Currency Moves Caught You Off-Guard? You’re Not Alone.

12-03-2020 | treasuryXL | XE |

In the past few years, the financial markets had just about lulled participants to sleep. Equity markets delivered steady returns, interest rates remained low, and global currencies adhered to ranges and experienced relatively muted volatility. But that’s no longer the case.

You’re not alone if you were jolted awake by all the recent market volatility. Few anticipated the unprecedented market movements of the past three weeks.

There was no definitive announcement on February 14 that in three weeks’ time:

  • US equity markets would plunge, taking the DJIA, Nasdaq, and S&P 500 all down nearly -25% at their lows,
  • The US Federal Reserve would execute a surprise 50 bp rate cut,
  • US 10-year and 30-year bonds would fall to record low yields, and
  • Oil prices would plummet -26% in one day after OPEC and Russia fail to reach an oil production accord.

Yet all of these events happened, leaving corporate finance departments, treasury groups, CFOs, and business owners to contend with the consequences.

Since February 21, three of the most commonly used currencies by North American corporations (CAD, EUR and JPY) have seen moves of 3.6% to 9.5%. Here’s a summary of the moves:

  • CAD -3.6% weaker against USD, trading above 1.3700 for the first time in nearly two years. What triggered this? The unexpected oil price plunge which was exacerbated by continued equity sell-off. Just three weeks ago, the CAD was at 1.3205.
  • EUR +6.1% against USD, trading at 1.1495 on March 9 after being at 1.0785 just three weeks ago. Exporters can enjoy both the 6% rise in spot and also the forward point premium, which makes locking in forward rates attractive. Importers have been left wondering what to do. Many decision-makers are frozen, hoping the spot rate will reverse. The charts remind us that just one year ago, EUR was at 1.1500 and two years ago 1.2400.
  • JPY +9.5% against USD, made more stunning as the JPY had a surprise 2% weakening to 112.00 on Feb 21 following weak GDP data, to only to be reversed dramatically by coronavirus safe-haven flows. These took the JPY to below 102.00 on March 9 with incredible speed. To quantify this, the FX option market which use FX Option volatility as a key measure, has seen 1-month JPY ATM option volatility spike nearly 10% (unheard of!) to 21.5% after being 11.8% on Friday.

 

What’s the takeaway from all this?

As a business, it’s important to recognize that FX risk is real and has many potential impacts to your results. Regardless of whether your company benefited or was hurt by these market moves, FX risk can:

  • Raise import costs,
  • Reduce export sales margins,
  • Make your product less competitive, and
  • Possibly disrupt your 2020 business plans.

To illustrate the financial risk, here are example payables or receivables denominated in CAD, EUR, and JPY. There is the P/L impact looking at both 2/21 to 3/9 period, as well as considering if the currency trends continue:

If P/L swings of this magnitude cause you corporate nausea, please know you can take actions to mitigate them. FX volatility is a risk you can manage.

 

Source

 

Get in touch with XE.com

About XE.com

XE can help safeguard your profit margins and improve cashflow through quantifying the FX risk you face and implementing unique strategies to mitigate it. XE Business Solutions provides a comprehensive range of currency services and products to help businesses access competitive rates with greater control.

Deciding when to make an international payment and at what rate can be critical. XE Business Solutions work with businesses to protect bottom-line from exchange rate fluctuations, while the currency experts and risk management specialists act as eyes and ears in the market to protect your profits from the world’s volatile currency markets.

Your company money is safe with XE, their NASDAQ listed parent company, Euronet Worldwide Inc., has a multibillion-dollar market capitalization, and an investment grade credit rating. With offices in the UK, Canada, Europe, APAC and North America they have a truly global coverage.

Are you curious to know more about XE?
Maurits Houthoff, senior business development manager at XE.com, is always in for a cup of coffee, mail or call to provide you detailed information.

 

 

Visit XE.com

Visit XE partner page

 

 

 

The Missing part of a Treasury Job Description

10-03-2020 | by Aastha Tomar

Change is where Treasury is

It’s difficult to ignore the word ‘sustainability’ when you are staying in the Netherlands, one of the leaders in sustainability, green finance and green bonds. This makes me wonder why everyone here talks about the word so much – Why is it absent from the Job description of one of the most crucial team of an organization – Treasury?

Any usual job requirement for a Treasurer includes Cash Management, Risk Management, Hedging, Cash flow forecasting, P&L and similar. But where is one of the most trending consideration? Especially, in times when corporations are weighing sustainability targets not far from their profitability targets. Is it not the responsibility of a “treasury” function to be cognizant and be considerate of possible approaches to impact environment through their decision of investments and borrowings?

This brings us to consideration – Are corporations expecting specific functions (read CSR team/ PR team) to work towards and prove their sustainability efforts to the world? Are corporations willing to implement the sustainability philosophy into organizational DNA?

With evolved considerations, gone are the days when a Treasurer was just involved in risk management and ensuring liquidity. In current scenario of news going viral each action creates a ripple effect. As famous Jane Goodall once said : “You cannot get through a single day without having an impact on the world around you. What you do makes a difference, and you have to decide what kind of difference you want to make”. A Treasurer has to take an active role in policy making and lead her organization towards sustainability and protecting consumers.

How can a Treasurer help in sustainability?

As I advocate sustainability related expertise, lets evaluate how a Treasurer can help in sustainability:

1. Consideration in Investment/Borrowing Rationale

  • Choosing counter-party carefully: A Treasurer while selecting for investing options for excess cash, while trying to increase returns for the company should also ensure that the partners with whom she is working are aligned with sustainability. ESG is the new word which is taking importance nowadays with almost all the organization, banks , asset management companies trying hard to come up with various financial products which are aligned with ESG . Try to choose such sustainable investing options where the counter party is trying to have a positive impact on environment and at the same time you don’t compromise on your returns.
  • Green Bonds / Sustainable finance : You don’t need to be in a renewable space to issue green bonds. You just need to have an intent: Drew Wolff, Starbucks launched green bond within few weeks of joining Starbucks in 2016. Even though it was an infrequent issuer, didn’t have leverage of being a regular issuer in the market they took chance by entering into sustainable bond space. The use of proceeds were supposed to get used to buy sustainable coffee. “The bond acted as lightning rod for a lot of separate social responsibility efforts at the company and helped align financing and these efforts for the first time” said Wolff. Additionally it increased commitment to transparency and reporting. Corporate should try to make best use of the current investment trend where investments both from retail and institutions have increased by 34% from 2016 in green investments. Investors have become savvier and trying to invest more in bonds which have green element in it. Corporates should try to integrate its financing with sustainable finance. Once they incorporate sustainable financing, they will automatically be aligned with guidelines designed for the same which will in turn give them a direction towards sustainability.

2. Business Partnership

  • A Treasurer also has a stake in supply chain, how? Let me answer this by asking one more question? Who had the most sleepless nights when Volkswagen posted loss for the first time in 15 years when caught implanting a sophisticated defeat device it implanted to pass emission tests? What would you have done if in your career you had to bear the scar of posting a loss for an organization due to an unethical supply chain? A Treasurer should increase her influence in company’s sourcing/ manufacture products and extended supply chain because they are the ones to bear the brunt when the cash flows are hit.

