During last few years, in addition to Taiwan, another frontier of contest emerged between China and the USA – the wrestle to control more than 2 billion worth of crypto market. Last week, Beijing has announced new strict regulation pertaining to the trading with cryptocurrencies. Even the mining is prohibited. The regulators in the USA are planning also to initiate new range of restrictions which may threaten the existence of the whole private crypto industry. 

The crypto industry was growing long time without serious impediments, and meanwhile the sector became so overwhelming that regulators, central banks and politicians could not afford any more to ignore it.  Supporters of decentralized finance system indicate about the core qualities of blockchain-technology, where crypto currencies are based. One of them being the privacy of users – decentralized exchanges do not collect data about the users of the currencies. Despite the regulatory threat, many players of the crypto market consider it almost impossible to completely stop trading with crypto currencies. Although after the news from China the oldest cryptocurrency, Bitcoin, has shed more than 15 % of its value, tokens from decentralized exchanges as Uniswap, Sushiswap, Pepetual Protocol and DYPS either increased or maintained their prices on the same level.

Chinas systematic attack on crypto currencies, since the start of the year, made them even more volatile. The latest restriction were issued in May which banned local financial institutions to offer crypto services.  Crypto exchanges moved to the gray-zone of regulations. On Monday, Huobi, one of the larges crypto market, advised its customers from China to quit the platform by the end of the year. Its competitor, Binance, refused to accept any user with Chinese mobile phone registration. Beijing declares the restrictions fight against fraud, speculations, money laundering and increased power consumption, demonizing bitcoin as the biggest culprit.  Still, against all odds, Chinese authorities announced to issue their own digital currency – so called “Stablecoin”.

Despite, the hurdles created by China to the users of crypto currencies, the most populous country still plays an important role in the crypto-market. According to the Chainanlysis, during the first six months of the year, wallets and digital markets booked more than US $150 million revenues from Crypto-users of Chinese origin. This makes China the second most important player on the market after the USA. 

In the USA, the Securities and Exchange Commission (regulator of the securities markets), plans to bring in the new regulations and  rules for the market of more than five thousand crypto currencies. The cause for such steps is that many crypto firms are in breach with securities’ regulations. Especially, the biggest claims come against crypto-lending services, where the users earn interest rates from lending the coins. Besides, they consider coins as the threat to the stability of the economy, as last month the chief of the SEC called coins as “chips in the Casino”. Still, like the other side of the pacific, the Federal Reserve Bank (Central Bank) of the USA plans to consider the idea of launching a U.S. digital currency.

Many industry experts surmise that the regulation of the crypto-market is imminent. However, the step from Chinese authorities is considered as the movie to control all financial transaction and the users, instead of insuring stability of the industry.

In line with the USA and China, central bank digital currencies are a hot topic among monetary-policy makers world-wide. More than 80 countries, representing 90% of the world’s gross domestic product, are looking into the blockchain technology. In my opinion, all these initiatives are caused by the fear of loosing control over financial transactions. This can a reasonable concern. However, a state controlled digital currencies come with serious risks.

Without additional privacy measures, central bankers shouldn’t establish them. Some of us may remember, privately issued digital dollars, such as electronic balances in checking accounts. Central bank digital currencies are similar, except the liability is on the central bank, rather than private banks. One benefit of tying digital currencies to a central bank is that payments would also be processed by central banks, strengthening national and international payments systems and potentially lowering transaction costs. The regulators also mention that “unbanked” part of the populations, can also benefit from having direct account at the central bank. 

However, it changes a lot of things. And, most important is that the states cut off lager chunk of financial industry from private businesses and creates it own crypto start-up, with inherent risks.

First, governments have strong incentives to simplify society for the purpose of social control. Bringing commerce within a centrally managed payment system is a textbook example. If widely used, these currencies would give central banks unprecedented power over the financial system. Without additional safeguards, virtually all transactions would be a matter of public record and the financial privacy would be difficult to maintain. 

Also, since this currency would be a liability of central banks, they could place conditions on its use to nudge users in desired directions.

Second, governments can use centrally managed digital currencies to meet its macro-economic policy target, even sometimes, at the detriment of a particular individual. Imagine your digital balance shrinking slowly over time to motivate rapid consumer spending. Or a Central Bank blocking payments to politically disfavored businesses.  The temptation to manage a central bank digital currency in line with these agendas would be strong.

