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US regulatory progress for crypto – Industry roundup: 9 June

US regulatory overhaul proposed for crypto

Cryptocurrency regulation is making progress in the US, with Senators Cynthia Lummis and Kirsten Gillibrand proposing what is “set to be the biggest Bitcoin bill in history” according to Marcus Sotiriou, analyst at the UK-based digital asset broker GlobalRock.

The Responsible Financial Innovation Act would empower the Commodity Futures Trading Commission (CFTC) to regulate most of the industry. The Lummis-Gillibrand bill would classify the majority of digital assets as commodities; thereby giving the CFTC control of regulating crypto, which are deemed to be commodities and includes most of the major cryptocurrencies. It would also mean the Securities and Exchange Commission (SEC) overseeing the regulation of coins that are deemed securities.

Transactions under US$200 would be tax exempt. “This removes a huge burden for merchants who have been deterred by this tax issue,” says Sotiriou. “In addition, stablecoins will have to be 100% backed, which will provide confidence to many investors, especially after recent events with TerraUSD (UST). Even though this bill has not passed yet, it is very promising, as it would provide regulatory clarity which many institutions are seeking before they invest in the space.”

Reflecting bipartisan support for the Act, Gillibrand is a Democrat from New York who sits on the Senate Agriculture Committee, while Lummis is a first-term Republican from Wyoming on the Banking Committee. They are promoting the Act as the culmination of months of collaboration in the House and Senate and says that it represents a critical first attempt to structure the markets for digital assets with long-awaited legal definitions. 

Their offices describe the bill as “landmark bipartisan legislation that will create a complete regulatory framework for digital assets that encourages responsible financial innovation, flexibility, transparency and robust consumer protections while integrating digital assets into existing law.”

Meanwhile, the multinational hedge fund Citadel Securities is reported to be building a cryptocurrency trading ecosystem that aims to create more efficient access to deep pools of liquidity for digital assets. It would facilitate the safe, clean, compliant, and secure trading of digital assets. Wealth managers, market makers, and other industry leaders are expected to join the marketplace ahead of launch.

Fidelity and Charles Schwab are also reportedly helping to build the platform. Fidelity have made significant moves recently in the crypto space, as have announced that they will allow account holders to invest a portion of their retirement funds in Bitcoin. Fidelity also aims to hire 110 blockchain experts by year-end as it expands beyond Bitcoin-related services. “As Fidelity are one of the biggest asset managers in the world, this will encourage more asset managers to enter the industry,” says Sotiriou.

Treasury blocks US investors from buying Russian debt

New US sanctions guidance in response to Russia’s invasion of Ukraine says that investors are not permitted to buy Russian corporate or sovereign debt and can only divest themselves of it to foreign buyers.

The US Treasury Department’s move to block US investors from making purchases of Russian debt in secondary markets would appear to mark an expansion from existing policy that only prohibited purchases of newly issued Russian government debt and some Russian corporate debts.

In its latest guidance, the Treasury Department announced that US persons remain prohibited from new investment in Russia, which now includes “purchasing both new and existing debt and equity securities issued by an entity in the Russian Federation.” Investors would still be allowed to sell or transfer securities provided they do so to a non-US counterparty, according to the Treasury, and they can also continue to hold the already issued debt.

The announcement, made on 7 June brought trading activity almost to a halt according to fund managers as investors scrambled to understand the new restrictions. A spokesperson for the Treasury’s Office of Foreign Assets Control (OFAC) confirmed that the rules apply to both corporate and sovereign debt as well as equities.

“Consistent with our goal to deny Russia the financial resources it needs to continue its brutal war against Ukraine, Treasury has made clear that US persons are prohibited from making new investments in the success of Russia, including through purchases on the secondary market,” said a Treasury spokesperson.

Removing a sizeable number of potential global buyers from the equation means it will likely be harder to sell any Russian debt or stocks and could put further downward pressure on Russian security prices. The move could also make it harder for Russia and its domestic companies to raise debt from foreign investors.

Russia had already closed its stock market to foreign investors when its troops invaded Ukraine on 24 February in a bid to arrest the sharp fall that the country saw in stock prices.

The Treasury guidance comes as Russia approaches its first sovereign default since 1998, following a separate US Treasury move last month to block US investors from receiving bond interest or repayments from Moscow. The Russian government has a 30-day grace period in which to find a way to get payments due on 27 May to western investors and avoid a default, which could trigger legal action from bondholders seeking to recover their investment.

The Credit Derivatives Determinations Committee, a derivatives industry panel, last week ruled that Russia’s failure to pay a slice of extra interest on one of its bonds will trigger pay-outs on credit default swaps, insurance-like contracts used to protect against debt defaults.

Bridgewater bearish on US and European corporate bonds

The Wall Street Journal reported this week that US investors are “going bargain hunting for beaten-down corporate bonds,” but the world’s largest hedge fund, Bridgewater, predicts a corporate bond sell-off later this year in line with recent gloomier forecasts for the global economy.

