08 December 2017

IMF Executive Board Concludes 2017 Article IV Consultation with Mauritius

On November 21, 2017, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Mauritius, and considered and endorsed the staff appraisal without a meeting.

Mauritius is seeking to become a high-income economy within the next 10 years. In the past 30 years, political stability, a sound macroeconomic environment and a strong track record of implementing economic reforms allowed Mauritius to successfully transform itself from a monocrop economy into a diversified services-based middle income country with low levels of poverty. To achieve advanced economy status, the government intends to pursue an ambitious growth strategy anchored on significant public investments in infrastructure and improvements in the business environment.

Growth in 2017 is projected at 3.9 percent in 2017, and about 4.0 percent over the medium term. International reserve buffers have improved substantially. The authorities have taken steps to mitigate financial stability risks and are well-advanced in modernizing financial sector regulation. However, the vibrant Global Business Sector faces pressure from international anti-tax avoidance initiatives. Fiscal space is limited, fiscal risks are increasing, and there are signs of building inflationary pressures.

Executive Board Assessment

In concluding the 2017 Article IV Consultation with Mauritius, Executive Directors endorsed staff’s appraisal as follows:

The macroeconomic outlook is broadly positive, but vulnerabilities are emerging. Economic activity is expected to remain robust, driven by the government’s ambitious Public Investment Program, and supported by continued dynamism in the tourism sector and financial intermediation activities. While headline inflation is expected to recede in the second half of 2017, it is likely to finish the year around 4.0 percent under current policies. The main sources of risks to the outlook include further slowing of manufacturing exports and the pace of implementation of the PIP.

The macroeconomic policy stance needs to be recalibrated to address the growing imbalances. Evidence is mounting that the business cycle has shifted phase: the output gap is closing, core inflation is increasing, and demand for credit is rising. Accommodative fiscal and monetary policies have contributed to a weakening external position and the overvaluation of the real exchange rate has increased. A countercyclical policy mix is required to safeguard external stability.

Further revenue mobilization efforts to build fiscal space, support the fiscal anchor and preserve debt sustainability are required. While staff supports the revised debt anchor, indications are that under current policies, the debt target would be missed. A tighter fiscal stance would then be required for Mauritius to meet its goals of improving infrastructure, and promoting inclusive growth while preserving debt sustainability. Higher tax efficiency could yield additional revenues of about 0.8 percent of GDP. Continued improvements in public investment management, and identifying pressure points in debt management should also be elements of the fiscal strategy. Moreover, a tighter fiscal policy would contribute to safeguard external stability, and curb real appreciation pressures.

A tightening of monetary policy is warranted to address growing underlying inflationary pressures. While current inflation trends may partly be reflective of a changing seasonal pattern, the expected increase in international oil and controlled prices and the anticipated introduction of the minimum wage policy by the Ministry of Labor in 2018 are likely to have second round effects, and increase inflation expectations. A tighter monetary policy stance should be implemented by mopping-up excess liquidity in sufficient quantities so as to bring interbank rates in line with the policy rate and regain control of money market conditions.

Clarifying the monetary policy framework will help increase policy coherence. While the primary objective of the central bank is to maintain price stability and promote “orderly and balanced” economic development, there appears to be no consensus on the definition of price stability and on the role of the nominal exchange rate in the conduct of monetary policy. The perceived multiplicity of objectives risks overburdening monetary policy, can result in policy inconsistencies, and potentially undermines the credibility of the BOM’s capacity to anchor inflation expectations.

Announcing a medium-term inflation objective will prove instrumental in the implementation of a new policy framework. An inflation objective of about 3 percent could serve as the foundation for the BOM’s policy actions and communication. More fundamentally, setting price stability as the overriding policy objective in the medium-term will allow the BOM to better navigate the inevitable policy trade-offs that are set to arise. Strengthening the operational independence of the central bank will improve its capacity to deliver on the price stability mandate; while allowing more flexibility of the exchange rate will help address the emerging inflationary pressures and improve resilience to shocks.

Staff welcomes the substantial improvement in international reserve buffers, in line with past Fund advice. As reserve buffers now stand inside the optimal range of international reserves, the FX intervention policy should be geared towards maintaining reserve coverage at least at 100 percent of the adequacy metric, opportunistically building reserves and curbing excess volatility.

The authorities are well-advanced in modernizing financial sector regulation and should now address salient banking sector issues. Having implemented many recommendations of the 2015 FSAP, the authorities should take additional steps to shore up financial stability. These include lowering the still-high stock of NPLs through a more stringent approach to writing-off legacy exposures, and safeguarding the longer-term FX funding needs stemming from banks’ swift expansion abroad. In addition, a formal macroprudential body could be established.

Efforts to address the concerns raised by the OECD and the EU about the tax regime should be prioritized. The GBC sector, to which banks remain highly exposed, will need to adjust its business model as Mauritius transitions to a jurisdiction of higher value-added, and ensure compliance with FATF standards, particularly on AML/CFT supervision and entity transparency. A significant decline of GBC activity could pose risks to external and financial stability if not properly managed.