3.  Behavioral Considerations

  • Less Paper more technology: In this rapid world of digitization there are still few who take help of paper and pen. You may see print outs of hedging structures lying on tables. Banks sometimes still need hardcopy of underlying from Corporates for their records. A small step of ensuring less/no paper usage by Treasurer will ensure that the team follows her and will eventually impact environment in a positive way.
  • There are times when there is no one in Dealing room but the Television (which is on so that we don’t miss any global news) is on. Dealing rooms have a Televisions as a necessary accessory, and its important also to keep a check on what’s happening in world. But we also know that it can be switched off when no one is in the room.
  • There are many other ways where just by small step a Treasurer can impact the environment positively. Just by saying no to sales/ business development professionals for a physical meeting and instead suggesting a skype meeting may help save fuel and decrease carbon emission.

Eventually it depends upon an individual that she just sticks to what has been asked for or to step forward and do something worthwhile which impacts the organization, its stakeholders and our future generations who look up to us to provide them a health living environment to live.

Sources :

  1. https://www.theglobaltreasurer.com/2019/04/29/green-bond-demand-continues-to-rise-as-esg-returns-grow/
  2. https://ctmfile.com/sections/background/sustainable-green-treasury
  3. https://www.oregon.gov/treasury/invested-for-oregon/Pages/Sustainable-Investing-governance.aspx
  4. https://www.bloomberg.com/professional/blog/treasurers-need-know-sustainable-financing/
  5. https://www.treasury-management.com/article/4/412/3484/the-rise-of-esg-business-drivers-and-treasury-imperatives.html

What are your thoughts?

Aastha Tomar

FX & Derivatives | Debt Capital Markets | MBA Finance
Electrical Engineer | Sustainability

Remaining challenges of blockchain adoption and possible solutions

| 06-03-2020 | Carlo de Meijer | treasuryXL

A growing number of companies have expressed their will to enter the blockchain arena. But after some number of years in which their focus was mainly on the benefits of blockchain in various areas, in terms of speed, costs, streamline operations and increased efficiency, their attention is now turned to the various challenges and bottlenecks that are preventing widespread adoption. In this blog I will go into more detail in these bottlenecks and how the industry is trying to tackle these.

Main challenges

First of all there is a reputation challenge. Blockchain is still very much connected to the crypto world in the mind of many. And that is seen as a world of bad actors, hackers, frauds and speculators.

But more important are the technical ones such as immaturity (still slow and cumbersome), lack of scalability, lack of interoperability, stand-alone projects, difficult integration with legacy systems, complexity and lack of blockchain talent.

What to think about the organisational challenges at corporates like lack of good governance, lack of awareness and understanding, lack of user experience and education, the attitude of incumbents, or the security and privacy challenges, including lack of regulation. And there is the productivity paradox.

And finally, but not unimportant other challenges such as culture, energy consumption/environmental cost.

Blockchain has an image problem

Blockchain has an image problem. Blockchain is too much linked with cryptocurrencies in the mind of many. Especially crypto has a negative image that is surrounded by fraudsters, hackers that are using he technology for criminal activities. This bad name is reflecting on the blockchain technology system as whole and is making people seriously think twice before adopting it.

Before the general adoption is possible, members of the public must understand the difference between bitcoins, other crypto-currencies, and blockchain. One should understand that cryptocurrencies are only one application of blockchain technology amongst many others. This will help to eliminate the sometimes negative implications and may result in an increased willingness to use the technology. In the meantime a growing number of collaborative initiatives in the blockchain world in various industries have come up to bring wider change. This sort of interdependence may be the key to moving forward.

Corporates are afraid of the disruptive character of blockchain

There are organisations that do not like the idea of blockchain and its disruptive character. For some it is a nightmare thinking they will lose market share or will even become obsolete.

Blockchain is about 80 per cent business process change and 20 per cent technology implementation. It represents a total shift away from the traditional ways of doing things. This even goes for industries that have already seen significant transformation from digital technologies.

It places trust and authority in a decentralised network rather than in a powerful central institution. And for most, this loss of control can be deeply unsettling.

It is still uncertain who will be most affected by blockchain implementations and which areas of the business are likely to be most disrupted. So, a more ‘imaginative’ approach is needed to understand opportunities and also how things will change.

And there are the vested interest of incumbent parties

Existing regulation represents by far the most significant hurdle for blockchain innovators, as ‘existing regulations favour incumbents and their vested interest over disruptors’. The digitisation (of information) process is taking place in a so-called regulatory “heavy” zone. That is not that strange given the long-established authority of governments to protect consumer and property rights.

Blockchain presents new challenges to regulators looking to protect consumers and markets, but the rigidity with which regulators in the world’s major economies have approached blockchain has served to stifle innovation and growth.

But that view is also changing and as soon as also governments and other public organisations are seeing the benefits of this technology and develop a regulatory model that encourages innovation while protecting consumers that might be an eye opener for others.

Blockchain is still an immature technology

Beyond the above described challenges, blockchain faces a number of implementation challenges, that has all to do with the still immature technology.

  • Lack of scalability

One major technology challenge of blockchain is related to the technical scalability of the network which can put a strain on the adoption process, especially for public blockchains.

Legacy transaction networks are known for their ability to process thousands of transactions per second. Visa, for example, is capable of processing more than 2000 transactions per second. The two largest blockchain networks, Bitcoin and Ethereum however are far behind when it comes to transaction speeds. While the Bitcoin blockchain can process three to seven transactions per second, Ethereum can handle approximately 20 transactions in a second.

This lack of scalability is not such an issue for private blockchain networks, since the nodes in the network are purposely designed to process transactions in an environment of trusted parties, which makes sense business-wise.

There are some interesting solutions upcoming to tackle the scalability issue. Such as s the Lightning Network, which consists of adding a second layer to the main blockchain network in order to facilitate faster transactions. Another interesting solution is Sharding that groups subsets of nodes into smaller networks or ‘shards’ which are then responsible for the transactions specific to their shard. When offered in conjunction with the proof-of-stake consensus mechanism, has the potential to scale up the application.

  • Lack of standardisation: limited interoperability

Another main challenge is the lack of interoperability between the large number of blockchain networks. Over 6,500 projects are leveraging a variety of – mostly standalone – blockchain platforms and solutions with different protocols, coding languages, consensus mechanisms, and privacy measures.

The problem is that with so many different networks, the blockchain space is in a ‘state of disarray’ due to a lack of universal standards that would allow different networks to communicate with each other.

The lack of such uniformity across blockchain protocols also takes away consistency from basic processes like security, making mass adoption an almost impossible task.

The establishment of industry-wide standards with regard to various blockchain protocols could help enterprises collaborate on application development, validate proofs of concept, and share blockchain solutions as well as making it easier to integrate with existing systems.

There are now various projects that offer interoperability among different blockchain networks, such as Ark which uses SmartBridges architecture to address this challenge, and claims to provide universal interoperability, plus cross-blockchain communication and transfers. Another example is Cosmos, which uses the Interblockchain Communication (IBC) protocol to enable blockchain economies to operate outside silos, and transfer files between each other.

  • Integration with legacy systems

And there is the challenge for corporates of how to integrate blockchain with their legacy system(s). In most cases, if they decide to use blockchain, organization are required to completely restructure their previous system, or design a way to successfully integrate the two technologies.

One problem is that due to the lack of skilled developers, organizations do not have access to the necessary pool of blockchain talent  to engage in this process. Reliance on an external party can soften this problem. But most solutions present on the market require the organization to invest a significant amount of time and resources to complete the transition.

