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Central banks get serious on digital currencies

Central banks get serious on digital currencies
Central banks get serious on digital currencies


The writer is chief executive of Lateral Economics and visiting professor at King’s College London’s Policy Institute

The Chinese are trialling it. The UK Treasury and the Bank of England have a task force on it. So, after years of talk, central bank digital currency has suddenly become serious business.

Think of CBDC as the digital equivalent of banknotes. In the early 19th-century, private banknotes were used in shops. With numerous banks issuing different notes, it was complex and confusing — and bank failure could render your notes worthless.

But, since the 1844 Bank Charter Act, things have been streamlined by the Bank of England issuing its own retail banknotes. That also levelled the playing field. The banks had always had access to a risk-free payments system between themselves via their own Bank of England accounts. But with banknotes — Bank of England IOUs — something similar was available to all.

However, the Bank of England retained its “wholesaler only” role in other services with commercial banks “retailing” cheque payment services via their local networks.

But, by the turn of this century, the internet made it technically straightforward for everyone to have an online Bank of England account. After all, wholesalers everywhere were disintermediating their own retailers over the internet — so you can buy your flight from a travel agent or online direct from the airline.

However, central banking for all online would have been classic “disruptive innovation” and that’s not usually prosecuted by large incumbent systems, to say nothing of the political obstacles it would have encountered. Now, with private digital currencies nibbling at the payments system, the CBDC sits smiling up at us from the in-tray, raising all these issues again.

A Bank of England issued digital currency would enable anyone to hold the Bank’s IOUs in their digital wallet for transfer to anyone else as easily as we transfer credit from our credit cards and phones. But, being central bank money, it would be cheaper, and risk free.

Moreover, Bank of England notes generate so-called seigniorage profits — the difference between the amount central banks receive on issuing money and the much lower cost of printing it. As owner of the Bank of England, this ultimately goes to the government.

A CBDC would do something similar but on a much grander scale — handily for a Covid-ravaged Budget. Currently, 97 per cent of the money in circulation is created by commercial banks when they lend. It’s nice work if you can get it, generating them large rents.

With money being the core economic public good, governments muscling in on the banks’ near monopoly on money creation would see banks’ profits fall just as telecoms companies had to find the cash to purchase spectrum at auction that had previously been gifted to them.

This raises two further questions. First, CBDC in your digital wallet can substitute for your deposit in a bank. To prevent a wholesale run from bank deposits into CBDC in a panic, the issuance of the digital currency could be capped

Modelling by Bank of England research staff looked at issuance equivalent to 30 per cent of GDP. This would make a major contribution to government coffers, displace costlier taxation and improve the efficiency of payments. All this would expand the economy by a hefty £90bn.

Second, falling bank deposits could reduce bank credit creation. In addition to the usual economic adjustments — for instance involving deleveraging and the expansion of equity funding — the central bank could lend back to banks or, as I’ve previously suggested, it could lend to others pledging super-safe collateral.

Of course, one might argue that, if it ain’t broke don’t fix it. But the more money creation is tied to bank debt, the more broke and unstable it is. As Mervyn King said as Bank of England governor in 2010, “of all the many ways of organising banking, the worst is the one we have today”.

Of course, adopting a CBDC would be “courageous”. Then again, these are not normal times. At another extraordinary time — 1943 — John Maynard Keynes was advising his government and reflected to a colleague on how things had changed since he’d done the same in the first world war. 

“Here I am back in the Treasury like a recurring decimal,” he said. But where previously “most people’s only idea was to get back to pre-1914. No one today feels like that about 1939. That will make an enormous difference when we get down to it.” And so it did. But that was a pandemic, a depression and another world war later.

So far, we’ve had the depression and the pandemic. How many more crises might it take to face our demons? How many might we avert by facing them now?



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Aston Martin in legal dispute over payments for £2.5m Valkyrie ‘hypercar’

Aston Martin in legal dispute over payments for £2.5m Valkyrie ‘hypercar’
Aston Martin in legal dispute over payments for £2.5m Valkyrie ‘hypercar’


Aston Martin is suing two Swiss car dealers whom it claims withheld more than £10m of customers’ money that had been paid towards its £2.5m Valkyrie hypercar.