For these reasons, some central bankers, such as Governor of the Federal Reserve Mr. Christopher Waller, oppose creating their own digital currency. In a recent speech, Mr. Waller emphasized concerns about privacy and government control of payments. One of his comparisons is highly illustrative: China, the major economy that has made the greatest strides toward a central bank digital currency, could use that technology “to more closely monitor the economic activity of its citizens.”

The third, and not least, is that governments’ involvement in the crypto business will halt the development and innovation in this field. Not only private investors will lose their investments, but they will stop to innovate and make the business more efficient and cheaper for so called “unbanked”. The latter is left “unbanked” mainly by regulators, not by his own misfortunes.  Otherwise, the mentioned strata of the society will maintain status quo for the long time, due to regulatory restrictions from authorities.  

The last, but not least, changes in financial industry, inducing cost reduction, increase of speed, and inclusion of broader part of population will have spillover effects on other industries and economies in general. To restrict economic development has never been a good idea. 

The Other Side of the Coin – Opportunity

On the other hand, most “gifted states”, use such moves from “regulation lovers” as opportunities. Singapure, as one of the pioneers of the crypto-openness, surmises to entice crypto users on its nascent crypto market. 

The regulators in Singapore have got it right. Whether or not the region’s “big bet” pays off, they think, banning cryptocurrency trading makes no sense. The industry remains a “wild west” because there is no consistency on standards to make it stable and secure for investors. Trading, in particular, remains fractured and illiquid, which contributes to the wild price swings.

In Singapore, they think that people anyway will continue to use cryptocurrencies so this will only push activity underground or elsewhere. Just look at the number of start-ups and talent piling into the sector. Singapore can use its approach as an option to find out how to solve these problems and benefit from being part of the crypto journey.

Done correctly, regulation can be very productive and foster crypto development in a healthy way by working with the industry to improve standards and prevent illicit activity. Plenty of businesses out there want to help create that framework. It’s about time the US and other leading markets caught up and took steps to establish collective frameworks so investors can operate safely and business can thrive. 

This is not the first time Singapore’s authorities used restrictive measures of other large states as opportunity to support its economy. Nowadays, the financial competition in the region as a game of fintech innovation, so it does not make sense to exclude cryptocurrencies. Singapore’s approach to inclusive crypto regulation can create an environment that fosters innovation while setting up frameworks for security and stability.

Now that Singapore’s crypto startups are gaining momentum, its mainstream financial institutions are learning about the technology and global fintech will make next steps from here.

The Deal

The September 15^th’s announcement of a new partnership between Australia, the United Kingdom, and the United States, dubbed AUKUS, is a significant move by the three countries to improve their strategic alignment and military cooperation as the Indo-Pacific increasingly becomes a focal point of foreign and defense policy, versus Chinese assertive moves to establish itself as a ruler of the region.

According to the deal, the partnership includes several workstreams on a range of defense and technology cooperation areas. As part of this defence agreement, the UK, US, and Australia are aiming to protect the undersea fibre optic cables that provide part of the military and civilian communication for the West. The cross-section of quantum, artificial intelligence and cyber is equally significant because quantum communication technologies would allow new types of encryption, and thus would make eavesdropping obsolete. Similarly, with artificial intelligence and machine learning applications, the parties could detect known cyber threats to undersea cables. The agreement is the basis for cooperation on research and development that could be a pilot for broader cooperation in the Group of Seven (G-7).

However, most of the attention is focused on the new fleet of nuclear-powered attack submarines Australia plans to build, which will involve the United States sharing its nuclear submarine propulsion technology for only the second time in history. (Washington had previously shared the highly classified technology only with the UK). The latter has led to anger in France—because as AUKUS was announced, Australia terminated an earlier multiyear deal with Naval Group (in aggregate worth of US $39 billion), a state-controlled French company, to build a dozen diesel-powered submarines. As a result, Franco-U.S. and Franco-Australian relations went underwater. French Foreign Affairs Minister Jean-Yves Le Drian, called the announcement a “stab in the back” and ordered a recall of the French ambassadors from Washington and Canberra. On top of that, the French canceled a gala at their Washington embassy meant to commemorate the Franco-U.S. partnership since the American Revolutionary War (1790). 

