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Should ICOs be regulated? A majority thinks so

In the most recent iteration of our digital currencies series with Baker McKenzie we are looking  into the rising popularity of Initial Coin Offerings – a means for blockchain start-ups to raise capital.

For those interested in cryptocurrencies and distributed ledger technology ICOs are one of the hottest trends of 2017. According to the latest estimates around US$1.3bn have been raised in ICOs since the beginning of 2017.

But we also warned that ICOs are “not for the faint-hearted“: while they can offer huge returns to investors they are also risky.

ICOs take place in a largely unregulated environment and a discussion is taking place whether this needs to change. More regulation would presumably reduce the risks, but quite possibly also the returns.

We were wondering how experts think about regulating ICOs and turned to banking, cryptocurrency, fintech and blockchain experts in the Euromoney Thought Leaders Panel to find out.

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Flash poll: 50.4% say regulating ICOs would make them more attractive

It turns out that a majority of respondents to the poll favours regulation, while about one third do not consider it to be necessary. Those opposing regulation do so for different reasons though: 15% argue that more regulation would reduce investor returns, while 21% think regulating ICOs would be a waste of time because they won’t be around for long anyway.

The poll “highlights the maturing of the digital currencies business, with its early adopters increasingly outnumbered by financial traditionalists with mainstream regulatory concerns around fraud and consumer protection,” writes my colleague Solomon Teague in his comprehensive analysis of the survey.

This is part six in of our series on digital currencies that we are publishing in collaboration with law firm Baker McKenzie. To catch up with all articles, infographics and interviews published earlier in the series, please head over to the Baker McKenzie financial institutions content hub.

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Two years in – what have we learned?

Guy Dunn, CEO, Euromoney Institutional Investor Thought Leadership

It is about two years since we first started talking to potential clients about how we could help them with their thought leadership initiatives. In that time we have had hundreds of conversations with marketing professionals about what they need to position their businesses as forward-thinking authorities on the issues that matter most to their clients and prospective customers. Happily for us, a number of those discussions have resulted in our business being chosen to research, produce and disseminate thought leadership content for some very prestigious organisations.

Back in 2015, there were a number of assumptions supporting the establishment of Euromoney Institutional Investor Thought Leadership:

1. There was space for us in the market

We were aware that a number of companies were already well established in providing third party content for the purposes of thought leadership. Indeed, many of us had worked for those organisations previously. We have found that traditionally large buyers of thought leadership content are interested in having a broad and diverse range of suppliers to choose from and that there is genuine interest in new players like us in terms of what different things we could bring to the table.

2. We had something new to offer

We knew that simply replicating the approach of others when it came to thought leadership projects was unlikely to be enough. We understood that the effective dissemination of thought leading content to the right audience was equally, if not more important to organisations than its production. Indeed, we had seen many examples of great thought leadership in search of an audience. We knew we had a distinct advantage with our Thought Leaders Network of over 6 million professionals worldwide and so it has proved. It has been deeply satisfying to surprise our clients with how quickly we have been able to conduct research and at the results we have been able to achieve in driving an audience to it.

3. Links with our wider organisation would help

It is not unusual for thought leadership businesses to be set up from within established publishing organisations but we believed that our organisational structure would set us apart. Firstly, the hugely diverse nature of businesses within the Euromoney group means that our potential client base is unusually broad and extends beyond traditional buyers of thought leadership. Secondly, traditional advertising and sponsorship clients of Euromoney group businesses are increasingly looking at thought leadership as an important component of their marketing spend and we now have an “in-house agency” that can respond to those needs. As well as developing our own business directly with clients, we have been fortunate to be involved in a number of projects where we have worked in conjunction with specialist Euromoney businesses in areas such as M&A, aviation and regulations.

