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Digital euro moves a step closer – Industry roundup: 19 October

ECB authorises next stage for developing digital euro

The European Central Bank (ECB) has taken the next step towards launching a digital version of the euro that would enable people in the 20 countries that share the single currency to make electronic payments free of charge and securely.

“The next phase of the digital euro project - the preparation phase - will start on 1 November 2023 and will initially last two years,” the ECB confirmed, adding that the phase will involve some “testing and experimentation”.

“We need to prepare our currency for the future,” said ECB president Christine Lagarde. The digital euro would “coexist alongside physical cash, which will always be available, leaving no one behind.”

Earlier, the European Union's data protection watchdog called for stronger privacy safeguards in EU draft legislation to underpin a digital euro.

The European Commission (EC) has proposed a draft law to give legal underpinning to the digital euro, but consumers are concerned that it will displace cash and allow authorities to track spending.

Approval of the draft law has been slowed down to give more time to address concerns that the digital euro will lack the anonymity of cash for low-value transactions.

The European Data Protection Board (EDPB) said it “strongly recommended” adding to the draft law a privacy threshold for online transactions using the digital euro “under which neither offline nor online low-value transactions are traced for purposes of anti-money laundering (AML) and for combating the financing of terrorism."

The draft law should also “further clarify” the data protection responsibilities of the ECB and of payments services providers (PSPs).

“This includes the legal bases the ECB and PSP should rely upon, and the types of personal data they should process for the issuance, distribution and use of the digital euro,” the EDPB said.

The board said it strongly welcomed the commitment that digital euro users will always have the options to pay in digital euros or in cash. “A high standard of privacy and data protection is instrumental in citizens' trust in this new digital currency,” said Irene Loizidou Nicolaidou, the EDPB's deputy chair.


US-China tech battle escalates with ban on AI chip exports

President Joe Biden’s administration is reducing the types of semiconductors that US companies will be able to sell to China, citing the desire to close loopholes in the current regulations announced a year ago.

The US Commerce Department unveiled new rules that further tighten a sweeping set of export controls first introduced in October 2022.

The updated rules “will increase effectiveness of our controls and further shut off pathways to evade our restrictions,” US Commerce Secretary Gina Raimondo said in a statement.“We will keep working to protect our national security by restricting access to critical technologies, vigilantly enforcing our rules, while minimizing any unintended impact on trade flows.”

Advanced artificial intelligence (AI) chips, such as Nvidia's H800 and A800 products, will be affected, according to a regulatory filing from the US company.

The regulations also expand export curbs beyond mainland China and Macao to 21 other countries with which the United States maintains an arms embargo, including Iran and Russia. The latest measures, which have adversely affected the shares of major US chipmakers, are set to take effect in 30 days.

The original rules aimed to hamper China’s ability to procure advanced computing chips and manufacture advanced weapons systems. Since then, senior administration officials have suggested they needed to be adjusted due to technological developments. 

Raimondo, who visited China in August, said the administration was “laser-focused” on slowing the advancement of China’s military and stressed that Washington had opted not to go further in restricting chips for other applications. Chips used in phones, video games and electric vehicles were not included in the new rules, according to senior administration officials.

However, the assurances are unlikely to placate Beijing, which has vowed to “win the battle” in core technologies in order to bolster the country’s position as a tech superpower. China’s Foreign Ministry criticised the Biden administration’s new rules even before they were officially unveiled.

“The US needs to stop politicizing and weaponising trade and tech issues and stop destabilising global industrial and supply chains,” spokesperson Mao Ning told a press briefing. “We will closely follow the developments and firmly safeguard our rights and interests.”


Egypt is first in Africa to issue sustainable panda bond

Egypt has successfully issued a three-year sustainabie Panda bond worth renminbi (RMB) 3.5 billion (US$478.7 million). The North African nation is the region’s first to do so, a move that highlights its commitment to access previously untapped sources of capital to drive economic growth.

The African Development Bank (ADB) and the Asian Infrastructure Development Bank (AIDB) provided partial credit guarantees to support the issuance, paving the way for other African countries to access fast-growing Chinese debt capital markets. Panda bonds are issued in China’s domestic capital market by foreign issuers, typically governments or corporations, and are denominated in Chinese yuan.

The combined guarantees from the two multilateral development banks with triple-A ratings helped crowd in investors and secured competitive terms for the transaction. The Bank of China Limited, with support from HSBC Bank (China) Company Limited, was the lead underwriter and bookrunner.

Egypt will use the bond proceeds for inclusive growth and green objectives under its Sovereign Sustainable Financing Framework. The Framework, which was launched ahead of the COP27 climate conference held in Egypt last November, targets sustainable development through investments in clean transportation, renewable energy, energy efficiency, sustainable water and wastewater management, financing for micro, small, and medium-sized enterprises (MSMEs), and essential health services initiatives, among others.