Further reforms are necessary to meet emerging cost competitiveness challenges. While recent reform efforts will likely bolster Mauritius’ position in the Doing Business rankings, broader structural reforms in areas such as the labor market, higher education, innovation, governance and anti-corruption (e.g. effective use of AML tools and strengthened asset declaration system) policies will be key drivers of Mauritius’ economic transformation going forward. Simplifying the wage-setting mechanism will improve competitiveness, while strengthening current efforts to boost the labor supply of youth and women will contribute towards closing gender gaps and reduce inequality.

Attaining the next level of economic development will require Mauritius to overcome the variety of policy challenges outlined above. A bold, coordinated, strategic vision, guided by strong and independent institutions, is necessary to guide the economic transition. Early signs are promising, with both the pending formation of the National Economic Development Board and the drafting of the Financial Services Sector Blueprint, important welcome steps towards harmonizing the policy direction and implementation across sectors. Considering Mauritius’ track record of reinventing its economic model, there are grounds for optimism that the country will successfully manage the reform process.

Staff encourages the authorities to phase-out the Exchange Rate Support Scheme (ERSS), and to expedite work on other measures to support the export-oriented sector. In staff’s view, there are less distortionary avenues to support the export-oriented sector, and removing the structural bottlenecks that hinder competitiveness should be the focus of work currently underway to address the sector’s problems. Staff recommends approval for the temporary retention of the Multiple Currency Practice (MCP), on the basis that the ERSS is temporary, does not materially impede the member’s balance of payments adjustment, does not harm the interests of other members, and does not discriminate among members.

[1] Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.
[2] The Executive Board takes decision under its lapse-of-time procedure when the Board agrees that a proposal can be considered without convening formal discussions.

05 December 2017

EU list of tax havens



The European Union has released a blacklist of 17 countries which it says are tax havens:
  1. American Samoa
  2. Bahrain
  3. Barbados
  4. Grenada
  5. Guam
  6. South Korea
  7. Macau
  8. Marshall Islands
  9. Mongolia
  10. Namibia
  11. Palau
  12. Panama
  13. Saint Lucia
  14. Samoa
  15. Trinidad and Tobago
  16. Tunisia
  17. United Arab Emirates
47 countries have also been included in a “grey” list of countries not compliant with EU tax standards but who have committed to change their rules.

  1. Albania
  2. Andorra
  3. Armenia
  4. Aruba
  5. Belize
  6. Bermuda
  7. Bosnia & Herzegovina
  8. Botswana
  9. Cape Verde
  10. Cayman Islands
  11. Cook Islands
  12. Curaçao
  13. Faroe Islands
  14. Fiji
  15. Former Yugoslav Republic of Macedonia
  16. Georgia
  17. Greenland
  18. Guernsey
  19. Hong Kong SAR
  20. Isle of Man
  21. Jamaica
  22. Jersey
  23. Jordan
  24. Liechtenstein
  25. Malaysia and Labuan Island
  26. Maldives
  27. Mauritius
  28. Montenegro
  29. Morocco
  30. Nauru
  31. New Caledonia
  32. Niue
  33. Oman
  34. Peru
  35. Qatar
  36. St Vincent & Grenadines
  37. San Marino
  38. Serbia
  39. Seychelles
  40. Swaziland
  41. Switzerland
  42. Taiwan
  43. Thailand
  44. Turkey
  45. Uruguay
  46. Vanuatu
  47. Viet Nam

30 November 2017

Bloomberg: Offshore Banking Guards Against Tyranny

From the vantage point of Western liberalism, individuals should be free from arbitrary confiscations of their wealth.

17 November 2017

The Global Forum on Tax Transparency intensifies the pressure on tax evaders worldwide

In the aftermath of the  release of the “Paradise Papers”, 200 delegates from more than 90 delegations met in Yaoundé, Cameroon for the 10th meeting of the Global Forum on Transparency and Exchange of Information for Tax Purposes which now includes 147 countries and jurisdictions.

The Global Forum adopted the first report on the status of implementation of the AEOI Standard a few weeks after almost 50 countries started exchanges of information under the new standard on automatic exchange of information, with another 53 countries starting in September 2018. The principle of annual implementation reports and peer reviews were agreed at the meeting to ensure effective implementation and a level playing field.

The Global Forum published peer reviews of Curaçao, Denmark, India, Isle of Man, Italy and Jersey. The publications bring to a total of 16 the number of second round reviews of the Forum’s 147 member countries and jurisdictions based on its international standard of transparency and exchange of financial account information on request. The standard was reinforced last year to tackle tax evasion more effectively, particularly in areas covering the concept of beneficial ownership.


Delegates at the Yaoundé meeting also agreed that the countries and jurisdictions working within the  Global Forum as well as within the Inclusive Framework on Base Erosion and Profit Shifting (BEPS) could provide support to the European Union on its current listing exercise to identify third country jurisdictions that fail to comply with tax governance standards

In other developments at the meeting, the Global Forum’s Africa Initiative will continue the work in order to benefit from advances in tax transparency. Other regional initiatives in Latin America and the Caribbean and in Asia are also helping to improve cross border taxation through effective use of exchange of information, both on request and automatically.

