Turn to high-yield crypto for better interest rates

On By mehranmuslimiblogIn crypto, DeFiLeave a comment

There has been much talk about cryptocurrency as a hedge against inflation, but it is now becoming clear that this is not the sole reason for entering the crypto ecosystem – it also has the potential to offer high-yield rewards and be an alternative to low interest rates. This is especially important as bank interest rates have remained at their lowest point for some time and there doesn’t seem that much movement is likely in the near future.

DeFi has made earning interest on crypto a reality

This new benefit has largely come about with the growth of DeFi products over the past year. The summer of 2020 has been called ‘the DeFi summer’ by some, and since its explosion last year, “the optionality has only increased, along with the amount of “money legos” that are being combined in different ways,” as Benjamin Powers writes at Coindesk.

Consensus 2021 talks up interest rates in crypto ecocsystem

This week Consensus 2021 is in full flow, with lots of interesting ideas coming out of it. For example, Felix Fen, co-founder and CEO of Set Protocol; Zac Prince, CEO of BlockFi; and Stani Kulechov, Chief Executive Officer of Aave, formed a panel to discuss “how people seeking out higher yield on their crypto assets can access a variety of services, and what the tradeoffs there can be.”

Prince said he saw real value in using interest rates to translate something really powerful that’s happening in the crypto ecosystem in the terms that everybody is already familiar with. What exactly does he mean by that?

He said: “If you try to explain how the blockchain works, or why Bitcoin has value, or some of the other more complex and in-the-weeds topics to folks when they’re on their journey into the crypto ecosystem, they might struggle to wrap their heads around it. Everybody knows what an interest rate is. And everybody knows that earning 8.6% on something is better than earning 0.2%.” Furthermore, he quite rightly points out that traditional banks are a long way off “from being ready to finance the crypto ecosystem in a meaningful way.”

Kulechov spoke about how the Aave community governs the parameters of the interest rates, which are then determined by supply and demand and are transparent. “The fact that everyone can participate in affecting what the interest rate will be in these markets is a very big thing because, traditionally, big interest-rate movements have been decided by the banking industry; for example, by a few people sitting down with a room in London,” Kulechov explained.

Fen talked about the variable nature of interest rates. He suggested that users evaluate the risk of a protocol in terms of its insolvency and take that into account when considering where to allocate funds. He also emphasised evaluating the protocol’s community when making a decision. “How stable is a parameter selection, how conservative or aggressive is a community in terms of its parameter selection, and how decentralized is the protocol overall?” he said. “I think those are some of the elements that we look at when thinking about yield, and so not all interest rates should be just looked at as a headline number. One has to dig a little bit more into this.”

HSBC challenges fintechs with digital wallet

On By mehranmuslimiblogIn Banks, Fintech, Mobile paymentsLeave a comment

Major bank HSBC is challenging its fintech rivals by launching a multicurrency digital wallet, called HSBC Global Wallet, which will enable businesses to make simple and secure international payments.

The digital wallet is first launching in the US, the UK and Singapore and offers payments in Euros, sterling, Hong Kong dollars, Canadian dollars, Singapore dollars, Australian dollars and Malaysian ringgit. Curiously, there is no mention of US dollars!

According to reports, HSBC clients will be able to send money in a number of currencies, and hold and manage those currencies. However, the ability to receive payments will only be added later this year.

This is the latest in new product offerings from HSBC intended to appeal to its more digitally-minded clients. Last November it launched a free mobile-based service that customers can use to hold, manage and send funds in various currencies to HSBC customers in over 20 markets, 24/7 and in real-time without incurring any fees. This product –the HSBC Global Money Account – was aimed at wealthier customers, whereas the new digital product is primarily for small- and medium-sized businesses with international supply chains.

Diane S Reyes, HSBC’s global head of liquidity and cash management, said, “HSBC Global Wallet makes it just as easy for our customers to deal with a supplier or a client on the other side of the world as it is to deal with one on the other side of town.” She added, “By fully integrating this solution into our everyday business banking platform we’re giving our clients a virtual presence in markets around the world.”

What we are witnessing is an attempt by the banks to claw back business lost to fintechs, such as Transferwise (now Wise), Revolut, N26 and others that offer their customers borderless accounts. Even Santander bank in the UK is offering its PagoFX app to the UK retail market and sole traders, and it is also available in Spain and Belgium. The focus of the Santander app is on easy international payments with transparent fees and exchange rates.

This all sounds good, but there is one thing they have forgotten and that is cryptocurrencies and stablecoins. PayPal has moved into crypto and so have the major card networks, such as Visa and Mastercard. There are others as well. So, whilst the banks are attempting to appeal to those customers who moved to the new digital banks and draw them back (which remains to be seen, as HSBC doesn’t have quite the same hip appeal as Revolut), there is a swathe of people who want more advanced features, such as being able to earn money on crypto, lend or borrow against it, and trade it, all in one place.  No doubt, HSBC’s new products will gain traction with its loyal customers, but whether it will win them new ones is another matter.

