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FSB stablecoin report, Hong Kong sanctions, digital yuan, Turkey pushing buttons, EU sanctions Russia, Iran arms embargo lifted

No grand narratives, just a bunch of interesting little things this week, starting with the FSB’s new stablecoin report. Here’s what’s I cover:

On to the show…

The FSB’s stablecoin report

Last week the Financial Stability Board (FSB) issued a report and recommendations on stablecoins. As it notes, the FSB was directed to issue this report by the G20 in June 2019. More precisely it was a few days after Facebook announced its plans for Libra. And indeed, the report is aimed not at stablecoins per se, but at what the FSB calls “global stablecoins” or “GSCs.” That category seems tailor made to encompass Libra. How is a GSC defined? There’s no clear definition offered, but an annex to the report lists 12 factors (focused mainly on scale and cross-jurisdictional reach) that authorities should consider in making a determination.

So, it’s probably fair to say that but for Libra, the FSB (and perhaps the FATF) would not be so focused on stablecoins as they are. It does not seem other stablecoins would have drawn the same attention from the FSB:

Financial stability risks from existing stablecoins are presently limited. This is largely due to the relatively small scale of these arrangements and their current limited use cases, mainly around facilitating trading in other crypto assets. However, the use of stablecoins as a means of payment or a store
of value might significantly increase in the future, possibly on a large scale and across multiple jurisdictions.

Whatever the case, they’re making recommendations now, and they point out that as long as they’re making the effort, their recommendations could be applied by authorities to cryptocurrencies as well:

Although the recommendations are aimed at global stablecoins, they could be used for other stablecoins, including those that may pose risks to financial stability only in some countries or regions, and, potentially, other crypto-assets that could pose risks similar to some of those posed by GSCs because of comparable international reach, scale and use.

The recommendations are what you would expect and focus on risks from reserve management, cybersecurity, consumer protection, wind-down plans, etc. One that caught my eye, though, is that “Authorities should ensure that GSC arrangements have in place robust systems for collecting, storing and safeguarding data.” In its entirety:

GSC arrangements should implement and operate data management systems that record and safeguard in a discoverable format relevant data and information collected and produced in the course of their operations, while conforming to all applicable data privacy requirements. Adequate controls should be in place to safeguard the integrity and security of both on-chain and off-chain data and conform to applicable data protection regulation.

Authorities should be able to obtain timely and complete access to relevant data and information to enable them to implement adequate regulatory, supervisory, and oversight approaches that capture the functions and activities of the GSC arrangement, in accordance with the level and nature of the risks posed.

Aside from the fact this presumes GSCs will be blockchain-based 😉, depending on how that passage is interpreted, it could seem to preclude certain potential stablecoin designs that minimize the amount of data generated or recorded. I’m therefore glad to see that (at least in the context of AML/TF), the report draws a distinction between centralized and decentralized stablecoins.

While decentralised so-called stablecoins without such an identifiable central body, prima facie, may carry greater ML/TF risks due to their diffuse operation, the FATF considers that their potential for mass-adoption is lower than centralised arrangements and, therefore, their associated ML/TF risks are smaller (although still present). However, even in a decentralised structure, there could also be a range of entities with AML/CFT obligations, including customer- facing exchanges and transfer services and custodial wallet providers. Importantly, there are functions that may mean an entity has AML/CFT obligations prior to the launch of a decentralised so-called stablecoin, as the process necessary to bring a product to launch is unlikely to be able to be fully decentralised.

That said…

The FATF has also identified potential risks which may require further action, including; so-called stablecoins located in jurisdictions with weak or non-existent AML/CFT frameworks (which would not properly implement AML/CFT preventive measures) and so-called stablecoins with decentralised governance structures (which may not include an intermediary that could apply AML/CFT measures) and anonymous peer-to-peer transactions via unhosted wallets (which would not be conducted through a regulated intermediary).

The bottom line is we’re likely to see a lot of regulation that will affect a lot of people spurred by a yet-to-be-launched product.