Egypt’s Minister of Finance, Dr. Mohamed Maait, said: “Egypt is the first African sovereign to issue Panda Sustainable Bonds in the Chinese Financial Markets. This is a historical move not just for the country but for the entire continent. We have paved the way for alternate, sustainable financing for our African neighbours and have deepened the partnership with our Chinese counterparts. It’s more than just a financing source; it’s a testimony of how important our economic and financial ties are with the Government of China.”

Mohamed El Azizi, African Development Bank Director General for North Africa, described the issuance as ground-breaking. “This first Panda bond issuance by an African sovereign is the perfect example of how ADB Regional Member countries could leverage the Bank’s AAA credit rating to penetrate new markets and mobilise sustainable financing at competitive terms from international investors.”


Shell has abandoned specific targets for carbon offsets

Shell has given up on specific spending and volume targets for carbon offsets, also known as nature-based solutions, Chief Executive Wael Sawan confirmed at this week’s three-day Energy Intelligence Forum in London.

The Anglo-Dutch oil and gas giant had previously said it wants to invest around US$100 million annually on offsets and use credits worth up to 120 million tons of CO2 equivalent per year by 2030.

But subsequent major offset credit-generating projects, including in forest preservation, have come under scrutiny for exaggerating their climate impact, while some climate activists argue any offset is a fig leaf for continued use of hydrocarbons.

“Both numbers we have retired,” Sawan said speaking via video link after climate protesters blocked the entrance to the conference for several hours on the opening day.

“(This) is to continue to drive my nature-based solutions organisation, not to spend the certain amount or not to spend at any cost to get a certain number of credits, but to actually drive what was going to be a viable business for us as a company.”

Recent news reports revealed that Shell had become the latest multinational to pull back from carbon offsets amid concerns many have no environmental impact, it has emerged, as the Carbon Trust discontinues its “carbon neutral” labelling scheme based on offsetting.

The decision means that Shell joins Gucci, Leon, Nestlé and other firms in moving away from offsets amid repeated indications that major volumes of carbon credits do little to mitigate global warming. Earlier this year, the published results of an investigation suggested that that many rfain forest carbon offsets were worthless.


Treasury bond market “headed for unknown destination”

The Treasury bond market is headed for the unknown as it sheds key anchors, economist Mohamed El-Erian has written in the Financial Times.

Recent volatility that rocked bond yields into sudden extremes goes beyond the latest reports on inflation or policy stances from Federal Reserve officials, the chief economic adviser to Allianz added. “The US bond market is losing its strategic footing, whether in economics, policy, or technical aspects,” he said.

Currently, long-term Treasury yields are hovering near 5% amid a massive US bond sell-off, due in part to a strong US economy that will require extended tightening to further rein in inflation.

This also comes as the US ran a US$1.7 trillion deficit in fiscal year 2023, with the Treasury Department issuing a massive supply of bonds. Israel’s war against Hamas has added to geopolitical worries that have contributed to the rollercoaster ride Treasurys are on.

“But my primary concern lies elsewhere: the most influential segment of the world's financial markets is losing its longer-term strategic anchors and is at risk of losing its short-term stabilizer ones as well,” El-Erian said, raising doubt about who will absorb the additional supply of US debt. 

He noted that the Fed is no longer purchasing Treasurys and is focused on shrinking its balance sheet, foreign buyers have turned more hesitant, and US institutional investors already have big paper losses on bond holdings, while banks may have to sell bonds to replenish declining deposits.

Short-term investors have held back even more extreme day-to-day volatility, El-Erian said, as peaking yields have been attracting some level of buyers, especially households investors. But the continued resilience of the bond market is not something investors should take for granted, he warned.


Tesco “begins process for possible sale of bank arm”

The UK’s biggest grocery chain by market share, Tesco, has kickstarted a potential sale of its banking division, Bloomberg reports.

The grocer has appointed Goldman Sachs to serve as its adviser and has started to hunt for potential buyers of the bank arm, the report states. Citing people familiar with the matter, Bloomberg added that the process is still in its early stages. One source suggested that a partial sale or joint venture could be among the options being considered,

Tesco Bank, which was launched in 1997, generated adjusted operating profits of £67 million (US$81 million) in its most recent half-year results and stated that its balance sheet “remains strong”. The bank has more than five million customers and offers a range of banking and insurance services.

Tesco’s rival in the UK grocery market, J Sainsbury, has also considered a possible sale of its financial services arm. In November 2020 Sainsbury's announced that it had received “some expressions of interest” in a possible acquisition of Sainsbury's Bank and later appointed investment bank UBS to handle a formal sales process. However, the following October it announced that talks on a possible £200 million deal had been ended.


BAFT updates playbook on correspondent banking relationships

The Bankers Association for Finance and Trade (BAFT) has released an updated version of its Respondent’s Playbook for Obtaining and Maintaining a Correspondent Banking Relationship (CBR) in a “complex environment”.

