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Global gosbankification risk is now at orange



“If it’s free, you’re the product” has become the adage of our digital times.

There is, as we are learning, always some iota of risk in giving something of yourself away for free.

In the best-case scenario, your data will be harvested in line with your personal sharing preferences and used to advertise products and content to you that you actually want and benefit from. That’s positive sum progress.

In the worst-case scenario your personal data will be harvested without permission and potentially used against you, whether that’s for the purposes of sending you political propaganda when you are most susceptible, inferior products you don’t really want to use or for the purposes of getting you to behave in ways that benefit others. That’s not progress, it’s a form of indentured servitude.

Understanding the spectrum is becoming vitally important. But it’s also crucially important to understand that these issues don’t just apply to the usual social networking platforms.

Currency is a social network platform in its own right, complete with its own data harvesting quandaries and ethical issues.

Nowhere are these quandaries (and trade-offs) more obvious than in China’s Digital Currency Electronic Payment (DCEP) project and the country’s related efforts to hook popularise the system with users abroad.

It’s easy to get excited about the potential upsides of a digital yuan system, such as low-cost frictionless payments across-borders. And mainstream media coverage is certainly doing its bit to endlessly highlight these aspects.

But the bigger issue about who controls the related data and what they do with it must not be lost sight of. The existential risks to liberty are real and very concerning.

We turn in that regard to the recent policy brief put out by the Australian Strategic Policy Institute’s International Cyber Policy Centre.

Here’s the thrust of the issue in their eyes (our emphasis):

What’s the problem?

China’s central bank digital currency, known as ‘DC/EP’ (Digital Currency / Electronic Payment), is rapidly progressing and, if successful, would have major international implications that have not yet been widely considered by policymakers.

DC/EP would have ramifications for governments, investors, and companies, including China’s own tech champions. It has the potential to create the world’s largest centralised repository of financial transactions data and, while it may address some financial governance challenges, such as money laundering, it would also create unprecedented opportunities for surveillance.

The initial impact of a successful DC/EP project will be primarily domestic, but little thought has been given to the longer term and global implications.

DC/EP could be exported overseas via the digital wallets of Chinese tourists, students and businesspeople. Over time, it is not far-fetched to speculate that the Chinese party-state will incentivise or even mandate that foreigners also use DC/EP for certain categories of cross-border RMB transactions as a condition of accessing the Chinese marketplace.

DC/EP intersects with China’s ambitions to shape global technological and financial standards, for example, through the promotion of RMB internationalisation and fintech standards-setting along sites of the Belt and Road Initiative (BRI). In the long term, therefore, a successful DC/EP could greatly expand the party-state’s ability to monitor and shape economic behaviour well beyond the borders of the People’s Republic of China (PRC).

What this sums up is that the rollout of digital yuan internationally is linked to more than just the desire to provide cheap and frictionless cross-border transactions.

There is a price to pay for such services. As the ASPI notes it comes at the cost of potentially “unconstrained data collection and the creation of powerful new tools for social control and economic coercion”.

The PBoC will no doubt insist that its currency system can maintain privacy. But as we’ve noted before, even in the western central banking sphere such promises run into regulatory conflicts. In the Chinese sphere, there’s even less reason to believe a one-party state with a habit of disappearing critics can keep intrusion and surveillance to a minimum.

John Garnaut and Dr Matthew Johnson offer some further food for thought in the briefing:

Statements from the CCP and financial insiders indicate that a key driver of DC/EP is the party’s need for a financial architecture which exists outside the SWIFT network and other US-dominated alternatives. The imperative of operating beyond the reach of US monitoring and law enforcement has come to the fore in recent months, as the US targets financial sanctions against CCP officials and entities in response to human rights and national security concerns. ‘We must make preparations to break free from dollar hegemony and gradually realise the decoupling of the RMB from the dollar,’ said Zhou Li, a former deputy minister of the International Liaison Department, in a June 2020 article.

They go on to ask what problem is a Chinese CBDC trying to solve anyway? We know it’s not related to the application of blockchain efficiency because that in itself, as FT Alphaville has reported at length, is a massive overhyped ruse.

What’s more, when it comes to efficiency, WeChat and Alipay were already providing a seamless and frictionless services to users all across China.

