Executive Magazine

In high spirits

by Nabila Rahhal February 16, 2018

written by Nabila Rahhal

Behind that flute of prosecco or gin-based cocktail enjoyed at a bar after a long day—or even the single malt whisky or bottle of wine recommended by a premium specialty liquor boutique—there is an intricate distribution chain.

Executive sat down with Lebanon’s major spirit importers and brand owners to discuss the Lebanese drinks of choice for 2017, the drinks consumption trends, how they were consumed, and by whom.

Reasons to celebrate

Spirit distributors had several reasons to toast in 2017. Diageo marked its 20th anniversary with various promotional activities, which introduced Lebanese consumers to the company behind well-known brands like Johnnie Walker whisky and Dom Pérignon champagne. “We wanted to highlight Diageo’s contribution to the business in terms of elevating the standards of service, building markets, growing the trade, [and] providing leadership for the industry,” says Ziad Karam, MENA corporate relations director for Diageo. Lebanon, he added, is among the key sales markets for Diageo worldwide.

Having acquired and re-launched the Edrington Group portfolio in Lebanon early in 2017, Carlo Vincenti, the owner of G. Vincenti & Sons, says its brands—in particular The Famous Grouse blended Scotch whisky and Macallan single malt whisky—had record growth. “The Famous Grouse had an almost 50 percent increase in sales in 2017 when we took over, and is now the preferred brand in [bars and restaurants]. The Macallan also had a record year in 2017, with an almost 100 percent increase from 2016: For example, we sold a Macallan Lalique bottle,” says Vincenti, referring to a 65-year-old limited-edition bottle priced at $36,000.

In fact, all the spirit distributors who spoke with Executive say 2017 was an overall growth year compared to 2016. “It was a very good year for spirits, with an overall double-digit growth across most of our spirits portfolio,” says Jeanine Ghosn, managing director of Gabriel Bocti.

Etablissements Antoine Massoud (EAM) also reports a positive 2017 for both its spirits-distribution arm and its retail arm, The Malt Gallery, which completed its third year of operations early in 2018. “The growth rate for EAM spirits arm is 10 percent, while for The Malt Gallery it’s 40 percent. The Malt Gallery has become an important component of our business and constitutes almost 14 percent of our sales,” says Anthony Massoud, EAM’s owner and managing director, adding that while whisky is a major contributor of sales in The Malt Gallery, wine and craft beer are becoming important components as well (for more on craft beer see article).

Is it party time in Lebanon?

Sales flourished last year despite the usual obstacles, both in the on-trade (hospitality venues such as restaurants and bars) and off-trade (retail spaces such as supermarkets or specialty stores) sectors.

Summer 2017 saw the opening of several new rooftop bars and clubs, much to the delight of spirit distributors, who see them as an opportunity to showcase their brands. “The summer was very good for the industry—especially for on-trade, since a lot of new places opened, and they were all very active and fully booked on weekends. Such clubs have a 1,500 [person] capacity, so it’s very good for business. However, these clubs usually have exclusivity deals with spirit distributors, so while profitability shrinks, it’s still a showcase for our brands,” says Roy Diab, marketing manager for Fawaz Holdings. Diab explains that brands that are marketed successfully in the on-trade sector eventually become popular and more consumed off-trade, and, as such, the on-trade sector is an important marketing tool for distributors.

While summer 2017 may have been a good season for the on-trade sector, some spirit distributors believe that the political uncertainties of November 2017 (the resignation and susequent return of PM Saad Hariri) put a stopper in the drinks on-trade market and led to a slight downturn in December’s performance. “In the on-trade, we were depending on end-of-year sales, and those were not as good as expected because tourists didn’t come to Lebanon for New Year’s,” says Ziad Nacouzi, head of the spirits distribution division at Neo Comet KFF Food and Beverage.

Gabriel Bocti’s Ghosn explains that the length of Lebanon’s tourism season—which used to be the whole month of December for end-of-year festivities, and July and August for the summer—is becoming shorter and shorter, which means the periods of high-frequency alcohol consumption are becoming narrower.

Vincenti also complains about the seasonality in on-trade due to low domestic consumption. “The HORECA performance is very much linked to the seasonality and festive timings, because it relies on expats and Arab tourists who are still not coming [to Lebanon] in big volumes, except for [during the] holidays,” he says, using an acronym for the food-service industry. “Domestic consumption spending is too small and doesn’t even cover 30 percent of the HORECA potential considering the number of venues in Lebanon and the number of people who go out.”