China potpourri: Hong Kong sanctions, CBDC, and debt

After China’s crackdown in Hong Kong, the U.S. announced sanctions against officials there, but it has yet to seriously enforce them. Last week the State Department announced it would soon be doing so, putting banks and other financial institutions on notice they may face sanctions if they do business with the officials.

U.S. State Department issues sanctions warning to banks over Hong Kong crackdown - Reuters

In a report to Congress, the State Department named 10 people, including Hong Kong’s chief executive Carrie Lam, all of whom have already been sanctioned, and said within 60 days it would identify financial institutions that conduct significant transactions with them.

Lam and other officials on the list have already been cut off by some banks. Even Chinese banks have taken steps to comply with the sanctions lest they lose access to the dollar system themselves. The response:

China’s foreign ministry vows countermeasures over US sanctions even as Hong Kong banks face blacklist threat - SCMP

“The Hong Kong issues are purely China’s internal affairs and no country has the right to make unwarranted remarks and interfere with the matter,” foreign ministry spokesman Zhao Lijian said during a press conference on Thursday, adding that China has lodged a formal protest with the US against the move.

“The US should correct its mistakes and stop interfering with Hong Kong affairs and China’s domestic politics. If the US insists on that, China will take resolute countermeasures to protect its sovereignty and national interest, and to safeguard the legal rights and interest of Chinese companies and related personnel.”

Of course, Zhao does not mention the 1984 Joint Declaration with Britain that makes the situation not wholly an ‘internal affair.’

On the CBDC front, authorities in Shenzhen gave away over 10 million yuan in new the new national digital currency as part of a trial.

They randomly chose 50,000 person to receive a “red packet” valued at 200 yuan (about US$30), which could be spent at 3,800 designated outlets in the district of Luohu. Now comes Reuters with some anecdotal info on user reaction.

China’s $1.5 million digital currency giveaway impressed analysts. Shoppers, not so much - Reuters

Sceptical reactions among some Shenzhen recipients of the giveaway - long used to scanning phones to pay for goods with other systems - showed the central bank and government have work to do in convincing consumers of the benefits of a central bank-backed digital yuan.

"Alipay and WeChat Pay have been out for a long time," said a shopper who gave only her surname, Zhong. "The new digital currency is similar to those so it's quite late to just start the trial," said Zhong, who said she was an accountant.

Attracting users will largely depend on incentives to lure customers from Alipay or WeChat Pay, already used to buy everything from basic goods to complex financial products, say analysts.

"It's especially important to offer convenience and other benefits to promote the use of digital yuan," said G. Bin Zhao, senior economist at PwC China.

Beijing may bundle it with subsidies, pension accounts, or state sector paychecks, he says, but "for digital yuan to be popularly accepted, banks and other institutions need to invest heavily in applications, marketing and education."

Another downtown Shenzhen user of the online wallet, who gave her surname as Yuan, echoed that notion, saying spending her digital currency gift was less convenient than existing options.

"I'm not planning on using it again," said Yuan, who said she works in finance. "Unless there is another red envelope, of course."

Another option available to the PBOC, I would imagine, is to require Alipay an WeChat to incorporate the new digital yuan into their wallet products.

Finally, just flagging this. At some point I’ll write my thoughts on China’s debt.

U.S. Buyers Fuel Bumper Demand for China’s $6 Billion Debt - Bloomberg

China drew more than $27.2 billion in orders for its $6 billion dollar bond, underscoring strong demand for its sovereign debt in an environment of low yields across the world.

The Ministry of Finance priced the jumbo-sized notes with three-year, five-year, 10-year and 30-year maturities, with an orderbook more than 4.5 times the issuance size, according to a person familiar with the matter who isn’t authorized to speak publicly. Premiums tightened as much as 30 basis points from initial pricing guidance.

China’s dollar debt offering for the fourth straight year came amid growing uncertainties about U.S. elections and tensions with Washington. The robust demand for the deal shows the latter’s appeal to international investors as global interest rates stay depressed following unprecedented monetary policy easing by major central banks. China’s quick rebound from a pandemic-induced economic slump also boosted investor confidence.

