Regulators throughout the world are finally taking the first steps to bring non-regulated digital currencies and their associated blockchains under regulatory control. The rapid growth in this alternative to the traditional financial system has finally brought global regulators to the conclusion that decentralised finance and defi apps need to come under regulatory control. 

Financial Action Task Force, (FATF) 

Paris, July 1989, the Financial Action Task Force or FATF was created as a joint-action intergovernmental task force at a meeting of the G7 nations. The initial remit was to develop global counter measures to money laundering. The remit was expanded in October 2001 to cover terrorist financing, and further expanded in April 2012 to cover the financing of proliferation of weapons of mass destruction. 

Money Laundering 

Last week FATF announced that they have urged global regulators to apply set rules and regulations to directors, shareholders and other individuals that control, own or exert influence on DeFi apps. These rules and regulations are designed to combat terrorist financing and money laundering and should also be applied to those who own, operate and create all decentralised finance. 

DeFi apps – are trading apps which allows any user to circumvent centralised exchanges, (such as Kraken, Binance and Coinbase), when engaging in crypto investment trading. 

Experts have suggested that Bitcoin has been and can be in the future used as an attractive way for the criminal classes to launder their ill-gotten gains. Due to the lack of regulation, and the security aspects of Bitcoin, makes large transactions in Bitcoin virtually untraceable, especially when converting Bitcoin to cash. Many exchanges and providers of wallets have no anti-money laundering regulations and do not request Customer Information Profiles, or KYC, Know Your Client profiles. 

Funding of terrorism is another problem that crypto industry has to live with. Again, experts suggest that terrorist organisations are currently using cryptocurrencies to deal weapons and drugs etc on the black market. There is a website on the dark web which apparently is associated with the transferring of Bitcoins to Islamic terrorists. 

Implementation of Crypto Policing 

The proposals as offered by FATF over the past few years have been delayed as jurisdictions across the globe have struggled to implement oversight on the decentralised finance. One of the big problems has been dealing with organisations that are run by algorithms instead of the usual board of directors who can be subject to oversight committees and investigations. 

However, one of the first moves will be to look at some of these decentralised projects where brochures suggest that they are a “Virtual Asset Service Provider”, which under today’s anti-money laundering rules makes them answerable to the relevant authority. Any person who is deemed to have authority or a major influence over the project will be subject to anti-money laundering rules and regulations. 

Conclusion 

Crypto trading projects or decentralised finance projects has increased by a figure of 500% in this year alone, reaching a staggering figure of USD100 billion. The term “The Crypto Industry is too Big to Ignore” is finally becoming relevant. 

Fraud in the cryptocurrency world is rife. In fact, it has been reported that over USD 197 million has been lost to fraudulent scams in this year alone. None of these losses are covered by FDIC, (federal Deposit Insurance Agency). Thus, investors or buyers of cryptocurrencies or investors in DeFi projects are not covered as they are investing in an unregulated market. 

FATF can only make recommendations to governments and their regulatory authorities. It is up to the governments concerned to pass the relevant laws that will bring decentralised finance within the purview of their regulators. Otherwise, investors will continue to be scammed, and money laundering and terrorism finance will continue unabated. 

LIBOR has been an important interest rate benchmark for decades. Any company or individual who either has debt or savings will be affected by any swings in LIBOR. For companies this affects the cost of borrowing and for consumers, affects will be noticed surrounding, mortgages, credit card rates, personal loans to name but a few. As of mid-night, 31^stDecember we will be saying good-bye to this very important interest rate benchmark. 

The London Interbank Offered Rate or LIBOR as it is referred to by traders worldwide is about to be phased out. The rate came into global usage in the 1970’s, originally as a key benchmark that is indicative of the borrowing costs between banks. The interest rate is calculated in five currencies, Japanese Yen, Swiss Franc, Euro, US Dollar and UK Pound Sterling. 

LIBOR is now synonymous with most parts of finance such as the derivatives market, where it is used in foreign currency options, interest rate swaps and forward rate agreements. In fact, in the last 50 years, any on-going or new financial instrument with a variable interest rate, will be using this as its benchmark. 

How is LIBOR Calculated? 