Price wars

Although distributors agree that December was a good month for the off-trade sector—largely driven by holiday gifting and increasingly lavish home celebrations—they say that the dwindling purchasing power among average consumers has become an issue. “Lebanese are still struggling with their purchasing power, the perfect example being when there were a lot of price cuts on alcohol in supermarkets in December,” says Samer Nassar, head of marketing at Diageo. “People are either moving to the more accessible categories as compared to the standard, or going to premium, but standard is still the biggest category.”

Indeed, starting in mid-November 2017, alcohol consumers were bombarded with text messages promoting major retailers’ promotions on all varieties of alcohol. Supermarket aisles were crowded with significant discounts on many alcohol brands and holiday promotions, such as free glasses with every bottle purchased. Major retailers were competing to provide the most attractive deals on alcohol, which would lure consumers into their spaces and get them buying.

For Diab, the problem with these price wars is that they negatively impact a premium brand’s perception. “The issue is that price reflects image, value, and position in the market, so when the price of a premium brand starts fluctuating downward in the market, questions may arise among consumers on the legitimacy and authenticity of the product from one end, as well as the image perception from the other end,” he says, explaining that since Fawaz Holdings has good relationships with these retailers, they usually reach an agreement to restrict the price cuts.

Ongoing trends

Trends in spirits consumption among Lebanese consumers did not change much in 2017. “A trend is not a fashion or a fad, and it lasts for a while—for almost 10 years. So today, we’re still in this trend of premierization, crafts, and cocktails,” explains Massoud.

Indeed, all the distributors Executive spoke to said they continued to see growth in their premium or high-end brands across all categories. Nacouzi says he saw an increase in sales of 10 percent and above in his company’s premium whiskies portfolio, mentioning that it recently released Dewar’s 25 into the market—priced at $225 a bottle—to positive feedback from consumers.

Likewise, despite an overall stagnation in the standard vodka category, the high end has been doing well. “Although consumption of regular vodka has slowed down, super-premium vodka continues to grow ,and Grey Goose saw a 20 percent increase,” says Nacouzi, explaining that since vodka is associated with partying, its growth is related to the new high-end bars and clubs that opened this summer.

Like Nacouzi, Diab says Absolut Vodka saw 8 percent growth compared with 2016—lead by an increase in off-trade consumption following two major holiday engagements for the brand in 2017—which, he says, is a significant increase given it already has a large volume base.

Of gins and single malts

The trend of gin consumption also continued through 2017. “Although it remains a small segment of the spirits industry, contributing less than 1 percent of its total value, it’s definitely the fastest growing,” says Diageo’s Nassar.

Speaking for Bocti, which distributes Hendrick’s gin, Ghosn says bottles of gin are now being offered on tables in nightclubs (for consumers to drink with their mixer of choice), while Fawaz Holdings’ Diab says gin consumption is still going strong both on- and off-trade.

“Beefeater, our core gin brand, is still doing strong in the on-trade and is growing in the off-trade because home consumption is increasing. People are growing more accustomed to creating their own cocktails at home or getting bar catering for their private events,” he explains, adding that super-premium gin is also growing solidly. Monkey 47, a super-premium gin made with 47 botanicals, is doing so well, Diab says, that Fawaz Holdings had to revise and increase the volume allocation for Lebanon twice in 2017.

Likewise, single malt whiskies are increasingly popular, and Nacouzi says his sales in that category have increased by 25 percent in 2017. Vincenti explains that the strength of the single malt whisky trend is in its value. “I would say the total single malt consumption in Lebanon increased by 30 to 40 percent [since the trend started in 2015], and it’s still driving the whisky category upwards in volume to some extent, but more importantly, in value. To give you a small example, in 2017, we sold five bottles of Bowmore 50 Year Old for $20,000 for each bottle [in our retail showcase store. The Cask and Barrel], which would have never been possible three years ago. This shows that there is a serious single malt fan base developing in Lebanon,” he says, adding his company has a waiting list on limited edition bottles.

Sparkling is better

Meanwhile, a new trend of prosecco consumption emerged in 2017. “Women primarily drive this category in both the on-trade and off-trade segments. Today, on the supermarket shelf you can find a large number of prosecco brands, while three years ago, you would only have seen a few brands,” says Diab.

The distributors Executive spoke to tried to explain prosecco’s rising allure. “Prosecco was growing slightly in 2016, but exploded in 2017. It’s a global trend that we’re following. It’s also smooth to drink, and the price compared to champagne is also attractive. There is a difference between a bottle of champagne sold for between $40 and $60, and a bottle of prosecco, which you can find for $10 to $12. There’s a big three-digit growth in some cases in this category,” says Ghosn.

Massoud explains that while champagne has always been an occasional drink in Lebanon and mainly associated with celebrations, prosecco is today more accessible and regularly served in bars and clubs.

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Who’s drinking?

