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Ripple: Davos man no longer

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Back in 2016, within the taupe-coloured finishings of the main Davos conference centre used by the World Economic Forum to shut down the Swiss ski resort every year, this reporter and the FT’s Gillian Tett met with Chris Larsen, then head of Ripple Labs.

It was January 22, the last formal day of the week-long Alps fest.

A low-key Larsen told us over he had come to Davos — his first time — because he felt it was a great place to network and spread the news about his new payment system. The mainstreamness of Davos didn’t bother Larsen. Unlike the rest of the crypto space, which famously eschewed traditional financiers, Larsen wanted Ripple to be seen as one of the grown-ups; as a serious offering that bankers would want to work with. That’s why it made sense to be at Davos.

Just a couple of years later Larsen would briefly become the fifth-richest man in the world, in paper terms, due to the soaring value of Ripple’s underlying tokens, known as XRP, he had come to Davos to indirectly pitch by promoting his system.

At the time of our Davos meeting, Ripple was still an obscure system not many outside of the “crypto space” had really heard of. And even within it there wasn’t much love for it because, unlike the rest of the world of crypto, Ripple Labs had controversially embraced centralisation — operating a bit like a central bank with its own supply.

While the crypto world remained suspicious, the banking community was more open-minded to dealing with a crypto firm that promised to behave like an adult. What began in Davos ended with a number of high-level financial institutions embracing “proof of concepts” using Ripple technology, the most of prominent of which was Santander.

Ripple’s charm offensive went so far as to open the door to a project with the Bank of England. A freedom of information request to the BoE about the project in 2019 received a response noting that: “in 2017 the Bank undertook a proof of concept (‘PoC’) exercise with Ripple which was one of a number of PoCs which it undertook with several companies.” How much it paid Ripple for the deal was undisclosed, due to confidentiality provisions.

Even so, most of these types of experiments went nowhere.

“Unlike its competitor R3, it struggled to gain traction among financial institutions which, according to my friends in the City, had regulatory compliance concerns about Ripple’s public token component,” Preston Byrne, a partner at US-based Anderson Kill specialising in crypto advocacy, told FT Alphaville on Tuesday.

This week, nearly five years after that Davos tour, the Securities and Exchange Commission revealed it had filed an action against Ripple Labs Inc including Ripple co-founder Chris Larsen and current CEO Brad Garlinghouse for “raising funds beginning in 2013 through the sale of digital assets known as XRP in an unregistered securities offering to investors in the US and worldwide”.

The suit goes on to note:

Ripple also allegedly distributed billions of XRP in exchange for non-cash consideration, such as labor and market-making services.According to the complaint, in addition to structuring and promoting the XRP sales used to finance the company’s business, Larsen and Garlinghouse also effected personal unregistered sales of XRP totaling approximately $600 million. The complaint alleges that the defendants failed to register their offers and sales of XRP or satisfy any exemption from registration, in violation of the registration provisions of the federal securities laws.

Critics of Ripple, especially the legally minded, had always claimed the organisation could find itself in hot water for having conducted an illegal security sale. Ashton Kutcher’s prominent giveaway of Ripple on the Ellen DeGeneres show in 2018 was flagged as a particular concern. Watch for yourself, it’s quite a moment:


Ripple Labs, in anticipation of such challenges, has for a long time been committed to a PR offensive that has hotly contest any connection between itself and XRP. This has focused on building a narrative that control of the underlying token-infrastructure was impossible because of its decentralised support structure. It’s a narrative that was echoed in its official Wells response this week:

XRP transactions take place on the XRP Ledger (“XRPL”), a decentralized, cryptographic ledger powered by a network that is not controlled or owned by any one party. The XRPL has successfully recorded hundreds of millions of transactions for over eight years without error or dispute.

In 2016 it was clear the organisation was trying to take steps to reduce its dependence on XRP — increasingly pushing technological solutions focused around ledger interoperability so as to better woo and hook the banks on its systems. “Banks don’t have to use XRP and to date they haven’t,” a Ripple PR summed up for us after our meeting with Larsen. “We’re first focused on creating existing fiat currency liquidity on Ripple. We see this as the foundational layer – make the world’s banks interoperable so money moves inexpensively and instantly around the world.”