Cameroon was proud to host the 10th Global Forum meeting as tax evasion and avoidance represent huge loss of revenues that countries could invest in public services” said Alamine Ousmane Mey, Minister of Finance, Cameroon. “The work of the Global Forum is key for developing countries, including those of Africa, and we are looking forward to keep working with our peers to strengthen global tax transparency ”.

ICIJ Releases Paradise Papers Data From Appleby

The International Consortium of Investigative Journalists publishes today new data in the Offshore Leaks Database on close to 25,000 entities connected to the Paradise Papers investigation.

Paradise Papers [zip] - [torrent]

Anil Gujadhur: The so-called ‘Paradise Papers’

We should be careful not to join cohorts of accusers who themselves act illegally to bring ourselves at the receiving end of all sorts of unfair accusations

14 November 2017

UK House of Commons Emergency debate: Tax avoidance and evasion (Paradise Papers)

MPs held an emergency debate on tax avoidance and evasion and the Paradise Papers on Tuesday 14 November 2017.

New Report by Accenture, MAS and ABS Shows How Blockchain Technology Could Improve Central Bank Payment Systems

Accenture, the Monetary Authority of Singapore (MAS) and The Association of Banks in Singapore (ABS) have published a report today that illustrates how blockchain technology could significantly improve the kinds of payment systems that currently enable banks around the world to transfer trillions of dollars per day to each other and help them manage their financial liquidity.

The report is based on the results of a successful prototype involving nearly a dozen major banks and three leading blockchain technology platforms that were tested in parallel. The test confirmed that real-time gross settlement (RTGS) functionalities such as gridlock resolution and a liquidity-saving mechanism on a decentralized system work. Real-time gross settlements are large-value interbank payments of cash or securities that require immediate settlement. Crucially, the test proved, perhaps for the first time, that blockchain-based designs can also effectively preserve privacy in such transactions.

According to the report, a blockchain-based system could also help mitigate interbank payment risks by increasing system resiliency through the removal of a single point of failure and providing cryptographic security, immutability and real-time processing.

Project Ubin: Phase 2 Outcomes 

The report is based on the outcomes of Phase 2 of Project Ubin, which was managed and delivered by Accenture. The 13-week project was led by MAS and ABS, with participation from 11 financial institutions. It explored the use of blockchain technology for specific RTGS functions, including the feasibility of decentralizing liquidity saving mechanisms, while maintaining privacy in banking transactions.

Accenture leveraged the blockchain capabilities of the Accenture Liquid Studio in Singapore to develop three prototypes by three workstreams on three different blockchain platforms: Corda, Hyperledger Fabric and Quorum. The prototypes successfully demonstrate that key RTGS functions, such as fund transfer, queueing mechanisms and gridlock resolution can be achieved through a variety of techniques and solution designs.

The report indicates that a blockchain-based RTGS system would reduce the costs and resources of day-to-day operations and eliminate the risk of the central bank becoming a single-point-of-failure in a systemic disturbance.

Divyesh Vithlani, Accenture managing director, financial services ASEAN said: “Ubin Phase 2 not only successfully proves that RTGS functions can be decentralized without compromising privacy, but also marks a major industry-wide collaborative success in Singapore, laying the foundation for future industry innovations.

This innovative collaboration with MAS and ABS demonstrates the value that blockchain can unlock in the settlement of payments,” said David Treat, managing director in Accenture’s global blockchain practice.  “We are excited about what can be achieved in the upcoming phases and the opportunity to demonstrate blockchain’s potential to support additional types of financial transactions and cross-border connectivity.


12 November 2017

In wake of ‘Paradise Papers’ leak, UN experts urge States to take action against corporate tax fraud

Ratings agencies must downgrade businesses responsible for unethical practices such as tax evasion carried out through off-shore-registered companies, two United Nations human rights experts warned, while urging countries to cooperate to counter this global tax abuse problem.

States must stop harmful tax competition amongst each other and work together to stop unethical tax avoidance schemes for wealthy individuals and international corporations,” said Juan Pablo Bohoslavsky, the UN Independent Expert on the effects of foreign debt and human rights, who also monitors the impact of illicit financial flows.

Mr. Bohoslavsky made the comment as information from the leak of the so-named ‘Paradise Papers’ continues to be exposed, following series of tax abuse scandals.

The Paradise Papers presented systematic tax avoidance by well-known international corporations, making use of tax havens in places such as Bermuda, the Cayman Islands, and the Isle of Man.

Wealthy individuals and international corporations are continuing to engage in unethical practices, reducing their tax burdens to minimal levels by using tax havens, which undermines the realisation of human rights,” Mr. Bohoslavsky warned Thursday.

In this connection, Surya Deva, chairperson of the UN Working Group on Business and Human Rights, called on businesses to assume their corporate responsibility, in line with the UN Guiding Principles on Business and Human Rights.