The rate is calculated by the Intercontinental Exchange (ICE) Benchmark Administration, who each day receives submissions from 18 banks with their likely borrowing rates. ICE takes the highest four and the lowest four submissions and then calculates the average rates which they then submit to the markets.

When is LIBOR Disappearing? 

The Financial Conduct Authority announced on 5^th March 2021, that as of close of business December 31^st 2021 all LIBOR settings for Pounds Sterling, Japanese Yen, Euro, and Swiss Franc, will no longer be representative or will cease. The US Dollar LIBOR one week and 2 months will also be non-representative or will cease. The remaining settings for the US Dollar being overnight, 1-month, 3- month, 6- month and 12-month, will cease or be non-representative as of close of business 30^th June 2023. 

Why is LIBOR Disappearing? 

There are two main reasons as to why the rate is being dropped.  

• The scandal that engulfed the interest benchmark, where LIBOR setting banks manipulated the rates. 
• The role LIBOR played in the 2008 Global Financial Crisis.

LIBOR Manipulation was uncovered in 2012 where multiple banks, (Deutsche Bank, Barclays Bank, UBS, Royal Bank of Scotland and Rabobank), had for a long time been manipulating this for profit. 

Financial Crisis 2008 – There was less lending by banks and with interest rates soaring on literally trillions of dollars on financial products day after day, markets were crashing everywhere. Whilst the rate did not initiate the crash it was key in transmitting the financial crisis throughout the world, leaving governments to seek a safer alternative. 

The Consumer 

LIBOR touches every consumer on the streets of the United Kingdom, as well as most people living in countries across the globe. In the United Kingdom for example LIBOR underpins all consumer loans including mortgages, credit cards, car loans, and personal loans. It has a massive impact on the person in the street and it is in their interest to understand what is the replacement for LIBOR. 

Companies 

LIBOR affects the cost of borrowing for all companies. If the borrowing company is quoted on the London Stock Exchange for example any swings in the rate can affect their share price. If Sterling LIBOR goes up the cost of borrowing goes up as well. This will have a negative effect on the company’s bottom line, possibly culminating in a sell off of their shares, thus producing a fall in their price. The opposite may be said if Sterling LIBOR falls. The cost of borrowing is then reduced, which will have a positive impact on the company’s bottom line. This may well precipitate orders to buy their shares, which will accordingly increase in price. 

What is Replacing Sterling LIBOR, and US Dollar LIBOR 

Sterling LIBOR is going to be replaced by SONIA, an acronym for Sterling Overnight Index Average. This will be the new reference rate for all sterling transactions. SONIA is already being utilised in certain parts of the market which includes retail banking. It is administered and published by the Bank of England and experts agree it is a reliable market standard. 

US Dollar LIBOR is being replaced by the Secured Overnight Financing Rate (SOFR), which is an across-the-board measure of the cost of borrowing overnight cash which is collateralised by treasury securities.  

Conclusion 

This is a major step being taken by governments and international markets. These reforms have been seven years in the making. As far back as 2014, the FSB, (Financial Stability Board), recommended that IBORs needed to be reformed and replaced by RFRs, (Near Risk Free Rates), which are based on more liquid overnight lending markets. 

Firms that have lending contracts in LIBOR will have to change to SONIA and it is hoped that they have started using SONIA long before the final departure date. This will have made the transition much easier, and for those companies with outstanding or “legacy contracts”, exposure to LIBOR will bring legal uncertainty from 1^st January 2022. 

The digital and cryptocurrency world has seen an explosion of non-fungible tokens (NFTs) onto the market. These tokens are generally traded and supported on the Ethereum blockchain.  

• Ethereum – a cryptocurrency, designed to offer clients smart contracts.  

• Blockchain – a digital ledger and system that records transactions. 

What is an Non-Fungible Token? 

A non-fungible token is used to represent ownership of unique items and can only have one official owner at a time. The record of ownership cannot be modified, nor can a new NFT be copy/pasted into existence. Items that can be tokenised range from art and collectibles to real estate. There is an excitement surrounding NFTs, which is the ability to sell the digital items using technology and creating scarcity by limiting or having zero replicas. Each Non-Fungible Token effectively has its own barcode and cannot be copied. 