But as Byrne notes, the contradictions seemed ever-present:

For nearly a decade it [XRP] has hovered in the top ten cryptos by market capitalization and even now, even after this lawsuit has been filed, ranks only behind Ethereum and Bitcoin in terms of importance to the markets. It has also been the envy of companies everywhere who wonder why Ripple should be permitted to print money when they cannot. For a time, Ripple was a contender to win the “blockchain” game. In 2013-14 it counted itself among one of perhaps half a dozen choices major banks could adopt for enterprise blockchain experimentation.

And even in 2016 there was vagary about who exactly was representing XRP. In a follow-up email, Chris Larsen’s PR confirmed to us that XRP units were majority-owned by Ripple management, with 66bn XRP held by Ripple and 33bn by others, adding that “we continue to distribute it every week to institutional investors and market makers”. She also noted XRP was “fundamental to the existence of the Ripple network”, adding that they were developing an incentive programme to offset market makers’ costs “when they were providing liquidity against XRP” as part of their longer-term plan to make XRP a key bridging asset in FX transactions.

In the end, Byrne notes, banks’ compliance concerns appear not to have been misplaced, as is laid bare by the SEC’s complaint. The regulator, he says, is arguing that at all relevant times, starting in 2013 when XRP was first created and up to and including parts of 2020, XRP itself “was an investment contract and therefore a security subject to the registration requirements of the federal securities laws”.

The implications of the case are profound for crypto. If the SEC action is successful it would set a precedent that all widely traded cryptocurrency should be redesignated and regulated as a security, something the agency has hesitated to establish up until now.

This may concern other cryptocurrencies such as Ethereum and Eos, which unlike Bitcoin were pre-sold to the public in a similar fashion, notes Byrne.

The SEC is a law enforcement agency so its allegations are allegations and must be proven in court. It appears from this complaint that the SEC seeks to end XRP. American regulators have so far not been persuaded by arguments from cryptocurrency professionals that investor protection laws should be disapplied to novel crypto offerings. Although cryptocurrency technology development – protocol dev, consensus engineering and layer 2 – will continue in the United States, this action signals that the U.S. is likely to be hostile to ICOs unless and until legislative change takes place.

2016, of course, turned out to be a funny year at Davos. It was the first year that Klaus Schwab, the head of WEF, officially went big on the idea of an incoming Fourth Industrial Revolution that would change the entire global system. Talk of robots, platforms and joblessness was everywhere. Talk of crypto — or more specifically blockchain — was also doing the rounds. High-level celebrity presence included Leonard DiCaprio, Will.I.Am and Kevin Spacey. On the political front, it was Justin Trudeau’s big year and even Joe Biden popped over to say hi.

Despite all of the networking and all of the hype, absolutely nobody seemed to foresee the two major events that would shake the world that year: Brexit, and the election of Donald Trump. It feels apt, perhaps, that it was also the year Chris Larsen managed to ripple his way through the conference without so much as a query about the legal fundamentals of his system from the high-level financiers there.

Related links:
Ripple is being sued by the SEC – FT Alphaville
Blockchain hype storms Davos – FT Alphaville
The art of redefining success, MoneyGram and Ripple edition (Updated) – FT Alphaville



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Vale chief rejects talk of iron ore supercycle

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Iron ore is not on the cusp of a new supercycle, according to the head of one the world’s biggest mining companies, who expects demand for the steelmaking ingredient to flatten out after a couple of years of the current tightness.

Eduardo Bartolomeo, chief executive of Brazil’s Vale, said the record surge in iron ore prices over the past year was very different to the boom of the early 2000s, which was driven by China’s rapid industrialisation. 

“In the last supercycle we had urbanisation in China. It was a structural change. A shock in demand,” he told the Financial Times. “We are not talking about a huge shock in demand now. I would say it is marginal. It is not a shock.”

But he added that, with big global economies revving up and iron producers running at or near capacity, prices could remain elevated until 2023.

“Although there is strong talk about cuts, production is still going up in China and now you have Europe coming back and the US announcing a huge stimulus package. There are also restrictions on supply,” he said. “This market is going to be tight for a while. At least two years.”

Iron ore has spearheaded a broad-based rally in commodities over the past year, rising more than 150 per cent to a record high above $230 a tonne last week, mainly on the back of strong demand from steel mills in China, before paring gains and hitting $209.35 on Friday.