The Rationale and Risks

The AUKUS partnership was not the fruit of some dastardly plan by the United States to exclude France (or Germany or Japan) from a new club and simultaneously undermine French commercial interests.  It shows the major shift of the US interest from north Atlantic to south pacific. It would not be surprising, if the trio is joined later by Japan and South Korea, New Zealand and/or Canada (the last two being the remaining two members of “Five Eyes”, the group of English-speaking nations including the USA, The UK, Australia, Canada and New Zealand. “Five Eyes” is about intelligence sharing among its members). 

Although the deal is targeted against rising influence of China in South Eastern Asian waters, it is perceived as a “small alternative” to NATO in face of new geostrategic realities. The break-up of Soviet Union (Russia is considered now as a regional player in Washington), creation of European Union, change of supply & demand curves of hydrocarbons in parallel with hasty withdrawal from Afghanistan and the rise of China has created the new geopolitical priorities for the US and the attention from the North Atlantic moved to South-Eastern Asia, to challenge growing aspiration of China towards the world’s supremacy. Russia is not deemed any more as the major rival for the USA.   

Although the pact has caused the discontent on the Continental Europe, the rise of AUKUS is worth the temporary tension as the U.S. tries to maintain a favorable military balance in the Asia-Pacific. Australia isn’t part of NATO, but the U.S. ally has come under coercive pressure from China. Beijing imposed tariffs on Australian food and raw materials after Prime Minister Scott Morrison called for a probe into the origins of the coronavirus. China has detained Australian citizens and demanded that its elected officials and free press stop criticizing China’s political system. The AUKUS initiative shows Western solidarity.

Focusing on submarines as the first initiative also sends the right message. China’s recent naval buildup has been extraordinary, and Beijing’s stated ambition is to control Taiwan and dominate disputed waters in the Western Pacific. The eight or more nuclear powered submarines the U.S. and U.K. will help Australia build are difficult for a hostile navy to detect as they travel long distances for reconnaissance or sea denial. They can remain submerged at high speeds for longer periods than diesel-powered boats, which need to surface periodically to burn fuel. The technology-sharing creates some risk, but the benefits of broadening the defense-industrial base across close allies are significant.

Secondly, Australia began to have second thoughts about the contract in recent months. Nuclear submarines can run for decades without refueling, giving them a much longer range than conventional submarines, which are powered by diesel. Compared to their diesel-powered counterparts, nuclear submarines have many advantages – they have longer range, are generally quieter, and more difficult to detect. There are disadvantages also – they are more technically complex, have a higher level of technical secrecy, and require nuclear materials restricted for most states. If successful, it will hamper Beijing’s capabilities to further acquire cutting-edge military tech to apply in its home-grown aircraft carriers. It is a significant step-up to counter China’s growing military presence in the West Pacific. Yet it remains ambiguous whether Japan will play a role or join AUKUS as the alliance develops.

On the other hand, doubts persist, not least over how far the UK and Australia are willing to accept the commercial and strategic consequences of antagonizing a China that views the pact as an explicit threat. The Trump administration proved how fickle US foreign policy could be; the current president may be committed to Aukus but that is no guarantee his successor will be. Meanwhile, the new submarines may not even be ready in the next decade. 

More awkward still is where the pact leaves the trio’s relationship with France, with which Australia previously signed a A$50bn (US$36.6bn) deal for a fleet of conventional submarines. There are trade-offs in rebuffing France for both the US and the UK, particularly when it comes to managing the threat from Russia. The purpose of Nato, so undermined by recent events in Afghanistan, needs now to be reaffirmed. Upsetting Paris could also have direct consequences for Washington’s efforts to constrain Beijing. An EUChina investment treaty that the Biden administration dislikes has been shelved — but might yet be revived. 

The Threat for Eastern Europe

NATO is mainly standing on the commitment from the USA. Europeans were runners-up both in funding and in supplying of technology & solders. In 2015, when the threat from Russia intensified to the new Nato members, Baltic States, and when it came to committing to upholding Article 5—the alliance’s sacred cow, which requires NATO members to defend an ally if it is attacked—the results were devastating. Polls showed that among Europeans, a median of 49 percent of respondents thought their country should not defend an ally, a response that exposes a lack of commitment to collective defense. Not only European populaitons, top politicians in key European countries (including Germany) had second thoughts about fulfilling the mentioned article of NATO if Russia attacks its Western member neighbors. The Chancellor of Germany was asking to define interpretation of the Article #5, which may not necessarily means military intervention.