The WSJ notes that the recent upturn in demand marks “a reversal from earlier in the year when investors sold off even the highest-quality debt. The turnaround highlights the tensions pressuring financial markets. In recent weeks, investors have grown more confident about the Federal Reserve’s path for raising interest rates to wrangle inflation – and more worried that, as a result, growth has begun to slow.”

However, one of Bridgewater’s chief investment officers (CIO), Greg Jensen, told the Financial Times that his firm’s bet against US and European corporate debt reflects its view that the recent weakness in key financial markets will not be short-lived. “We’re in a radically different world,” he told the paper. “We are approaching a delay.”

Jensen, who helps make investment decisions with co-CIO Bob Prince, warned that inflation will persist more than economists and the market are currently predicting, putting pressure on the US Federal Reserve to lift interest rates higher than expected by many on Wall Street.

He added that if the Fed’s policymakers committed to bringing US inflation back to its 2% target, “they could tighten in a very strong way, which would then burst the economy and probably hurt the weaker [companies] in the economy.

“We think nominal growth will hold up. The real economy will be weak, but not a self-reinforcing weakness.”

Jensen said the Fed’s decision to tame inflation, coupled with stricter policies from many other central banks around the world, would drain liquidity from the financial system. In addition, the prices of many assets that rose last year would come under pressure.

“You want to be on the other side of that liquidity gap, out of assets that need the liquidity and in assets that don’t,” he said

However, despite the Fed’s current hawkish rhetoric, Jensen told the FT that he ultimately believed that the Fed would blink and accept inflation above its 2% target. Policymakers, in his view, will be unable to tolerate a stock market sell-off and the high unemployment that would probably result from raising rates high enough to bring inflation down to that threshold.

Otherwise, he estimated stocks could “crash” a further 25% from current levels if the Fed was unrelenting in its push to tackle inflation.

Citi looks to recruit more Asia and tech staff

Citigroup plans to recruit around 3,000 new staff for its institutional business in Asia as it steps up its presence in the region and is seeking more than 4,000 new tech employees to help move its institutional clients online in the wake of the coronavirus pandemic.

Most of the new recruits in Asia will be based in Hong Kong and Singapore, with smaller numbers going to India, South Korea, China and Australia, where the group has large institutional businesses. They will work in areas including investment, corporate and commercial banking, in roles involving trading, securities services and trade finance, said Citi spokesman James Griffiths.

“Despite exiting retail banking outside Hong Kong and Singapore, this region remains front and centre of Citi's global strategy,” he added. “We’ve been in Asia for 120 years. We have a very strong local presence.”

Citi announced in April 2021 that it intended to exit retail banking in Asia except for Hong Kong and Singapore, which it designated as two of the bank’s four global wealth hubs. In January thus year it announced that it had hired 5,500 junior employees for its Asia businesses over the last two years, as part of a target to recruit 6,000 by 2023.

Citi has around US$200 billion in wealth assets in Asia, and the bank aims to grow client assets by US$150 billion in the region by 2025, Griffiths said. The bank’s revenues in Asia for 2021 were in excess of US$10 billion.

The group also plans to hire more than 4,000 tech staff to help move its institutional clients online in the wake of the pandemic.

More than 1,000 of the recruits will join the markets technology team as part of an aggressive growth strategy, said Jonathan Lofthouse, Citi’s head of markets and enterprise risk technology. “We're trying to digitalise as much of our client experience as possible, front and back, and modernise our technology,” he added. “Those firms that can digitalise fastest are going to create competitive advantage.”

Demand is growing for data specialists across banking and the wider jobs market. Lofthouse said pay was a factor in getting new workers through the door, but training and flexible working models would help to keep them. Citi currently has more than 30,000 software engineers.

“Everyone in lockdown suddenly had to do everything digitally, whether than was getting groceries delivered or watching more Netflix,” he said. “We’ve always seen the tech market to be competitive but particularly at the moment, coming out of the pandemic, we've seen a digital explosion across industries.”

Reserve Bank of Australia hikes interest rate again

The Reserve Bank of Australia (RBA) announced the biggest single rise in the cash rate in 22 years as Australia’s central bank tries to dampen inflation.

Following its first interest rate hike since November 2010 at the start of last month. The RBA board at its regular monthly meeting lifted its cash rate target 50 basis points to 0.85%. Economists were again surprised by the size of the move, having been mostly split between predicting a 25- or 40-point increase, according to Bloomberg. Last month’s 25 basis points hike to 0.35% was also more than anticipated.

Westpac was the first of Australia’s big four banks to pass on the increase. “From 21 June, Westpac will increase home loan variable interest rates by 0.50% per annum for new and existing customers,” the bank announced.

“Inflation in Australia has increased significantly,” said the RBA governor, Philip Lowe, in a statement. “While inflation is lower than in most other advanced economies, it is higher than earlier expected.