All business enterprises have a responsibility to avoid adverse human rights impacts caused or contributed by their tax evasion practices,” said Mr. Deva.

Noting that many countries are struggling with increased debt levels as tax revenues do not match public expenditure, the experts urged Governments to make greater efforts to ensure tax justice rather than reducing spending on infrastructure.

They also warned law firms that facilitate tax avoidance schemes to assume their responsibility.

The UN Guiding Principles apply to law firms too – they should consider human rights implications of their legal advice given to businesses,” said Mr. Deva.

The experts further underscored that corporations should extend their commitments for respecting human rights to taxation, to be considered ethical.

The issue of corporate tax avoidance will also be addressed at the UN Forum on Business and Human Rights to be held in Geneva, Switzerland, from 27 to 29 November 2017.

10 November 2017

The Paradise Papers – Implications for Law Firms and the Offshore Services Business

The much reported hack of computer systems at the offshore law firm Appleby, and the subsequent leakage of 13.4 million files, has highlighted, once again, how critical data security is to professional service providers, company secretarial companies and financial institutions in the offshore finance business.

FSC Mauritius issues Draft Financial Services (Peer to Peer Lending) Rules for Consultation

Following the announcement made in the Budget Speech 2017/18, the Financial Services Commission, Mauritius (the ‘FSC Mauritius’) is issuing the draft Financial Services (Peer to Peer Lending) Rules 2017 (the ‘P2P Rules’) for consultation in line with its inclusive and transparent rule-making processes.

The aim of the P2P Rules is to inter-alia establish a sound and conducive automated environment or platform for the offer and execution of alternative peer to peer lending, other than bank lending, for the benefits of borrowers and stakeholders in the non-banking sector of Mauritius.

These P2P Rules, together with an explanatory memorandum, can be consulted on following links:



The FSC Mauritius is inviting comments on the P2P Rules from the institutions, operators and the public at large by email to p2pconsultation@fscmauritius.org, not later than 11 December 2017.

The dark series continues

The latest gaffe in the series: Showkutally Soodhun who would have uttered disparaging words about a section of the Mauritian community

09 November 2017

Richard Teather: Everybody is outraged about offshore investment funds – because nobody understands what they are or what they do

I really must re-tune the alarm clock so that I am not woken in the morning by the BBC trying to drum up a bit of outrage about offshore investments.

Another load of personal data has been stolen from a law firm, and the BBC is trawling through it with prurient glee, trying to find some famous names that it can expose.


Mauritius: Prime Minister's Statement on the "Paradise Papers"

The Government of Mauritius has taken cognizance of serious and unfounded allegations levelled against the Mauritius jurisdiction by the International Consortium of Investigative Journalists (ICIJ) on information they have leaked in the so-called "Paradise Papers" and subsequent articles.

We find it extremely important that Mauritius, as an international financial centre of repute, should set the record straight.

Mauritius has been falsely described as a tax haven and a place which promotes an environment of secrecy. Nothing can be further from the truth. According to the OECD criteria, Mauritius is not a tax haven. Our jurisdiction has always adopted sound regulatory practices and complied with international standards on transparency and exchange of information.

In June 2015, the country adhered to the Multilateral Convention on Mutual Administrative Assistance in Tax Matters, and currently has an exchange of information mechanism with 127 jurisdictions. We have committed to exchange information on an automatic basis under the Common Reporting Standard (CRS) as from 2018, as an early adopter, and are already exchanging information on an automatic basis under the Foreign Accounts Tax Compliance Act (FATCA).

The overall rating of 'Compliant' given to Mauritius by the OECD Global Forum on Transparency and Exchange of Information for Tax Purposes in 2017, is proof of the transparency and robustness of our exchange of information system.

Moreover, in line with the OECD and G20 initiatives to fight treaty abuse and base erosion, Mauritius is actively participating in the BEPS project and as a member of the Inclusive Framework has already given its commitment to implement the recommended minimum standards. We are also working with the OECD Forum on Harmful Tax Practices and the EU Code of Conduct Group to ensure that our tax regime has no harmful features. Mauritius remains a fully cooperative jurisdiction.

Mauritius as a founding member of the Eastern and Southern Africa Anti Money Laundering Group (ESAAMLG) has also been at the forefront in the fight against money laundering and other forms of financial crime.

Mauritius strongly disagrees with the statement that it is "rising at the expense of Africa". It is regrettable that in an attempt to surf on the wave of sensationalism and to toy with emotions, the authors have not realised that Mauritius is itself an African country, and proud to be so.

Mauritius has over the years created a business enabling environment that is competitive, transparent and respectful of international standards. The World Bank in its latest report on Ease of Doing Business recognises our efforts to improve our investment climate and has upgraded our ranking from 49th to 25th, globally. Mauritius has also established itself as a credible platform for cross-border investments into the African continent. As a member of the African Union (AU), the SADC and the COMESA, we are contributing to the sustained economic development of the Continent and prosperity of all Africans.

Dunkley questions future of Appleby

A former Bermuda premier predicted yesterday that under-siege law firm Appleby may not survive after confidential company information was hacked in a massive cyberattack.


