Huge number of countries with an array of recession forecasts

20-02-2020 | treasuryXL | XE |

Widespread weakness continues to weigh on a huge number of countries with an array of recession forecasts in the wake of global weakness due to pandemic, trade wars and trade deleveraging.

Hong Kong having slipped into recession last year seems as if this is likely to be repeated in the wake of the Coronavirus and months of political unrest. Hong Kong GDP already contracted at an alarming 3.2% in the middle of 2019 and key signals from economic data are already pointing at a continued slow-down of their fiscal situation. Japan is widely believed to enter a recessive environment as well suffering a huge typhoon and then a big tax increase and straight away afterwards the virus also affected their growth. There is a chance the UK could slip into recession following a protracted Brexit process and, if trade deals are not as positive as expected, the additional costs will threaten growth during the course of the year. Germany produced a string of contracting economic figures during the end of 2019 as it wore a sustained decline in manufacturing sector and auto sales. Italy was in a technical recession for half of 2018 and has not really recovered where they have seen weak productivity, big debt figures and unemployment and these do not appear to be being restored quickly. China continued to slow during the trade war and this led to a forecast of GDP growth of 5.8% which sounds very high, but when compared to the figures of 6.6% and 6.1% in the last two years respectively it is certainly a big reduction. Add to these, significant stresses in the economies of Turkey, Argentina, Iran, Mexico and Brazil and the picture for global growth could be gloomy.

In the UK, the situation is finely balanced and after the prolonged Brexit situation our attention returns to stalwart economic data production. We saw prints in jobs and earnings data and there are small positive signs there as earnings rose slightly. We are waiting for inflation data which will be a potent conversation in context of the UK’s buoyancy. Expectations are a significant rise in Retail Price Index figures year on year but a reduction month on month. Consumer Price Index figures are pointing at a slight increase year on year but a big reduction month on month. Lastly, Producer Price Index looks set to largely balance out so that is good news for the near future if forecasts proves to be accurate.

Looking over the pond at the US inflation and housing data, there appears a mixed bag of results expected. Housing starts seem to have an expectation of a big contraction but there looks as if the Producer Price Index data will be a move higher, which will push an increase in costs to consumers over time and increase inflation more generally but this has a likelihood to manifest in the requirement of tools to mute this price pressure, namely interest rate hikes. This would need to be a sustained factor for this conversation to play out in this way within the Federal Reserve.

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

 

 

 

Looking for a Treasury & Trade Finance Business Partner

19-02-2020 | Treasurer Search | treasuryXL

Our partner Treasurer Search is looking for a Treasury & Trade Finance Business Partner for a multi-billion $ global market leader in various complex technological project industries.

The Treasury & Trade Finance Business Partner will claim her role in the teams that land complex technological & infrastructure deals in the global market. She will understand the project and help shape the underlying deal from financial risk perspective. In this she will take FX, payments terms, counter party risk and other parameters in consideration. With her toolkit filled with instruments like bank guarantees, letters of credit, commercial contract clauses and derivatives she will structure the best possible solution.

Next to project related tasks, the Business Partner is responsible for regular cash management and other corporate treasury tasks in cooperation with the headquarters that is based abroad.

Ideal Treasury & Trade Finance Business Partner

The ideal candidate for this position has the proper balance between relevant knowledge and externally oriented business behaviour. Skills for this position can be acquired in a banking environment as well as within an international technology corporate. As a person she is a strong communicator, analytical and willing to be a one-person-department. Most likely the ideal candidate has an academic degree in economics, legal, business science or other relevant areas.

Our Client

Our client is a multi billion global market leader in various complex technological project industries. The company has various divisions in different parts of the world. Engineers are the backbone of the company and their goal oriented, direct way of working is very telling about the company culture.

Remuneration and Process

The expected annual base salary for this position is €75K. Our client offers freedom and support to shape the position in the best possible way. For candidates that qualify, a more comprehensive job desription is available. The Treasurer Test might be part of the recruitment process.

Contact person

Kim Vercoulen

 

T: (0850) 866 798
M: (06) 2467 9339
E: [email protected]




Corporate Governance and Treasury | Embrace the Corporate Treasury Policy

| 18-02-2020 | François de Witte | treasuryXL |


Corporate Governance

Corporate Governance is a mechanism through which boards and directors can direct, monitor and supervise the conduct and operation of the corporation and its management in a way that ensures appropriate levels of authority, accountability, stewardship, leadership, direction and control.