Where there were associated risks, the PBoC acted to contain them back in 2019 when it forced Alipay and WeChat to hold the entirety of their customer floats at the central bank on a full-reserve basis. The move represented prudent risk management but also, to some degree, a stealth takeover of those services by the Chinese state. In that context, a CBDC does little more than make the implicit explicit (ie. that payments are now entirely state-controlled) while opening a channel for the PBoC to mine and harvest personal data for political purposes directly.

As the ASPI authors note, this total-control approach is in line with an overall policy of reducing risk at the cost of turning society into a Minority Report pre-crime dystopia:

Xi’s position that ‘financial risk should not occur’ is consistent with the party’s state security strategy, which prioritises pre-empting risk before it can emerge. This is embedded in the party’s state security work through the concept of ‘financial security’ (金融安全). Financial security means stability on the party’s terms. It calls for reforming the financial system by establishing supervision and control mechanisms, total financial governance, and strengthening China’s financial power.

International social management

There’s a reason why FT Alphaville has been arguing for a long time that CBDCs are a sort of Pandora’s Box and that once the box is opened, it will be very difficult to get the old currency structures we have always depended on back.

Yes the dollarised international system was and remains biased in favour of US controls and law enforcement. But China’s CBDC vision threatens to undermine privacy on a hitherto unseen level.

The difference between the Chinese CBDC system and the old dollar system is that under the latter the user was only ever asked to volunteer personal information to relevant financial intermediaries on a need-to-know basis.

Such intermediaries would then make a judgment about the user’s trustworthiness, brokering his or her information on an anonymised basis through the broader socio-economic system. Importantly, the respective banking networks always remained siloed with all their respective users retaining anonymity between them, much like the workings of a sleeper-cell network.

Another crucial difference is that banks, unlike today’s social media or CBDC platforms, would take pride in operating as secret keepers. Their intent was not to sell as much data as possible about a user but to give away as little of it as possible. Their pathway to monetisation was focused instead on the soundness of the judgments they made about users’ contributions to economic wellbeing and society, not the data they could sell about them.

That’s not to say banks didn’t have the power to black list or render certain demographics unbanked. They did and still do. But that power was and is kept in check by a free and competitive market, meaning rejection by one bank didn’t necessarily constitute rejection by the entire system. And in the worst-case scenario (one of total system rejection) the user could and can still always resort to cash.

In a CBDC world — especially a Chinese CBDC world — there are no such privacy or exclusion guarantees. A user can be frozen out of the system entirely, left to starve because they can’t access payments for food, at the whim of a warrantless government directive.

CBDCs, because they are cash, are the literal last resort already. And since they do pose an existential threat to the funding mechanisms that allow competitive “secret-keeping” banks to exist at all, we need to think long and hard about the powers we bestow upon the institutions battling to issue them.

Control through access

As a system of control, access-brokering is nothing new. Journalists have long bowed to the whims of government censors for access to war zones, press briefings or government facilities. PRs, meanwhile, have always attempted to control stories by threatening to limit access to information or executive interviews.

As a society, however, we are only beginning to grapple with the limitations imposed upon our freedoms by the power social media platforms have to determine access into their networks.

As it stands platforms like Twitter and Facebook can enforce far more stringent policies on hate speech and alternative facts than the nations their corporate head quarters reside in. The argument is, if you don’t like their terms, you don’t have to use their systems. You are free to leave. You can of course lobby the management to change their minds, but you have no democratic right to be listened to.

In the modern digital-networked world, access is king.

The same access power resides (and has always done so) in nation states and their respective currency systems.

If you want access to the UK, you’re supposed to abide by the terms and conditions of the land. The same goes for use of sterling. If you want to be cleared through the UK payments system, you must abide by the rules of the system at hand (which can include everything from capitalisation minimums to the legal frameworks that govern related contracts).

Sometimes those rules can be tougher than one’s home jurisdiction, in which case the system may be more expensive to use than one’s own. At such times what the user loses in affordability he gains in reliability, stability and privacy.

Other times, the rules can be laxer than one’s home jurisdiction, in which the system may be cheaper and more “fluid” to use than one’s own, but what the user gains in affordability, he may well lose in reliability, stability and privacy.