As China’s steel production continues to expand analysts believe prices can remain around current levels but say the market will be highly volatile.

Iron ore’s turbocharged performance has been a boon for big producers including Vale, which require a price of only about $50 a tonne to break even.

It has fanned talk of a new commodities supercycle — a prolonged period where prices remain above their long-term trend, usually triggered by a structural boost to demand to which supply is slow to respond.

Following a deadly dam disaster two years ago that killed 270 people, mainly company employees and contractors, Vale was forced to curtail production.

Its output fell from a planned 400m tonnes a year to about 300m tonnes in 2019 and 2020, and the company lost its position as the world’s largest iron ore producer to Rio Tinto, which has managed to produce about 330m tonnes in each of the past two years.

Bartolomeo said Vale eventually needed to increase production to 400m tonnes because iron ore was a “high fixed-cost business”. However, he said the company would do so in a “very paced way”, mindful of safety.

Erik Hedborg, analyst at the CRU consultancy, said Vale’s journey to 400m tonnes would take time because it required the “restart of many mines, which will go through several complex licensing processes”.

Over the medium term — from 2025 to 2030 — Bartolomeo said Vale expected diminishing demand for iron ore from China because of increasing use of scrap in electric arc furnaces.

“Everybody talks about the circular economy. Scrap is going to come to China. It has to. We see it diminishing demand for iron ore from China.”

Bartolomeo said there would also be a shift to higher-quality iron ore as the steel industry sought to reduce emissions by moving to less polluting methods of steelmaking such as hydrogen-based production.

“All the roads lead to high-quality iron ore and Vale is very well positioned for that,” he added. 



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US banks could cut 200,000 jobs over next decade, top analyst says

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US banks stand to shed 200,000 jobs, or 10 per cent of employees, over the next decade as they manoeuvre to increase profitability in the face of changing customer behaviour, according to a banking analyst. 

“This will be the biggest reduction in US bank headcount in history,” Wells Fargo analyst Mike Mayo told the Financial Times. If his forecast bears out, this year would mark an inflection point for the US banking sector, where the number of jobs has remained roughly flat at 2m for the past decade.

The jobs most at risk are those in branches and call centres as banks prune their sprawling networks to match the new realities of post-pandemic banking, Mayo’s report found. That is consistent with Department of Labor statistics that predict a 15 per cent decline in bank teller jobs over the next decade.

Historically, lay-offs, particularly for lower-paying jobs, have been a contentious issue for the banking industry, which is often held up by progressive politicians as an example of a wealthy industry prioritising profits over people.

But the threat of technology companies and non-bank lenders chipping away at the business of payments and lending, which have traditionally been dominated by banks, has intensified over the past year, making job cuts necessary, Mayo said.

“Banks must become more productive to remain relevant. And that means more computers and less people,” he said.

Most of the reductions can be achieved through attrition over the next 10 years rather than cuts, reducing the risk of a backlash, Mayo said.

The new research, reported first by the FT, comes on the heels of disappointing jobs data that showed the US economy added just 266,000 jobs last month, sharply missing estimates of 1m. Structural elements of unemployment like accelerated automation that took place during the pandemic could pose stronger than anticipated headwinds to a recovery in the labour, economic officials said following the report. 

Pandemic activity pushed headcount up roughly 2 per cent last year as banks hired staff to meet the sudden demand for labour-intensive mortgages and government-backed small-business loans. But that trend is likely to be reversed in the near-term as lenders refocus on efficiency to compete more effectively with technology companies that increased their share of business during the health crisis. 

Increased competition from unregulated companies such as PayPal and Amazon entering financial services was one of the principal concerns JPMorgan Chase chief executive Jamie Dimon outlined in his annual letter to shareholders last month. 

Mayo estimates that banks currently represent just a third of the overall financing market.

“Digitisation accelerated and that played to the strength of some fintech and other tech providers,” Mayo said. 

Many of the bank branches that were closed during the pandemic will probably stay that way, and even those that remain open are likely to be more lightly staffed as branches become more focused on providing advice than facilitating transactions. A large amount of back-office roles also stand to be automated but those numbers are harder to quantify, the report said. 

Mayo said his team 20 years ago was twice as large and responsible for half as much. Doing more with less was the new norm across the industry.