And there are the high incidences of data loss and breach that are discouraging most companies from transitioning to blockchain. Every enterprise is reserved and unwilling to make changes to its database, and for good reasons, as data loss or data corruption constitute major risks.

Recently, new solutions emerged which enable legacy systems to connect to a blockchain backend. One such solution is Modex Blockchain Database, a product designed to help people without a background in technology, access the benefits of blockchain technology and remove the dangers posed by the loss of sensitive data.

  • Lack of blockchain developers

While the demand for qualified blockchain staff is increasing dramatically, the blockchain landscape suffers an acute  shortage of an adequately trained and skilled /qualified people  for developing and managing the complexity of peer-to-peer networks. Blockchain technology however demands additional qualification and know-how.

According to some, the demand for blockchain-related jobs has increased by almost 2000% between 2017 and 2020. Having a sufficient pool of qualified developers is a top industry concern.

Blockchain technology is still in its infancy and is still evolving. It requires time for the developer community to adopt it, and for educational institutions to introduce relevant blockchain-related courses. Though this will alleviate the market demand, the results however will become palpable only after students will finish their training and that will take some time. .

  • Blockchains can be slow and cumbersome

Due to their complexity and their encrypted, distributed nature, blockchain blockchains can be slow and cumbersome. Transactions can take a while to process, certainly compared to “traditional” payment systems such as cash or debit cards.

When the user number increase on the network, the transitions take longer to process. It can take even days to process the whole transaction. As a result, the transactions cost is higher than usual, and this also restricts more users on the network.

In theory the principle extends to blockchain networks which are used for something other than as a store of value (for example logging transactions or interactions in and IoT environment). This is a problem which could be solved with advances in engineering and processing speeds, but that will take some time.

Organisational challenges


And there are various organisational challenges that are limiting the use of blockchain technology by corporates.

  • Lack of awareness and understanding

The main challenge for corporates associated with blockchain, especially the small and medium ones, is a lack of awareness of the technology and a widespread lack of understanding of how it works. Many companies do not understand what blockchain is or what they can do. This has a lot to do with the dominance of technicians in the blockchain area and their too much technology approach.

This is hampering investment and the exploration of ideas. Instead a much more business oriented approach is very much needed. This asks for improving the user experience for those not as technically minded. Organisations really must educate themselves about this emerging technology. They should increase their level  of understanding at all levels. This asks for better educational campaigns to make all this knowledge more accessible.

  • Productivity paradox

And there is the so-called blockchain paradox. The speed and effectiveness with which blockchain networks can execute peer-to-peer transactions comes at a high aggregate cost, which is greater for some types of blockchain than others. This inefficiency arises because each node performs the same tasks as every other node on its own copy of the data in an attempt to be the first to find a solution.

Therefore, decisions of corporates about implementing blockchain applications need to be carefully thought through. The returns to individual processing may diminish as the network grows in size. This means that blockchain applications must harness network effects to deliver value to consumers or to sectors at large.

  • Lack of cooperation

The blockchain creates most value for organisations when they work together on areas of ‘shared pain or shared opportunity’. The problem with many current approaches, though, is that they stand alone: organisations are developing their own blockchains and applications to run on top of them.

In any one industry sector, many different chains are therefore being developed by many different organisations to many different standards. This defeats the purpose of distributed ledgers, fails to harness network effects and can be less efficient than current approaches.

A positive developments is however the rise of so called blockchain consortia, aimed to tackle industry wide issues, including standards, critical mass etc.

  • Security and privacy challenges

And what to think about the various security and privacy challenges. While cryptocurrencies offer pseudonymity, many potential applications of the blockchain require smart transactions and contracts to be indisputably linked to known identities, and thus raise important questions about privacy and of the security of the data stored and accessible on the shared ledger.

Many companies nowadays work with privacy rules governed by regulation. Their consumers trust them with sensitive information. But if this information is all stored in a public ledger it won’t actually be private anymore. Private or consortia blockchain could work here. You would get limited access, and all your sensitive information would stay private as it should.

Security is another crucial topic here. However, only a handful of scenarios have good protocols that can cope with this. While blockchains are more secure than traditional computer systems, hackers can still breach apps, systems, and businesses built on blockchains.

The solution is not just government protection of privacy. Self-sovereign identities on blockchain will enable us to capture and control our own data. While there is a lot of work on several privacy protocols such as proof of zero knowledge to overcome these obstacles and good identity initiatives are underway (Sovrin), we are still a long way from a radically new identity framework.

  • Lack of regulatory clarity and good governance

There is also the lack of regulatory clarity regarding the underlying blockchain technology, which is a significant roadblock for mass adoption. Regulations have always struggled to keep up with advances in technology. This is also the case with blockchain. One of the challenges of the blockchain approach (which was also one of its original motivations) is that it reduces oversight.

Many organizations are making blockchain technology as a means of transaction. But even now there aren’t any specific regulations about it. So, no one follows any specific rules when it comes to the blockchain, so there is still no security.

There are certain areas that require regulatory support, such as the earlier mentioned smart contracts. If the regulations do not cover smart contracts, it inhibits adoption as well as investment in the blockchain industry.

Centralised systems, particularly in financial services, also “act as shock absorbers in times of crisis” despite their challenges and bottlenecks. Decentralised networks can be much less resilient to shocks, which can impact participants directly, unless careful thought is given to their design.

There is thus a strong argument for blockchain applications to work within existing regulatory structures not outside of them. To get over this challenges, Government and extremely controlled sectors may need to create regulations for blockchain. But this means that regulators in all industries have to understand the technology and its impact on the businesses and consumers in their sector.

Other challenges

  • Blockchain has an environmental cost

And finally but not least important the huge energy consumption is another blockchain adoption challenge. The majority of blockchains present in the market consume a high amount of energy.

Most of the blockchain technology follow bitcoins infrastructure and use Proof of Proof-of-work (PoW) as consensus mechanism for validating transactions. These protocols require users to solve complex mathematical puzzles, and require tremendous computing power to verify and process transactions and to secure the network.

In the meantime the amount of energy consumed by computers that compete to solve the mathematical puzzle has reached an all-time high. Some estimate that Bitcoin transaction energy consumption could soar as high as the yearly electricity usage of Denmark in 2020. Add to this the energy needed to cool down the computers, and the costs increase exponentially.

To overcome this issue, many blockchain proponents are developing more efficient consensus algorithms, that are less energy taxing. So-called proof-of-stake (PoS) protocols were introduced, that involve a combination of a participant’s stake in the network and an algorithm to randomly assign the task of validation to a node. Given that the participants are not required to solve complex puzzles, these mechanisms significantly reduce energy consumption.

Furthermore, from a business perspective, private blockchains are more suitable to serve company interests, as they provide restricted access, an additional layer of privacy to protect trade secrets, and are more energy-efficient.

Forward looking

In general, technological advancements take a long time to mature and reach a stable form that can be introduced into the market. Like any technological innovation, blockchain will follow the same, slow trajectory of adoption over the coming years. Although there are many possibilities, it will still take some time to get rid of all the challenges and use it to get all the benefits of it.

The list of Blockchain adoption challenges mentioned above clearly underlines the need for technological improvements. And the industry is very busy solving them. If we can fix these and remove the various bottlenecks, things will surely become more comfortable and trigger mass adoption.

 

 

Carlo de Meijer

Economist and researcher

 

What’s Money Transfer Really About?