A Digital Future: Financial Services and the Generation Game

Digitalisation of financial services re-shifts the focus on three key customer needs: trust, transparency and time. The Economist Intelligence Unit report explores the digital future of financial sector.

Mauritius: Gateway to Africa

Welcome to Mauritius: Africa’s offshore tax hub. Where one country has a tax treaty with Mauritius that includes lower tax rates for Mauritian companies, that treaty can help companies save millions in tax and move money out of Africa.

Gilbert Noël: “The judgment is against Estera not Appleby”

In a judgment delivered by the Royal Court of Jersey on 11 September 2017, Gilbert Noël was mentioned as having refused to give evidence and to have helped Mrs Edoarda Crociani in her endeavour to hide funds from her daughter Cristiana Crociani and this in favour of her other daughter, Princess Camilla De Bourbon des Deux-Siciles. Mrs Crociani has fallen out with her daughter Cristiana but has kept control of the estate settled in a trust since 1987. Mr Noël has accepted to answer our questions in view of this high profile case now known as the Crociani case.

08 November 2017

LegalWeek - Paradise lost: what will the latest leaks mean for the offshore legal market?

Will the Paradise Papers leaks spark a regulatory crackdown for offshore law firms?

The Lawyer: The Paradise Papers aren’t the smoking gun for offshore reform

The first thing to note is that this story emerged from a hack of documents from a reputable law firm. The second thing to note is that so far there appears to be little of revelation in the leaked papers about the role of offshore, or the role of offshore advisers.

07 November 2017

06 November 2017

The Knife: A brief overview of offshore accounts, tax evasion

Much of the media coverage of the “Paradise Papers” describes offshore service providers as legal institutions that may facilitate tax evasion and money laundering, among other potential crimes. While this may be true, the articles we examined in our analysis, “7 ways to imply guilt in the ‘Paradise Papers’ coverage,” lack data to support these implications, and they don’t say what steps governments have taken to address such issues. We provide you with some data on the subject to fill in the gaps.

The Knife: 7 ways to imply guilt in the ‘Paradise Papers’ coverage

  • We identified seven ways the media implies the “Paradise Papers” investigation is uncovering wrongdoing.
  • It’s possible the investigation might expose criminal activity, but it’s premature to assume this.
  • See why slanted coverage such as this limits critical thinking and damages those summoned to the court of public opinion.

05 November 2017

Paradise Papers: Tax haven secrets of ultra-rich exposed

A huge new leak of financial documents has revealed how the powerful and ultra-wealthy, including the Queen's private estate, secretly invest vast amounts of cash in offshore tax havens.

BBC Panorama: Offshore Secrets of the Rich Exposed

BBC Panorama have been investigating the hidden offshore world of the rich and powerful. So who's got secrets to hide?

03 November 2017

Nespresso Reveals Colourful, Candy-Inspired Limited Edition Collection For The Festive Season

Coffee lovers are set to be full of joy this holiday season as Nespresso reveals its Limited Edition Festive Collection, in collaboration with renowned artists Craig & Karl. To bring to life the colour and fun of the season, this exclusive collection has been inspired by traditional candies that evoke nostalgic childhood memories.


To create the ultimate gift collection, Nespresso has teamed up with design duo Craig & Karl. Craig Redman and Karl Maier are transatlantic-based university friends turned creative collaborators who have a love for simple shapes paired with wildly colorful patterns and a wry sense of humour. The duo have injected their signature colours and patterns into both the Nespresso Limited Edition Variations coffees and espressos and into a selection of unique accessories that make the perfect gifts for design and coffee aficionados.

Craig and Karl explained: "We were inspired by the Nespresso Variations flavours and the notion they were all based around old-style confectionery. We were also mindful that the design had to feel modern and relevant to now, so in our initial development we honed in on candy cane style stripes, which were prevalent in the past. In it, we saw a classic motif that can evoke nostalgia for the customer, but one that equally feels current owing to its bold and graphic form. We also loved that the stripes once applied to dome-shaped capsules gave them the appearance of candy themselves."

NESPRESSO LIMITED EDITION VARIATIONS CONFETTO 
The holidays are a time for unique experiences, and the range of Nespresso Limited Edition Variations Confetto coffees and espressos do not disappoint in that regard. Their candy-flavoured aromas are combined with the highest quality Pure Arabica to invoke feelings of surprise and wonder. There are three OriginaLine and three Vertuo™ Variations to try, each with a Craig & Karl designed capsule.

The OriginalLine Variations consist of Pure Arabica from Southern and Central America, while the Vertuo™ Variations consist of a smooth Arabica from Ethiopia in addition to the Arabica blend from Southern and Central America.