The PR from the PBoC, of course, is that the digital yuan has found a way around the inherent paradox of access-based value. It is both cheaper and more fluid and more secure and reliable. There is no trade-off.

But as they say in Game of Thrones, only death can pay for life. It is highly unlikely the PBoC can achieve all of the above without introducing a trade-off somewhere. (It’s in the privacy obviously.)

In ASPI’s mind there is no doubt that under Xi Jinping, the concept of social management has expanded to specifically include “international social management”. This is already done by exerting pressure via access control to their own market. The next phase will come by exerting pressure via access to their own digital yuan.

As they note:

Something to consider is the fact that Hong Kong’s new state security law criminalises separatism, subversion, terrorism, and collusion in and support for any of those activities by anyone in the world no matter where they are located. This means that journalists, human rights advocacy groups, researchers or anyone else accused of undermining the party-state and advocating for Hong Kong democracy could be accused of those four types of crime. By extension, anyone financing those individuals or entities (such as funding a research group) could potentially be linked to the accusations.

If DC/EP is successfully rolled out and adopted, then the world would have to be prepared to contend with a PRC in possession of information that would also allow it to enforce its definitions of the activities that it’s monitoring (anti-corruption and anti-terrorism, for instance) globally, thus potentially allowing it to implement PRC standards and definitions of illegality beyond its borders with greater effectiveness.

So, in short, be careful what you wish for and what freedoms and privacies you inadvertently give up for a slightly quicker and cheaper financial transaction.

If it’s too good to be true it probably is. And with the PBOC’s digital yuan you’re not just likely to become the product, you’re likely to be the mechanism by which your own country could become a Chinese vassal state.

Related links:
There’s very little evidence for blockchain, it turns out – FT Alphaville
When the state takes on the digital float, the state takes on the risk – FT Alphaville
BIS homes in on the paradox at the heart of central bank cryptocurrencies – FT Alphaville
The flipside of China’s central bank digital currency – ASPI
CBDCs give libertarians the heebie-jeebies – FT

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Chancellor spots break in clouds after Brexit, Covid and battered finances




Rishi Sunak will next week deliver a Budget in the shadow of a pandemic, in the aftermath of Britain’s painful divorce from its biggest trading partner and with its public finances, on his own account, under “enormous strains”.

But the chancellor, in an interview with the Financial Times, insisted he can see a brighter future and that his second Budget since being appointed last February will help to build a “future economy” characterised by nimble vaccine and fintech entrepreneurs.

Sunak supported Brexit and now has to show it can work. He knows he cannot expect much help from the EU, which has shown no appetite for opening its markets to the City of London, but still insisted Brexit is an opportunity.

He said post-Brexit Britain would be an open country. “It’s a place driven by innovation, entrepreneurship, taking the agility we have after leaving the EU and putting that to good ends, whether in vaccines or fintech,” he said.

Sunak’s Budget on Wednesday will attempt to flesh out the government’s “build back better” slogan; Britain’s successful vaccine scientists and scrappy tech start-up twenty-somethings will be the poster children of this new approach.

While big and profitable companies are expected to face a hefty increase in their corporation tax bills — part of Sunak’s drive to restore fiscal discipline — the chancellor will focus on companies for whom a profit is a distant dream.

On Friday he told the FT he would launch a new fast-track visa scheme to help Britain’s fastest-growing companies recruit highly skilled workers, as part of a drive to build an “agile” post-Brexit economy.

He said he wanted to help “scale up” sectors such as fintech to compete for the best global talent. The new visa system, he added, would be “a calling card for what we are about”.

Next week Sunak will publish a report by Lord Jonathan Hill, Britain’s former EU commissioner, on the City of London’s listings regime, to make it more attractive for fast-growing tech companies.

“We want to make sure this is an attractive place for people to raise capital — we’ve always been good at that,” Sunak said. “We want to remain at the cutting edge of that.”

The chancellor confirmed Hill will look at whether London can be a rival to New York as a location for so-called Spacs, the modish blank-cheque vehicles that hunt for companies to buy and take public.