Non-Fungible Token Explosion 

The market for non-fungible tokens has reached new highs, with total trading volumes for the first six months of 2021 reaching $2.5 billion, compared to 2020 where the total trading volume was $125 million. In March of this year Christies sold a digital image for $69.3 million while Sotheby’s sold a CryptoPunk image for $11.8 million. Even the world’s largest auction houses are jumping on the bandwagon. Visa have even purchased a NFT for $150,000. 

Funds are now being created to invest in digital art. Artcels, an online art investment platform, created the XXI Fund – designed to invest in digital art through Non-Fungible Tokens. Currently a Mayfair London art gallery is exhibiting works of Fabio Vale, an Italian Sculptor along with other artists such as Yoshitomo Nara and Nina Abney.  

These artists’ work is now digitised and Artcel offered 320 shares in the fund at £1,000 per share represented by a NFT. This is proving a major attraction to millennials, especially those found in London, China, America and Japan. They believe in the fundamentals of the blockchain, e.g., cannot be destroyed, faked or lost.  

Conclusion 

During the Pandemic the interest shown in NFT’s and cryptocurrencies exploded. The younger generation now have an “in” to the art market, where before art markets, auctions and exhibitions were the playground of yesteryear investors 

NFT’s may well represent the future of art sales. Art NFT’s represent not only digital art with an underlying physical piece, but also represent art that has been digitally created. Instead of a picture hanging on the wall, there will be a screen depicting the digital art owned by the householder or museum.  

And guess what? This art cannot be stolen by burglars or destroyed in fires. The gains saved on insurance premiums should be astronomical. Experts have estimated that within the next decade half the world’s artists and their artwork will be digitally recorded as an NFT. 

On Tuesday 7th and Wednesday 8th September 2021 cryptocurrencies lost their value across the board to the tune of USD300 billion. Bitcoin, true to its reputation for lack of stability, lost 17% on Tuesday 7th September. However, investors are piling back in with Bitcoin trading at USD44,344 but still well below its pre-Tuesday levels of USD52,000. 

Those who are worried suggest that Bitcoin has no intrinsic value except for the fact that coins are in short supply. Can these cryptocurrencies truly perform in the long-term for investors, or will they be a bubble that will eventually burst? Below are some arguments for and against cryptocurrency. 

Arguments In Favour of Cryptocurrencies 

Alternative to Fiat Currencies   

Nearly all cryptocurrency users/followers cite the global financial collapse of 2008 as the reason why cryptocurrencies are necessary. Can we trust bankers and the institutions they work for to not make the same mistakes again. Can we trust central banks to ensure these mistakes do not happen again?  

None of us have any say in the financial policies of the European Central Bank (ECB), the Bank of England (BOE) or US Federal Reserve. Perhaps it makes more sense to ignore the potential mistakes of bankers and put one’s faith in algorithms. 

Privacy and Obscurity of Cryptocurrencies

The identities of the owners of digital coins are encrypted and therefore anonymous. All cryptocurrency wallets, (equivalent of bank account holders), are in the names of pseudonyms allowing the owners complete privacy. There is no supervision or control from third parties such as banks and government oversight bodies. 

Peer-to-peer payments can be made in complete privacy avoiding any bank charges or fees. Many critics of the system have pointed out that many criminals have been tracked by using bitcoin. There are however, other cryptocurrencies that offer stronger privacy controls such as Verge, Monero or DASH. 

One Reason to Invest  

Good news for cryptocurrency investors. Despite the recent decline across the board in the value of cryptocurrencies, one cryptocurrency stood out from the rest. Solana has seen an increase in value over the past one month of 420%. It is understood that the double digit increase in Solana’s value over the past year is due to the underlying technology containing exciting novel features.  

Arguments Against Cryptocurrencies 

Cryptocurrencies & Volatility  

One of the favourite arguments against cryptocurrencies is they are too volatile and lack transparency. Indeed, the CEO of HSBC Noel Quinn has advised that they will not be opening a cryptocurrency desk or offer digital coins as an investment for those very reasons. He cited similar reasons for not going into Stablecoins such as Tether. 

Cryptocurrencies & Regulation  

Cryptocurrency supporters are proud of the fact that their currencies are completely unregulated and decentralised. But how can you put your trust in something that has no rules and regulations. Many individuals from all over the world have lost billions to cryptocurrency scams. Two examples of this are One Coin and BitConnect where clients lost USD15 billion and USD2 billion respectively. If ever there were adverts for regulation in the cryptocurrency markets, then these two would be right at the top. 