OriginalLine Variations Confetto Snowball – a delicious espresso pairing sweet coconut notes with a touch of vanilla.
Intensity: 6

OriginalLine Variations Confetto Orangette – the bittersweet flavour of an orange peel and a hint of chocolate are vibrant in this flavoured espresso.
Intensity: 6

OriginalLine Variations Confetto Licorice – a tasty combination of spices and licorice candy notes are prominent in this espresso.
Intensity: 6

Vertuo™ Variations Confetto Banana – a sweet banana flavour, reminiscent of banana candy, is present in this coffee. With milk, the roasted coffee notes fade, further enhancing the sweet indulgence.
Intensity: 5

Vertuo™ Variations Confetto Peppermint Cane – the peppermint flavour comes to life with a distinctive candy-sweet note characteristic of a peppermint candy cane within this coffee. With a touch of milk, the lingering notes of peppermint soften to reveal a well-balanced finish.
Intensity: 5

Vertuo™ Variations Confetto Cherry – the cherry flavour opens up, harmonizing with almond notes for a cherry candy inspired treat within this coffee. With the addition of milk, the coffee flavour is reminiscent of a sweet dessert.
Intensity: 5

01 November 2017

IMF: Fintech and Cross-Border Payments

By Dong He, Deputy Director, Monetary and Capital Markets Department, IMF
Ripple – Central Bank Summit 
Carnegie Hall, New York

It’s a pleasure to join you here today, at Ripple’s “Central Bank Summit,” as we explore some of the key issues facing central banks raised by the current acceleration of progress in “fintech.”

The IMF has been carefully studying the trends in fintech, and my colleagues and I have gathered some initial thoughts about the way that the financial realm is likely to change. We’ve also been weighing how financial regulation and central banking will need to respond.

Those of you who would like to explore our reasoning in deeper detail may enjoy reading the two Staff Discussion Notes that we published in the last couple of years—entitled, “Virtual Currencies and Beyond: Initial Considerations” and “Fintech and Financial Services: Initial Considerations.”

However: To gauge the IMF’s most recent analysis: A speech last month, at the Bank of England, by the IMF’s Managing Director—Christine Lagarde—analyzed potential challenges posed by fintech innovations to central banking.

With her uplifting tone, the Managing Director argued that we have the capacity to shape a technological and economic future that works for all. We have a responsibility to make it work. And it’s up to us to adopt the right policies.

In my remarks here today—focusing on implications of fintech for cross-border payments—I’ll explore three broad areas:

  • First, a sketch of the economic framework on how fintech applications will affect financial services and the market structure.
  • Second, the current landscape of cross-border payments, and the possible evolution of cross-border payment systems; and
  • Third, the role of central banks, themselves, and the possible reasons for them to issue their own digital currencies.

I. The Organization of Financial Services—A General Framework

At the outset, let’s consider an overall economic framework, which will help us assess the impact that fintech might have on the financial sector, and help us envision how regulation should respond.

Technology can affect the attributes—for instance, speed, security, and transparency—of new services, as well as the organization of service providers—termed market structure.

Technological progress can promote the development and adoption of new services especially when targeted at unmet user needs—what we might call the “gap” or “shortcomings” of services. The bigger the shortcoming, the greater the incentive for firms to improve services as permitted by technological advances, and the faster users’ adoption of such services.

Technology can also affect the market structure of service providers. Will new technologies merely increase the profits and the efficiency of established players, or will they have deeper repercussions? Specifically, will they (i) reduce the need for financial intermediaries; (ii) push intermediaries to change their internal structures (possibly leading to partnerships and acquisitions); or (iii) induce the entry of new intermediaries while displacing older ones?

Technology may affect the factors shaping intermediaries. Technology can alter the market imperfections that are pervasive across the financial system, which underpin the need for trusted intermediaries. It can reduce asymmetric information (limited knowledge of one’s counterparties to a transaction), facilitate the matching of parties to a transaction, and reduce transaction costs. Technology can also affect the incentives for intermediaries to be horizontally or vertically integrated (offer multiple services to end-users, as does a universal bank, or acquire upstream suppliers). Finally, technology can alter barriers to entry for new intermediaries to compete against incumbents.

II. The Current and Future Landscape of Cross-Border Payments

Now let’s apply this framework to cross-border payments. This is an area especially ripe for change, and could benefit from new technologies. There are significant shortcomings in today’s system—stemming in part from technological limits, and in part from a highly concentrated market structure.

It may seem surprising, but cross-border payments are very different from domestic payments. The future could be different—as a simple analogy will suggest. Before the internet, sending so-called “snail mail” domestically was fundamentally different from sending mail internationally. Pricing was significantly different; the infrastructure was different; and the handling of cross-border mail required international agreements on payment sharing, packaging, tracking, handling and other processes.

In the age of the internet, however, there is no distinction between a message going to a domestic or foreign recipient: Both of them require, simply, a single click. A package is just a package—and we may soon recognize that a payment is just a payment, wherever it’s going.

When making cross-border payments, various types of users—whether they’re households, or small enterprises, or large corporations—all put special emphasis on low cost, security, convenience, predictability, and transparency—the assurance that intermediaries will preserve the confidentiality of their information.

Shortcomings of Cross-border Payments

The shortcomings of cross-border payment services are substantial. Cross-border transfers are costly and cumbersome. Moreover, services are opaque; the price paid for cross-border payments is not transparent, nor known at the time of initiating the transaction in most cases. Finally, sending money across borders is slow. Payments can be routed through many banks before they reach their destination, causing delays and incurring fees. These shortcomings arise from technology, regulation, and market structure.