On Tuesday morning the luxury carmaker will lodge documents with the Swiss criminal prosecutor asking it to investigate the board members of Nebula Project AG, according to people briefed on the action. 

Aston will also bring a civil action against Nebula Project, which handled some customer deposits for the hypercar. 

The carmaker will take a £15m hit to profits this year and book a further undisclosed financial impact next year, it will tell investors on Tuesday morning, the same people said.

At least £10m of that is from the missing customer deposits, with an additional unquantified hit next year.

The remaining £5m is from an accounting provision due to changes in commercial arrangements after Aston terminated the Aston Martin dealership run by the same directors in Switzerland. The company has four other dealerships in the country.

The two directors of the business are Andreas Baenziger and Florian Kamelger, according to filings and earlier press releases about the project.

The pair helped Aston finance the Valkyrie in 2016 by offering to underwrite the project and by handling some Swiss customer deposits, which were used to fund development of the car.

In return, Nebula was due to collect commission from sales of the Valkyrie model as well as two subsequent cars based on the same technology, the Valhalla and the Vanquish.

Because it has now cancelled the deal, Aston believes it will avoid having to pay a cut of the sales to Nebula, leaving the carmaker financially better off in the long run despite the hit to finances over the next two years.

The unusual funding model was put in place at a time when Aston was struggling financially and unable to invest in the vehicle, which it claims will be the fastest and most expensive road car ever made.

While deposits paid to Nebula by buyers of the hypercar were passed on to Aston, Nebula directors also collected further payments from some customers, which they did not pass on to the carmaker, it is alleged in the court filings.

A number of Aston customers have joined the legal case, and the carmaker says it will honour the sales agreements. Deliveries of the car are expected to begin in September and run into next year.

The episode is an embarrassment for the business at a time it is seeking to win back investor confidence under the new management of Lawrence Stroll.

The Canadian billionaire led a £540m bailout last year and is now its chair, pushing back its electric cars and focusing on mid-engine supercars based on the Valkyrie to poach customers from Ferrari. 

Sales of the Valkyrie had been expected to begin in 2020, but were delayed until late this year after the pandemic affected product testing.

The Valkyrie is a flagship product for Aston Martin, with a limited run of 150 models and 30 more for a racetrack version that is designed to spearhead the company’s push into mid-engine models.

The Valhalla supercar, which is based on the Valkyrie, will also appear in the upcoming James Bond film No Time To Die.

Aston Martin declined to comment. The Nebula directors have been contacted for comment.



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‘Not Equitable and Not Fair.’ How the WHO Plans to Solve Africa’s Desperate Shortage of COVID-19 Vaccines

‘Not Equitable and Not Fair.’ How the WHO Plans to Solve Africa’s Desperate Shortage of COVID-19 Vaccines
‘Not Equitable and Not Fair.’ How the WHO Plans to Solve Africa’s Desperate Shortage of COVID-19 Vaccines


(JOHANNESBURG) — The World Health Organization is in talks to create the first-ever technology transfer hub for coronavirus vaccines in South Africa, a move to boost supply to the continent that’s desperately in need of COVID-19 shots, the head of the U.N. agency announced.

The new consortium will include drug makers Biovac and Afrigen Biologics and Vaccines, a network of universities and the Africa Centres for Disease Control and Prevention. They will develop training facilities for other vaccine makers to make shots that use a genetic code of the spike protein, known as mRNA vaccines.

“We are now in discussions with several companies that have indicated interest in providing their mRNA technology,” said WHO director-general Tedros Adhanom Ghebreysus at a virtual press briefing on Monday. That technology is used in the Pfizer-BioNTech and Moderna vaccines.
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Africa will soon be able to “take responsibility for the health of our people,” as a result of the new WHO-backed technology transfer hub, South African President Cyril Ramaphosa said in the press briefing.

It is “just not equitable and not fair” that some people are denied access to COVID-19 vaccines because of where they live, Ramaphosa said.