05-03-2020 | treasuryXL | XE |

There are some situations where cash just won’t cut it. This is where we enter the wonderful world of money transfer. What is money transfer? It’s simple: it’s any form of payment that doesn’t involve cash.

Money transfer comes in two forms: payment and transfer. When you use you debit card at a store or your boss gives you your paycheck through direct deposit, you’re experiencing small-scale money transfer. When you’re sending money to another account or person, whether it’s across town or across the world, you’re also making a transfer.

When would you need an international money transfer? If you’re:

  • Purchasing property overseas
  • Sending tuition or spending money to a student studying abroad
  • Making an international move
  • Preparing for an exotic trip

…then money transfer is the way to go. Your money is in good company: experts estimate more than $2.5 quadrillion moves around the world each year.

Don’t let the technical details overwhelm you. Online money transfer is a quick, simple, and secure process for any of your currency exchange needs.

Is one money transfer method better than the others?

If you’ve been looking into making a transfer, there’s no doubt you’ve run across several different methods for your transfer. In addition to money transfer, you’ve probably also heard about:

  • Wire transfer
  • Money order
  • Balance exchange
  • Bank transfer

These options may seem more or less interchangeable—after all, at the end of the day, your money is moving where it needs to go, so does it really matter how it gets there?

Yes, it absolutely does. Choosing a money transfer over some of these other methods can influence:

  • The speed of your transfer
  • Your currency exchange rate
  • Whether or not you incur any additional fees during your transfer
  • The ease of the process
  • The amount you can transfer
  • Where you can transfer
  • The currencies you can exchange.

When you make a money transfer through Xe, you can trust that your money will reach its destination quickly, securely, and with no tacked-on fees.

Source

Get in touch with XE.com

About XE.com

XE can help safeguard your profit margins and improve cashflow through quantifying the FX risk you face and implementing unique strategies to mitigate it. XE Business Solutions provides a comprehensive range of currency services and products to help businesses access competitive rates with greater control.

Deciding when to make an international payment and at what rate can be critical. XE Business Solutions work with businesses to protect bottom-line from exchange rate fluctuations, while the currency experts and risk management specialists act as eyes and ears in the market to protect your profits from the world’s volatile currency markets.

Your company money is safe with XE, their NASDAQ listed parent company, Euronet Worldwide Inc., has a multibillion-dollar market capitalization, and an investment grade credit rating. With offices in the UK, Canada, Europe, APAC and North America they have a truly global coverage.

Are you curious to know more about XE?
Maurits Houthoff, senior business development manager at XE.com, is always in for a cup of coffee, mail or call to provide you detailed information.

 

 

Visit XE.com

Visit XE partner page

 

 

 

Do Androids dream of Electric Spreadsheets? A Beginner’s Guide to AI in Treasury – Part II

| 03-03-2020 | treasuryXL | Cashforce |

MISSED PART I? YOU CAN READ IT HERE.

Not too long ago, AI seemed a distant dream for creatives in Hollywood and sci-fi movies such as Blade Runner. Today it is all around us. We carry it in our pockets, it harnesses the technology in self-driving cars and it teaches itself how to solve a Rubik’s Cube in under a second. As this technology matures, every company must ask itself the central question: Will artificial intelligence disrupt my industry? And how can it benefit me? While the world of finance may have a conservative ring to it, it is rapidly modifying to a digital future. We can already see artificial intelligence being used in many applications.

Grim city

Just as Blade Runner was an artistic catalyst for future-noir narratives, so is machine learning essential for the narrative of treasury automation.

For example, machine learning algorithms are incredibly good at recognizing corrupt financial activities or identifying bank fraud since it can handle information thousand times faster than we can blink. Algorithms analyze user actions and distinguish between various types of transactions by gathering a huge amount of data (Big Data). By pointing out odd behavior, it learns over time and becomes even better at it. Another way Big Data is being used, is through credit scoring. By deciding who is eligible for a credit card and who isn’t the algorithm takes over the role of a human analyst.

Not only for analysis purposes but also for saving costs you will find different applications. Today we see customer care or cold calling getting replaced by talking bots, almost indistinguishable from human interaction, helping enterprises save a lot of time and money.

Finance is a fundamental aspect of everyday life for everyday people, all around the world. The endless potential is mesmerizing and what we now see is only the tip of the iceberg. However, the sudden shift is already delivering tangible business benefits. So where does this sudden shift come from? First off, as we’ve seen in part 1, the shift has been going on for well over a decade, silently emerging.  The market is becoming more and more electronic, due to the explosion of the amount and speed of data in- and output. Secondly, the cost of running high powered computing networks came down drastically. These two key factors resulted in a trend that has never been seen before.

Crystal Ball or Digital Snake Oil? 

So what exactly is true of the hype? I’ll be the first one to admit that the proclaimed revolution is often widely exaggerated and ungrounded. When it comes to stock market predictions, a monkey with a dartboard still has the upper hand compared to powerful AI tools in many occasions. Success in human-imitative AI has in fact been limited due to the complexity of human intelligence. It has layers of nuance still to be grasped. In addition, to answer on a human intellectual level is not the same as understanding the meaning behind it. Thus, the challenge of creating humanlike intelligence in machines remains greatly underestimated.

So where is the line between the crystal ball that knows all and digital snake oil? So far, the limiting factor lies in automated and repetitive processes. The basic approach only works in a closed domain with strict rules, such as chess or Go. Now if you add in the word ‘tedious’ to ‘automated’ and ‘repetitive’, you will have the perfect recipe for what is a monotonous task in finance: Managing & updating spreadsheets.

Electric Spreadsheets 

Plumbing the depths of the seemingly infinite sea of spreadsheets is still a known task in treasury, although the negative consequences are common knowledge among business departments. According to our survey, still more than 90% of companies use Excel spreadsheets for their day-to-day operations. Yet, technology doesn’t suffer from some of the dilemmas humans may face in finance which could affect people’s ability to make good decisions: Computers don’t need vacations or sleep, they are less biased and they can do the job more precise. These are obstacles in which AI, in comparison to managing spreadsheets manually, can excel.

Another factor that heavily influences the conversion to artificial solutions is the huge amount of data spread over different branches in a company. Though every department has its own responsibilities, it still has useful data. This untapped information, called Dark Data, has the potential to create a bridge between treasury and other branches, leaving more room for actual analysis between departments within. It goes without saying, AI is remarkable for finance and the promises of this technology, including Big Data, are starting to enter the realms of possibility.

A Crystal Clear Future 

A great example in which artificial intelligence has become an especially important asset is effective cash flow forecasting, one of the essential components of treasury which requires a varied skill set. Despite our best intentions, no human being has the cognitive prowess to deliver a fully accurate prediction of the future. As cash forecasting is in most cases still manually managed through spreadsheets, this often results in forecasting errors. Now, technological improvements are quickly reshaping current business strategies. AI algorithms can be of help in this case to complement the human industry expertise and business acumen, while effectively using historic data to paint a more accurate picture.

So how does this work in practice? One possibility is by analyzing a vast amount of data from your ERP and TMS system and attributing certain weights to time-based (day, week, month, …) or amount-based (customer’s payment behavior) parameters. Through variance analysis, the AI system can continuously learn and adapt to new data and expose hidden patterns, making cash flow forecasts become more accurate over time. This can be combined with statistical methods such as linear regression or time-series analysis to create synergies for accuracy.