For now I’ll just say that China’s “quickly rebounding” economy continues to be debt and export driven. China’s official debt-to-GDP ratio rose dramatically from roughly 252% last September to roughly 275% last month. And that’s not including private debt.

Turkey potpourri: Russian missile system, Eastern Med, and Saudi boycott

Turkey hasn’t been acting like a member of NATO lately. After buying a missile system from Russia, it tested the radar against F-16s, and has now test-fired it. The U.S. is not happy.

US Condemns Turkey for Testing Russian-Made S-400 Missile - VOA

The United States has condemned Turkey for testing a highly advanced Russian air defense system on Friday, disregarding U.S. warnings.

A Haber television, which is close to Turkish government, reported that the Turkish army conducted the test firing of the S-400 system in the northern province of Sinop by the Black Sea.

The U.S. State Department said the missile launch is “incompatible with Turkey's responsibilities as a NATO ally and strategic partner” of the U.S.

A Defense Department spokesperson said “We have been clear: an operational S-400 system is not consistent with Turkey’s commitments as a U.S. and NATO ally. We object to Turkey’s purchase of the system and are deeply concerned with reports that Turkey is bringing it into operation."

Senators have called on the administration to impose sanctions on Turkey and for the country to divest itself of the missile system.

Meanwhile, Turkey is poking Greece and Cyprus again. It has sent back the survey ship it withdrew last month from the waters off those countries.

Greek-Turkish tensions rise in crisis over eastern Mediterranean - Reuters

“Turkey has proven it lacks credibility. All those who believed Turkey meant all it said before the European summit of Oct. 1-2 now stand corrected,” Greek government spokesman Stelios Petsas said on Monday.

At the summit, the EU said it would punish Turkey if it continued operations in the region and that sanctions could be imposed as soon as December.

As I said in my missive at the time, it’s going to be interesting to see if the EU can muster the unity to follow through on its threat or whether Cyprus and Greece will have to take the bloc’s foreign policy hostage again.

And here’s an interesting development.

Informal Saudi ban on Turkish goods hits global fashion retailers - FT

A de facto Saudi ban on Turkish goods has hit global fashion brands in the latest sign of the escalating rivalry between the regional powers.

Saudi Arabia has “banned all imports for made in Turkey products”, an employee at clothing group Mango told Turkish suppliers in an email seen by the Financial Times.

The Spanish company, which is one of a number of European and US fashion retailers with manufacturing facilities in Turkey, said in a statement that its teams “are looking into alternatives to the slowing down of custom processes for products of Turkish origin in Saudi Arabia”.

Mustafa Gultepe, head of Istanbul Apparel Exporters’ Association (IHKIB), said all retailers producing in Turkey and exporting to the Gulf state were affected. “We are talking about all global brands that have stores in Saudi Arabia, produce in Turkey and sell over there,” he told the FT.

Turkish exporters have complained that their products have faced long delays at Saudi customs over the past month. The problems have been viewed by businesses as an attempt by Riyadh and its close ally the United Arab Emirates to punish Ankara for what they deem to be its destabilising interventions in the Arab world.

​But it’s totally unofficial.

The Saudi government said it had not “placed any restrictions on Turkish goods”, adding that trade between the two countries had not “witnessed any noticeable decline, except for the general impact of the repercussions of the Covid-19 pandemic”.

In a statement from the government’s media office, Riyadh also said it was committed to free trade and international agreements and treaties.

But this month, Ajlan al-Ajlan, the chairman of the Riyadh Chamber of Commerce, called for a boycott of “everything Turkish” in response “to the continued hostility of the Turkish government against our leadership, country and citizens”.

EU officially sanctions Russia over Navalny poisoning

Speaking of EU foreign policy unity, they really did it on Russia sanctions.