He declined to speculate on what Hill will recommend, but gave a broad hint he supports radical reform. “Do we want to remain a dynamic and competitive place for people to raise capital? Yes we do,” he said.

The loss of some City business, including EU share trading, to Amsterdam has reinforced criticism of the government over its negotiation of a trade deal that focused heavily on fish, but hardly at all on financial services.

Last summer the Treasury filled in hundreds of pages of questionnaires from Brussels about its regulatory plans for the City but Britain is still waiting for a series of “equivalence” rulings that would allow UK firms to trade with the single market. It could be a long wait.

When Emmanuel Macron, French president, was asked this month by the FT if he was in favour of Brussels granting “equivalence” to UK financial services rules, he replied simply: “Not at all. I am completely against.”

Sunak insisted he has not given up and that the Treasury remained “constructive and open” in talks with Brussels. But he added: “We live in a competitive world. It’s not surprising other people are looking after their interests.”

Sitting in his sparse Treasury office, stripped of any clutter, wearing his trademark bright white shirt, Sunak said: “We just need to focus on what we’re in control of. I’m enormously confident about both the future for the City of London and, more broadly, financial services.”

At the age of 40, Sunak is only just a year into the job. “When I got the job I had three weeks to prepare a Budget,” he recalled. “I genuinely thought at the time it would be the hardest thing professionally I would have to do in my life.” But that was before the full-blown pandemic hit the UK.

“That Budget turned out, probably, to be the easiest thing I did in my first year in the job. It has been a tough year, dealing with something that nobody has had to deal with before. There was no playbook. We had to move at speed and scale.”

His critics argue that handing out £280bn of borrowed money to support the economy may not have been that difficult either — Sunak’s approval ratings remain very high — and that the really difficult bit is yet to come: trying to rebuild the economy and the tattered public finances.

Conservative MPs are anxious that Sunak’s innate fiscal conservatism might lead him to make unwelcome raids on the finances of core Tory voters and businesses, just as the economy starts to reopen.

The chancellor is expected to freeze income tax thresholds, pushing people into higher tax bands as their pay rises. Another “stealth” move — freezing the lifetime pensions allowance at just over £1m for the rest of the parliament — was reported in the Times on Friday and not denied by the Treasury.

And all the while Sunak will carry on running up debts into the summer to protect the economy from what he hopes will be the last Covid-19 lockdown. He said he is “proud” of what the support measures have achieved so far.

“I’m going to keep at it,” he said. “Some 750,000 people have lost their jobs and I want to make sure we provide those people with hope and opportunity. Next week’s Budget will do that.”

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‘Digital big bang’ needed if UK fintech to compete, says review




Sweeping policy changes and reform of London’s company listing regime will spark a “digital big bang” for the City and turbocharge the UK’s fintech industry, according to a government-commissioned review.

The report, to be published on Friday, warns that the UK’s leading position in fintech is at risk from growing global competition and regulatory uncertainty caused by Brexit

The review, carried out by former Worldpay chief Ron Kalifa, is one of a series commissioned by the government to help strengthen the UK’s position in finance and technology.

Both sectors are under greater threat from rivals since the UK left the EU in January amid growing global competition to attract and retain the fastest growing tech start-ups. 

Changes to the UK’s listing regime are recommended, such as allowing dual-class share structures to let founders maintain greater control of their companies after IPO. The review also proposes a lower free-float threshold to allow companies to list less of their stock.

Kalifa said the rapid evolution of financial services, from online banking and investment to digital identity and cryptocurrencies, meant that the UK needed to move quickly.

“This is a critical moment. We have to make sure we stay at the forefront of a global industry. We should be setting the standards and the protocols for these emerging solutions.”

John Glen, economic secretary to the Treasury, said more than 70 per cent of digitally active adults in the UK use a fintech service “but we must not rest on our laurels . . . all it takes is a bit of complacency to slip from being a leader of the pack to an also ran”.

He said the government would consider the report’s recommendations in detail. 

The review was welcomed by executives at many of the UK’s largest fintechs and leading financial institutions such as Barclays. Mark Mullen, chief executive of Atom Bank, said the review was “essential to maintain momentum in this key part of our economy and to continue to drive better — and cheaper outcomes for all of us”.