Poor countries in Africa and elsewhere are facing dire shortages of COVID-19 jabs despite some countries having the ability to produce vaccines, lamented Lara Dovifat, a campaign and advocacy adviser for Doctors Without Borders.

“The faster companies share the know-how, the faster we can put an end to this pandemic,” she said in a statement.

Numerous factories in Canada, Bangladesh, Denmark and elsewhere have previously called for companies to immediately share their technology, saying their idle production lines could be churning out millions of doses if they weren’t hampered by intellectual property and other restrictions.

More than 1 billion coronavirus vaccines have been administered globally, but fewer than 1% have been in poor countries.

South Africa accounts for nearly 40% of Africa’s total recorded COVID-19 infections and is currently suffering a rapid surge, but vaccine rollout has been slow, marked by delayed deliveries among other factors.

South Africa currently does not manufacture any COVID-19 vaccines from scratch, but its Aspen Pharmacare assembles the Johnson & Johnson shot by blending large batches of the ingredients sent by J&J and then putting the product in vials and packaging them, a process known as fill and finish. Earlier this month the company had to discard 2 million doses because they had ingredients produced in the U.S. in a factory under suspect conditions.

South Africa’s current wave of infections threatens to overwhelm the country’s hospitals.

“The climb in new cases has been extraordinarily rapid and steep over the past few weeks,” Ramaphosa said Monday in his weekly letter to the nation. “The number of daily new cases jumped from below 800 in early April to more than 13,000 in the past week. In other words, it increased more than 15-fold from the last low point.”

Gauteng province, the country’s most populous with the cities of Johannesburg and Pretoria, is the worst-affected by the current surge with 60% of the new cases. All public and private hospitals are full, yet the numbers of new confirmed cases continue to rise, the province’s deputy premier, David Makhura, said Monday.

“I don’t want to send a message saying everything is okay,” said Makhura. “I want to say to the people of the province: The house is on fire.”

WHO officials said that while their new vaccine transfer technology will hopefully increase future supplies, it won’t address the immediate crisis, since it will take months for any new factories to start producing shots.

With dozens of countries desperately waiting for more doses after the COVAX initiative, a U.N.-backed plan to distribute vaccines to poor countries faltered in recent months, the WHO has been trying to persuade rich countries to donate vaccines once their most vulnerable populations are immunized.

But Dr. Michael Ryan, the WHO’s emergencies chief, acknowledged that countries have mostly declined to share vaccines immediately.

“When you ask countries (to donate), they say, ‘Well, we’re going to vaccinate according to our priorities and our priorities are our own citizens,’” Ryan said.

He added that while transferring vaccine technology will help in the medium to long term, it won’t help stem the current spike in infections.

“We have not used the vaccines available globally to provide protection to the most vulnerable,” he said. ”And the fact that we haven’t … is a catastrophic moral failure.”



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Revolut boss expects digital bank to remain profitable

Revolut boss expects digital bank to remain profitable
Revolut boss expects digital bank to remain profitable


Revolut’s chief executive said the digital bank expected to remain profitable despite falling enthusiasm for cryptocurrencies after buoyant markets helped offset the negative impact of the pandemic. 

“I don’t think interest [in crypto trading] will increase. I think it will come off a bit, but Covid showed we’re very resilient to shock,” Nikolay Storonsky told the Financial Times ahead of the publication of the company’s latest annual report.

“Crypto might potentially come off and most likely it will, but we have other bets.”

Revolut launched six years ago offering a travel-focused prepaid debit card, but has expanded into areas from business payments to stock and cryptocurrency trading.

Rising interest in digital currencies helped Revolut hit profitability late last year for the first time since 2017, when it benefited from an earlier bitcoin boom before falling back into a loss after prices crashed. 

However, Storonsky and Mikko Salovaara, Revolut’s recently appointed chief financial officer, said the latest developments would be more sustainable.

“We continue to expect to be profitable, [but] the rates in terms of growth and profitability are difficult to forecast,” Salovaara said.

Overall revenues increased 34 per cent to £222m in 2020, despite the hit to its traditional travel-related income. However, the company’s net loss rose from £107m to £168m, as it ramped up spending on new staff and invested in areas such as compliance.