The playbook serves as a roadmap for respondent banks navigating international anti-money laundering and combating the financing of terrorism (AML/CFT) standards. The update, a successor to the 2019 guidance document, incorporates current regulatory changes and introduces a new section on ISO 20022 migration.

BAFT regards CBRs as “the linchpin of international trade and finance, enabling cross-border transactions and providing a gateway to foreign financial markets.” However, it says that these relationships have come under scrutiny in recent years, with a decline in CBRs observed in many parts of the world.

This decline has raised concerns about financial exclusion and the rising costs of trade finance, issues that have only gained urgency in the face of evolving regulatory landscapes and technological advancements.

The BAFT Respondent’s Playbook 2.0 can be accessed here.

Mastercard teams with Worldpay and Zip to scale open banking

Mastercard said that it is leveraging its open banking technology through partnerships to provide flexible and secure lending and payments experiences for consumers and small businesses.

The group is partnering with key players in the ecosystem, such as Worldpay from FIS and Zip, “scaling new open banking-powered solutions that empower consumer lending, modernise account-based payments, and offer a wider range of payment choices.”

As more individuals manage their finances online, the digital landscape must evolve to prevent account takeovers and synthetic identity fraud. To address this concern, Mastercard employs artificial intelligence (AI) to protect over 125 billion payment transactions annually, guided by its data responsibility principles. These principles ensure that consumers own and control their data, benefit from its use, and have it protected.

“We are delighted to partner with Mastercard to leverage their open banking platform in the U.S. to offer secure and seamless account verification services, providing our customers with enhanced payment options and advance open banking around the world,” said Sudev Balakrishnan, chief product officer at Worldpay Merchant Solutions, FIS, in a statement.

Mastercard cited online bill payments as one area where it is easing the burden for consumers. “With a growing demand for choice in payment methods, especially for recurring payments, consumers expect frictionless and secure transactions,” it said. “To meet this demand, Mastercard collaborates with partners like J P Morgan Payments to scale account-based payments using its open banking technology. This collaboration simplifies recurring biller and merchant payments made via Automated Clearing House (ACH), covering expenses such as rent, utilities, government fees, and insurance payments.

Mastercard’s open banking technology also extends to lending programmes through its partnership with Zip. By enhancing the real-time underwriting process, Mastercard’s open banking technology enables consumers to budget for larger purchases that can be paid over time.

“Zip is valued for helping customers with managing their expenses and providing access to a financial cushion in times of unexpected expenses,” said Larry Diamond, co-founder and US.CEO of Zip, said in a statement.


Huawei spin-off Honor says ESG will be central to its IPO

A senior executive at Chinese smartphone maker Honor stressed the important link between environmental, social and governance (ESG) and the firm’s plans for an initial public offering (IPO) during a discussion at CNBC’s East Tech West conference in the Nansha district of Guangzhou, China.

“ESG is embedded into the company’s DNA since day one,” said Martin Xu, corporate senior vice president at Honor.

Xu added that the business is focusing on several ESG-related areas, such as accessibility, environmental protection and transparent governance. The firm is a spin-off from another Chinese company, Huawei, and since 2020 has been owned by Shenzhen Zhixin New Information Technology.

He stressed that ESG is inextricably linked to how his company functions. This year saw Honor publish its first ESG Report, and it has also pledged that its operations will be carbon neutral by 2045.


Nova Credit raises US$45 million to expand cash flow underwriting

Nova Credit, described as the “data analytics firm enabling businesses to achieve sustainable growth by leveraging alternative credit data,” has announced a US$45m Series C round. The firm started out as a graduate research project out of Stanford University seven years ago, was founded to help immigrants overcome the obstacles when applying for apartments or loans with no credit history in the US.

The capital injection comes from lead investor Canapi Ventures, with contributions from the likes of General Catalyst, Index Ventures, Kleiner Perkins, Y Combinator, Avid Ventures, Geodesic Capital, Harmonic Capital, Radiate Capital, and Socium Ventures (Cox Enterprises).

“This new wave of investment signifies growing confidence in Nova Credit’s unique blend of products that centre around cash flow underwriting and verification,” a release stated. “In essence, Nova Credit provides a pivotal service for businesses, especially lenders. Its primary product, Cash Atlas, stands out as a leading tool for cash flow underwriting, effectively verifying income and employment data. The firm’s commitment to open finance data pipelines, specialised datasets, and benchmark-setting analytics and compliance tools means its partners can securely grow, all while aligning with their risk appetites.

The financing “will bolster Nova Credit’s aspirations to go beyond its renowned cross-border credit reports. The vision is to offer an even broader product spectrum, catering to the intricate demands of today’s lenders.”

The firm added that since its Series B round in 2020, it has seen a tenfold growth in revenues, formed partnerships with HSBC, Verizon and Scotiabank, and successfully ventured into new markets, including Canada, the UK, the UAE and Singapore.

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