Not only will AI help with the processing of data, but it will also change the role of the treasury department altogether. Cash forecasting administrators will be better placed to direct their time to the greatest effect, draw out valuable insights from the AI-produced forecast and tailor the process over time to address any variances. The combined intelligence, in which humans and machines have vastly different thought processes, produces superior results. In the future, AI will become as important as the human component for financial decision-making. Collaboration is key, a crystal clear future is the aftermath.

With the help of an AI-based algorithm, a cash forecast with a considerable accuracy can be constructed.

One Night at Time

So Do Androids Dream of Electric Spreadsheets? To dream you need neurons which, until we’ve reached further, are only present in the brain and controlled by the principles of nature. It’s safe to say no blade runner will hunt down your Cash forecasting system (at least for now). But surely the world of finance will be disrupted by the unprecedented AI revolution, one night at a time.

Movie references aside, the better question would be ‘Can my company benefit from this emerging technology?’. Sitting still and letting your corporate competitors gain the first advantage through AI is a risk that every industry should consider for every relevant department involved. For now, we can only know for sure that this unfinished scenario could lead to all sorts of directions. With all these changes happening, you probably do want to be a part of it when the new script on AI in treasury is being written.

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Are we entering an unprecedented economic situation?

| 28-02-2020 | treasuryXL | Pieter de Kiewit

One of my favourite professional pastimes as a corporate treasury recruiter is digesting treasury technical content and bridging it to the “rest of the world”. Or see what is happening in the global news and projecting it on the field of corporate treasury.

Currently there is a constant flow of news about too much money in the market. One would say this is a good thing. Let me give you some positive and negative examples of the effects:

But also:

  • Pension funds are not able to invest in a future-proof way;
  • We have to pay for our savings (if you have a lot);
  • Hedge fund managers use external funding, instead of the funding of their investors, to safeguard their bonuses.

We enter an unprecedented economic situation only encountered by Japan and there is no obvious path to take. I will not try to clarify macro economics, it is not my field of expertise, but do know that changing demographics contribute. Us getting older and people retiring rich, most likely richer than their kids, has to do with this. What do I see as effects on corporate treasury? Let’s focus on three main tasks of a corporate treasurer.

In cash & liquidity management there are many exciting initiatives in the improvement of cash flow forecasting. Payments can technically be done smoother, safer and quicker. Cash visibility can be increased and liquidity is centralized. Most corporate treasurers want to implement these new solutions. As liquidity is high, many CFOs do not feel the urgency to invest in these initiatives. Doing nothing will not result in higher cost, so what is the ROI?

In risk & investment management the obvious focus is on interest developments. The general opinion is that interest will be low for a very long time. Getting long term funding for (almost) 0% is doable. So why bother matching long and short term funding options? This results in a situation that the use of hedging instruments is less important. Investing excess cash or helping the company pension fund with their strategy currently requires analysis and choices.

Corporate Finance has the fun task of optimizing the balance sheet and lowering funding costs to an extreme. I recently met the group treasurer of a real estate company who is able to make money attract funding for his company! The more challenging task of corporate finance is participation in business development and M&A. The willingness of entrepreneurs, shareholders and boards to invest in adventurous ways is high. The corporate treasurer has to hold on to his role of risk manager and hit the brake. This does often not increase his popularity…

A lot more can be said about the topic, that will be for other blogs. Back to a non-corporate mindset and not pretending to be a socialist, I hope all this money will be used to improve the world: better the environment, lowering the income gaps, makes us all happier. The real philosophical approach I leave to Notorious B.I.G.

Enjoy your money,

 

 

Pieter de Kiewit

Owner at Treasurer Search

Coronavirus Concerns See Equity Markets Suffer As Investors Head for Safe Havens

27-02-2020 | treasuryXL | XE |

Coronavirus took the headlines again with the World Health Organisation warning that the world should prepare for a pandemic. The WHO stated it was too early to call the outbreak a pandemic but countries should be “in a phase of preparedness”. As with before, the Dollar and Swiss Franc are benefiting from their safe-haven status, with CHF hitting a 4-year high against the EUR. Both strengthened against most major currencies, as risk-averse investors fear that if the virus becomes a pandemic it will have a significant negative impact on global growth.

GBP/USD fluctuated around 1.29 for the day, despite US Equities collapsing yesterday, as investors adopt a risk off approach. Long-term bond rates fell sharply as worries about a recession increased. The 10-year treasury note is not far from its 2016 record low of 1.32%. In turn, Gold has continued to climb higher, hitting fresh multi-year highs and edging ever closer to the $1,700 mark. Despite the fear amongst wall street, the US Dollar has shrugged off the negativity as it moved higher thanks to its safe-haven status.

EUR/USD moved towards 52-week lows yesterday, falling to 1.0804 yesterday. Coronavirus related events in Italy had affected the EUR, with around 50,000 people under lockdown and the death toll rising to four. The pair   however recovered towards the end of the day, hitting one-week highs of 1.0850 as the S&P 500 closed in on the low of 2020.

GBP/EUR appears to be relatively stable as investors assess the impact of coronavirus to be potentially greater within Europe than it is in the UK. Also, news that the UK budget – which is due to be announced on March 11th – could be bigger than expected should help the Pound remain relatively well supported against the Euro and other major currencies. In the meantime, the market keeps one eye on the build up to the UK-EU trade talks, due to commence next week. Some potentially positive news for the Pound yesterday was reports that the EU’s latest draft mandate indicates the EU will not be pushing for ‘dynamic alignment’. Dynamic alignment is essentially a requirement for the UK to adhere to a certain set of laws and standards, set by the EU, in order to have a free-trade agreement. Today, the EU leaders will be holding a general affairs council, with the Brexit Strategy on the agenda. This could provide greater detail around the EU’s position ahead of next weeks’ talks, any demands that may emerge from the agenda could have implications for the Pound.

Source

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Deciding when to make an international payment and at what rate can be critical. XE Business Solutions work with businesses to protect bottom-line from exchange rate fluctuations, while the currency experts and risk management specialists act as eyes and ears in the market to protect your profits from the world’s volatile currency markets.

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4 top Questions and Answers about Cash Management

| 25-2-2020 | by Kendra Keydeniers |

Cash Management is one of the three primary disciplines of Corporate Treasury. (Risk Management and Corporate Finance are the other two.) Cash management is often described as monetary logistics management. This analogy works quite well. It is the discipline of Treasury that is devoted to the management of planned expenditures, so it is highly focused on operational efficiency and process optimisation. It is about optimising the flow of money coming in from customers, some money going into savings, and other money going out to pay the bills. Since this is such a vital process to any organization, it is not hard to understand how cash management can make or break a company.

 

4 questions and answers about cash management

Here are 4 top questions and answers about Cash Management

1. Why should a company have more than one bank account?

Historically, large companies have used multiple bank accounts to gain insight into the activities of their local subsidiaries. In an extreme example, a retail chain might have held a different bank account for each local shop, so that a large retailer could easily hold over 500 accounts! Today, such unnecessary complexity is considered unprofessional. Insight into local activities can be achieved through proper bookkeeping, and extra bank accounts cost extra money. Modern bank accounts also tend to feature more extensive payment capabilities than in the past. A single European bank account, for example, will allow you to send payments within most European countries. Nevertheless, the operations of global businesses still often require multiple bank accounts. In addition, many companies like to hold accounts with banks that are widely recognized by customers in the local market.