Looking back, it is gratifying to see that the assumptions we made have largely proved correct. Of course, it hasn’t all been plain sailing and start-ups like us, without a list of past projects, have to work especially hard in order to prove ourselves. We were enormously helped in this by being able to prove the worth of our survey panel through the deployment of quick-to-market “pulse surveys” that demonstrated to clients that we could conduct reliable research at speed. We were also fortunate that a couple of our early projects allowed us to prove our value in disseminating content back out through our research panel, resulting in unusually high rates of engagement for the client.

It is interesting to me to see the range of projects that we have been involved with in this relatively short space of time. There are long-established programmes where we have been chosen to bring a new dimension as well as completely new initiatives where the client is breaking new thought leadership ground and has seen us as a flexible and innovative partner. Some rely almost entirely on our substantial research panel while others are driven completely by the ability of our team of managing editors to create great content.

I had always felt confident that we would eventually be regarded as an important addition to the ranks of thought leadership providers. That it has happened so quickly is testament to the quality of what we have produced as well as the willingness of our growing list of clients to try something new.

Guy Dunn

CEO, Euromoney Institutional Investor Thought Leadership

P.S. Here are some examples of the projects that we have been working on with our partners. I hope they demonstrate the variety of research that we have been able to conduct and the innovative ways that we can deliver it:

Capital confidence – a renowned and long-standing M&A research project (produced  for EY)

Artificial intelligence – a survey-based, interactive digital report (produced with Baker & McKenzie)

Aviation finance – research and interviews with 400 senior industry executives (produced with Deloitte)

Trade secrets – survey and report of senior executives across multiple industries (produced with Baker & McKenzie)

Growth ambitions – an important new survey of 2,300 executives in mid-market and start-up companies (produced for EY)

Emerging markets – a survey-based report on the prospects for M&A in emerging markets (produced with CMS)

 Regulations – research among senior executives on the implication of BEPS legislation (produced with RSM)

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Initial Coin Offerings: Not For The Faint-Hearted

Initial coin offerings are the latest way for blockchain startups to raise capital and engage with their prospective client-bases. Investors have been making huge returns but the market has all the hallmarks of a bubble and is bound to burst sooner or later.

The ICO market has been red-hot in recent months. Only an indicator is the increased popularity of the search term “initial coin offering” on Google.

In fact, the total number of ICOs in the first half of 2017 surpassed the number for the whole of 2016, according to Santiment, a crypto-market intelligence platform: the increased interest reflected on Google is certainly no coincidence.

Advocates argue ICOs, where companies create and sell a new digital token or ‘coin’ to investors to raise capital, offer issuers huge advantages. They allow them to raise millions with lower barriers to entry than alternatives like debt financing or an IPO and link issuers with investors that are also typically early adopters, beta testers, development contributors and evangelists.

While issuers are attracted to ICOs by the flexibility that is possible due to the lack of regulation around them, investors are principally in it for the returns. These have often been spectacular, with returns of 10 or 20 times the initial investment not unusual.

But others warn of the volatility and risk for investors. In our latest piece in our digital currencies series, Gabriel Dusil, co-founder of blockchain infrastructure company Adel, describes the ICO space as “Wild West”. He knows what he’s talking about: Adel conducted its own ICO in March 2017.

You can read the full article “ICOs: not for the faint-hearted” here.

 

Banks Embracing the Blockchain

Digital currencies and distributed ledger technology will have huge and unpredictable implications for banks, increasing efficiency in some business segments and inviting competition in others. Eventually it could completely transform their relationships with clients.

Christophe Van Cauwenberghe, head of payment innovation at Societe Generale

Christophe Van Cauwenberghe, head of payment innovation at Societe Generale

The distributed ledger has the most obvious potential for banks in payments, syndicated loans, trade finance and know your customer (KYC) compliance, according to Christophe Van Cauwenberghe, head of payment innovation at Societe Generale.

In part four of our digital currencies series, which we are publishing in collaboration with law firm Baker McKenzie, we are asking how banks are embracing the blockchain.