Distributors agree that these trends are driven by well-traveled Lebanese in their mid-20s and above, who are social media savvy. “The new generation and young drinkers have more curiosity and are more exposed to social media, and so you feel they want different drinks than the older generation used to consume. With them, it’s more about the experience and the journey. When we introduce niche new brands to the market, there is curiosity from the consumer where before we were met with resistance,” explains Ghosn.

To Nacouzi, this means less volume, but more value. “People are upgrading what they drink: Instead of going out every night they go out less, but consume higher-quality, and hence, more expensive alcohol. It’s also a sign of prestige to bring premium alcohol to a party or to a house party one is catering. Also, some on-trade outlets use the premium brands as their go-to pouring [brand] to distinguish themselves from the competition,” says Nacouzi.

Distributors also give credit to their own marketing efforts which, they say, support these trends and sustain them through a variety of events, including tastings for consumers, training for bar staff, and social media campaigns. “We’re very dedicated and aggressive in events, visibility in the trade, in promotions, and a lot of tastings across the whole market. All our competitors are also doing this, and we have common platforms like the Whiskey Live event or dedicated platforms like Malt Gallery. We’re all working on further exposing these brands to the consumers,” says Ghosn.

All in all, 2017 was another good year for Lebanon’s spirits importers and brand owners, and while concerns over the increased end price of imported alcohol, and the low purchasing power of the domestic market continue to worry those in the industry, it looks like 2018 will be another good year for spirits.

February 16, 2018 0 comments

Bringing order to the Order

by Scott Preston February 16, 2018

written by Scott Preston

After living in France for 30 years, Jad Tabet, an architect and urban planner, returned to Lebanon early last year to run for the presidency of the Order of Engineers and Architects of Beirut (OEA), an independent trade syndicate covering all Lebanese regions bar the North. Tabet campaigned as an independent against Paul Najem, a Free Patriotic Movement candidate that was backed by several of Lebanon’s most powerful political groups. Having secured an unlikely victory in May, he is turning his attention to several ambitious goals for his three-year term, including reforming the organization and increasing employment for members in new sectors. Executive sat down with the new president in January to discuss his plans for the OEA.

E Tell me about your platform, and why you think you were able to come out on top.

In the last few years, there has been a large civic movement, with people raising different issues related to the question of garbage, electricity, water, pollution, etc. My platform was based on several things. The first thing was the participation of engineers in the large issues that concern the public. We think that all these issues are related, from electricity to transportation to pollution to the preservation of heritage, forests, natural heritage, etc. All of these issues [fall under the purview] of engineers and architects. We have technical solutions for these things. So one of the first points on my platform was that the order should play a role in these issues. This was not the case before, so since September, we have launched a series of conferences during which all these issues were debated, and we invited people from the government, from different administrations, to come and discuss these issues with us.

The second thing that we raised was the role of the engineers and architects in the market. The problem is that the market is shrinking. Traditionally, Lebanese engineers and architects worked not only in Lebanon but across the whole Arab region. We have 52,000 engineers and architects registered in the order. Obviously, the Lebanese market cannot provide opportunities for everyone, so what [has] happened since the 50s [is that] Lebanese engineers and architects [have] worked in the Arab region—mainly in the Gulf—but also in Africa. Now, we know that the market in these regions is shrinking, and this is creating a big problem for us, for engineers. Moreover, the real-estate situation in Lebanon is also shrinking, and we know through the number of buildings permits for the year [that] 2017 was not a good year, and we’re not expecting 2018 to be better. So this also raises a problem for the engineers [trying] to find work.

E What are your main priorities for 2018?

We are raising two issues. The first one should be a real transformation in the practice of engineering and architecture in this country. I deeply believe that there is general trend everywhere in the world toward what I call the environmental revolution—I think we’re entering a new phase of human history, protecting the environment is becoming a major issue, and our engineers and architects in Lebanon should be trained for this.

I think this will open new initiatives and new work possibilities for them everywhere in the world, if we train our engineers and architects [in environmental protection] and green buildings…this will open new [opportunities] for them. I deeply feel that [in] the next 10 or 20 years, the issue of the environment will be [commonplace]. Everywhere in the world today, environmental protection [is] becoming [a] major issue, and [at the moment] we in Lebanon [have not yet caught up]. We should give much more importance to this and we should train our engineers and architects for it.

The other issue is [the] internal organization of the order. The order now has [just over] 50,000 members, but it is still working as a small club. So one of the main issues I’m [pursuing] is transforming the order into a modern institution, and to have it [rated by the International Organization for Standardization, or ISO]. With 52,000 engineers, we should become a real modern institution with very clear rules of governance. This is not the case today.