“If I was giving advice to my kids, I’d say you probably don’t want to go into the financial industry,” Mayo said, adding that technology and customer or client-facing roles are probably the only areas that will see growth. “It’s likely to be a shrinking industry.”



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Inflation wild card unsettles markets

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Regime changes usually take a while to fully register among investors. The big talking point in markets at the moment surrounds the potential return of a more troublesome level of consumer price inflation and what protective action investors should take.

The underlying trend of inflation matters a great deal for financial markets and investor returns. The rise in both equity and bond prices in recent decades has occurred during a long period of subsiding inflation pressure and from recent efforts by central banks to arrest disinflationary shocks since the financial crisis. 

A year after the global economy abruptly shut down, activity is duly picking up speed. The logical outcome has been a surge in readings of inflation and this week, a measure of US core prices recorded its largest annual gain since 1996, running at a pace of 3 per cent*.

Core readings exclude food and energy prices and are deemed a smoother gauge of underlying inflation pressure, a point that many people outside finance find baffling when budgeting the cost of groceries and petrol.

So the significant jump in the core measure, and even accounting for the base effect of the pandemic’s brief deflationary shock a year ago, has understandably generated plenty of noise.

This will remain loud in the months ahead as activity recovers from lockdowns with a hefty tailwind of fiscal stimulus working its way through the broad economy.

But muddying the waters for investors is that the outlook for inflation is still difficult to judge at this stage.

“There is so much dislocation in the economy from the reopening and base effects from a year ago that it will take at least six to 12 months before we get a clear view of the underlying inflation trend,” said Jason Bloom, head of fixed income and alternatives ETF strategies at Invesco.

Investors who are now worried about an inflation shock face a dilemma. Some assets seen as traditional hedges against such a risk, like inflation-protected bonds and commodities, have already risen appreciably. Effectively a period of inflation running hot has been priced in to some degree.

And history does provide a cautionary note for those moving late to buy expensive inflation protection.

Past inflationary alarms, as economies recovered in the wake of the dotcom bust in the early 2000s and the financial crisis of 2008, proved false dawns. After a mercifully brief pandemic recession, the powerful and well entrenched disinflationary trends of ageing populations and falling costs associated with technological innovation are by no means in retreat.

For such reasons, a number of investors and the US Federal Reserve expect inflationary pressure this year will prove “transitory”. But stacked against deflationary forces is the immense scale of the monetary and fiscal stimulus of the past year.

The effects of monetary and fiscal stimulus means “inflation may settle into a pace of 2.5 per cent (annualised) and that would be different from the average of 1.5 per cent before the pandemic”, said Jason Pride, chief investment officer of private wealth at Glenmede Investment Management. “Inflation will be higher. At a dangerous level? No.”

In an environment of firmer growth and moderate inflation pressure, equities will benefit, led by companies that have earnings more influenced by the economic cycle. Investors also will seek companies that have the ability to pass on higher prices to customers in the near term and offset a squeeze on profit margins.

Still, a troublesome period of elevated inflation cannot be easily dismissed. The “transitory” argument could be challenged if economic growth continues to run hot into next year, accompanied by a trend of higher wages from companies finding it hard to attract workers.

Before reaching that point, expected inflation priced into the bond market may well push past the peaks of the past two decades and enter uncharted territory in the US and also for other developed markets in the UK and Europe.

Bond market forecasts of future inflation pressure over the next five to 10 years have already risen sharply in recent months. But the rebound is from a low level and for now, expected inflation is not far beyond the Fed’s long-term target of 2 per cent.

“It is the change in inflation expectations that drives asset returns,” said Nicholas Johnson, portfolio manager of commodities at Pimco. Assessing almost 50 years of data, a portfolio holding equities and bonds underperforms during bouts of elevated inflation, while real assets including inflation-linked bonds and commodities prosper, according to the asset manager.

“Most investors have not experienced a period where inflation surprised to the upside,” added Johnson. Clients are asking more questions about insulating their portfolios, but their present exposure to commodities and other assets show that in broad terms investors are “not paying much of an inflation premium”.

That can change and the prospect of inflation regime change remains a wild card for investors.

michael.mackenzie@ft.com

*The value of core inflation has been changed since first publication.



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