While for now it remains next to impossible to say specifically how things may change, one thing is clear: no matter how disruptive distributed ledger technology may be for banks, it is always better to embrace new technology and adapt than pretend it isn’t happening.

If you would like to catch up on our digital currencies series, you can find our earlier publications here:

Part 1: Life after quantitative easing: Digital currencies could be a powerful tool for central banks, but there are risks

Part 2: Infographic: Centralised vs decentralised digital currencies

Part 3:  Banking on the Blockchain. An interview with UBS’ Head of strategic investment and fintech innovation, Hyder Jaffrey.

 

An interview with UBS about digital currencies
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Hyder Jaffrey is Head of Strategic Investment and Fintech Innovation at UBS

Banks have spent the last few years exploring how distributed ledger technology, or the blockchain, can help them cut costs or improve service.

To better understand how banks look at the issue we spoke to Hyder Jaffrey, Head of Strategic Investment and Fintech Innovation at UBS. In the interview he explains the utility settlement coin, a form of cryptocash a group of banks, including UBS, is working on.

Jaffrey argues that it helps to think of the world of digital currencies as a spectrum:

“At one end of it you have bitcoin, which is unregulated and operates outside of government control. At the other end you have central bank digital currencies – digital versions of existing currencies. The utility settlement coin is positioned right in the middle, with some of the benefits of bitcoin, such as the real time transfer of value (settlement), while taking on some characteristics of ‘real money’ issued by central banks. It is pegged to those fiat currencies and will always have the same value.”

You can read the full interview with Hyder Jaffrey here.

This is the third part in of our series on digital currencies, that we are publishing in collaboration with law firm Baker McKenzie.

Accumulate to innovate: Staying ahead in the innovation arms race

Last year Siemens, the 170-year old industrial conglomerate, announced the creation of something that had a strong whiff of back to the future about it.

The innovative German company hasn’t yet, unfortunately, created the world’s first time travelling train. But on October 1 it did launch a business that speaks as much to its past as it does to its future.

Indeed  in founding next47, a new unit designed to foster innovation and accelerate the development of new technologies, Siemens is focusing even more than it has in the past on partnering and investing in innovative start-ups to enhance its future growth and development.

“Siemens itself was a start-up in 1847,” said Joe Kaeser, president and CEO of Siemens. “With next47, we’re living up to our company founder’s ideals and creating an important basis for fostering innovation.”

Siemens has been partnering and investing in start-ups for the past 20-years or more. But in next47 – a play on the year Siemens was founded – the company has consolidated all its existing start-up activities, empowering the unit and essentially giving this business greater strategic importance to the entire company than ever before.

What’s interesting is that Siemens is not alone.

For years many of its blue-chip company peers – from Intel and IBM to Unilever, Google and more recently GE – have been partnering with and investing in some of the brightest start-ups in much the same way.

Unilever Ventures, the consumer goods conglomerate’s venture capital and private equity arm, was founded, for instance, in 2002. Intel Capital, by comparison, has been going since 1991.

Back then the innovation arms race was only really just getting going. And yet in the last decade this race has accelerated phenomenally, transforming the global economy in ways few knew or perhaps thought were possible.

From AI and machine learning, to distributed ledger technology, augmented reality, robotics, cybersecurity, energy storage and 3D printing, large, mature companies are today seeking out some of the most innovative start-ups in an ever increasing array of profoundly impactful areas.

Consequently, corporate venture capital investment – the means through which these companies tend to invest in or acquire start-ups via their own dedicated divisions – has rocketed in recent years.

Last year, for instance, corporate venture capital investment touched $85bn globally – roughly double what it was in 2014, according to Global Corporate Venturing.

It looks set to keep soaring.

An increase in acquisitions of innovative start-ups by larger, more established competitors is seen as one of the top themes in M&A over the next 12 months, according to over 2,000 company CEOs, CFOs and other senior executives who participated in the recent Capital Confidence Barometer survey we conducted on behalf of EY.