Reports earlier this year said Revolut was lining up investment bankers for an investment round that could take place after the summer, but Storonsky said Revolut had no immediate need to raise funds after a $500m fundraising last year that valued the company at $5.5bn.

“We’re always making fundraising plans, but at the moment we’re not fundraising,” he added. “We might in the future but we’re very profitable now and simply don’t need the money.”

Unlike British fintech rivals such as Monzo and Starling, Revolut prioritised international expansion rather than building a full-service bank in a single country first, but it is now applying for banking licences in the UK and USA.

It started offering loans last year in Lithuania and Poland, where it already has a bank licence, but had lent just £1.4m by the end of 2020.

“We’re very risk-averse with our credit portfolios,” Storonsky said. “We decided to grow [the loan book] much more slowly because there was no need to rush the products, and we’d prefer not to lose money.”

Storonsky admitted that early growth in the US had been slower than he had hoped for, but said performance was picking up. 

He added that he was not concerned about rising competition in its home market from established companies such as JPMorgan, which plans to open a digital bank in the UK this year.

Storonsky, who last year became the UK’s youngest self-made billionaire, compared JPMorgan’s efforts to NatWest, which spent about £100m attempting to build a new digital bank that closed after just a few months.

“I’ve had this conversation so many times,” Storonsky said. “First it was ‘what about [NatWest] launching a digital bank’, then it’s some other bank. The end is always the same. I don’t think legacy banks can build great products . . . they’re just bankers.”

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Hong Kong’s Biggest Pro-Democracy Newspaper Likely to Shut Down This Week After National Security Law Raid

Hong Kong’s Biggest Pro-Democracy Newspaper Likely to Shut Down This Week After National Security Law Raid
Hong Kong’s Biggest Pro-Democracy Newspaper Likely to Shut Down This Week After National Security Law Raid


Next Digital plans to stop publishing Apple Daily later this week if authorities don’t allow access to its bank accounts, and will make a final decision on Friday, the pro-democracy newspaper reported on Monday.

In an internal memo at the flagship newspaper of media tycoon Jimmy Lai, a senior editor said online news would stop at 11:59 p.m. on Friday night and the final print edition would be distributed on Saturday if the funds remain frozen. In a staff meeting, managers offered to allow reporters to quit immediately, according to people familiar with the situation who asked not to be named.
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“In theory, if the company decides to shut down on Friday and lay off employees, there may be an additional month of payment in lieu of notice, but no one can guarantee that,” said the memo seen by Bloomberg News. “The wish of the management is for everyone to stay till the end, but the risks are unpredictable. Everyone should make their own decisions.”

Representatives for Apple Daily didn’t immediately respond to a request for comment.

Hong Kong national security officials are blocking the newspaper’s bank accounts, and it may need to close its print and digital operations unless authorities allow access to the funds, Mark Simon, a top adviser to Lai, said earlier on Monday. Companies that regularly do business with the newspaper tried to deposit money in its accounts on Friday but were prevented from doing so, he said.

The paper had roughly HK$521 million ($67 million) in cash at the end of March and said it was able to keep operating for 18 months from April 1 without any new injection of funds from Lai, according to an exchange filing. Trading in Next Digital shares is suspended.

Simon said the authorities’ decision to block access to that money is effectively shutting down the company. “It’s the government that decides if Apple Daily stays or goes,” he said. “Once they get rid of us, who’s next?”

Hong Kong’s moves to arrest Lai and target Apple Daily editorial staff have alarmed foreign governments and human rights groups, which say China and the Beijing-backed local administration are undermining constitutionally guaranteed freedoms in the Asian financial hub.

Hong Kong police arrested five senior staff at the media organization on Thursday and froze HK$18 million in company assets. Around 500 police officers descended on Apple Daily’s headquarters, searching offices, barring journalists from their desks and carting away nearly 40 computers belonging to editorial staff.

Some teams have already told part-time staff including interns that there’s no need to show up at the office or keep working for the paper, according to three reporters and editors who asked not to be identified. Some staffers were planning to leave for other jobs after the raid on Thursday, they said, adding that they were worried that companies or media outlets won’t hire anyone who worked at the paper.