2. Why is cash management separate from bookkeeping?

In small companies, cash management need not be separate from bookkeeping. The two activities may be done within the same department. In larger companies, though, these activities are specialised. This is because the skill set required for bookkeeping is different from that of cash management. Furthermore, in larger companies it is important to segregate duties for purposes of operational control: the one sending the invoice should not be the one who processes the related payment. Lastly, it is important to mention that in larger companies a distinction is made between cash flows, on the one hand, and income and expenses, on the other. In the financial accounts of a large corporation, revenue is booked when a sale is made. However, it might take some time before this revenue actually reaches the company in the form of cash. Until it does, booked revenue is generally irrelevant to the cash manager. The same is true for expenses. An expense may be booked, but from a Treasury perspective, until an expenditure is disbursed, it is still considered cash on hand.

3. Do cash managers also do foreign exchange (FX) management?

In smaller companies, cash managers also manage foreign exchange, but FX management is a separate field of expertise. It might be the role of a cash manager to set up bank accounts in various currencies. By doing this, the cash manager lowers operational costs by preventing repetitive transactions between the same currency pairs, which can generate unnecessary fees; but, this is not FX Management. (The FX Manager researches market developments that have an impact on Treasury operations, and often plays a more analytical or strategic role.)

4. For cash managers, what was the impact of the introduction of the international bank account number (IBAN)?

When the IBAN was introduced a few years ago, this new standard for bank account numbers made international electronic payments easier. In theory, it allows companies to work with fewer bank accounts, making cash management easier and cheaper. However, some companies argue that doing local business requires having a local bank, so they maintain multiple international bank accounts, despite the convenience of the IBAN.

Read more about Cash Management and check out these treasury topics as well:

What is Treasury?

What is Corporate Finance?

What is Risk Management?

What is Working Capital Management?

Kendra Keydeniers
Community & Partner Manager at treasuryXL

Do Androids dream of Electric Spreadsheets? A Beginner’s Guide to AI in Treasury – Part I

| 24-02-2020 | treasuryXL | Cashforce |

Do Androids Dream of Electric Sheep by Philip K. Dick, adapted to the movie Blade Runner in 1984 (yes, it’s that old), ponders the question whether technology can replace humanity in every aspect of life. Whether advanced technology could attain a comprehensive cognitive interpretation of dreaming is a philosophical conundrum that I’ll leave for the brightest among us. However, while this doomsday scenario in Hollywood movies in which robots rise against their human creators is far from happening, the reality is that a computer has already surpassed the level of strategic thinking of a human being. This rise of artificial intelligence carries the potential to disrupt any industry, including treasury, but often leaves you wondering if the hype lives up to reality.

Abstract blue lights background. Vector illustration, contains transparencies, gradients and effects.

[Spoiler alert] In the dystopian world of Blade Runner, the protagonist called Deckard, a bounty hunter or “blade runner” hunts outlawed androids or “replicants” while feeling no remorse due to them being machines. An interpretation endorsed by the iconic unicorn dream sequence hints that his human memories might have been artificially implanted, implying he might be an android himself. Is this the course artificial intelligence will eventually take us to?

Man vs. Machine – A Boardgame Evolution 

In 1997 IBM’s computer Deep Blue beat Gary Kasparov, the world champion at that time, in a game of chess. Deep Blue was able to analyze thousands of high-level chess games that were stacked into its system. When proposed with a move, it would choose the best outcome out of different scenarios. By basic number-crunching it was picking out the move that would lead to the best position on the board. This milestone was heralded as a boon for technology and viewed as almost exclusively disruptive for many industries.

Go, an abstract strategy board game invented in China, has simpler rules than chess, but many more moves at each point in the game. Just to give you an idea, the size of possible outcomes is larger than the number of atoms in the universe. Looking too far ahead in the game, or considering all possible moves and counter-moves is therefore nearly impossible. In 2016, distinguished Go player Lee Sedol was put up for the task to beat the next high-tech invention, named AlphaGo. Created by the sharp minds at Google’s DeepMind, its intelligence is based on its ability to learn from millions of Go positions and moves from previous games. Once again, machine triumphed over its human equivalent when it came to strategic thinking.

AlphaZero, released in 2017, is a version of the same program that takes it a step further. It can play chess, Go and other games and is only given the rules of the game, nothing more. By playing millions of games against itself without any previous knowledge of plays, tactics or strategy, it was able to master these games on its own. So how much time went by from the moment they launched AlphaZero to the moment where it achieved a superhuman level of playing Go? Less than 24 hours. Even more baffling is, while humans have been playing it for the past 2500 years, it came up with brand-new strategies that have never been seen before. While it is ‘only’ about fun and games, this sheds a new light on technological concepts that seemed at first like far-out fiction.

Artificial intelligence systems can dazzle us with their game-playing skills and lately it seems like every week there is a baffling breakthrough in the field with mind blowing results. It is almost unthinkable that the finance sector would be untouched by the rise of AI, any sector for that matter. Nonetheless, with the present hype around it, many of the used concepts and terminology seem to be used carelessly, which makes it hollowed and deprived of any meaning. You have probably heard of the terms “machine learning” and “deep learning”, sometimes used interchangeably with artificial intelligence. As a result, the difference between these concepts becomes very unclear. To understand this distinction and why AI will disrupt current technologies, we have to understand where it comes from.

Let there be l(A)ight – A brief History

Simply put, AI involves machines that can perform tasks that are similar to human tasks. A very broad definition which can go from simple solutions such as automated bank tellers to powerful and complex applications such as androids, which inspired the movie Blade Runner.

Surprisingly, the script on AI arises from a time when James Dean was rocking the screen and Elvis was celebrating his first “Blue Christmas”. While the statistical framework is based on the writings of French Mathematician Legendre from 1805, most AI models are based on technology from the 50’s.
1950, the world-famous Turing test is created by Alan Turing (who will soon be commemorated on the new £50 note). The test reflects on the question whether artificial intelligence is able to appear indistinguishable from a human in terms of thought and behaviour.
1951, the first artificial neural network was created by a team of computer scientists: SNARC (Stochastic Neural Analog Reinforcement Computer). They attempted to replicate the network of nerve cells in a brain. It imitated the behaviour of a rat searching for food in a maze. This was largely an academic enterprise.

SNARC computer

In the same way, 1952 rouses the birth of the first computer learning program or machine learning by Arthur Samuel. The program played checkers and improved at the game the more it played. Machine learning, a subset of AI, is defined as the ability to learn without being explicitly programmed what to “think”. It enables computers to learn from their own mistakes and modify to an altering environment. Machine learning also includes other technologies such as deep learning and artificial neural networks. Nowadays this technology can, among other things, use data and statistical analyses to predict possible future scenarios such as for Cash flow forecasting.
The Dartmouth Summer Research Project was a 1956 summer workshop and widely considered to be the starting point of artificial intelligence as a scientific field. With this uprising of technology there came a lot of excitement for the potential of automation in finance and treasury. It was believed to help accountants and bankers speed up their work. But if wishes were horses, beggars would ride. And in this case, androids would be riding along with them. Unfortunately, a reduced interest in the field and many failed projects leave artificial intelligence stranded in what is called the ‘AI winter’.

Blade runnerinfographic artifical intelligence

Luckily humans are not one trick ponies, so our story doesn’t end here. After a period of economic & technological proliferation in the 1980’s, Expert Systems found their way into the world of finance. These are computer systems that are capable of decision-making on the level of a human expert having been designed to solve complex problems. But when push came to shove, the technology wasn’t mature enough and didn’t meet client’s demands.