The ultimate responsibility for Treasury management within an organization lies with the board of directors. Due to the practicalities and technical aspects involved in corporate treasury, the board typically delegates the daily management of risk to responsible individuals in each department. In the case of financial risks, many of these are delegated to the treasurer.

Whilst, due to its specific activities, the corporate treasurer needs to take a lot of actions and decisions independently, it is important that he does this within a framework and Governance. Quite a lot of corporates have formalized this in a “Corporate Treasury Policy”.

Corporate Treasury Policy

The Corporate Treasury Policy is the mechanisms by which the board, or risk management committee (RMC), can delegate financial decisions in a controlled manner. This document should be a summary of all the principles approved by the Board or the Financial Committee of the Board as a mandate of the Board to the treasurer (the Treasury Mandate).

The Corporate Treasury Policy is a framework document, which covers the following areas:

Organization of the Treasury Function

In most of the companies, the Corporate Treasury Reports to the CFO. The CFO is usually himself a Member of the Executive Committee, which itself reports directly to the Board of Directors. (Treasurer – CFO – Treasury Committee – Audit Committee – Board):

A policy should set out clearly which decisions are delegated to the treasurer and when the treasurer should refer a decision back to the board or other person within the organization. Within several corporate, the Board of Directors have delegated the decision process to dedicated committee, like the Risk Committee, and the Liquidity and Funding Committee.

Treasury Control Framework (including the Code of Conduct)

Procedures and controls to manage the risk should be put in place to provide an overall framework for decision-making by the treasury team.

Ideally, this should also include a code of conduct. The Corporate Treasurer should act as a Corporate Custodian. In other words, he is Protector of the company’s assets, and should act according to a strict Code of Conduct and Ethics. There exist examples of codes developed by professional organizations such as IGTA, ATEB, AFTE, ACT and ATEL.

Liquidity and funding

The board should be informed about funding possibilities to put currency, maturity, cost and equity/debt character into a wider context. The board should decide on the strategy but can delegate fund raising decisions and actions to treasury. However, I recommend that Treasury asks the final board approval for strategic decisions (e.g. major syndicated loans, bond issues, etc.).

The board should have an overall view on the liquidity risk of the company. The Board should also define the financial policy, covering the gearing and maturity issues, fixed and variable interest rate obligations, dividend policy and covenants.

Banking Relationship

Banks chosen by the treasurer must be able to meet the needs of the organization, both domestically and internationally. I recommend that the Board approves annually criteria for selecting the banks with whom it will work.

Risk Management

The Treasurer must identify the various risks to which the company is exposed, quantify the impact, and should inform the Board thereof. He should estimate the size of these exposure risks and their impact on the he overall operations and financial performance of the company, and make recommendations in these areas

The board must approve the hedging policy, the company’s foreign exchange, interest rate and commodity risk management policy and its attitude to risk. It should define which part of the risks must be hedged and the hedging horizon. I recommend that the Treasurer submits at regular intervals to the Board the list of authorized instruments, the amount per instrument and their term

Investment Policy – Counterparty Credit Risk

The board should approve the treasury’s Investment policy including the choice of instruments, the list of counterparties used + the maximum amount/counterparty & maturity. It is recommended that the Board provides guidelines and limits per instrument.

It is recommended that the Board approves the guidelines for fixing counterparty limits, and maximum exposure per counterparty.

Authorized instruments and Arrangements – Authorized Approvers

The Treasurer should make sure that the board must understands and approve the strategies and instruments used and sets guidelines for the appropriate limits for their use. These guidelines need to ensure that treasury has not sacrificed long-term flexibility or

survival for short-term gain, especially in view of the volatile financial market’s situation.

Treasury Operational Risk

The treasurer should make the Board aware of the operational risks to which the company is exposed. He should provide recommendations in this area. Furthermore, the treasurer should also submit recommendations to the board on the treasury organization and the ways to reduce the operational risks.

Monitoring

A Corporate Treasury Policy has only sense, if there is a regular follow up and control framework; Hence procedures and controls to manage the risk should be put in place to provide an overall framework for decision-making by the treasury team.

It is also important to provide to the Board a regular update on the way the treasurer complies with the policy. The policy should also be regularly reviewed.

Treasury must alert the board to external changes and internal strategic developments, which may have long-term implications for the organization and make proposals for managing them.