The newspaper, which cheered on Hong Kong’s unprecedented pro-democracy protests in 2019, has been under increasing pressure since China imposed a national security law on the city last year.

Lai, a media tycoon and well-known democracy advocate, is in jail for attending unauthorized protests. The city’s Security Bureau had earlier frozen some of Lai’s assets and sent letters to some of his bankers, threatening them with years in jail if they deal with any of his accounts in Hong Kong.

A Hong Kong court on Saturday denied bail to Editor-in-Chief Ryan Law and Cheung Kim-hung, the newspaper’s publisher and chief executive officer of Next Digital. The others arrested included Chief Operating Officer Royston Chow and Apple Daily deputy editors Chan Pui-man and Cheung Chi-wai.

The U.S. called for the immediate release of the detained editors, while Human Rights Watch said the arrests amounted to “a new low in a bottomless assault on press freedom.”

In a statement, the Foreign Correspondents’ Club, Hong Kong, said it was “concerned that this latest action will serve to intimidate independent media in Hong Kong and will cast a chill over the free press,” which is guaranteed under the city’s mini-constitution, the Basic Law.

Simon, Lai’s adviser, said the government’s moves against Apple Daily tarnish the image of Hong Kong as an international financial center where information can flow freely and basic freedoms are protected.

“You can’t limit what the average person considers normal journalism and expect to run an international financial center,” he said. “‘No free press’ is a direct correlation to ‘no free markets,’ which equals not being an international financial center.”

–With assistance from Natalie Lung and Alfred Liu.



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US banks set to return money to shareholders after stress tests

US banks set to return money to shareholders after stress tests
US banks set to return money to shareholders after stress tests


America’s biggest banks will learn the results of their latest stress tests from the US Federal Reserve this week, with a passing grade expected to be a catalyst for billions of dollars in stock buybacks and dividends.

The expectation that banks will return more money to shareholders is a sign of how much cash the US banking sector has amassed during the pandemic. The likes of Goldman Sachs and JPMorgan Chase have been bolstered by government stimulus and buoyant revenues from trading and dealmaking.

“The big banks came into the pandemic looking overcapitalised and after more than a year of no stock buybacks they look even more overcapitalised,” said Jeffery Harte, senior research analyst at Piper Sandler.

“They were buying up a lot of stock before the pandemic and now a year of capital on their balance sheets means we’d expect the pace of that potentially to step up meaningfully,” Harte added.

The Fed capped dividends and banned stock buybacks last year at the outbreak of the Covid-19 pandemic. The central bank loosened some of these restrictions at the start of 2021 but still limited the amount of money banks could return to shareholders to no more than the cumulative profits of the prior four quarters.

These limits will be pulled back further pending the results of the annual Comprehensive Capital Analysis and Review, known as CCAR and a requirement of the Dodd-Frank post-crisis financial regulations. The results are due Thursday, June 24.

To “pass” CCAR, the 23 banks participating have to demonstrate they have sufficient capital to weather a string of doomsday scenarios and emerge with a minimum amount of capital left over.

These scenarios include a US stock market crash and a steep drop in economic output. There was also a scenario of substantial distress in commercial real estate, a focus given the uncertainty around the pace at which businesses will return to in-office work.

From the tests, the Fed will prescribe for each bank how much high-quality common equity tier one, or CET1, capital in excess of regulatory minimums they need to keep through a so-called stress capital buffer. The CET1 ratio, which is measured against risk-weighted assets, is a crucial benchmark of financial stability.

Bar chart of The six biggest US banks have cash well in excess of regulatory requirements showing US banks flush with cash

Last year was the first time the Fed had taken this stress capital buffer approach.

Once given the green light, finding money to give back to shareholders will not be a problem. US banks are sitting on more cash than they know what do with.

For JPMorgan, the largest US bank, it grew its pile of CET1 capital to $206bn at the end of the first quarter from $184bn a year earlier. At Goldman Sachs, its CET1 capital rose over the same period to $85.2bn from $75.55bn, while Morgan Stanley’s swelled to $94.3bn from $74.7bn.