We should have a real structure that functions well: How do you [expect] the order to really serve the engineers if the structure does not function well? The other thing that I really want is to have very strict rules of governance with no conflict of interest possible. This is very important to me.

When I was elected, I did two things immediately. First of all, I [issued] a declaration of what money I owned in accounts in the banks, as houses [in] real estate, etc. [I] put in a sealed envelope [the information about] all I owned. This envelope is sealed, and it can be opened at any time in order to have real transparency.

The other thing I [issued was] an official conflict of interest declaration. I [used the] example of what is done [by] international organizations. You know when you have UNESCO, [the] United Nations, [its necessary for] key staff to [release a statement] on conflict-of-interest. I did it, and I want to generalize it for all the elected people in the order. I think this is very important. Having a very clear rule of transparency is something that, in a country like Lebanon, is very important.

E What are some specific examples of the structural shortcomings you’ve alluded to?

For the time being we don’t have an HR department—we have 140 employees, but we don’t have an HR department. [At the moment], it’s the director of the order and the president who are acting as HR managers, which is not [acceptable]. This is one example. We have really to [create] a real structure. We have, for example, a very light and poor communications department, which is not acceptable. We have to [improve the] communications department with new technologies, etc. The website of the order is very bad. So all these things should be transformed and changed, and for this reason we should probably hire new people—but I don’t want to hire people before the whole evaluation and the whole new structure is done.

E What are your next steps in achieving this ISO certification?

We are now launching a tender among international companies to help us establish a new [internal] organization, to first of all do an evaluation of the situation of the administration in the order today, then propose a new organizational chart that will allow us to have an order that is organized based on international standards, so that we can apply to have the ISO certification. We’re launching it in the following months.

E What is your expected time frame?

The whole process will take around one year [or] one year and a half, and in that case I want to do it before I leave the order. I want to have the order certified ISO before I leave. We got the approval of the [OEA] council.

E You’ve spoken about environmental training programs to help Lebanese gain employment abroad, but what can be done for those engineers and architects that hope to make a living while remaining in Lebanon?

I think also in Lebanon this is a very important issue. You know that more and more environmental issues in Lebanon are becoming very important. You have a lot of pollution; it’s becoming [a] major environmental issue. It’s [a] health issue also.

What we can do is basically training first and then raising awareness—raising awareness and exerting pressure on the government and on [the] public sector to issue laws and regulations for environmental protection. We did something; now it has become a nest for all big projects that are examined by the higher council of urban planning. All big projects that are examined by the higher council of urban planning should have an environmental approach.

We have started [a] training center in the order. We have started to do training sessions on environmental issues. We’re preparing the engineers, for example, to become LEED [Leadership in Energy and Environmental Design] registered engineers. You register in the order [for] the program of training and then once you [finish] with the program you can go to the LEED and present your [qualifications] to become LEED certified.

E Architects and engineers frequently report that they are underpaid in relation to the fees recommended by the OEA. What can be done to improve their wages?

This is true. Look, I will tell you something. We’re in a free market. Lebanon is a free market, and you can’t intervene. The percentage put in the order is a sort of incentive, it’s a direction that is given, but you cannot force [it]. You can’t force the owners, the developers, to apply these things. [For example, the Tripoli OAE said fees paid to members should be paid at the order at fixed rates. But members started to reimburse part of their salary to developers to remain competative.]

E Architects and engineers also report issues of overregulation associated with technical control offices that were established a few years ago.

It’s not the order that installed this; [it was] the government. It’s a governmental decree imposing this issue of technical control, which is something that came from France. It’s a copy of what happens in France. I think the decree has a lot of things that do not work. It’s not well applied in Lebanon; it’s not adapted to the Lebanese case. We are now discussing [it] with these [offices]. [Currently] you have seven bureaus of control, technical offices. We’re talking with them to try to set up some rules for their work.

We want to organize these technical control offices, because we’re getting a lot of complaints from engineers that they take money, [but] they don’t do what is really important, and what is their real function. They don’t go to the site, etc. So we want to [impose some] sort of control on them. We hope that the decree will be changed. We’re trying to work on a committee that would propose amendments to the decree to the government and to the minister of public works.

E When you ran for the presidency of the OEA, a few parties said they backed you, including Beirut Madinati, Kataeb, and the Progressive Socialist Party. Do you identify with any of these parties?

No. In fact, I will tell you exactly what happened. I had been living in France for 30 years, and in December 2016, I got a phone call from a former student of mine [who] told me, “We want to have somebody that runs for the presidency of the order, that could be backed by the civil society, who would not be affiliated to any political party … You are a figure, a professional figure. We want you to run for this post.” I told them, “Look, I don’t think we have [a good chance of winning], but, if you want, I will do it just to do campaign that raises major issues.” We did the campaign, I was backed by several [groups]: Beirut Madinati, but not only [them], by other civil-society groups [as well]. The backing by Kataeb and [the] Progressive Socialist Party only came [in] the last week. I will be very frank with you. The whole campaign was done with the civil society, not only Beirut Madinati.

