Central bank digital currency momentum grows

Global interest in developing central bank digital currencies (CBDCs) is accelerating according to a comprehensive study conducted by the US-based Atlantic Council, with 130 countries representing 98% of the world economy actively exploring digital versions of their currencies.

The research, published by the Washington, DC think tank, reveals that nearly half of these countries are in advanced stages of development, pilot testing, or preparing for launch. The study highlights the significant progress made over the past six months, with all G20 nations, except Argentina, now in one of these advanced phases.

Among the 130 countries, 11 nations, including several in the Caribbean, and Nigeria, have already launched their CBDCs. China, with its pilot testing reaching 260 million people and covering 200 scenarios, leads the way.

Two other major emerging economies, India and Brazil, plan to launch their digital currencies next year. The European Central Bank (ECB) is on track to begin piloting the digital euro, with a potential launch in 2028. In addition, more than 20 other countries are expected to take significant steps towards CBDC pilots this year.

While progress on a US digital dollar is “moving forward” for a wholesale (bank-to-bank) version, development of a retail version for broader public use has “stalled,” according to the Atlantic Council’s research. In March 2022, President Joe Biden ordered officials to assess the risks and benefits of a digital dollar.

The Federal Reserve, however, stated in January that the decision to launch a digital version should rest with Congress due to the dollar’s significant role in the global financial system. Any move by the US regarding a digital dollar carries substantial global consequences.

The global push for CBDCs reflects decreasing physical cash usage, given added impetus during the pandemic and the desire to protect money-printing powers from the influence of cryptocurrencies like Bitcoin and dominant technology companies.

Sanctions imposed on countries such as Russia and Venezuela have further motivated the exploration of CBDCs. Europe aims to establish an alternative to payment networks such as Visa, Mastercard, and Swift.

The Atlantic Council’s report notes that since Russia’s invasion of Ukraine in February 2022 and subsequent G7 sanctions, wholesale CBDC developments have doubled, and there are currently 12 multi-country “cross-border” projects in progress. However, some countries that have launched CBDCs, including Nigeria, have experienced low adoption rates, while others like Senegal and Ecuador have halted development work.

 

More CEOs have pay linked to ESG goals

The practice of linking incentive pay for senior executives to performance on environmental, social and governance (ESG) factors has gained traction in the past 12 months, with around half of CEOs reporting that their compensation is now tied to sustainability goals, up from only 15% one year ago, a global CEO survey released by IBM finds.

For the study, “CEO decision-making in the age of AI,” the IBM Institute for Business Value (IBV), in cooperation with Oxford Economics, interviewed 3,000 CEOs across more than 30 countries and 24 industries, with a focus on areas including perspectives on leadership and business, the executives’ changing roles and responsibilities, key challenges and opportunities, and their use of technology, data and metrics.

In addition to the rapidly growing integration of ESG factors into executive compensation, the survey also found that “environmental sustainability” was identified as the most frequently cited top challenge over the next three years by CEOs, at 42%, and retaining the top spot from the 2022 survey, followed by cybersecurity and data privacy at 32% and tech modernization at 27%.

Yet although sustainability challenges and incentives remain top of mind, the IBM report found that environmental sustainability has declined on the list of top organisational priorities, with respondents ranking it in fifth place, down from third last year, as ‘productivity or profitability’ moves to the top spot from sixth last year, and cybersecurity and data privacy also move higher as well.

The lower prioritisation on sustainability comes as progress on sustainability-related initiatives remains slow, with the report citing another recent IBV study, “The ESG data conundrum,” which found that while 95% of companies have now established operational ESG goals, only 10% have made significant progress towards achieving them, with a lack of inadequate data cited as the greatest obstacle.

The earlier study also found that nearly three in four executives agreed that ESG needs to be a higher priority for their organisations, but noted challenges to sustainability efforts including inadequate data (the top cited challenge at 41%), followed by regulatory barriers at 39%. The study found that only 45% of CEOs reported confidence in their organisations’ ability to report on ESG strategy and initiatives, and that this lack of confidence was mirrored by consumers, with consumer trust in corporate sustainability statements falling sharply to only 20% from 48% in 2021.

