The New Money Brief covers the global rise of digital currencies and how they are disrupting finance and the world of payments, and much else.
Delivered several times a week. Created and edited by Marc Andrew.
“Almost half of America’s 4,800 banks are already burning through their capital buffers. They may not have to mark all losses to market under US accounting rules but that does not make them solvent. Somebody will take those losses.
“It’s spooky. Thousands of banks are underwater,” said Professor Amit Seru, a banking expert at Stanford University. “Let’s not pretend that this is just about Silicon Valley Bank and First Republic. A lot of the US banking system is potentially insolvent.”
The full shock of monetary tightening by the Fed has yet to hit. A great edifice of debt faces a refinancing cliff-edge over the next six quarters. Only then will we learn whether the US financial system can safely deflate the excess leverage induced by extreme monetary stimulus during the pandemic.’
Source: The Telegraph
A myriad of unforeseeable “consequences” could be brought about by retail central bank digital currencies (CBDCs), the managing director of the International Monetary Fund has claimed.
The IMF's Kristalina Georgieva erred on the side of caution regarding retail CBDCs in a May 1 interview at the Milken Institute’s 2023 Global Conference.
Georgieva explained the IMF considers retail CBDCs to have far more room for error than wholesale CBDCs.
“We think that wholesale CBDCs can be put in place with fairly little space for undesirable surprises, whereas retail CBDCs completely transform the financial system in a way that we don’t quite know what consequences it could bring.”
Retail CBDCs are state-backed virtual currencies issued by central banks for use by consumers and businesses.
Wholesale CBDCs are similarly central bank-issued but are designed to allow financial institutions to carry reserve deposits with a central bank.
Source: Cointelegraph
Once again, Washington is turning to its favorite Wall Street cleaning crew to pick up after the US banking industry. After almost two months of smoldering turmoil in the banking sector — and investors worrying there could be more trouble ahead — BlackRock has only just begun its work.
The firm’s Financial Markets Advisory unit, a sort-of financial-crisis SWAT team, has been retained to size up and sell investments related to two failed lenders, Silicon Valley Bank and Signature Bank. A third, First Republic Bank, has been sold to JPMorgan Chase & Co., but markets remain on edge.
For FMA, the client is the Federal Deposit Insurance Corp., and the challenge is to find buyers for $114 billion of securities left to the US government by SVB and Signature, all while not further ruffling financial markets.
Source: Bloomberg
Bhutan’s investment arm and Nasdaq-listed company Bitdeer Technologies Group plan to seek investors for a fund worth up to $500 million that will be used to develop green crypto mining in the Himalayan kingdom.
Fund raising targeting institutional investors will begin at the end of May and the goal is to set up carbon-free digital mining that taps Bhutan’s abundant hydroelectric power, according to a joint statement Wednesday.
Mining is the least risky way for Bhutan to tap crypto opportunities and for now the nation will focus on Bitcoin, Ujjwal Deep Dahal, the chief executive officer of the investment arm, Druk Holding & Investments, said in an interview.
Source: Bloomberg
What’s the Difference Between a Stablecoin and a Cryptocurrency? Stablecoins are a type of crypto, but they're different from regular cryptos Bitcoin and Ethereum.
While cryptocurrencies like Bitcoin and Ethereum dominate headlines with bulletins about astronomical all-time highs or heavy losses, stablecoins typically take up less of the limelight.
Although popular stablecoins like Tether, USD Coin, DAI, and Binance USD all sit among the landscape's largest cryptocurrencies based on market capitalization, their roles are largely understated.
Source: Make Use Of
Today, most merchants looking to sell a product or service online can quickly get their payment system live with the help of a modern checkout platform. If the merchant works in a “high-risk” industry like games, sports betting, telehealth, travel, or cannabis, however, it’s more complex.
Such industries lack viable out-of-the-box software products that help with payment-adjacent issues such as identity management (for games companies), payment reconciliation (for telehealth businesses), and logistics compliance (for alcohol and cannabis businesses). While there are a few big payment-acceptance incumbents to specifically serve some of these industries, there’s now an opportunity to couple payments with a vertical-specific software layer to offer better compliance, wallets, tools for identity management and fraud detection, reconciliation, and more.
These industries are larger than you may expect, and they are also growing their online presence quickly. Games, cannabis, telehealth, and sports betting, for example, each represent billions of dollars in annual payment volume and spend (see the chart below for a few examples). Additional high-risk industries, like travel, online dating, and adult entertainment, also see billions of dollars of annual spend:
Source: Andreessen Horowitz
More:
Gaming, cannabis and telehealth are some of “high-risk” niches that would benefit from more vertical-specific payments software, two partners for the firm contend.
Partners at AH Capital Management, the big-name venture capital firm better known as Andreessen Horowitz, see an opportunity for entrepreneurs to design payment systems in what they call “high-risk” niches, such as gaming, sports betting and cannabis.