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EY CCB: An rise in acquisitions of innovative start-ups a top theme

Ask the same executives the same question but our over a longer timeframe and the acquisition of start-ups may be nearer the top.

Part of the reason why is the recognition that internal research and development alone struggles to deliver the type of innovations companies want, when they want, and at a cost that they want to see.

Combine that with the fact that the type of environment that fosters innovation – one where staff can collaborate and operate under the freedom to create, experiment and ultimately fail – is not typically to be found flourishing in large, mature multi-billion dollar companies.

At least, not in most.

Part of Siemens’ objective for next47 is to provide existing group employees, entrepreneurs as well as external start-ups and established companies with the “freedom to experiment and grow” without the organisational restrictions so often symptomatic of a company its size.

In some sense, Siemens is just opening its doors to bring the innovations that can and do happen outside, in.

And while much of that focus is on attracting the ingenuity and flare that start-ups can bring, large mature companies are also getting in.

The first of next47’s projects is with European aircraft maker, Airbus. By 2020 they aim to show the technical feasibility of hybrid/electric propulsion systems for small to medium-sized passenger aircraft.

Innovations driven by and among large companies can of course be just as profound as any developed by start-ups, but to stay ahead in the innovations arms race, better ultimately to work together as one.

And who knows, anything might be possible – even time travel.

Who Owns Digital Currencies (and why it matters)

Digital currencies come in different shapes and forms, which in turn has important implications for their respective use and application.

A lot depends on the question who ultimately controls a specific currency. Bitcoin, for instance, is decentralised and operates outside of the oversight of a single institution. It is therefore not well suited to manage inflation.

ownership digital currencies snippetBut a central bank issued digital currency* – none exists so far, but central banks around the world are considering it – would be a powerful tool to control and manage inflation.

A third type are digital currencies issued by banks, such as the Utility Settlement Coin (USC), being worked on by a number of top tier banks.

Our infographic: Centralised versus Decentralised Digital Currencies compares the implications the characteristics of different digital currency types have.

The chart is the second iteration in our new series on cryptocurrencies, which we are publishing in collaboration with law firm Baker McKenzie.

We’d be delighted to hear your comments. You can get in touch using the contacts form. For social media, we recommend the hashtag #cryptocurrencies.

* For more on central bank issued digital currencies, check our recent article, “Life after Quantitative Easing

Deal or no deal: Protecting acquisitions amid manic market moves

Three to 12 months is a long time in global markets where so much can change in the blink of an eye.

And yet three to 12 months is the average time it takes to close a merger or acquisition – opening-up an acquirer to the risk markets may move against them.

In such unpredictable times as these this risk is increasingly real, potentially making any acquisition more expensive or, in extreme cases, unravel.

Take, for example, how markets reacted last year to the UK voting to leave the European Union and the election of Donald Trump as US president. Sterling lost almost 20% of its pre-referendum value in the weeks after, while Trumps election sent bond yields soaring in anticipation US interest rates would rise.

While such market moves only really occur when unexpected events hit, the regularity of these seismic events is undoubtedly worrying.

Indeed, over the next 6-12 months, high volatility in currencies, commodities and other capital markets is considered the greatest economic risk to the core business of companies, according to over 2,000 CEOs, CFOs and other senior executives who participated in the recent Capital Confidence Barometer survey that we conducted on behalf of EY.

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At the same time, a near-record number of the companies that participated in the survey said that they plan to acquire in the next 12 months, with most of them believing that the main theme in M&A this year to be an increase in cross-border dealmaking.

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So at a time when there is a resurgence in appetite for cross-border M&A and fear of higher currency and capital market volatility, what’s a deal-hungry CEO to do?

One option making something of a comeback is for companies to use derivatives to help mitigate the financial risk costs in an acquisition.

Foreign currency forwards – a derivative essentially enabling the buyer or acquiring company to purchase or sell a set amount of foreign currency at a specified price in the future, thereby protecting themselves against any wild market swings – is one such hedging solution. But it is so-called deal-contingent FX forwards, which offer buyers greater optionality, that are specifically re-emerging again.