Similarly, the new report found that only 34% of CEOs often use ESG data to make strategic decisions, compared to 76% and 75% who use operational data and financial data, respectively.

Hackett: Largest US companies “hit a ceiling” on delaying supplier payments

The largest US companies found it much harder to extend payments to suppliers in 2022 and have likely hit a ceiling on the practice of supplier payment terms optimization that has historically helped them bolster their balance sheets, according to working capital research from The Hackett Group.

Its analysis of data from 1,000 of the largest US public companies showed that last year days payable outstanding (DPO), or the number of days companies take to pay suppliers, decreased by nearly five days, or 8%.

After a rare Triple-Crown event in 2021, where companies saw improvement in all three working capital management metrics – receivables, payable, and inventory – US companies saw their overall working capital performance or cash conversion cycle (CCC) worsen by 3% in 2022, as they faced major headwinds such as inflationary pressure on costs, supply chain disruptions and increased geo-political instability.

While receivables (days sales outstanding or DSO) improved by 5% and inventory levels (days inventory outstanding or DIO) improved by 3%, the improvements were eclipsed by the significant degradation in payables (days payables outstanding or DPO).

Contributing factors to the improvement in inventory performance (DIO) were strong demand that depleted inventory levels and lessons learned during the pandemic, which has led best-in-class companies to take a more strategic approach to inventory management and rely on technology to optimize inventory amid sustained and shifting customer demand, the research found.

Receivables (DSO) performance improvement was mainly driven by double-digit improvements in consumer durables, recreational products, airlines, and oil and gas, which saw strong demand as a result of continued economic rebound. DSO in other industries benefited from the expansion of subscription models and business-to-consumer sales channels as those continue to alter the customer/supplier dynamic and positively impact receivables performance.

These US companies now have almost US$1.9 trillion tied up in excess working capital, the research found, including US$666 billion in excess inventory, US$665 billion in payables, and US$531 billion in receivables. Top performers now collect from customers 42% (19 days) faster, hold 59% (41 days) less inventory, and take 52% (25 days) longer to pay suppliers.

The Hackett Group’s 2023 Working Capital Survey is currently featured on CFO.com.

According to The Hackett Group Director Shawn Townsend, “After the ‘great working capital reset’ of 2021, this is a year of course correction and growth, despite significant challenges in the business environment. As we predicted in mid-2022, it appears that companies have reached an inflection point in their ability to improve their balance sheet by extending payments to suppliers. For a decade or more, this practice has been the easiest way for companies to improve their working capital performance, and companies have heavily relied on it. But now, supply assurance is a bigger challenge than ever for most companies, with many facing issues related to supplier criticality, competition for resources and the availability of supply.

“We expect this trend of worsening payables performance to continue in 2023, especially as the restructuring of several major regional banks will likely lead to less availability of supply chain finance assets," said Townsend. "In addition, the new accounting disclosure rules introduced by the Financial Accounting Standards Board (FASB) requiring companies to disclose information about their supply chain finance programs has softened the demand for such tools.”

 

HKMA aims to restructure three-tier banking system

The Hong Kong Monetary Authority (HKMA) has issued proposals for major changes in the city’s three-tier banking system for the first time in four decades in a move that would eliminate the smallest category of lender altogether.

Under the proposals, the 12 existing so-called deposit-taking companies licensed by the HKMA would be required to upgrade themselves to join the other tiers – licensed banks and restricted licence banks – in the next five years, the de facto central bank said.

“The review aims to simplify the structure of Hong Kong’s banking system, enhancing its vital role in strengthening Hong Kong’s status as an international financial centre,” said Eddie Yue Wai-man, chief executive officer of the HKMA in a statement.

The move would “revitalise institutions in the category of deposit-taking companies and enhance their flexibility and efficiency in conducting business and meeting customers’ needs,” he added.

The HKMA has invited views on its proposals until September 25. If approved it would be the first major change to the four-decade old three-tier banking system, streamlining it into a two-tier licensing mechanism.