In 1991 the World Wide Web was opened to the public. It’s the start of the data revolution. In 2005, it reached 1 billion people and today more than half of the world’s population is connected to the internet.
Coming back to our first example, it was in this period (1997) that Deep Blue challenged the capacity of the human brain and proved it could think more strategically than a human being.
Today AI is demanding so much computing power that companies are increasingly turning to the cloud to rent hardware through Infrastructure as a Service (IaaS) and Platform as a Service (PaaS) offerings. That’s why around 2006, players such as Amazon Web Services (AWS) opened up its cloud environment to broaden the capacity of AI even further.

In the same year, Geoffrey Hinton coined the term “deep learning”, helping the progress of operating AI applications in the real world. This brought the world one step closer to bridging the fuzzy gap between humans and androids.
2015, AlphaGo is introduced to the world. Two years later in 2017, its successor AlphaZero sees the light of day.
2019, the first picture of the black hole M87 the constellation Virgo is rendered through artificial intelligence opening the door to new knowledge in the universe. The path of AI took us a giant leap forward, but we’re far from the finishing line. Roughly 90% of the universe exists of dark matter or dark energy that leaves us in confusion. Accordingly, a similar percentage of untapped dark data, the fundamental building block to understand a company’s future, isn’t being used.

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Central bank digital currencies: towards a global approach

| 21-2-2020 | Carlo de Meijer | treasuryXL

In one of my earlier blogs, I mentioned that Facebook’s efforts to launch its Libra cryptocurrency triggered intense debates over who would control money in the future. It has also forced Central Banks to think about and explore their own digital currency.

According to recent research, at least 18 central banks are currently developing digital currencies. But up till recent that was just done on an individual stand-alone basis. The most effective way to counter private digital currencies however is via a collaborative approach.

This year we are seeing more collaboration between central banks, aimed to think about the impact of such a digital currency for monetary policy and financial stability and what could be the optimal design of such a currency.


Why a central bank digital currency?

There are various reasons why central banks may introduce their own digital currency. First of all as a defensive move. The rise of crypto currencies like the Libra could create tensions among central banks and regulators as these can make it difficult for central banks to manage their foreign exchange controls and implement a sound monetary policy.

Another reason is the optimisation perspective. Current central bank operated money systems work well, but could certainly benefit from improvements e.g. in settlement. They see this technology as ‘optimizing or improving the rough edges on a system which is already great, and which they have no desire to fundamentally change’.

Central Bank Digital Currencies versus Crypto currencies

While central banks recognize digital money may be an improvement over physical money, a central bank designed digital currency will not resemble a decentralized cryptocurrency.

Though both CBDCs and cryptocurrencies, to a varying degree, are based on blockchain technology, CBDCs are – fundamentally – different to cryptocurrencies. CBDCs are traditional money, but in digital form, issued and governed by a country’s central bank, whereas cryptocurrencies are decentralised. The Central Bank consensus is that decentralization is not a desirable property in a CBDC as it could aid tax avoidance and enable criminal payment systems. Cryptocurrencies are neither recognised as legal tender – which CBDCs, by definition, would be. And unlike central bank money, both traditional and digital, the value of cryptocurrencies is determined entirely by the market, and not influenced by factors such as monetary policy or trade surpluses.

BIS Survey

Early this year the Bank of International Settlement (BIS) published a paper that presents the results of a survey that asked central banks how their plans are developing in the area of central bank digital currency (CBDC).

It shows that a wide variety of motivations drive extensive central bank research and experimentation on CBDCs. According to the survey about 80% of the central banks are engaging in some sort of work in this area, with half looking at both wholesale and general purpose CBDCs. About 40% of central banks have progressed from conceptual research to experiments or proofs-of-concept while another 10% have developed pilot projects.

Every central bank that has progressed to development or a pilot project is an institution in an emerging market economy. Globally, emerging market economies are moving from conceptual research to intensive practical development, driven by stronger motivations than those of advanced economy central banks.

Nonetheless, plans of central banks in advanced economies appear to be accelerating compared with earlier expectations.

Central banks need to collaborate

The BIS survey also showed the urgent need for collaboration by central banks on CBDCs. To find an optimal design of a central bank digital currency cooperation between these institutions is a must. Collaboration through international vehicles, such as the BIS Innovation Hub, will be necessary to avoid any unforeseen international consequences.

The collaboration on understanding the impact of CBDCs need to intensify. The survey shows that more central banks should be looking at the risks outside the financial system while also exploring ways to improve the system with CBDCs.

Collaboration initiatives

Since this year we see a shift from more stand-alone projects towards working with other central banks in the CBDC field. It is seen as critically important for central banks worldwide to join the discussions and take part in a more global coordinated approach for CBDCs.

1. Group of six leading central banks

Last month the Bank of International Settlements (BIS) announced that it had created a group involving six leading central banks including Bank of Canada, Bank of England, Bank of Japan, Central Bank of Sweden, Swiss national Bank, as well as the ECB.

The group will be co-chaired by the Head of BIS’ Innovation Hub, Benoît Cœuré, and the Deputy Governor of the Bank of England and chair of the Committee on Payments and Market Infrastructure, Jon Cunliffe. Senior representatives of other bank members will also be included.

These central banks have joined forces to explore digital currencies, assess the potential for central bank digital currency (CBDC) in their respective jurisdictions, share experiences as they assess the potential cases for CBDC in their home jurisdictions and look at ‘cases for central bank digital currency’. The members will thereby work closely with the Committee on Payments and Market Infrastructures (CPMI), an international standard-setter for payments and clearing, and the Financial Stability Board (FSB).

“The latest decision [by the six central banks] is not just about sharing information. It’s also an effort to keep something like Libra in check.” “Something like Libra would make transactions costs much cheaper. Major central banks need to appeal that they, too, are making efforts to make settlement more efficient with better use of digital technology.” Yamaoka, Bank of Japan president

2. World Economic Forum CBDC Toolkit

The World Economic Forum (WFO) and a community of over 40 central banks, international organizations, academic researchers and financial institutions have created a framework to help central banks evaluate, design and potentially deploy CBDC. The framework, dubbed the “CBDC Policy‑Maker Toolkit”, is intended to help accelerate critical and rigorous analysis of CBDC.

The framework provides a guide for central banks around the world. The toolkit provides information on retail, wholesale, cross-border and “hybrid” CBDCs, for all sizes of emerging and developed countries.

It is aimed to help policy‑makers within central banks confidently evaluate whether CBDC is the right fit for their economy and guide them through the evaluation, design and deployment process. It describes a step‑by‑step evaluation process for CBDCs, including potential benefits and challenges, could help “identify trade-offs between benefits from the use cases and their associated risks across different dimensions.” For those who are already researching, it helps them “make progress quickly”.

“Given the critical roles central banks play in the global economy, any central bank digital currency implementation, including potentially with blockchain technology, will have a profound impact domestically and internationally.” “The toolkit can serve as a springboard as central banks progress with their CBDC investigation and development.” “The intricacies of implementing CBDC are complex and the implications are wide‑reaching. As a result, policy‑makers may find themselves in uncharted waters when attempting to evaluate the potential benefits and trade‑offs.” Sheila Warren, Head of Blockchain and Distributed Ledger Technology at the World Economic Forum

3. European Central Bank Task Force

At the end of 2019 the ECB created an expert task force to look into and analyze the feasibility and potential outcome of establishing a central bank digital currency (CBDC). Central banks should consider the merits, which may include public goals such as financial inclusion, consumer protection and payment privacy.