Whereas a company must pay for a FX forward irrespective of whether or not the acquisition is completed. With a deal-contingent forward, the company can walk away – without paying to unwind the agreement – depending on how the acquisition actually progresses.

If that sounds too good to be true, the catch or downside is that deal-contingent forwards are expensive, costing between 2-5% of the notional value of the transaction – far more than a FX forward.

It’s a tough call to know whether it is worth it or not. But amid more volatile markets, what price does a company put on being protected?

Similarly, just as currencies can appreciate during the time it takes to close a deal, financing conditions can of course change rapidly too.

Most large-scale M&A transactions are financed initially using a bridge loan before being refinanced on the bond markets, but if interest rates rise during this time the cost of finance does too.

To manage this risk derivatives called forward-starting swaps offer something of a solution, essentially enabling the acquirer to lock-in current rates for an asset or liability and on a deal-contingent basis.

Similar to a deal-contingent FX forward, a company can walk away from the hedging agreement depending on how the deal progresses.

Such interest rate derivatives have been used for some time in infrastructure and project financing, where the long-dated nature of it means it is particularly susceptible to interest rate changes over time.

They haven’t, as yet, become as prevalent in the shorter-dated corporate bond markets. But interest is expected to grow. After all, interest rates can only go one way after being so low for so long.

Digital Currencies: Powerful Tools for Central Banks

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Today, we are launching a new project on digital currencies.

Over the next weeks and months we will investigate different types of cryptocurrencies and consider their benefits and potential downsides to financial institutions, central banks and the real economy.

We will discuss regulatory hurdles, explain digital payments systems, and look at distributed ledger technology.

We will also be speaking to central bankers and blockchain developers, commercial and investment bank experts, fintech visionaries and other stakeholders who will play a role in shaping the future of cryptocurrencies.

In the first part of this new project, which we are publishing in collaboration with law firm Baker McKenzie, we are examining why central banks are looking seriously at creating digital versions of fiat money. The article explains how the issuance of digital currencies will provide central banks with a new powerful tool that will give them unprecedented control over economies and markets.

Upcoming pieces in the series will include interviews, videos, animations, infographics and more.

In the meantime, please head over to our partner’s website to read our first article, “Digital Currencies: Life after Quantitative Easing”.

We hope you will find this new article series interesting. As ever, we would be delighted to hear your thoughts. You can get in touch using our contacts form. For social media, we recommend the hashtag #cryptocurrencies.

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Aviation Finance and the Cost of International Tax Reform

Tony Ryan, the Irish businessman, is best remembered as the co-founder of the low cost airline that carries his name. Ryanair launched in 1985 with a single 15-seat turboprop connecting Waterford with London Gatwick. Today, it is Europe’s largest airline. More than 106 million customers boarded Ryanair planes last year.
But before popularising no-frills flying in Europe, Ryan had already revolutionised the aviation industry in a different area: In 1975, as the founder and CEO of Guinness Peat Aviation (GPA), he invented aircraft leasing as it exists today.

Patrick Blaney, who succeeded Ryan in the CEO post, described in an interview with the Irish Independent in 2016 how the GPA founder created the new industry almost single-handedly. It began when Aer Lingus, his employer at the time, tasked Ryan to solve an overcapacity problem by ridding the company of two unneeded planes.

“Tony Ryan was dispatched by [Aer Lingus] to find a home for these two planes and he found an airline in Thailand called Air Siam, which needed not just the planes but a flight crew and cabin staff,” Blaney said.

“So he very neatly organised for two aeroplanes that Aer Lingus had bought but didn’t need, they had trained crews and all the rest to fly, and he shipped the whole lot out to Thailand.”

With the creation of GPA soon after sealing the Air Siam deal, Ryan filled a niche in the market: leasing allowed airlines to quickly increase capacity in growth times, or scale back when demand dropped. In addition, there are certain advantages to airlines in the way leased planes are accounted for on the balance sheet.