E So you were not, and are not, a member of Beirut Madinati?

I’ve never been a member of Beirut Madinati. Never. I have friends in Beirut Madinati. I have people with whom I work, but I’m not a member of Beirut Madinati.

E When you were elected, you won by a narrow margin of only 21 votes. How would you describe your relationship with the OAE council and other members now that you’re the president?

You know that the council of the order is sort of [a] reduced example of the Council of Ministers. You have all political parties there. It’s not always easy. I always say that, well, I’m not against political parties. I’m not against engineers and architects being affiliated to political parties, but what is important is that when they are in the order, they basically act as [such], having in mind the interest of engineers and architects. And what I told them, what I always tell [them], is that they should take these interests and concerns and [raise them with] their political parties, and not the reverse. Not the interest and concerns of their political parties the order. This is very simple to say, but it’s very difficult to apply. It’s not easy. I’m trying to work with this. We’ll see.

(This interview has been edited for length and clarity.)

February 16, 2018 0 comments

Banking & Finance

Is Lebanon technologically ready to tackle growth?

by Paul Karam February 16, 2018

written by Paul Karam

In March 2017, The Economist reported that Intel, the giant American chipmaker, paid $15.3 billion for Mobileye, an Israeli firm at the forefront of developing autonomous-car technology. The deal was not the first to involve an Israeli tech firm attracting foreign buyers, but it was the biggest yet. The Mobileye acquisition is an example of how Israel’s technological edge has strengthened its economy, and a reminder of the crucial role that technology and production efficiency play in the growth process of any economy today.

Of course, very few countries have the necessary elements to create an edge in technology—especially if they are a developing country, and more so if they go through recurrent political instability. Lebanon is generally known to have an educated workforce, and during the postwar rebuilding period it benefited from considerable capital accumulation. But it has also been subject to political setbacks that have sapped its energies.

One way to understand Lebanon’s growth process and the role of technology in its economic development is to examine what the American economist Robert Solow called the sources of growth, or the factors that contribute to gross domestic product (GDP): human labor, physical capital, and total-factor productivity (TFP). TFP measures the contribution to GDP that cannot be explained by labor or capital—in other words, it captures extra factors that affect the overall efficiency of production, like political stability, technology, human capital, governance, institutional quality, and cultural traits.

Research published in 2003 by Barry Bosworth and Susan Collins of the Brookings Institution shows that for developed economies, TFP contributes close to 40 percent of growth in output, making growth an “intensive” process that is dependent on technology and the quality of inputs. But in developing countries, TFP contributes no more than 10 percent to growth, clearly indicating that growth is still heavily reliant on the quantity of inputs.

The picture is worse for Arab countries, where the contribution of TFP has been zero and sometimes negative, according to 2007 research by Aamer Abu-Qarn and Suleiman Abu-Bader published in the journal “World Development,” which implied that TFP has held back production efficiency and economic output due to technological underdevelopment, political instability, and institutional weakness. These outcomes did not spare the buoyant, modernizing countries of the Gulf Cooperation Council (GCC). Evidence compiled by Raphael Espinoza in a 2012 research paper for the University of Oxford shows that TFP growth was negative for all GCC countries between 1990 and 2009, and only positive for three countries when non-oil output is considered: Kuwait, Oman, and UAE, which had an annual TFP growth of 0.9, 0.8, and 0.2 percent respectively.

The two glaring exceptions to the international picture are China and Israel. China has returned to the world economic stage with gusto, averaging an annual GDP growth rate of 9.2 percent between 1978 and 2004, and, just as importantly, an average TFP growth of 4 percent—translating into a TFP contribution to output growth at 43.5 percent, which is even higher than that of developed economies. While less advertised, Israel’s experience has been equally notable: GDP growth in the same period averaged 4.3 percent and TFP growth 1.97 percent, indicating that the TFP contribution to output growth was at 45.8 percent.

Politics affects growth

What about Lebanon? The table, from research done by the Lebanese economist Ali Bolbol, displays the growth accounting numbers for Lebanon between 1992 and 2015, and for four consecutive sub-periods within these 23 years. Overall, GDP growth was 4.69 percent, but TFP growth was 0.52 percent annually, thus contributing only 11.1 percent to growth.

