is “to help Maybank’s business teams have clarity in developing green, social and sustainable products by looking at the intended use of the proceeds from the product or solution offered, and whether it meets the Group’s sustainable standards throughout its life-cycle.”

“As a leading financial institution in ASEAN and in line with our aspiration to be a regional environmental. social and governance (ESG) leader, we want to be able to drive sustainable financing through our regional operations in a more meaningful and impactful manner,” said Group President and CEO of Maybank, Dato Khairussaleh Ramli.

“This has led us to draw clear definitions of green, social and transition activities to guide our risk, business and sales teams on eligible sustainable financing and solutions. We hope that by giving our teams the right tools and clarity on perimeters of sustainable financing, this can expedite the growth of timely ESG financing solutions over the near term as well as enhance our efficiency in turnaround time for processing of these solutions.”

Standard Chartered pilots Trade Financing Validation Service

Standard Chartered said that it has successfully completed an industry-first pilot testing of the Trade Financing Validation Service provided by fintech MonetaGo over SWIFT, to mitigate the risks of duplicate trade finance fraud on a global scale.

A release stated: “With a view to effectively detecting, deterring and preventing duplicate financing, the TFVS… powered by fintech MonetaGo’s Secure Financing system is the first natively global solution that is interoperable between markets.

"Accessible via SWIFT’s global application programming interface (API), the TFVS provides checks on financing transactions to detect and thereby prevent duplicate financing frauds within domestic markets and cross-border.

“Trade finance providers register select document information by sending the information via API. MonetaGo’s Secure Financing system cryptographically hashes the data to create document fingerprints that can be compared with already registered document fingerprints, to detect duplicates. All customer and transaction data are encrypted in compliance with global banking and data protection standards, and the document fingerprints created by the system cannot be reverse engineered to reveal the data that created them.

“In addition to preventing duplicate financing between financiers by comparing transaction data and informing financiers of match results, the solution also verifies document data through automated validation against trusted sources such as government authorities and logistics databases.”

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