In case of weakening interest from the United States, the likelihood of Western and South Europe to shy away from its eastern neighbors is very high (causes may range from of generous bribe to the informational war and strong tactical moves). And Russia has been preparing for this moment since 2008 (after failed test of the West to resist the invasion to Georgia).   

In such elevated levels of uncertainty, Eastern and Northern European countries, with high risk of confronting Russian need to work on the Plan B. It would be wise, in line with participating to breath a new life to European Unity and NATO, they need to create their own political and military union to defend themselves and have the same stance and policy against the bigger aggressor. These countries may be three Baltic states, Ukraine, Poland, Slovakia, Czech Republic, Bulgaria, Romania, Moldova and Nordic countries (including Finland). The North-East European alliance may have technological exchange with AUKUS, including submarine technologies and artificial intelligence. They need to keep in mind that, Western and South European countries may continue to keep their conformist policies with Russia, making occasionally mild statement to remind the world of their moral attitude against occupation of weaker countries from their larger neighbor, but Russia knows very well, they will not interfere. The world is changing and it would not be better place for the weak. They need to be ready.

In parallel with China’s plans to issue e-CNY (digital Yuan) and CBDCs (central bank digital currencies) of Sweden, South Korea, El Salvador is the sixth country (beside the cohort of small Caribbean states – the Bahamas, Saint Kitts and Nevis, Antigua and Barbuda, Saint Lucia, and Grenada), which has officially launched virtual currency as a legal tender. However, Salvador was the first to legalize Bitcoin tokens as a mean of payment.

The President says the country has already purchased 550 bitcoins, equal to just 0.00275 per cent of the outstanding value. Bitcoin’s aficionados around the world showed their support for El Salvador by each buying $30 of bitcoin. Still, it did not help bitcoin to fall 3 days ago, which was at $46,776.65, at the end of the day on Sep, 6, 2021, down by 9.9%, after 11% growth over preceding 7 days.

Last week, government took its bitcoin e-wallet offline for several hours after tens of thousands of people tried to download the app overloaded servers. The administration of President Nayib Bukele, plans to spend additionally more than $225 million on the rollout, including a $30 credit in bitcoin to those who take up Chivo (slang meaning “cool” on the local dialect of Spanish) – the government-run e-wallet that can be used to buy a cup of coffee, get a haircut or even pay taxes and home loans in bitcoin or U.S. dollars.

On the side of crypto-traders, Coincaex, a Central American foreign-exchange platform to buy and sell bitcoin or U.S. dollars aims to be among the first foreign bitcoin service providers to get a license from the central bank. The Salvador’s government is also rolling out a network of 200 bitcoin ATMs and building a chain of stylish, Chivo-brand kiosks with staff who will introduce consumers to bitcoin at plazas around the country.

Data from CoinGecko shows it was not the largest mover. Ethereum leapt 16 per cent over the past week. Solana’s tokens rose 69 per cent. Trading apps make it easier for retail investors to buy crypto. The Coinbase initial public offering in April raised its profile, leading to a jump in downloads.

The make-believe world of non-fungible tokens, or NFTs (see Note at the bottom of the article), has also given cryptos a boost. These prove ownership of digital assets such as art, music or even virtual pet rocks. Many use the ethereum network. Solana has its own NFT marketplace, Solanart.

Rising prices mean the total market value of cryptocurrencies has reached nearly $2.2tn. It is closing in on the previous record of $2.57tn set in May. Bitcoin’s share of the market has fallen. It is now about 40 per cent, down from 57 per cent a year ago. Yet bitcoin remains a bellwether of the token market.

There are no sensible reasons for these moves, teething problems with El Salvador’s digital wallet included. The country is not expected to make other virtual currencies legal tender. Instead, the swings reflect a mix of low rates, blind faith and better investor access. The crypto asset has proved to be much more volatile than traditional currencies, as it lacks economic fundamentals to support its value and trades entirely on sentiment.