EU, Britain sanction Russian officials over Navalny poisoning - Reuters

The European Union and Britain imposed sanctions on top Russian officials close to President Vladimir Putin on Thursday in an unexpectedly robust and swift response to the August poisoning of Kremlin critic Alexei Navalny.

Pushed by France and Germany, where Navalny was treated after collapsing on a flight from Siberia, the EU and Britain targeted six Russians and a state scientific research centre accused of deploying a banned nerve agent designed for military use against the 44-year-old opposition politician.

“We Europeans remain committed to the fight against chemical weapons,” French President Emmanuel Macron told reporters as he arrived at an EU summit. He called for talks with Moscow.

The Kremlin condemned the sanctions as a deliberate and unfriendly step against Moscow and promised retaliation.​

Unlike the poisoning of a former Russian spy in Britain in 2018, when the EU took almost a year to sanction military intelligence agents, the bloc targeted officials it believes planned and helped carry out the poisoning.

And here’s the background:

Western spies privately blame Russia's FSB for Alexei Navalny poisoning | Alexei Navalny - The Guardian

Western security agencies have privately concluded that the Russian opposition leader Alexei Navalny was poisoned by the country’s FSB domestic spy agency, in effect pointing the finger at the Kremlin for ordering the attack.

The stark conclusion has been shared between London, Berlin and Paris, among others, and underpins the decision this week by the UK and the EU to target the FSB chief, Alexander Bortnikov, with sanctions.

The response: ​ Russia threatens to halt dialogue with EU amid Navalny spat - AP

Russia s foreign minister warned Tuesday that Moscow could freeze its contacts with the European Union in response to its sanctions over the poisoning of Russian opposition leader Alexei Navalny — an unprecedented threat that reflects a bitter Russia-EU strain.

The tough statement from Sergey Lavrov comes a day after the EU foreign ministers agreed to impose sanctions on Russian officials and organizations blamed for Navalny's poisoning with a Soviet-era nerve agent.

“We probably simply have to temporarily stop talking to those people in the West who are responsible for foreign policy and don’t understand the need for mutually respectful dialogue," Lavrov said at a foreign policy conference attended by experts in Moscow.

UN arms embargo on Iran lifted, U.S. says no way

Part of the Iran nuclear deal was that the UN arms embargo against the country would be lifted after five years of compliance. Well, the day has come.

Iran hails lifting of 13-year UN arms embargo as ‘momentous day’ - The Guardian

Iranian officials have hailed the lifting of a 13-year UN arms embargo on their military as a momentous day, claiming they were once again free to buy and sell conventional weapons in an effort to strengthen their country’s security.

The embargo was lifted on Sunday morning despite US protests and was in line with the five-year timetable set out in the Iran nuclear deal, which was signed in 2015.

Russia and China are the two countries now most likely to offer arms to Tehran, making Iran less dependent on its own weapons industry – and smuggling.

The European Union and the UK are to maintain a separate arms embargo on Iran despite the lifting of the UN one.

Pompeo warns of sanctions for any arms sales to Iran - AFP

US Secretary of State Mike Pompeo on Sunday (Oct 18) said that arms sales to Iran would breach UN resolutions and result in sanctions, after Teheran said the longstanding UN embargo on arms trade with the Islamic republic had expired.

"The United States is prepared to use its domestic authorities to sanction any individual or entity that materially contributes to the supply, sale, or transfer of conventional arms to or from Iran," Mr Pompeo said in a statement.

"Every nation that seeks peace and stability in the Middle East and supports the fight against terrorism should refrain from any arms transactions with Iran."

It’s not like Iran has a ton of money to spend on arms, so we’ll see how this gets tested.

About Jerry Brito

I’m executive director of Coin Center, a DC-based think tank focused on the public policy issues facing cryptocurrency. I’ve testified several times before Congress and presented at the White House, the Treasury Department, the State Department, the SEC and CFTC. My scholarly research has been published in the Harvard Journal of Law & Public Policy and the Stanford Technology Law Review among other outlets, and my articles have appeared in the Wall Street Journal, the New York Times, and elsewhere. My views are often cited by the media. More

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