The policy needs also to be reviewed at regular intervals each “Policy” in function of the market and of other internal or external developments. I recommend having treasury on the Board’s agenda on a quarterly basis.

Conclusion

Treasury is not an island in the company. It is closely linked to the corporate governance. Hence it is important to define the right framework.

I recommend to corporates to put in place a treasury policy validated by the Board of Directors and reviewed regularly. It is important to update the Board at regular intervals about strategic topics, such as strategic financing topics and risk management.

The treasurer has also an important educational role, as he must be able to make complex treasury topics understandable for the board members.

Hence there must be a good interaction between the treasurer, the CFO and the Board is key, where the Treasurer is the linking pin.

 

François de Witte
Founder & Senior Consultant at FDW Consult
Managing Director and CFO at SafeTrade Holding S.A.
treasuryXL ambassador

Top 5 most common pain points in Treasury

14-02-2020 | treasuryXL | Michael Ringeling

The purpose of Treasury is to manage a company’s funding, liquidity and to mitigate its financial and other risk. Made up of three sub-disciplines, Treasury’s overall objective is to safeguard the company’s holdings and to follow the long-term strategy set forth by Corporate Finance (and strategy). Cash Management, on the other hand, is primarily focused on operational, short-term, efficiency and process optimisation, whereas Risk Management is oriented towards financial research and operational controls.

Michael Ringeling, corporate treasury expert,  made a top 5 of the most common pain points he encounters in Treasury, including consequences and a solution.

Top 5 of the most common pain points in Treasury

 

  1. Too many bank accounts at too many banks

Consequence:
Complex to manage, poor control, higher risk of fraud, higher costs, more KYC/AML requirements

Solution:
Less bank accounts at fewer banks, all via one or two electronic banking systems or multibank platform to manage payments and cash flows. The result will be more efficient, more secure and more cost-effective payment transactions, reporting and reconciliation into the ERP system.

  1. No reliable cash flow forecast

Consequence:
Poor liquidity management. Insecure about the required short and long term funding and poor management information.

Solution:
A good cash flow forecast, providing adequate insight in the organisation’s short and long term cash flows, will contribute to an efficient funding strategy and lower cost of funds.

  1. FX results, (negatively) impacting the company’s P&L

Consequence:
The company’s financial results are impacted by unforeseen and unknown FX results

Solution:
FX risk management analyses, create a FX policy and perform deal execution (hedging) to control FX results

  1. New Loan Agreement needed – negotiations

Consequence:
Difficulties in assessing if the loan terms and conditions are fair. Risk of overpriced loans and/or unfavorable terms and conditions required by the bank(s).

Solution:
Assist the company when negotiating with the bank(s) to get a fair deal with terms and conditions that will not unnecessary limit the company’s flexibility.

  1. Cash is trapped on too many stand alone bankaccounts around the world

Consequence:
Company cannot effectively use a significant amount of cash, resulting in higher (short term) loans and higher interest costs.

Solution:
Implementation of a cross border cross currency cash pool to centralise the company’s cash balances. As a result the amount of local trapped cash will be reduced and that cash can be used for general corporate purposes. Less short term loans and lower interest costs.

Sounds familiar?

Do you recognize the pain points that we mention above in your business? Or are you experiencing other critical treasury pain points in your business?

In our active network there are several treasury experts who can offer treasury support. They can be hired for specific projects or on a regular basis. Check Rent a Treasurer and let us help you.

 

Michael Ringeling

Corporate Treasurer Expert

Inflation Data for EURUSD

13-02-2020 | treasuryXL | XE |

Markets have once again turned risk averse overnight, with the Chinese city of Hubei the latest outbreak focus. With a European tech conference cancelled, as well as fears in South Korea and Japan. The medium and long-term impacts are still non quantified. Currency markets do not like uncertainty.

And so, the now go-to bellwether currency is the USD, which moved above the psychological level of 99.00 which has been touted for some days. As a consequence most currency pairs have moved lower against the Greenback. One of the more notable casualties is the most liquid pair – EURUSD. Generally regarded as a low volatility play, it’s has now moved down over 13.5 % in the last two years, and tests key support.

GBPEUR has gained momentarily as a result, and indeed UK importers can be buoyed by a much healthier session for GBP across the board. Risk bearing currencies like AUD, NZD and CAD have all suffered as a by-product, and will be dictated to by Geopolitical fears related to the Coronavirus outbreak.