One Reason not to Invest 

In the USA recently, Joe Biden’s USD1.2 trillion infrastructure bill has slowly been making its way through congress. Incongruously there is an important clause within this bill aimed at the American crypto economy. This clause will attempt to bring the crypto economy within the US tax system. If the crypto industry is forced to acquiesce, the result could be complete devastation, forcing investment and innovation to jurisdictions outside the USA. 

Conclusion 

There are obviously arguments on both sides of the cryptocurrency debate. However, cryptocurrency is here to stay, especially as some banks are now jumping on board. Institutions such as Goldman Sachs re-opened their cryptocurrency trading desk in March 2021, and UBS has announced it is looking for avenues where they can offer cryptocurrencies to their clients as an investment product. 

These financial institutions can only lend weight and credence to the crypto revolution. However, one thing is clear, some form of regulation will have to be introduced if the supporters of cryptocurrencies wish to see their influence grow and grow throughout the world. 

When the United Kingdom voted to leave the European Union in June 2016, the Federal Council of Switzerland in September of that year unveiled its “Mind the Gap” strategy. This strategy was implemented on 1st January 2021. This strategy allows for both countries to retain their existing legal relationships post Brexit. Outlined below are the main agreements between the two countries.

The UK and Switzerland will continue to apply all existing air transport rules, allowing carriers to retain current traffic rights. The continued passage of goods and people by road will carry on as normal – No authorisations will be needed.

Post Brexit Trade Agreements

The trade agreement allows for relevant trade agreements with the European Union to be implemented between Switzerland and the United Kingdom which include:

• The Free Trade Agreement (1972)
• The Procurement Agreement (1999)
• The Mutual Recognition Agreement (1999)
• The Agricultural Agreement (1999)
• The Anti-Fraud Agreement (2004)

It allows for Swiss and UK insurance companies to operate in each other’s jurisdictions, however, excludes life insurance. The rights of Swiss nationals in the UK and vice versa are protected under the Citizens Rights Agreement. This includes the free movement of both nationals, the recognition of social security entitlements and qualifications. The Police Cooperation Agreement enhances cooperation on both terrorism and crime prevention.

Exports to Switzerland

The exports from the United Kingdom to Switzerland totaled USD 19.94 billion for the year ending 2020. Pearls, precious stones, coins, and metals made up USD 14.20 billion, whilst works of art and antiques made up USD 1.55 billion. Other exports such as pharmaceutical products made up USD 426.28 million, vehicles, (other than railways) made up USD 490.72 million, machinery boilers and nuclear reactors made up USD 490.72 million, and organic chemicals made up USD 686.09 million.

Both countries have agreed on a continuing dialogue to improve migration, have closer cooperation on financial services, and further, develop economic and trade relations. In other words, it is business as usual with our Swiss friends. Both countries have gone out of their way to maintain a healthy and working relationship.

Post Brexit European Economic Area

Interestingly in early June 2021, Norway announced a post-Brexit trade deal with the United Kingdom, which also includes Iceland and Liechtenstein who together form the European Economic Area (EEA). Norwegian prime minister Solberg advised that whilst not on a par with the EEA agreement, the agreement reached with the United Kingdom is the most comprehensive free trade agreement ever.

The United Kingdom’s trade with the EEA for the year ending 2020 totaled GBP 21.6 billion. This agreement also includes reduced tariffs on haddock, prawns, and shrimps. This goes a long way to supporting the 16,000 jobs in the fish processing industry in the north of England and Scotland.

Summary

It goes without saying that leaving the EU was highly contentious as the United Kingdom was split down the middle. However, the government is continuing to move forward with independent trade deals with many countries, and as in the past, the United Kingdom will prevail as the EU continues to flounder under its own red tape.

A Letter of Credit or a Documentary Letter of Credit is a negotiable instrument and is a means of payment. A Bank Guarantee is a financial instrument and is a guarantee of payment. For information, a Standby Letter of Credit is a means of payment but can also be utilised as a guarantee of payment.

All these instruments are issued on a daily global basis. Here in Geneva, Switzerland, and in financial centers and hubs throughout the world.