Market Structure

Existing intermediaries benefit from high barriers to entry; each segment of the payments chain remains highly concentrated. In many cases, barriers stem from high fixed and sunk costs required to interface with users, comply with regulation, build trust in services, and operate large back-offices in the case of correspondent banks. In addition, size matters for these institutions to manage liquidity and counterparty risk. Finally, network externalities are prevalent in messaging—and also in settlement, where netting bilateral positions lowers costs, and access to multiple counterparties facilitates transactions.

Against this background, how could fintech innovations reshape the cross-border payments landscape? To what extent might new technologies reduce service shortcomings, and alter market structure by favoring market platforms over intermediaries, reshaping business plans and firm boundaries, or encouraging entry? And how should regulation respond? While one can only speculate, to some degree, on potential outcomes, much will depend on the scenario for technology adoption.

Three scenarios could be considered, each centered on DLT-based applications. In increasing order of potential disruption, applications might target the areas of: (i) back-end processes; (ii) compliance; and (iii) means of payment.

Back-end Processes

DLT could be applied to various processes in cross-border payments. For example, correspondent banks could participate in a shared permissioned DLT platform to automate the tracking of payments, and to optimize liquidity and risk management.

Gains would be most evident in efficiency, with little impact on market structure. In theory, lower fixed back-office costs would diminish economies of scale, spurring new entry—possibly by new types of service providers. However, many of the other barriers to entry to correspondent banking would remain.

End-users may still benefit. Payments settled through correspondent banks would become more transparent and traceable. However, the impact on speed and costs for the end-user is unclear. Correspondent banks may remain oligopolistic and thus unlikely to pass on cost savings.

Compliance

DLT, when combined with other technologies, has the potential to significantly lower the cost of compliance. In particular, know-your-customer utilities and digital identity can facilitate information-sharing and help reduce the cost of compliance, including with respect to AML/CFT regulation and sanctions-related controls. However, the use of new technologies in the field of compliance may be limited by broader issues, including the extent to which regulation would allow financial institutions to outsource customer due diligence.

Market structure would not be left unscathed. Digital identities could allow end-users to switch more easily between service providers, thereby reducing the economies of scope extracted by intermediaries from proprietary information on customer profiles. Such a development would depend on the willingness of existing service providers to share such information, unless they are required to do so by regulation.

New compliance technologies could benefit end-users, but privacy and security issues may arise. Services would probably become cheaper and more inclusive. However, DLT-based applications for compliance could raise concerns over privacy and the security of personal information maintained on the ledger. In addition, the security of digital identities will be an important issue to address (for instance, if a digital identity were stolen and misused by a third party).

Means of Payment

DLT can be used to underpin an entirely new means of payment. This is already happening with the emergence of virtual currencies. These means of payment are tokens that are exchanged electronically between market participants, much like cash, over a permissionless (open) or permissioned (fully private or consortium) DLT-based network. The use of these systems effectively shifts payments from accounts-based systems to token-based systems.

Two applications of DLT as a means of payment are relevant for cross-border payments; the first involves a privately run hub-and-spoke payments network. Users exchange fiat money into a virtual currency (DLT-based tokens) held in digital wallets through ATM machines, point of sales terminals, online interfaces, or other means (the spokes). These tokens are then transferred, possibly across borders, over the virtual currency’s secure network (the hub) to the payee’s digital wallet. Finally, tokens are exchanged into foreign fiat money, as desired, through the same means as above (spokes again).

The implications for market structure are significant; pressure would grow to shorten the traditional payments chain. Messaging and settlement either in central bank money or through correspondent banks would no longer be needed. In the capturing and distributing segments, instead, virtual currency exchanges and wallet providers would compete for customers, potentially taking significant business away from other players.

From the end-user’s perspective, the attributes of payment services offered by hub-and-spoke networks look attractive—despite three important caveats. Cross-border payments could become significantly faster, more traceable, and easier to use. Payments could also become cheaper and more secure.

But here are the three caveats:

The first caveat is: The potentially erratic valuation of virtual currencies introduces risks and could limit the adoption of hub-and-spoke networks, at least for large-value payments. In their current form, virtual currencies are not likely to be adequate stores of value given the volatility in their exchange rates to fiat money.

The second caveat is: A lack of trust in hub-and-spoke networks could erode their value. Just as trust is needed in the authenticity of a paper bill in traditional token-based payment systems, trust in the hub-and-spoke solution is also essential. That is truly vital, for three reasons. One: Counterparties need to have legal certainty regarding the transfer of ownership of the virtual currency. Two: Counterparties need to have trust in the stability and security of the technology underlying the virtual currency. This also implies trust in the issuance rule (or backing) for the virtual currency. Three: Users need to trust the security of the virtual currency exchanges and wallet providers needed to enter and manage hub-and-spoke transactions. Users may be concerned with the security of their data, and the ability of others to access their wallets. Regulators may then need to consider regulatory approaches to virtual currency exchanges and wallet providers that would sufficiently protect consumers, and address AML/CFT concerns.