“Inflation is expected to increase further, but then decline back towards the 2% to 3% range next year,” Lowe said. “Higher prices for electricity and gas and recent increases in petrol prices mean that, in the near term, inflation is likely to be higher than was expected a month ago.”

Market commentators suggested that two consecutive higher than anticipated monthly rate rises showed that the RBA recognised it was “behind the curve”. Firetrail Investments’ head of investment strategy, Anthony Doyle, said interest rates were now being lifted to more normal levels for an economy with 5.1% inflation and a 3.9% unemployment rate.

“The RBA has been slow to recognise the inflation problem in the Australian economy, and in surprising the market is trying to win back some of its inflation-fighting credibility,” he commented.

Nigeria’s central bank bars bank neutral cash hubs from FX transactions

The Central Bank of Nigeria (CBN) has announced that the country’s Bank Neutral Cash Hubs (BNCHs) are not permitted to receive, disburse, or engage in any transaction involving foreign currency.

The central bank added that the hubs – which provide a platform for customers to make cash deposits and receive value irrespective of the bank with which their account is domiciled –are also barred from carrying out investing or lending activities; sub-contracting another entity to carry out their operations as well as any other activities that may be prohibited by the CBN.

The decision was announced in the Guidelines for the Registration and Operation of Bank Neutral Cash Hubs (BNCH) in Nigeria, which was posted on the CBN website.

The initiative, which was developed in collaboration with the Banker’s Committee is in furtherance of the central bank’s mandate to promote a sound financial system in Nigeria. The BNCH is among the initiatives from the Nigerian Cash Management System (NCMS) conceived by both parties to reduce cost and improve operational efficiency in the country’s cash management value chain.

The BNCHs serve as cash collection centres to be established by registered (licensed) processing companies or Deposit Money Banks (DMBs) based on business needs.

According to the CBN the hubs are, however, authorised to receive Naira denominated deposits on behalf of financial institutions from individuals and businesses with high volumes of cash. They are also allowed to disburse Naira denominated withdrawals on behalf of financial institutions to individuals and businesses with high volumes of cash as well as any other activities that may be permitted by the CBN.

Under the programme, only deposit money banks and Cash Processing Companies (CPCs) are permitted to apply for registration of a BNCH.

The guidelines also specified the financial requirements for approval to operate as BNCH, which may be amended by the CBN as it deems necessary. These include the non-refundable application fee of N100, 000 (US$240); and a non-refundable approval fee of N500, 000.

Russia’s Rostec “has devised SWIFT alternative”

Russian state-owned company Rostec claims that one of its subsidiaries has developed a blockchain-based international transfer system which it describes as “a real alternative to SWIFT in international settlements.”

Rostec – officially the State Corporation for Assistance to Development, Production and Export of Advanced Technology Industrial Product Rostec – was established in 2007. Headquartered in Moscow, it comprises around 700 enterprises under 14 holding companies of which 11 are in the defence sector and three in civil sectors.

The CELLS blockchain platform was developed by the Novosibirsk Institute of Program Systems (NIPS) and supports multicurrency payments, digital currency and identity. Rostec says that the platform can process more than 100,000 transactions per second.

“The system will make it possible to switch to settlements in national currencies, eliminate the risk of sanctions and ensure the independence of the national financial policy for clearing participants,” said Oleg Yevtushenko, Executive Director of Rostec.

Although SWIFT has barred access to several Russian banks since the invasion of Ukraine, Russia has been looking for ways to circumvent its network for years. In 2019 it suggested that the five-BRICS nations of Brazil, Russia, India, China, and South Africa develop a BRICS digital currency.

M&G launches global sustainable corporate bond fund

Global investment manager M&G is expanding its range of sustainable investment funds with the launch of the M&G Sustainable Global Corporate Bond Fund in a strategy “designed to maximise sustainability outcomes within the context of a global investment grade bond universe.”

The firm said that the launch represents the Public Fixed Income division’s first global corporate bond fund to utilise its dynamic and value-driven investment approach, while putting sustainability factors at the core of the proposition. “The Fund will aim to drive positive environmental and social outcomes through a dedicated allocation to environmental, social and governance (ESG)-themed bonds. This includes investments in green bonds, social bonds, sustainability bonds or sustainability linked bonds.”

M&G’s release adds that the Fund aims for an ESG quality uplift as well as an improved climate profile compared to the investment universe of the global corporate bond market. Further, the fund ensures environmental and social safeguards are in place and minimum ESG quality standards are established to reduce the risk of unexpected revenue loss or business disruption related to insufficient management of material ESG risks.

M&G names Ben Lord, manager of global corporate credit and inflation-linked portfolios, as manager of the strategy, with Mario Eisenegger, a manager specialising in ESG and sustainability, deputising. The Fund is supported by the firm’s in-house global credit research capability, stewardship and sustainability specialists and its dedicated fixed income dealing desk.

“Launching or evolving investment strategies to deliver more sustainable outcomes is a key part of M&G plc’s sustainability plans, which includes achieving net zero carbon emissions across its investment portfolio by 2050 at the latest,” the release added.

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