As none of this has anything to do with El Salvador’s attention-seeking adoption of bitcoin, this move diverts domestic attention from the failing economy of this impoverished central American country, the first nation to embrace bitcoin as legal tender. It also supplied cheerier news flow to bitcoin fans than the cryptocurrency’s collapse in value this spring.

The stakes are high for the indebted country of 6.5 million. Economists say bitcoin’s sharp fluctuations risk denting the tax revenue and foreign-currency reserves of a government that has neither the policy tools nor the financial firepower to contain a speculative attack.

There are pros and cons of these indeed risky steps:

The government is betting taxpayers’ money, more than $200 million, in highly volatile virtual assets.

The International Monetary Fund also advised against the adoption of privately issued tokens that bypass authorities and open doors to illicit transactions. Government officials respond by the argument that bitcoin’s adoption will lead to affordable financial services in a country where an estimated 70% of the workforce operates in a vast underground, cash-based economy.

Part of business owners applauded the government’s initiative because it widens payment options for clients with an easy-to-use mobile app that eliminates costs such as the credit-card fees that banks charge to merchants.

Financial-services companies, which are the main channel for the $6 billion in remittances that El Salvador receives each year from migrants living in the U.S., will accept payments in bitcoin, but the funds will be immediately converted into dollars. Their top concern will be how to prevent federally regulated banks in the U.S., which provide financial services to banks in El Salvador, from cutting ties because of due diligence and compliance risks, American banks most likely shy away from Bitcoin based transactions.

Note: According to investopedia.com, non-fungible tokens or NFTs are cryptographic assets on blockchain with unique identification codes and metadata that distinguish them from each other. Unlike cryptocurrencies , they cannot be traded or exchanged at equivalency. This differs from fungible tokens like cryptocurrencies, which are identical to each other and, therefore, can be used as a medium for commercial transactions.
NFTs are unique cryptographic tokens that exist on a blockchain and cannot be replicated. NFTs can be used to represent real-world items like artwork and real-estate. They can be also used to represent peoples identities, property rights, and more.

Europe is facing a natural gas shortage just as Russia is completing a controversial pipeline to Germany, increasing Russia’s leverage over the continent’s energy flows. Europe’s gas stores are at their lowest (the part of which is owned by Gazprom) levels for years after demand rebounded from a pandemic-induced low that had led producers to slash output. As a result, prices are hitting record levels and utilities are firing up coalfired power stations to keep their own costs down.

Despite this, Russia, Europe’s biggest gas supplier, has declined to book big additional flows through pipelines in Ukraine, which are running below full capacity. A large share of Russian gas exports to Europe transits through neighbor Ukraine, but that is expected to change after Russia completes construction of the Nord Stream 2 pipeline, which the company running the construction expects to happen this month. This will allow Gazprom to export directly to Germany and bypass Ukraine and Poland, whose governments are critical of Russia.

From commercial as well as from political viewpoint the project is only beneficial for the Russian Federation. The pipeline can be used as the weapon not only to punish Ukraine and other Eastern European countries cutting them from the supply of natural gas but also it gives Russia greater leeway to influence gas prices in Europe. Russia and Germany say Nord Stream 2 is a commercial project, providing a shorter and cheaper route for gas supplies.

Russia accounted for half of gas imports by the EU in the first quarter of this year, well ahead of Norway on 24%, according to the European Commission. Nord Stream 2 AG, the unit of Russian state-controlled gas giant Gazprom PJSC that is building the pipeline, says Europe will need increasing amounts of Russian gas in addition to gas from other sources to meet demand as domestic fossil-fuel production shrinks in the coming years. Mr. Putin said Friday that less than 10 miles of pipe needed to be laid to complete Nord Stream 2, which will double the capacity of an existing link to Germany to 110 billion cubic meters a year. Gazprom says it sold 175 billion cubic meters to Europe, including Turkey, in 2020.