Yesterday did not help the EUR on the data from with Industrial production numbers much lower than expected at -2.1%, a huge shift. And this fragility for the single currency will today be magnified by German CPI inflation releases. For the EURUSD traded pair, the release of US CPI inflation numbers later in the session could have a similar push/pull impact.

Back to the UK and today we see PM Boris Johnson reshuffle his cabinet, and whilst not significantly market moving; the emphasis will be closely eyed for negotiations with Brussels.

One final thing to note is the release this morning of the RICS house price balance numbers here in the UK. This number has shown a positive swing, the post UK. election decision clearly has people moving on up. Long may it continue.

 

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

 

 

 

Financing a Livable World

11-2-2020 | by Aastha Tomar

If Greta Thunberg doesn’t inspire us, breathing some Delhi air may. While these might have been in news recently, more of this discussion is on social media rather than real action.

Sustainability has thus mostly been associated with activist connotation and, less with real, on-ground impact.

As we evaluate on-ground actions, investments towards such actions become first step and these need to make “financial sense” for investors to flock in. That’s when, I believe, that traditional financial acumen fails us. The foundational elements of investment rationale shall make such investment difficult. Let’s evaluate how –

  1. It’s all about ROI in purely Financial Terms: All financial evaluations are about monetary returns. Such approach is more likely to make Investing in sustainability related projects unattractive
  2. Organizations as going concern: While some projects have started evaluating impact of climate change, organizations are often considered as going concern without climate change & its impact. It’s it a time that we start considering some serious impact of climate change while evaluating cash flow and hence the project IRR.

Of all, these foundation elements make investment capability of capital markets to adapt in disruptive situations, like we are facing now for climate change, difficult. Financial markets, in its prevailing methods, would only consider climate change once its impacts are visible, but that, I guess, would be too late.

Having worked in Debt capital markets (DCM) my first reaction was to search of how DCM is contributing in sustainability and this led me to know about a beautiful concept of green bonds. The bond by their very name “green bonds” click into mind that there is something related to sustainability in it.

Green bond principles, intended to provide a framework for debt funding for projects which shall contribute to sustainability, is a step in the right direction. It has been framed with four core pivotal elements –

  1. Use of Proceeds
  2. Process for Project Evaluation & Selection
  3. Management of Proceeds
  4. Reporting

It’s the use of proceeds which sets apart green bonds from regular bond issues. The eligible projects for such issuance should be from around ten categories including renewable energy, energy efficiency, pollution prevention and control, green buildings etc.

A cumulative $580 billion of green bonds were sold through 2018, according to Bloomberg New Energy Finance. According to climate bond initiative in quarter 3 of 2019 itself USD 6.2 bn worth green bonds were issued worldwide, which is 87% up YoY. There were 139 issuers from 32 countries. There are many issuers joining the race and many nations as well. European nations being the ones taking the lead.

Though figures for green bonds may seem encouraging when we see them standalone but when compared to the global bond markets which are more than USD 100 trillion market, green bond market is hardly a fraction of it. Europe alone needs about 180 billion euros ($203 billion) of additional investment a year to achieve 2030 emission targets set by the European Union in the 2015 Paris Agreement on climate change.

In nutshell, green finance initiatives are steps in right direction but need more muscle and speed to enable actions on ground.

What are your thoughts?

Aastha Tomar

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

Factoring – Unlocking the (hidden) potential of your working capital

31-1-2020 | by Ron Wessels 

Do you also wait for your customers to pay you after a sale is closed? In today’s world it is getting more difficult to arrange cost efficient traditional bank financing and not everybody has sufficient cash reserves. If funding for you is tight, you can search for alternatives. Many suppliers of alternative funding are quite expensive and their business ethics are not always solid. Perhaps your working capital offers a better solution.

There is a way to convert your outstanding debtors into cash. This is called “Factoring”, offered by factoring companies.

How does Factoring work?

Depending on your existing AR (accounts receivable) portfolio an arrangement with a specialist factor provider can be made to sell those invoices on the date your issue them and get paid within a couple of days (mostly 2-3 days).