Banks typically aim to keep capital in excess of regulatory minimums. Analysts say the big banks have enough cash sitting on their balance sheets to return more money to shareholders and still comfortably sit up above regulatory requirements.

Buying back their own stock is less effective now though than it would have been when share prices for banks like Goldman, JPMorgan and Morgan Stanley plunged in March, 2020 at the start of the coronavirus pandemic. Their stocks have rallied since September, many to all-time highs on the back of booming in trading and dealmaking activity, as well as the brightening outlook for the US economy.

Nevertheless, Barclays analysts estimate that the median bank out of the 20 that it covers and are subject to a stress test will return over 100 per cent of its earnings to shareholders over the next year, with capital returned to investors approaching $200bn.

“Whether they tell you how much stock they’re going to buy back or not is irrelevant,” said Jason Goldberg, an analyst at Barclays. “They’re all going to buy back stock and increase the dividend.”

In addition to large US banks, the American subsidiaries of foreign banks with significant US investment banking operations are also subject to CCAR.

This includes Swiss bank Credit Suisse, whose risk controls have faced scrutiny after suffering a $5.5bn loss on credit extended to Bill Hwang’s Archegos family office.



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Volvo and Northvolt to team up on new battery gigafactory

Volvo and Northvolt to team up on new battery gigafactory
Volvo and Northvolt to team up on new battery gigafactory


Volvo Cars and Northvolt will set up a joint venture to build a new battery gigafactory in Europe and develop energy cells for the Swedish premium carmaker and its electric-only sister brand Polestar.

The partnership, announced on Monday, will aim to build a plant with capacity of up to 50 gigawatt hours per year — equivalent to batteries for about 500,000 cars — to start production in 2026 as part of Volvo’s push to sell only fully electric cars by the end of this decade.

Volvo will buy an additional 15GWh of batteries from Swedish start-up Northvolt from 2024 out of its first gigafactory, to be built just south of the Arctic Circle in Sweden.

“It’s important to be in the lead,” Volvo chief executive Hakan Samuelsson told the Financial Times. “If you’re late in this race, it will be tough to get the talent . . . This is not something we do because it looks good or sounds good. This is a new core competence for Volvo.”

Volvo is the most advanced traditional carmaker in phasing out the internal combustion engine. Northvolt, Europe’s great battery hope founded by former Tesla executives, is backed by investors including Volkswagen and Goldman Sachs and valued at about $12bn.

The Swedish companies will set up a research and development centre next year in their home country to start developing batteries purely for Volvo.

Samuelsson said he hoped to develop a “state of the art battery” with different chemistry and a better performance to current designs, giving it a longer range and faster charging capability.

The new gigafactory should be enough to cover Volvo’s needs in Europe but it will need similar set-ups in China and the US, its two biggest markets, Samuelsson stressed.

Peter Carlsson, Northvolt chief executive, told the FT his company was now looking at “specifically the US, possibly also Asia” for expansion after previously saying the battery maker had more than enough to do in Europe.

Both CEOs said US President Joe Biden’s push on electric vehicles made it all the more important to establish battery operations in the country, although it is unclear as to whether Volvo and Northvolt would do it together.

Carmakers globally are scrambling to get access to enough batteries for electric cars, with VW alone planning six gigafactories, including buying out Northvolt — in which the German carmaker is the largest industrial shareholder — from a planned plant in Germany.

Various European start-ups are seeking to develop a local battery industry that could eventually rival those in the US and Asia from the likes of Tesla and Panasonic.

Samuelsson said it was essential for carmakers to make batteries “one of the core competences we need to understand much more”. He added: “You can’t just buy on the general market. We want to start from zero. The best way to build up this knowhow is . . . with a very tight co-operation with a partner.”

Northvolt held particular appeal to Volvo because of its use of renewable energy — predominantly hydroelectric power — for the plant it is building in northern Sweden. Their future joint gigafactory would also need access to green energy, possibly from with Finland and Norway.

Carlsson said more joint ventures were likely and that Northvolt would benefit from significant economies of scale as it built more gigafactories, possibly leading it to exceed its 2030 target of 150GWh.



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