Gazprom says it could pump 5.6 billion cubic meters of gas via Nord Stream 2 this year, which could still be too little to make up the current shortfall if the winter is cold, analysts said. Europe has 73 billion cubic meters of gas in storage, about 18% below the five-year average for the time of year, according to S&P Global Platts. This is the lowest figure for this time of year in the last eight years. Gas stocks in the four largest UGS facilities of Gazprom in Europe – the Austrian Haidach, the German Rehden and Jemgum and the Dutch storage Bergermeer – amount to about 1.8 billion cubic meters of gas out of the total design volume of just over 10 billion cubic meters. As of August 16, the occupancy of UGS facilities in Europe was estimated at 61.87%, while at the beginning of August it was 57.19%. In total, they contain 67.23 billion cubic meters of gas against 62.15 billion cubic meters at the beginning of the month, which is the lowest figure for this time of the year over the past nine years. 

James Huckstepp, lead European gas analyst at the commodities-data firm, said much of the gas that flows through Nord Stream 2 this year will be diverted from other pipelines rather than representing additional fuel. He said Gazprom doesn’t have the capacity to produce large extra volumes after a lack of investment in gas fields during a stretch of low prices in recent years. In Poland, experts expect westbound gas flows via Poland on the Yamal-Europe pipeline to fall once Nord Stream 2 is working and the European gas market has cooled.

Meanwhile, last month, Gazprom decided to raise the average gas export price for European countries. The company’s managers expect it to reach $240 this year, which is way more than what Gazprom and market analysts had forecasted. During this summer, Gazprom PJSC has been withdrawing natural gas from some of Europe’s storage facilities, denting critical efforts to rebuild supplies ahead of winter. Inventories are being withdrawn from Gazprom’s Rehden storage site in Germany since last week, according to data from Gas Infrastructure Europe. The amount of gas taken from Katharina site, another gas storage facility in Germany, co-owned by Gazprom, jumped last week to the most in more than a year. 

On top of it, simultaneously to the depletion of European gas storage facilities, Gazprom has slowed the delivery of piped natural gas to Europe in recent weeks, according to analysis from ICIS, a commodity intelligence service, raising questions about the potential causes behind the drop and its implications for global gas markets. Natural gas flows at the westernmost point of the Yamal Pipeline — a strategically important 2,000-kilometer pipeline that runs across four countries: Russia, Belarus, Poland and Germany — dropped to 20 million cubic meters per day in mid-August, according to ICIS. This was down from 49 mcm per day at the end of July, and a sharp fall from its typical rate of 81 mcm per day.

European gas market prices have skyrocketed more than 116% since the start of the year, with the ICIS TTF benchmark closing at an all-time high of 47.86 euros ($56.17) per megawatt-hour on Aug. 16. It is reflective of a tight market, with Europe facing incredibly low natural gas storage levels and rebounding Asian and South American LNG demand.

Now as renewable energy sources produce close to a quarter of total electricity production of the world and maintains the fastest growth among all other power generation plants, the technological development to ensure their smooth integration with national grids is critical both for power grids as well as for the fight against climate change, to phase out fossil fuels from electricity generation.

One of the remarkable technological development is the battery which immediately backs up intermittence caused by the change or wind or solar radiation. Several companies worldwide are trying to take advantage of this opportunity. Recently, good news came from power storage provider Stem.

The San Franciso–based company installs arrays of large batteries for utilities and industrial companies and sells software to manage them. Stem already has dozens of utility customers and has deployed more than 900 systems that combined could produce a gigawatt-hour of electricity, enough to power 100 homes for a year. A bet on Stem is a bet on renewable energy’s future.

Stem doesn’t make batteries, for good reason. The lithium-ion batteries used for commercial storage, applications have become commodities, in a market dominated by a few huge players, such as South Korean LG Chem and Chinese Contemporary Amperex Technology LG Chem.

Battery arrays can replace the expensive natural-gas-fed power plants that many utilities use to meet spikes in demand. In 2020, for instance, Australia famously bought a huge battery array from Tesla to store electricity from a large wind farm in a power-starved area of the country.

Power prices vary throughout the day. Industrial companies typically pay a rate based on the peak price they hit each month. Falling battery costs have led many to install solar energy systems with power-storage capability. These can replace some utility-generated electricity, especially during periods of peak usage.

Employing renewable power and batteries to replace energy from a utility is known as going “behind the meter.” Stem installs the batteries and provides software that uses artificial intelligence and machine learning to optimize their performance, by automatically switching among battery power, onsite generation, and grid power. This can save up to up to 30% of costs for industrial companies.