Growth was driven mostly by physical capital accumulation at 2.43 percent, which thus contributed more than 50 percent to growth. Interesting patterns emerge in the sub-periods: During the rebuilding period of 1992–1998, growth was notably characterized by TFP at 1.95 percent, but more so by capital accumulation at 3.21 percent. A slowdown period followed, which was characterized by political bickering and culminated with the assassination of Prime Minister Rafik Hariri in 2005. TFP dropped precipitously during that period, robbing from growth at the rate of 2.33 percent annually.

The subsequent 2007–2010 period was underpinned by the Doha Accord of political reconciliation. TFP did well, growing at 2.24 percent, but the construction boom in the real estate sector had the biggest effect, with capital growing at 5.49 percent and contributing more than 50 percent to growth. The last period, 2011 to 2015, was the most dismal, marked by internal political paralysis and the Syrian war. TFP contracted at a rate of 1.77 percent annually, and even capital accumulation suffered due to the dearth of investment, growing at only 0.98 percent. Labor growth saved the day, growing at 2.85 percent, thanks in part to inflows of low-cost Syrian labor. It contributed more to Lebanon’s GDP growth during this period than capital growth and TFP combined.

Overall, post-war Lebanon has fared better than its Arab counterparts. Capital accumulation explained slightly more than 50 percent of its growth, whereas TFP growth was positive and contributed close to 12 percent to growth. But compared to countries like China and Israel, Lebanon has done poorly as far as TFP is concerned—that is, in terms of technological development and the quality of inputs.

It was always quite evident that political stability matters greatly to growth; now, we can put an approximate number on it. As reflected in TFP, we saw that between 1999 and 2006, political instability denied the economy 2.33 percent annually in growth, whereas between 2007 and 2010, political stability added 2.24 percent. This is the minimum impact, since instability can also affect labor utilization and capital investments.

But TFP captures more than the impact of politics. What Lebanon needs is not only continuous political stability, but also a climate that fosters innovation and technological growth. Focusing on technological growth is one of the most effective ways to boost TFP, and, with it, overall growth. In this respect, Banque du Liban, the central bank of Lebanon, took a welcome step in the right direction with Circular 331, an initiative to channel bank investments into “knowledge economy” entrepreneurs establishing companies in Lebanon through direct investment or via a locally based venture capital (VC) outfit. However, this was an isolated event within a sector that lacks momentum and a VC culture, in an overall environment that still remains cumbersome to invest in, because of a lack of modern regulations and good governance. The government must clear the way for investing, and the private sector must seize these incentives and take on investments that can ultimately transform the economy into a modern, technology-driven economy.

The private sector will need first and foremost an educated labor force to carry out these structural changes. The popular perception that the Lebanese education system is extraordinary may not hold water: TFP growth in post war Lebanon has been low, and the contribution of education small. A 2016 UN report on Lebanon, “Mind the Gap,” argues that the country should design an educational system that focuses more on new technologies and applied sciences, reverses the widening skills gap, and exploits cooperation between universities and the private sector.

Lebanon’s comparative advantage no longer lies in services, given the emerging and competing centers in the region, like Dubai. Technology is now the undeniable driving force behind growth and the rise of modern economies. Post-war Lebanon is still lacking in this respect, as apparent in the country’s relatively low TFP. It can reverse this pattern by maintaining political stability, enriching human capital and talent, and improving governance and the business environment. If it fails to do so, the country will lag increasingly behind its peers, and move toward a dimmer future.

February 16, 2018 0 comments

Comment Cover story Cryptocurrency

Legal aspects of digital currencies

by Nicole Purin February 16, 2018

written by Nicole Purin

In the virtual Wild West of the digital economy created by the internet revolution, the emergence realm of cryptocurrency represents an important legal frontier. The rise of cryptocurrencies can be thought of as a digital-money revolution. Cryptocurrencies have the potential to transform the way people view money, how they transact, and even the overall structure of the financial system, starting from individuals all the way up to central banks and sovereign states.

Individual central banks and governments in different countries are considering new regulations and legal frameworks to rein in the wild horses of Bitcoin and other digital currencies. In the new year, the regulatory debate widened with remarks from the German central bank when Joachim Wuermeling, a member of the board of Germany’s Bundesbank, said national rules may struggle to contain a global phenomenon.

“Effective regulation of virtual currencies would … only be achievable through the greatest possible international cooperation, because the regulatory power of nation states is obviously limited,” Wuermeling said at a January event in Frankfurt, the German financial hub and seat of the European Central Bank, according to Reuters.

Roughly at the same time as the German banker’s statement, French media reported that Bruno Le Maire, the French economy minister, announced the creation of a working group to develop cryptocurrency regulations. According to the French financial daily Les Echos, he said the working group would be responsible for proposing guidelines and drafting a framework for cryptocurrency regulations aimed at preventing abuse of the technology and curbing speculation.