The third caveat is: The lack of interoperability among networks could keep prices of hub-and-spoke payments high. If networks are not interoperable, network externalities could be strong, and providers could take advantage of market power to charge high fees. Regulation aimed at addressing anti-competitive concerns could help alleviate this outcome.

III. Central Bank Digital Currencies

Let me now turn to a second possible avenue for DLT application to be used as a means of payment: Central banks could offer their own digital currencies.

A “Central Bank Digital Currency—let’s call it, in shorthand, a “CBDC”—would not be a parallel currency. It would merely be a digital form of central bank money that can be exchanged in a decentralized manner. In other words, it can be transferred or exchanged peer-to-peer, directly from payer to payee without the need for an intermediary.

Such a CBDC would be exchanged at par with the central bank’s other liabilities (its cash and reserves)—either through banks or directly at the central bank.

Why Issue a Central Bank Digital Currency?

The balance of benefits and costs surely needs further study—but central banks might consider introducing CBDCs for various reasons. Efficiency considerations provide a first reason. Efficiency arguments for CBDCs are based on countering the monopoly power that strong network externalities might confer on one or a few private operators in the payments system or private virtual currencies, or on the inability to ensure the full stability and safety of privately coded and maintained currencies. In addition, a CBDC could overcome the coordination failure involved in any inability to agree on a single new technological standard for electronic payments. In terms of stability, a DLT-based CBDC could also be more secure and resilient than current settlement systems which are exposed to single point of failure risk.

From a retail point of view, gradually replacing notes and coins with a CBDC entails savings on the costs of maintaining and replacing notes and coins for the state. It may also significantly reduce transaction costs for individuals and small enterprises that have little or costly access to banking services in some countries or regions; and it may facilitate financial inclusion. In addition: By facilitating small-value payments, it could boost the adoption and efficiency of the new, decentralized, service economy.

Monetary-policy considerations provide a second reason. The introduction and potential proliferation of private virtual currencies might threaten to erode the demand for central-bank money and the transmission mechanism of monetary policy. A CBDC may forestall such private virtual currencies or relegate them to a secondary role in the payments system.

Another monetary policy consideration is that replacing cash, except possibly for costly-to-store small denomination notes, with a CBDC could allow the central bank to lower interest rates well into negative territory when necessary to fulfill its mandate. However, this potential benefit has to be balanced by the important consideration that central banks will need to respect social preferences for the form of money.

What Kind of Central Bank Digital Currency?

In making the decision about whether to issue a CBDC, central banks should also consider: Precisely what type of digital currency should they issue?

In terms of basic design, the CBDC would presumably respect the following requirements: it would be issued in the same unit of account as fiat money; it would be a liability of the central bank and would be exchanged at par with its other non-equity liabilities—mainly cash and commercial bank reserves.

Other characteristics of CBDCs, however, would differentiate them from commercial-bank reserves in one or several ways. Importantly, whether interest is paid on a CBDC or not has important and differing implications for the transmission and effectiveness of monetary policy, as well as for financial stability. A non-interest-bearing CBDC would be a better substitute for cash than for bank deposits, an interest-bearing one for bank deposits. The latter may affect the transmission mechanism and financial stability more than the former.

The central bank would have to make decisions relative to distribution. The basic questions are how and to whom it would distribute its digital currency. The last issue concerns the choice of technology used to support the CBDC. The form and broad design of the CBDC eco-system will eventually reflect the development and maturing of fintech technologies.

These technological and organizational choices raise several questions, such as: can the chosen technology be made secure, and can speed be maintained? What does it imply as to who bears the costs of operating, maintaining, and developing the digital currency? Should it be the central bank, or could private sector participation be possible, so that the central bank can remain a catalyst as opposed to a full-scale operator?

These are among the many questions that the introduction of CBDCs raise about the nature and regulation of the financial system, the conduct of monetary policy, and the role of the central and commercial banks in the economy. Many of these questions are political and complex. This would seem to warrant a gradual approach to introducing CBDCs, if at all, building on experience, and on evolving and maturing financial technologies.

Let me now conclude.

As fintech innovations gather pace, boundaries are blurring between intermediaries, markets, and new service providers. Barriers to entry are changing, being lowered in some cases but increased in others, especially if the emergence of large closed networks reduces opportunities for competition; but trust remains essential. And technology has the promise to improve cross-border payments, including by offering better and cheaper services, and lowering the cost of compliance with AML/CFT regulation.

Amid a landscape of change, one thing is certain. As our Managing Director, Madame Lagarde, said in her recent Bank of England speech: “To make things smoother – at least a bit – we need dialogue. . . . Between policymakers, investors and financial-services firms – and between countries.”

As you bring your ingenuity to the task of reshaping the cross-border payments landscape, we at the IMF are ready to work with you constructively – aiming to ensure that down-side risks are minimized, and that the economy can capture the full value of fintech’s promise.

Thank you very much.

31 October 2017