Aircraft leasing and financing became big business. Today, 40–50% of all commercial planes are leased. While Ireland still dominates the industry, other jurisdictions including Singapore, Hong Kong, Cyprus and Malta have also sought to attract the sector.

New Challenges

But the business model is facing new challenges created by changes to the international tax environment. Supranational organisations have agreed measures to curb tax avoidance and the question arises whether this will have a detrimental impact on aviation finance.

In a global survey of more than 400 industry experts, conducted by Euromoney Institutional Investor Thought Leadership in conjunction with Deloitte, 78% of aviation experts working for airlines, and 87% of those working for lessors agreed that the industry will feel the impact of anti-tax avoidance measures.

General impact chart 1One of the main drivers for changes to international taxation is the OECD’s Base Erosion and Profit Shifting (BEPS) Action Plan. This project aims at closing gaps in international tax rules that allow multinationals to minimise their tax bills by playing the tax regimes of different jurisdictions against each other.

Haroun Asghar, Head of Tax at Etihad Airways, thinks that “the political support underpinning [the] BEPS [Project] can’t be under-estimated”. He adds that “the speed and scope of these changes has been impressive. It is the most significant development to international tax architecture for over half a century.”

The anti-tax avoidance directive (ATAD) is the EU’s implementation of the BEPS Action Plan. Agreed last year, the ATAD will come into effect from January 2019 and apply to all EU members, including Ireland, the global centre of aviation finance.

What financial impact will the new measures have? While the survey results display considerable uncertainty — 30% of respondents didn’t take a view — a narrow majority of the survey panel, 53%, expects the cost for leasing aircraft to increase. Only a 13% minority does not think so.

Double tax treaty changes

More recently in focus of the BEPS Project have been double tax treaties. An OECD signing ceremony scheduled to take place in June in Paris will set in motion changes to more than 2,000 tax treaties– about two-thirds of the worldwide total. First treaty amendments could come into effect from January 2018.

In addition to the other measures, the prospect of changing double tax treaties will draw increased attention to tax gross-up clauses.

Included in most standard aircraft lease agreements — but rarely triggered — gross-up clauses could almost be considered a mere formality: added to every contract, but never expected to become relevant. Now that tax bills are set to increase, they will be subject to closer scrutiny.

Half of respondents to the survey agree that “proposed double tax treaty changes will have an impact on the negotiation of aircraft lease agreements, in particular the provisions of tax gross-up clauses”.

Gross up clauses Q18Again, a considerable number of respondents refrained from taking a view, underlining the lack of clarity around the impact of international tax reform.

If — as the survey indicates — aircraft leasing costs are set to go up, who will pay for it?

Lessors’ largest customers might have sufficient buying power to force lessors to absorb rising costs themselves. It’s an indicator for market expectations that 41% of experts believe (vs 25% who disagree) that the implementation of the BEPS Action Plan via the ATAD will result in a drop of lessor profits.

Lessor profits decline Q11

But that does not mean that the aircraft leasing business invented by Tony Ryan in the 1970s has seen its best days. Leasing aircraft offers more than just tax-related advantages, and therefore it is unlikely that its popularity with airlines will change significantly. “Ultimately, the amount of leasing will depend on wider market and business factors,” comments Etihad Airways’ Haroun Asghar.

And Markus Ohlert, Head of Leasing at Lufthansa, adds that this might be particularly true for companies that don’t have strong balance sheets. For them, “leasing may be the only way to get access to aircraft,” he says.

The survey and report “Game Changer not Game Over: Aviation Finance and International Tax Reform” has been prepared by Euromoney Institutional Investor Thought Leadership in conjunction with Deloitte. The complete research is available for free download here.

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With a team of independent journalists, experienced editors and professional marketers, we create reports, surveys, blogs, articles, videos and infographics. All of our content is unbiased, original, research driven and audience-led.

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