You receive most of the cash upfront but yet you are still in charge of the collection process and dunning (there are factoring companies that also offer credit collection services). You want to stay in control of the collection side as this is very important for your Customer Relation, e.g. you want to know if things are not going as they should be. You do not want to outsource the management of potential conflicts with your important clients. Your customers will pay into a bank account in your name but under custody of the factor provider. Obviously, you will have/need full insight on the activities on this bank account. Typically, you get funded about 90% of the face value of the invoice (ex.VAT) and the remainder minus costs, upon collection from the customer. The costs for factoring are depending on the size of your AR portfolio sold but vary around 1,5 to 4%, depending on aforementioned size (this is an estimate and have to be explored during an evaluation). This cost includes the credit insurance.
The factoring program can be tailored either on-balance or off-balance to optimize your accounting processes and your balance sheet strength. Factoring most of the times also requires a credit insurance for the outstanding accounts receivables. Both you as well as the factoring company want to mitigate the risk of clients who cannot pay.

Why is Factoring interesting?

Often factoring, including a credit insurance, is cheaper than traditional bank financing. Especially for companies with no or low credit rating. The factoring industry is more mature than many of the suppliers of alternative funding. This results in more stable processes and improvement of existing processes. Last but not least, the build-up of your balance sheet will be different resulting, amongst others, better financial ratios.

Is factoring difficult to implement?

Not necessarily, you need to agree on the terms and conditions with the factor, the credit insurance and it involves some legal advice/work. Furthermore, you need to agree with the factor on how to deliver the AR data (preferable automated) and the frequency of submission. As this is a mature industry, it is relatively easy to compare quotes of different factoring companies. Two further aspects are very relevant. The first is the quality of your existing processes. If your AR is a bit chaotic, it will be harder to implement the factoring services. Furthermore, the size and activity of your company is important. Small companies with a low number of deals will be treated differently by a factoring company. For example, a mobile telephone operator.

Conclusion

Factoring is a good alternative for traditional bank debt to finance your working capital. It will require up front work but once installed it is easy to maintain at a low cost. A quick scan of your existing AR outstanding can prove whether it is cost efficient to enter such program.

If you are looking for independent advice on factoring before reaching out to suppliers, please contact us. We are happy to help you.

 

 

 

 

Ron Wessels

Group Treasurer

 

European Parliament backs Withdrawal Agreement

| 30-1-2020 | treasuryXL | XE |

Following a debate in Brussels yesterday evening, The European Parliament backed the Brexit Withdrawal Agreement put forward by Boris Johnson. This was approved with by staggering 621 votes in favour, with 49 against. A major milestone in the Brexit agreement which was somewhat already expected, following news last week that it cleared the committee stage. This bodes well for the UK to leave 11pm Friday evening. Following this result, the debate did become slightly emotional with Farage taking his chance to rub it in the face of the European politicians, triggering Parliament’s Vice-President Mairead McGuiness to turn off his microphone stating ‘put your (Union Jack) flags away, you are leaving.’ Not everyone was so cold with the likes of Ursula von der Leyen stating that the British MPs ‘wit, stubbornness and charm’ will be missed.

In terms of UK data, Mark Carney will announce whether or not the UK will cut its interest rate. A decision which has left markets unsure on which way it’s going to go, with a 50-50 split between raising and dropping rates. This will be Carney’s final rate decision and will be sure to affect the markets. The Quarterly Inflation Report is also due out and may be the deciding factor on the rate cut which the markets will be looking out for come 12:00 GMT.

US

The FED decided to leave interest rates unchanged at the much expected range of 1.5% – 1.75% leaving a rather muted market reaction. Other US Data out today is Gross Domestic Product figures which comes out at 13:30 today with a consensus at 2.1%, the same at the previous quarter. In other news, the Greenback has continued to benefit as a safe-haven currency with the uncertainty surrounding the Cornovirus.

At the time of writing:

GBPUSD – Trading above 1.29 at 1.2994

GBPEUR- Trading above 1.1 at 1.1792

EURUSD- Trading above 1.10 at 1.1018

The figures are based on the live mid-market rate, correct as of 08:30 GMT on 30/01/2020, and are provided for indicative purposes only. Live mid-market rates are not available to consumers and are for informational purposes only. The rates we quote for money transfer can be selected via the page on our website ‘Live Money Transfer rates’.