Given that South Korea, Japan, and China also sought to calm the waters of cryptocurrency speculation by talking publicly about introducing regulations, the number of people seeking to sell their cryptocurrency holdings has leapt upward, judging from market developments as well as media reports. There appears to be growing assumptions—which for some are mounting concerns—over the acceleration of globally coordinated cryptocurrency regulations: perhaps beginning with a meeting about the rise of Bitcoin planned for March, when the G20 finance ministers and central bank governors will convene in Buenos Aires, Argentina. Hosted for the second time by a Latin American nation since the inaugural G20 summit in 2008, G20 meetings this year are scheduled to include several meetings of finance leaders and a digital-economy working group before the G20 general summit at the end of November.

The current state of cryptocurrency

At present, cryptocurrency is governed mostly by financial-crimes regulations designed to cover money laundering, terrorist financing, and other financial wrongdoings. Tax regulations on cryptocurrencies and on digital-currency exchanges are also important factors in this novel legal structure.

The United States Internal Revenue Service defines cryptocurrencies as a digital representation of value that function as a medium of exchange, a unit of account, and a store of value, yet which does not have legal tender status in any jurisdiction. The legal framework applicable to the buyers, sellers, and users of cryptocurrencies is very basic, and it relies on existing legal concepts pertaining to commodities as well as value and exchange.

The central question is whether in a specific jurisdiction a cryptocurrency may be classified as money or not. Answers have been legally inconsistent due to the hybrid nature of digital currency as a means of exchange. Also, different countries have adopted conflicting regulatory and legislative responses, some supportive and others restrictive, depending on the classification of the cryptocurrency either as a commodity or a currency.

Categorizing Bitcoin and other cryptocurrencies from a legal perspective is complex because unlike electronic money, for example, a cryptocurrency does not legally represent a “claim” on the issuer. It is a rather fluid and versatile concept, and its legal status is open to a broad interpretation. Arguably, authorities and legislators have not fully come to grip with all of the ramifications of cryptocurrencies, and this lack of governance has led to a general reluctance to accept cryptocurrencies.

Legal Framework in the US and EU

In the US, cryptocurrencies are permissible. Bitcoin and cryptocurrencies have been classified as convertible decentralized virtual currencies and the Commodity Futures Trading Commission treats Bitcoin as a commodity like gold, judging that it should be taxed on this basis.

There have been some attempts to regulate the cryptocurrency market in the US. In 2014, Benjamin Lawsky, then the New York state financial services chief, took a conservative stance on cryptocurrencies, mainly due to money laundering and terrorist-financing considerations, and spearheaded the historic regulatory framework for Bitcoin, referred to as BitLicense.

A BitLicense is essentially a business license for virtual-currency activities issued by the New York State Department of Financial Services for New York companies and residents. Crypto-economy startup Ripple, operator of a “digital asset” called XRP, the fastest and most scalable digital asset enabling real-time cross-border payments, and Coinbase, a cryptocurrency exchange platform headquartered in the US, were both successful in obtaining BitLicenses in 2016 and 2017, respectively. Members of the cryptocurrency community have criticized New York’s interventionist regulatory provisions, as many of them hold the view that the cryptocurrency market should remain unregulated to avoid harming the potential for long-term innovation.

The European Union also lacks a solid cryptocurrency and blockchain regulatory regime. This is not surprising, as the technology is very new. However, the legal status of digital currencies has been analyzed and considered by the European Central Bank, the European Parliament, and the European Commission. The Court of Justice of the European Union was asked to opine on applicability of Value-Added Tax (VAT) to Bitcoin, and it concluded that Bitcoin is a currency and not a commodity (unlike the approach adopted by the US Commodity Futures Trading Commission) and hence it is exempt from VAT.

It appears that for the moment there is no clear consensus on whether Bitcoin should be treated as a currency or as a commodity. This distinction is important, because if it is treated as currency, it would fall under the jurisdiction of a central bank, and if it is a commodity, it would fall under the relevant commodity authority and face tax implications such as VAT.

The emergence of cryptocurrencies has caught markets unprepared. In 2016, the European Parliament voted for the establishment of a task force to develop financial regulations designed to harmonize the market. However, until the harmonization process is in place, each country is taking its own measures.

While the situation is very much in flux and new discussions on regulations may erupt every day, the general position in Europe at the time of writing is that cryptocurrencies and ancillary activities that derive from it are legal. Le Maire, the French economy minister, said that a working group headed by Jean-Pierre Landau, the former deputy governor, the country’s central bank, had been established to propose regulations and parameters designed to ensure that cryptocurrencies are used within the limits of the law and not to abuse the tax and payment systems, Les Echos reported recently.