The review also recommended the government create a new visa to allow access to global talent for tech businesses, a move likely to be endorsed by ministers as early as next week’s Budget, according to people familiar with the matter.

Fintechs have been lobbying for a visa scheme since shortly after the 2016 Brexit vote, but the success of remote working since the onset of the coronavirus crisis has reduced its importance for some firms.

Revolut, for example, has ramped up its hiring of fully remote workers in Europe and Asia to reduce costs and widen its potential talent pool, according to chief executive Nik Storonsky.

Charles Delingpole, chief executive of ComplyAdvantage, a regulatory specialist, agreed that fintech was becoming more decentralised. He added that the shift in tone from the government could have as big an impact as specific policy changes. “Whilst none of the policies is in itself a silver bullet . . . the fact that the government recognises the threat to the fintech sector and is publicly acting should definitely help.”

The review also proposed a £1bn privately financed “fintech growth fund” that could be co-ordinated by the government. It identified a £2bn fintech funding gap in the UK, which has meant that many entrepreneurs have in the past preferred to sell rather than continue to build promising companies. It wants to make it easier for UK private pension schemes to invest in fintech firms. 

The report also recommended the establishment of a Centre for Innovation, Finance and Technology, run by the private sector and sponsored by government, to oversee implementation of its recommendations, alongside a digital economy task force to align government efforts.

The review has identified 10 fintech “clusters” in cities around the UK that it says needs to be further developed, with a three-year strategy to support growth and foster specialist capabilities.

Dom Hallas, executive director at the Coalition for a Digital Economy (Coadec), said it was now important that people “follow through and actually implement” the ideas in the review. The sector’s direct contribution to the economy, it is estimated, will reach £13.7bn by 2030.

However, the review also raised questions over the role of the Competition and Markets Authority, saying that the CMA should better balance competition and growth. 

“There is a case for more flexibility in the assessment of mergers and investments for nascent and fast-growing markets such as fintech,” it said. 

“Success brings scale but as some businesses thrive, others inevitably will fail. Some consolidation will therefore be critical in facilitating the growth that UK fintechs need in order to become global champions.”

Charlotte Crosswell, chief executive of Innovate Finance, which helped produce the report, said: “It’s crucial we act on the recommendations in the review to deliver this ambitious strategy that will accelerate the growth of the sector.

“The UK is well positioned to lead this charge but we must act swiftly, decisively and with urgency.”

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Coinbase: digital marketing | Financial Times




Coinbase will be a stock riding a runaway train. The US cryptocurrency platform wants investors to think long term about the prospects for a global “open financial system”. Most will be unable to tear their eyes away from wild, short-term price swings in bitcoin, the world’s largest digital asset. 

This has its benefits. Coinbase, which has filed for a US direct listing, makes most of its money from commissions on crypto trades. Sales more than doubled to $1.3bn last year. The company has swung from a loss to net income of $322m as crypto prices jumped.

But the company has given no detail on the financial impact of the 2018 bitcoin price crash. Will Coinbase’s 2.8m active retail users and 7,000 institutions hang on if there is another protracted price fall? 

Coinbase was valued at $8bn in a 2018 private funding round and $100bn in a recent private share sale, according to Axois. That rise looks remarkably similar to the increase in bitcoin’s price from less than $5,000 to more than $50,000 this year.

The rally is hard to justify. Bitcoin has not become a widely used currency — nor is the US ever likely to countenance that. It offers investors no yield. Volatility remains high. Elon Musk’s tweet this weekend that bitcoin prices “seem high lol” propelled a sharp fall that hit shares in crypto-related companies. Shares in bitcoin miner Riot Blockchain have lost a quarter of their value this week. 

Prospective investors in Coinbase should keep this in mind. Its listing will take cryptocurrencies further towards the financial mainstream. But risk factors are unusually numerous, including the volatility of crypto assets and regulatory enforcement. 

Both threats are widely known. Another risk factor in the listing document deserves more attention. Vaccination campaigns and the reopening of shuttered sectors of the economy is raising yields in safe assets such as Treasuries. Risky trades may become less attractive. Coinbase might be about to go public just as the incentive to trade cryptocurrencies is undermined. 

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