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

 

 

 

Impressive year for our partner Cashforce

| 28-1-2020 | treasuryXL | Cashforce |

We are very proud at our partner Cashforce. What a year it has been for Cashforce! From opening new offices, to processing millions of transactions, Cashforce successfully round up 2019. More specifically last year, Cashforce:

  • Opened up three new offices in London, Copenhagen and Ghent
  • Moved its HeadQuarters to Antwerp, Belgium
  • Visited over 20 countries during 2019
  • Attended 12 Treasury conferences, gave 9 speaking sessions, hosted 4 Belgian Beer Nights and gave away 2159 Chocolates
  • Processed over 40 million transactions, doubled their clients, hired 14 new FTE’s and collected $5 million of investments by Citi & Inkef
  • Gained 724 followers on social media, consumed 10,498 cups of coffee and held 5 board game nights
  • Won the best use of Artificial Intelligence in Treasury Management reward by Global Finance Magazine 2019 and became 1 of the Top 5 hottest Startups in Belgium
  • Settled new partnerships with Citi, BNP Paribas and KBC
  • Upgraded their Smart Algorithms and further developed Artificial Intelligence

Source

Crypto regulation in the Western world: towards more global uniformity?

| 24-1-2020 | Carlo de Meijer | treasuryXL

In my last Blog I suggested that regulation of the crypto markets would be one of the main issues for 2020 and beyond. There seem to be urgent need for more clarity on many cryptocurrency issues. The EU Fifth ALM Directive came into effect early January, while ESMA announced its plans to develop a legal framework for cryptocurrencies in 2020. In the US the Crypto Currency Act of 2020 is being discussed in the House of Representatives. My prediction that a growing number of regulators worldwide would more prominently enter the crypto stage this year will come true. Main question is: will this lead to more uniformity in the regulatory approach worldwide?

European Commission consultation on EU crypto framework

In December last year, the European Commission launched a public consultation on the future EU framework for markets in crypto-assets. It thereby seeks stakeholder views on, among others, the usefulness, means and features of future crypto-assets classification.

The Commission notes that the lack of any comprehensive classification of crypto-assets leads to uncertainty in the markets, as to whether (and potentially which) such assets fall within the scope of EU financial services legislation by means of being MiFID II financial instruments.

The Commission also seeks stakeholder views on the importance of specific benefits related to crypto-assets and also specific risks related to its use. The Commission notes that while crypto-assets can bring about significant economic benefits in terms of “efficiency improvements and enhanced system resilience”, they can also cause potential challenges for their users.

The consultation document includes detailed questions designed to assess legislation applying to security tokens and including, but not limited to, MiFID II, Market Abuse Regulation, Short Selling Regulation, Prospectus Regulation, Central Securities Depositories Regulation, EMIR and UCITS.

More broadly, the Commission seeks views whether a tailor-made EU regime for crypto-assets would “enable a sustainable crypto-asset ecosystem” and whether the use of crypto-assets in the EU would be “facilitated by the greater clarity as to the prudential treatment of financial institutions’ exposures to crypto-assets”. The current consultation remains open until 19 March 2020.

The consultation paper: Three main parts

This consultation paper consists of three main parts: (1) Classification of crypto-assets, (2) Crypto-assets that are not currently covered by EU legislation; and (3) Crypto-assets that are currently covered by EU legislation.

a. Classification of crypto-assets
The Commission acknowledges that while there is a wide variety of crypto-assets in the market, there is no commonly accepted way of classifying them in the EU. There is still a lack of a single and broadly accepted definition.  For the purpose of this consultation, the Commission defines a crypto-asset as “a digital asset that may depend on cryptography and exists on a distributed ledger”.

b. Crypto-assets not covered by EU legislation
The consultation document includes specific questions focused on service providers related to crypto-assets, and in particular the issuance of crypto-assets, trading platforms, exchanges, provision of custodial wallet services for crypto-assets and other service providers.

The Commission notes that such activities and services providers remain – with some exceptions – outside the European (and national) legislative and regulatory framework and considers that “regulation may be necessary in order to provide clear conditions governing the provisions of these services.”

c. Crypto-assets covered by EU legislation
The Commission considers “security tokens” as crypto-assets “issued on a DLT and that qualify as transferable securities or other types of MiFID financial instruments”. For activities concerning such security tokens qualifying as MiFID II investment services/activities, authorisation is required.

In summarising trends concerning security tokens, the Commission admits “the limited evidence available at supervisory and regulatory level” and that “existing requirements in the trading and post-trade area would largely be able to accommodate activities related to security tokens via permissioned networks and centralised platforms”.

Fifth EU Anti Money Laundering Directive

The Fifth EU Anti Money Laundering Directive  that took effect from 10 January 2020 puts a regulatory framework for all 28 EU members to date. Even the United Kingdom has decided to implement the law despite its decision to leave the EU.