The group is a result of efforts by Christine Lagarde, the new ECB president, who has pushed the European Central Bank to dedicate significant resources to studying the merits of CBDC. She explained that this task force was aimed at ensuring the European Central Bank plays an active role in fostering cheap and speedy payment transactions, likewise exploring the benefits of having a CBDC. With this development, Europe would join the rest of the world in their pursuit of having a central CBDC.

“In terms of the road ahead, the ECB will continue to assess the costs and benefits of issuing a central bank digital currency (CBDC) that would ensure that the general public remains able to use central bank money even if the use of physical cash eventually declines”. Christine Lagarde

The task force will work closely with the EU national central banks to study the feasibility of a euro area CBDC in various forms, covering all the practical aspects, including how to minimise possible unintended side-effects.

Lagarde agrees that pursuing a CBDC is a legitimate goal for the ECB but does not rule out competitive solutions that may come from private companies pursuing platforms that utilize digital currencies to expedite cross-border and domestic transactions.

“We are looking closely into the feasibility and merits of a CBDC, also because it could have major implications for the financial sector and for the transmission of monetary policy”. Lagarde

Optimal CBDC design

Interesting question is: what is the most optimal CBDC design? Certainly, a digital central bank currency has the potential to impact the financial system in a significant way. But for an optimal design one need a good cost-benefit balance and mitigate – as far as possible – potential unintended side-effects.

In this blog the focus is on so-called general purpose CBDCs accessible to the broad public. Wholesale CBDC are seen as of more limited scope and does not really question the established structure of the monetary base. General purpose CBDC could be implemented in two alternative ways: they could be offered in the form of deposit accounts with the central bank to all households and corporates. Alternatively, the central bank could offer a digital token currency that would circulate in a decentralized way without central ledger.

But for security and privacy reasons this latter alternative is not the favourite of central banks especially in the well developed countries.

Opportunities and challenges of CBDCs

Central banks have started to analyze intensively the benefits and negatives of introducing central bank digital currencies (CBDC). They are especially looking at what is their potential impact on monetary policy, financial stability and the financial system. It is imperative that central banks thereby proceed cautiously, with a rigorous analysis of the opportunities and challenges posed.

Opportunities    

In various studies a number of quite diverse benefits of CBDCs have been put forward.

More efficient payments

CBDCs could address problems like inefficient payments that cryptocurrencies seek to solve, while maintaining state control over money. Central banks think CBDCs could make payments systems more efficient, reducing transfer and settlement times and thus promoting economic growth. Other advantages could include making available efficient, secure and modern central bank money to everyone, and strengthening the resilience, availability and accessibility of retail payments. This is especial true for the countries with underdeveloped banking systems, and/or without a secure and efficient payment system.

More security

A widely adopted CBDC would allow better control of illicit payment and saving activities, money laundering, and terrorist financing. It would thus place users at less risk of violent crimes that target holders of cash, and potentially reduce security and insurance costs associated with keeping cash on business premises. This however would requires the discontinuation of banknotes (or at least of larger denominations). Obviously, this motivation of CBDC would not apply if CBDC circulates as anonymous token money even for high amounts.

Improve overall effectiveness monetary policy

CBDCs could provide significant competition for traditional monetary instruments. Such a competition would present monetary policy with challenges but also with opportunities. Central bankers fear that Libra and other crypto currencies could quickly erode sovereignty over monetary policy. CBDCs could counter the rise of cryptocurrencies issued by the private sector.

Next to that CBDCs could allow relaxing the so-called zero-lower bound constraint on nominal interest rates as negative interest rates can be applied to CBDC. If digital cash is used to completely replace physical cash, this could allow interest rates to be pushed below the zero-lower bound, which could promote macro-economic stability. CBDC could also widen the range of options for monetary policy. Variable interest rates on CBDC would provide for a new, non-redundant monetary policy instrument that would allow improving the overall effectiveness of monetary policy.

Improve financial stability

CBDCs could also improve financial stability and macroeconomic stability and reduce so-called “moral hazard of banks“ by downscaling the role of the banking system in money creation via sight deposits, as CBDC would take over to large or full extent sight deposit issuance by banks. By providing competition for bank deposits, the adoption of a CBDC could limit the practice of fractional reserve banking, thereby strengthening financial stability.

Safer financial system

A CBDC could have profound implications for the banking sector, either positive or negative. CBDC can also make the financial system safer as. Under a central bank digital currency scheme, citizens and business would be permitted to open and hold interest paid accounts with the central bank. It would allow individuals, private sector companies, and non-bank financial institutions to settle directly in central bank money (rather than bank deposits). A CBDC, therefore, would compete directly with commercial bank deposits, likely inducing a partial shift of deposits away from commercial banks towards the central bank.

This may significantly reduce the concentration of liquidity and credit risk in payment systems, resulting in a safer financial system, with less scope for impairment in monetary policy transmission.

Potential costs of CBDCs

Most of the proposed advantages of CBDCs however are not that straight forward and are mostly subject to controversial debate. Overall, one may conclude from reviewing the arguments in favor of CBDC that the merits of CBDC i.e. contribute to an efficient, resilient, accessible and contestable payment system seem relatively uncontroversial, without this per se being sufficient to justify CBDC. But that is not the case for other arguments.

Disintermediation of the banking sector

It remains uncertain to what extent and in what direction a sovereign digital currency would impact the banking sector and financial stability. Different outcomes are conceivable, with different policy implications, but with no clear indication as to which is most likely. Some warn against the structural disintermediation of banks that could be caused by CBDC. This disintermediation has been considered as one of the major drawbacks and risks of CBDC.

De-funding of the banking sector

Too widespread a substitution of bank deposits by CBDC could lead to a significant de-funding of the banking sector. If CBDCs replace private deposits, that could erode commercial banks’ credit channels, having negative spill over effects on credit creation and economic activity. Another danger associated with CBDC, is that it would facilitate runs out of bank deposits into central bank money in times of financial crisis situations.

Impact on financial stability

A substitution of bank deposits by CBDCs could also weigh on growth prospects if it compromised bank lending activity. First, even if banks were both willing and able to attract alternative funding, the adoption of a CBDC as a very easily safe asset could make credit supply more volatile, facilitating a flight to safety. It might act as a vehicle for bank runs, undermining financial stability. Second, the de-funding risks of banks associated with a CBDC might push the private sector into shadow banking activities.

Forward looking: are CBDCs close to becoming reality?

There is growing consensus that central bank digital currencies have a big chance to become a reality. But it is still guessing when and how it will look like. Most CBDC projects are still in very early or conceptual stages.

While the creation of the group of six leading central banks in the developed economies demonstrates that central banks are moving forward in their research on the costs and benefits of digital currencies at the global level, present findings are not (yet) enough to justify a central bank digital currency. It is still too early to say what would be the optimal design for CBDCs.

There are still many open questions such as, what will be the effect on monetary policy? How will it impact financial stability? And what about the position of financial institutions?

For that there are still too many controversies in the various arguments pro and con. It remains uncertain to what extent and how CBDCs would impact the banking sector and what that means for financial stability. It is also unclear how CBDCs really impact monetary policy.

More research should be devoted to better understanding and assessing the pros and the cons associated with the use of such a CBDC. Only than balanced decisions can be made.

 

 

Carlo de Meijer

Economist and researcher