Those areas, where there are elevated fraud and customer chargebacks, aren’t having their particular needs met by basic payment software products, two partners wrote in a post on the investment firm’s website. So, that creates an opening for payments developers to create vertical-specific software with better tools for compliance, identity management and fraud detection, among other improvements, the AH Capital Management authors wrote in their Monday website post.
Source: Payments Dive
Can inherently volatile cryptocurrencies become safe-havens? Apparently they can in some parts of the world, such as Argentina and Turkey, where soaring prices and tumbling local currencies have forced people to seek refuge in digital coins.
Ownership of digital currencies in Turkey was the highest in the world at 27.1% followed by Argentina at 23.5% -- well above global crypto ownership rate estimated at 11.9% -- according to data from research firm GWI.
What's common to Turkey and Argentina besides their pole positions in crypto adoption is high inflation, which has led to crumbling currencies and capital controls to deter local residents from taking money out. Turkey's annual inflation was 50.51% in March, Argentina's was even higher at 104%.
The lira and peso have been plunging and are at record lows. Argentina's peso trades around 464 per dollar in the black market , more than double the official exchange rate of 222.
Source: Reuters
Harmonising cross-border payments is arguably one of the most complex topics in the payments universe. But achieving the combination of cross-border payments and instantaneity, as is planned for roll-out across the European Union, is even more challenging.
Interoperability, level of services, security, risk, and costs are all key elements to be addressed across the multiple jurisdictions involved. Even when countries share a geographical proximity and the same currency as is the case in the EU. In front of such a mandate to make Instant Payment universally available across the EU, the European financial industry needs to prepare for in depth change. As said by Mairead McGuinness, Commissioner for financial services, financial stability, and Capital Markets Union: `Moving from `next day` transfers to `ten seconds` transfers is seismic and comparable to the move from mail to e-mail.
Today, despite the fact that two-thirds of the payments services providers in the EU already propose Instant Payments in Euros, the EU market remains largely disjointed, a situation which is leading to a low rate of Instant Payments adoption, with Instant Payment only representing 11% of all payments across EU in 2022. With the European Commission mandating the European marketplace to move to Instant Payments, this fragmentation should reduce, allowing the remaining seventy million accounts that do not allow their holders to send and receive euro instant payments to join the race.
Source: The Paypers
On the the Digital “Chicago Plan”
Here’s a list of some of the great financial problems of the day: governments are overindebted and the cost of servicing that debt is rising; central banks have swollen balance sheets and face losses on securities holdings; commercial lenders are exposed to rising interest rates and to bank runs fanned by social media; financial regulations are plainly not up to the task; inflation is hard to control; and the fate of the euro zone remains in doubt.
To cap it all, central bankers are having trouble finding the appropriate interest rate that will bring inflation back under control without simultaneously collapsing the financial system.
These multiple problems appear intractable. In theory, however, they could all be resolved at a stroke. In the early 1930s, economists Henry Simons and Frank Knight of the University of Chicago and Irving Fisher of Yale identified what they claimed was the essential flaw of modern banking…
Source: Reuters
The future of retail and peer-to-peer payments is undoubtedly digital. As the use of cash plunges around the world, central bank digital currencies are an inevitable part of this transition.
Most central banks are bowing to this reality, either experimenting with or preparing the ground for CBDCs — as instruments for broadening financial access, increasing payment system resilience and ensuring monetary sovereignty. Even as these digital tokens gain momentum, however, the case for them has weakened.
What has changed?
In the first place, the landscape looks less promising in practice than it did in theory a couple of years ago. China, Brazil and India are undertaking trials but face scant demand for their CBDCs, as they already have excellent digital payment systems. Sweden’s Riksbank has concluded a multiyear pilot but a parliamentary committee has found no pressing need for an e-krona. Nigeria’s eNaira has been a flop, although recent cash shortages have increased its usage.
Source: Financial Times
DWS has agreed a strategic partnership with US-based digital assets manager Galaxy Digital to launch a “comprehensive” range of cryptocurrency-focused exchange traded products for investors in Europe. Germany’s largest provider of retail funds and the New York-headquartered firm also intend to “subsequently explore other digital asset solutions”. DWS, the €821bn listed fund house controlled by Deutsche Bank, will be Galaxy Digital’s exclusive partner for crypto ETPs in Europe.
The Frankfurt-based firm and Galaxy Digital’s asset management unit will work together to provide European investors with access to the $1tn digital assets market “through cost-effective investment solutions that are easy to access via traditional brokerage accounts”.
Source: Financial Times
CSI’s ambitious plan to nearly triple annual revenue comes just months after the $1.6 billion acquisition of the company by the investment firms Centerbridge Partners and Bridgeport Partners was completed last November. The Paducah, Kentucky-based company provides financial technology, regulatory technology and cybersecurity services to community banks across the country.
That purchase came as the payments industry and the broader fintech market prepared at the end of last year for a potential increase in dealmaking.
Culbertson estimates CSI’s market share at about 10% in competition with larger rivals that include Fiserv, Fidelity National Information Services, or FIS, and Jack Henry & Associates.