The new Directive defines crypto-assets as “digital representation of a value that is not issued or guaranteed by a Central Bank or a public authority and that does not have the legal status of a currency or money, but that based on agreement or practice is accepted by natural or legal persons as means of payment or exchange or is used for investment purposes and that is transferred, stored and traded electronically”. This is to specifically exempt digitally stored and transferred fiat money, but include both payment and security tokens.

Among the most notable changes are that cryptocurrency service providers will have to follow Know-Your-Customer (KYC) rules. Cryptocurrency platforms and wallet providers are required to identify their customers for anti-money laundering purposes. All transactions will have to be monitored, and companies will need to file Suspicious Activity Reports (SARs) with law enforcement. The new KYC mechanism would require personal ID when opening an account on EU-operating exchanges. The proof-of-identity would serve as insurance, for not making any illicit financial operations.

The New Regulatory Framework is mandatory for all EU-based crypto exchanges and custodial wallets. Every crypto exchange operating on the European Union market must meet the legislation in order to continue its operation in the EU. They had to achieve compliance with the rules already by 10 January.

Worldwide exchanges must undergo an AML/KYC upgrade for the EU market, as until now, there were no rules about implementing such mechanisms.  However, meeting those regulations would streamline the EU market to become competitive to other regulated markets, such as the United States.

Challenges

For firms buying and selling crypto assets, the Fifth Anti-Money Laundering Directive will require them to register with national financial regulators. The way exchanges and crypto-oriented companies must verify they are KYC-compliant, is via appropriate licensing in every jurisdiction. It also states minimum requirements for AML processes, similar to what we see with traditional asset classes.

Unless any company wishes to leave the EU, they should comply in full. Because the Directive requires crypto-related firms to register with their national regulators and comply with a variety of AML guidelines, it’s likely that some firms may struggle to adjust to the new regulatory environment. European crypto exchanges and companies are still far behind the “KYC-ready” state that the Directive requires.

While U.S.-based exchanges have the expertise to deploy AML/KYC protocol updates to comply with the EU Directive, crypto exchanges in the EU however have shown mixed readiness for KYC upgrades to their platforms. The majority of EU-operating exchanges have taken a so-called “procrastinating” approach. That could be very bad for those as, if the services do not comply with any of these requirements, they will have to pay fines and penalties, or even risk being shut down.

And while the Fifth Anti-Money Laundering Directive suggests a “harmonized regulatory framework,” there are significant differences in the ways the Directive is being implemented across the European Union.

ESMA aims to develop legal framework for cryptocurrencies in 2020

Early this month ESMA published its 2020-2022 priorities list, noting that EU capital markets are facing new risks from digitalisation. ESMA wants market participants to acknowledge and prepare for these apparent risks. In its Strategic Orientation, the regulatory agency also revealed its plan to bring a legal framework for digital currencies and related products.

“The dangers of cyber threats to the financial system as a whole and a sound legal framework for crypto-assets are increasingly becoming areas of focus for ESMA together with the other ESAs, the ESRB, the ECB and the European Commission.”

“The new Strategic Orientation sets out how we will exercise our new powers, and meet our new responsibilities, in pursuit of our mission of enhancing investor protection and promoting stable and orderly financial markets in the EU,” Steven Maijoor, chairperson of ESMA

The European agency had already been watching the digital asset industry for a while and has been grappling with the question of how to regulate cryptocurrencies and securities in the space. Last year it issued an advisory on initial coin offerings (ICOs) and crypto-assets, highlighting that some crypto-assets may qualify as MiFID financial instruments.

US Crypto Currency Act 2020-2022

But also in the US more crypto regulation is arriving, triggered by the possible launch of Facebook’ s Libra. The introduction of the Cryptocurrency Act of 2020 is seen as a vital move in regulating crypto markets. The goal of the new legislation is to provide additional clarification on digital asset regulations to the market and create a framework for cryptocurrencies, thereby countering the negatives of crypto investing.

The Act has now been introduced in the US House of Representatives. The bill has some wide-ranging regulations that, if voted into law, could reshape the crypto landscape moving forward – at least in the United States, but also elsewhere.

The objective of the Act is to enforce regulations and to force crypto companies to play by the same rules. The Cryptocurrency Act 2020 categorises digital assets into three main groups: crypto-commodities, cryptocurrencies, and crypto-securities. The draft bill thereby contains broad definitions of the types of digital assets. It further determines the various regulatory bodies that will oversee the crypto currency space and will be responsible for the creation of regulation and legislation. The Act thereby seeks to clarify the power of each government agency to regulate the crypto space.