Deposit-taking companies are normally owned by banks and offer consumer finance, securities business or other commercial lending. They have the lowest capital requirement among the three tiers, at only HK$250,000 (US$32,000), while they can accept deposits of HK$100,000 or above that must be held for at least three months. They account for a tiny proportion of customer deposits in Hong Kong.

Some 160 licensed banks form the core of the local banking system, accounting for 99% of local deposits. These firms need to have a minimum capital requirement of HK$300 million. They can accept deposits of any size and offer a full range of banking services.

The second tier of 15 restricted licence banks are mainly merchant banks serving the capital markets. They need to have at least HK$100 million capital and can take deposits of HK$500,000 or above.

Under the new proposals, the requirements for licensed banks and restricted licence banks will remain the same. The 12 third-tier players can upgrade their capital requirements to join one of the other two categories or exit the market voluntarily.

 

Quant launches Overledger Platform

Quant Network, the UK-based blockchain-for-finance developer has opened its infrastructure platform to business customers.

The company’s Overledger Platform, used in the Bank of England (BoE) and Bank for International Settlements’ (BIS) retail central bank digital currency (CDBC) project is now available via software-as-a-service (SaaS), Quant said in a news release.

“Until now, businesses have struggled to capitalise on the benefits provided by blockchain because it’s a complex technology requiring specialist skills,” said Martin Hargreaves, Quant’s chief product officer. “Overledger Platform changes all that. It’s simple to use, continually updated, and integrates seamlessly with your existing systems. That’s how it unlocks the power of blockchain for everyone.”

According to the release, Overledger is a low code SaaS that enables customers to issue digital money and interoperable assets with a few clicks, transfer them from one blockchain network to another, and create new apps that will run on any network.

The company says Overledger permits developers to accomplish in minutes what could otherwise be months-long projects. “The launch of Overledger Platform comes at a critical time for the financial services industry,” Quant said in the news release. “Although the unregulated crypto experiment has failed, blockchain-based infrastructure and systems, regulated tokenised money and digital assets are still central to innovation.”

Quant partnered with digital transformation company, UST, on the project. Quant provided the underlying infrastructure and blockchain platform, secure smart contracts and interoperability of central bank ledgers. UST built the frontend API layer used by the BoE in “Project Rosalind”.

 

Yuan usage soars in Argentina

More than 500 companies in Argentina have reportedly requested to pay for imports using Chinese yuan (CNY) as the country’s US dollar shortage intensifies. “The central bank doesn’t have dollars so it needs the emergency aid China is offering,” a trade economist in Buenos Aires explained.

The Argentine customs agency has revealed that over 500 companies in Argentina, spanning various industries such as electronics, auto parts, textiles, oil, and mining, have requested to use CNY for import payments, according to a recent Bloomberg report.

As the scarcity of US dollars persists in Argentina, the use of CNY has reached an all-time high in the country. According to officials from the country’s central bank, import payments authorised in the Chinese currency have amounted to US$2.9 billion.

Marcelo Elizondo, a trade economist in Buenos Aires, commented: “The central bank doesn’t have dollars so it needs the emergency aid China is offering. For Argentina, its currency ties to China represents an emergency, but for China it’s a point of leverage to take advantage of a geopolitical opportunity.”

Whirlpool Corp. is among the companies seeking to utilise China’s currency for import payments. The US appliance manufacturer invested US$52 million in its new factory outside Buenos Aires last year. Juan Carlos Puente, president of Whirlpool Latin America, was quoted as saying: “We’ve had to stop the factory at some points and that’s not good for business, productivity nor quality … We’re working to see how we can leverage this new avenue of flows to be able to continue importing materials.”

According to Argentina’s customs agency, between May and August, Argentine companies, including Mirgor and Newsan, made import payments totalling US$630 million in CNY.

China recently granted Argentina access to over half of a US$18 billion currency swap line, aimed at bolstering trade between the two countries. This bilateral swap agreement, which has been in place since 2009, serves as a contingency measure to enhance foreign reserves during periods of liquidity crises.