Fears about CBDCs are misplaced

On By mehranmuslimiblogIn CBDCs, cryptoLeave a comment

Interesting read from Marcelo M. Prates in Coindesk this week with his thoughts on CBDCs who puts forward the idea that there is nothing to fear from central bank digital currencies (CBDCs), although some seem to think it will ‘disintermediate banks’ and ‘facilitate monetary surveillance and censorship’.

He says, “From papers to blog posts, a lot has been said on how a CBDC would deprive banks of deposits, as funds could be easily moved to CBDC accounts or wallets, especially in times of crisis.” CBDCs are also seen as instruments of control “ since CBDC transactions would be traceable in real time.” But the important question he asks is this; would these risks emerge because of CBDCs, or would they happen even if CBDCs never come into existence?

What about disintermediation?

There is a fear that people will remove their deposits to the safety of the digital currency provided by the central bank thus reducing the funds of the commercial banks. If there is no CBDC, the risk to the banks disappears. Not so, says Prates, because “We already have alternatives to bank deposits that could greatly reduce banks’ funding if used extensively.” What he is referring to is “the possibility of converting money from your bank account to a safer option of digital money that is currently available: e-money or its unregulated twin, the stablecoin.” Look at the success of Wise, PayPal and other e-money issuers and you will probably come to the same conclusion.

Surveillance

For some the possibility of state surveillance and censorship is the worst aspect of CBDCs. Prates points out that it is true that unscrupulous governments could use some of a CBDC’s unique features, such as traceability, to discriminate or to censor specific activities or individuals. He adds, “If, moreover, CBDCs were kept deposited directly at the central bank, governments could even threaten their citizens with balance freezing and confiscation.”

This is not something to be taken lightly, but as Prates says, abuse of people via their finances is not something new and cites the story of Fernando Collor, the first democratically elected president in Brazil in 1990 after 20 years of military dictatorship, and his “infamous plan to “kill inflation”: the Collor Plan.” Amongst its various measures, the Collor Plan determined that all bank balances above the equivalent of $1,500 would be frozen for 18 months and paid back in installments after that period. Not only did the banks comply with this order, the judiciary didn’t say a word, and the law was only repealed after two years. Prates says, “This kind of abuse, like many others against individual rights, is typical of countries with a weak rule of law, incapable institutions, and no political accountability.” These have existed long before CBDCs.

Fundamentally, the fears surrounding CBDCs are ones that have long existed in the current monetary system and the advent of a CBDC will not be “the root of all evil” that many fear.

Banking uses more energy than Bitcoin

On By mehranmuslimiblogIn Banks, Bitcoin, cryptoLeave a comment

When super-tweeter, Elon Musk, announced nobody could pay for a Tesla with Bitcoin because of its detrimental effects on the climate, it caused upheaval with a downward trajectory in the crypto market. It probably seemed rather disingenuous of him to many, as he must have been aware of the energy usage in mining Bitcoin when he invested a billion or so in it and said people could buy a Tesla with Bitcoin. He also needs to look at the recent research study by Galaxy Digital shows the leading crypto is not the biggest climate culprit in finance.

Last week Galaxy Digital Mining released a report titled “On Bitcoin’s Energy Consumption: A Quantitative Approach to a Subjective Question.” They also provided open-source access to their research methodology and calculations. Here are some of the figures.

Galaxy’s mining department estimates Bitcoin’s annual electricity consumption to stand at 113.89 TWh. This includes miner demand, miner power consumption, pool power consumption, and node power consumption. It may seem like a lot of energy, but the banking system and the gold mining industry use twice as much as that every year.

A Galaxy bar chart shows that bank branches, ATMs and card networks use a relatively smaller amount of energy, but the banks’ data centres are massive energy consumers. Given Galaxy’s estimations of power usage by banking data centres, bank branches, ATMs, and card network’s data centres, the total annual energy consumption of the banking system is estimated to be 263.72 TWh globally. 

Furthermore, Bitcoin’s energy consumption is easy to track. You can look at it on the Cambridge Bitcoin Electricity Consumption Index for example. Whereas, trying to track the use of energy in gold mining or banking services is really quite difficult, because banking certainly doesn’t report the energy it uses.

The gold industry utilizes roughly 240.61 TWh per year, according to the Galaxy report, based on the World Gold Council’s data in its report, “Gold and climate change: Current and future impacts.” 

Returning to Musk’s statement that he was concerned about the impact of Bitcoin on the environment, which rightly provoked a barrage of fury from the crypto community, perhaps somebody can inform him that whatever bank he uses is doing far more damage. It would be great if he had the courage to tweet that out and set the record straight.