Up till now multiple government agencies have been competing to regulate the crypto space, leading to a confusing mixture of laws. This is suppressing the crypto space, since crypto companies can be attacked by multiple federal agencies.

Additionally, rules will be established with the goal of tracing all crypto and digital currency transactions, in addition to the personal facilitating the transacting, similar to other traditional currency transactions, securities fraud, corporate auditing and other financial activities.

Digital assets: Three main groups

The most interesting change is how digital assets are to be split up into three main categories. A distinction is made between cryptocurrencies, crypto-securities, and crypto-commodities.

a. Cryptocurrencies
The draft bill puts cryptocurrencies in a separate category of digital assets. They are defined  as “representations of US currency” synthetic derivatives backed by smart contracts or collateralized by other digital assets (resting on a blockchain or decentralized cryptographic ledger).

The crypto class includes Bitcoin, Bitcoin Cash, Litecoin, and any other cryptocurrencies that don’t fall under the current securities regulations. Smart contracts and oracles fall under the cryptocurrency category as well. Furthermore, the role of stablecoins will be scrutinized, as not all of these currencies are created equal.

The Financial Crimes Enforcement Network (FinCEN) is to overlook cryptocurrency regulations, on behalf of the Treasury secretary. FinCEN will thereby need to collaborate with the Secretary of the Treasury to enforce AML and KYC protocols in the market. Primarily, regulators want to develop a way to trace all cryptocurrency transactions, which seems highly questionable.

b. Crypto-commodities
The bill defines crypto-commodities as all digital assets, regardless of who produced them, stored on a “blockchain or decentralized cryptographic ledger”. A key aspect of these tokens is the fact that they contain some form of substantial fungibility. Fungible assets are interchangeable, such as the USD.

The Commodity Futures Trading Commission (CFTC) is to be responsible for regulating crypto-commodities. The group will need to develop the framework for these tokens from the ground up if the legislation passes. Due to the rise of cryptocurrencies, it is expected crypto-commodities will play a major role in the space going forward.

c. Crypto-securities
Crypto-securities, the most comprehensive of the three types of digital assets, “include all debt, equity, and derivative instruments that rest on a blockchain or decentralized cryptographic ledger.” These tokens are simply any coin that “fails the Howey Test”. What the Howey test defines is whether or not an asset will be categorised as a security by financial regulators.

The draft bill’s exceptions to crypto-securities are as follows: “A synthetic derivative operating as a money services business and registered with the Department of the Treasury; and, or Any security that operates in compliance with the Bank Secrecy Act “and all other Federal anti-money laundering, anti-terrorism, and screening requirements of the Office of Foreign Assets Control and the Financial Crimes Enforcement Network.”

In the Cryptocurrency Act 2020 security tokens are to be overlooked by the Securities and Exchange Commission (SEC).

Growing need for crypto compliance professionals

The fast evolvement of crypto regulation worldwide as well as the – sometimes very – different approaches ask for a large number of regulatory and compliance professionals. There is still a great lack of knowledge of future crypto compliance and governance, so finding, recruiting and hiring these people may become a big challenge especially for smaller firms. Bigger companies generally will likely have the necessary procedures and processes already in place needed for crypto from working with other asset classes.

The news of “pending” clarity of new government regulation is mobilising a growing number of professionals (crypto accountants, tax professionals and compliance officers) to study the various compliance issues that are arising from these mostly different crypto regulations. They are working together to use any available information to accurately meeting the new reporting and compliance requirements for 2020 and beyond.

Towards a global regulatory framework?

The year 2020 should be seen as the start of a regulatory revolution for cryptocurrencies. Regulatory initiatives in both the EU and the US could trigger new cryptocurrency regulations around the world, to attribute regulatory clarity to the global crypto market.

A global regulatory framework for cryptocurrencies however will not be easy to implement. Bringing a complex and fast evolving area like cryptocurrencies into a global framework is going to be a difficult and lengthy process.

In countries all over the world, governments have been struggling to develop laws and guidelines regulating the use of cryptocurrencies currencies. This has resulted in a patchwork of different regulations.

But while the approaches of other governments may initially remain quite different, most experts however believe that, triggered by the regulatory approaches in the EU and the US  such a global framework will be a reality at the end of this decade

 

 

Carlo de Meijer

Economist and researcher