 

UK to work more closely with EU on financial services

The UK has signed a pact with the European Union (EU) to increase co-operation on financial services. It will set up a forum where the EU and UK can meet twice a year to discuss financial regulation and standards.

The long-awaited move is regarded as a sign that post-Brexit, the UK is willing to work more closely with the EU. Chancellor Jeremy Hunt said building a constructive relationship was of mutual benefit, as the UK and EU financial markets were "deeply interconnected".

The memorandum of understanding being signed was first outlined in the UK-EU Trade and Co-operation Agreement, in the wake of the UK losing unfettered access to EU markets under Brexit.

The text was published last month, and the MoU itself amounts to a list of broad shared objectives.

However, it falls short of representing an “agreement” as the UK is not committing to align with the EU on regulation, nor conceding to any previous demands Brussels may have signalled, such as moving the processing of some euro-denominated financial instruments out of London.

It does, however, commit both sides to a regular twice-yearly meeting to discuss “voluntary regulatory co-operation on financial services issues"
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“Both sides will share information, work together towards meeting joint challenges and co-ordinate positions,” the MoU says. Daniel Ferrie, a spokesperson for the European Commission, said the move would “set up a forum to facilitate dialogue”.

 

BNP Paribas in talks as France’s Orange looks to exit retail banking

Orange, France's biggest telecoms operator, has begun exclusive talks with bank BNP Paribas with the aim of bringing its online retail banking clientele under BNP Paribas' umbrella, the company confirmed in a statement.

If successful, the talks would put an end to Orange's venture into the retail banking sector, which started after the acquisition of a majority stake in Groupama Banque in 2016. and represented a key strategic move by former Orange CEO Stephane Richard.

Richard's successor, Christel Heydemann, decided to get rid of the loss-making unit following a strategic review, sources close to the matter said. But the telecoms operator, advised by M&A firm Lazard, has faced difficulties in trying to find a buyer for its online bank, which has amassed more than one billion euros (US$1.09 billion) of losses since its launch, the sources said.

The end of Orange Bank's experiment would confirm the domination of French traditional lenders in the online banking field, with Société Générale’s Boursorama being the clear leader with close to five million clients in the country.

Other independent digital-only banks like Germany's N26 and Britain's Revolut also compete against French banks.

The BNP Paribas-Orange talks would aim to create a partnership under which Orange Bank's retail clients would be invited to become customers of BNP Paribas' online bank Hello Bank!, the sources said.

Orange Bank has around two million clients in France and Spain, a figure that also includes close to one million clients who signed insurance contracts managed by BNP Paribas' Cardif insurance division, the sources said. A fourth of this clientele -- 500,000 -- are French retail clients who would move to Hello Bank!, which will aim to lure them via "attractive offers", they added.

BNP Paribas’ online bank has 3.3 million customers in Europe, of which 800,000 are in France.

Potential hurdles for the proposed partnership to succeed include the fate of the 700 employees currently employed by Orange Bank, which the telecoms operator will aim to redeploy within the company, the sources said.

 

ESG funds rebrand to avoid opposition

Fund managers have grown weary of the growing political scorn aimed at the environmental, social and governance (ESG) label, so many have decided to call their funds something else reports Bloomberg.

Thematic exchange-traded funds (ETFs) – ones that focus on stocks around a particular subject – have taken over as the most common way to launch products in areas such as clean energy or gender diversity. According to a report by RBC Capital Markets, 56% of sustainable fund debuts so far in 2023 have been labelled thematic rather than ESG. This follows a similar breakdown seen last year, writes RBC Capital Markets’ Sara Mahaffy.

BlackRock CEO Larry Fink has recently begun distancing himself and his firm from ESG investing and recently said that he was “ashamed” to be part of the political debate over ESG factors driving investment decisions. 

“I’m not going to use the word ESG because it’s been misused by the far left and the far right,” Fink said last weekend during an appearance at the Aspen Ideas Festival in Colorado.