France has been very active in this sector, passing regulations for Bitcoin market transparency in 2014 which require Bitcoin distributors to identify their customers and the applicability of capital gains tax to digital currencies, according to an official press release. In the UK, digital currencies are treated as “private” money and they are subject to taxation based on profits from sales.

European and UK regulators have issued warnings against cryptocurrency investments and are pushing for stricter regulations. Due to the secrecy around cryptocurrencies, the expectation is that the UK and the European governments will pass legislation in 2018 to regulate cryptocurrencies, aligning them anti-terrorism and money-laundering legislation. This might not be counterproductive, as it is likely to create legitimacy and credibility for the digital market.

Legal Framework in the Middle East

Central banks and governments in the Middle East have been very cautious in supporting cryptocurrencies. Although the Saudi Arabia Monetary Authority has not banned Bitcoin specifically, it has encouraged dealers not to use it due to its highly speculative nature. Banque du Liban, the central bank of Lebanon, has decreed that banks and exchanges cannot transact in virtual currencies. In Jordan, the central bank has also discouraged the use of cryptocurrencies, which it does not consider legal tender, and it forbids financial institutions, financial companies, and exchanges from dealing in cryptocurrencies.

In the United Arab Emirates, trading cryptocurrencies is legally prohibited pursuant to the Regulatory Framework for Stored Value and Electronic Payment Systems issued by the Central Bank of the UAE in January 2017. A one-sentence provision in this regulation (Provision D.7.3) reads, “All Virtual Currencies (and any transactions thereof) are prohibited.”

In spite of this prohibition, Bitcoin trading, according The National, occurs on a regular basis, and it has become what appears to be a “tolerated practice” according to several legal advisors. Several real-estate brokers and entrepreneurs last fall announced their willingness to receive property payments in Bitcoin. Strengthening this view, local media last year repeatedly cited Mubarak Al Mansouri, the governor of the UAE central bank, as saying in January 2017 that the aforementioned new regulations do not cover digital currency, “defined as any type of digital unit used as a medium of exchange, a unit of account, or a form of stored value,” and “do not apply to Bitcoin or other cryptocurrencies, currency exchanges, or underlying technology such as blockchain.” He also stated that digital currencies are currently being reviewed and new regulations will be issued in due course. However, in remarks made later in the year, Governor Al Mansouri warned about volatility risks related to trade in cryptocurrencies. At present, it is not clear if Bitcoin can be used a form of payment or for money transfers in the UAE.

State-backed digital currencies: the way forward?

Estonia presented a proposal back in 2013 designed to launch its own state-managed digital currency, estcoin, but this was strongly dismissed by European Central Bank President Mario Draghi. More recently, Venezuela, under tremendous financial pressure, announced a plan for a sovereign oil-backed digital currency that was criticized by many international experts. However, state-backed digital currencies could be in the cards in the GCC and the wider Arab region. There has been ongoing discussion that Saudi Arabia and UAE may create a cryptocurrency for cross-border transactions under the umbrella of the two central banks via blockchain technology.

In 2016, the Dubai Future Foundation established the Global Blockchain Council, indicating that the technology is being studied and not dismissed out of hand. The challenge is significant. “Technology advances such as blockchain are causing massive shifts to the way we use financial services,” noted Abdul Basitt Qayed, managing director of private investment firm Ghaf Capital, “but regulations are struggling to keep pace with the rate of change in new technologies for the past decade, and by the time they build new laws and regulations for such technology, [they] will be outdated, because a new technology will appear to replace the old one. Since technology [is] outpacing human development, regulators need to learn technologies faster and increase their ability to adapt.”

Riad Salameh, the governor of Lebanon’s central bank, has also suggested that the government is looking at the possibility of a state-backed cryptocurrency (see overview and interview). These are highly significant developments for the region, although a timeline for implementation has not been set. A distinction is being made between central bank transactions and the use of cryptocurrencies for individuals. Certainly, validation by UAE and Saudi central banks might influence other countries in the region.

Many observers are predicting that it is only a matter of time before central banks across the world will launch their own cryptocurrency and move toward a cashless society. Banks are embracing blockchain technology across different sectors, including derivatives.

In the next 18 months, a global regulatory framework for the sector must be developed, but in order to be successful, it will need to balance intervention and innovation. It appears that there is no stopping the digital financial economy, and the players who fail to assimilate and adapt to this new system risk becoming obsolete.

February 16, 2018 0 comments

Cover story Cryptocurrency Startup

Lebanon hops on the crypto train

by Thomas Schellen February 16, 2018

written by Thomas Schellen

Antoine Yazbek and Zaki Soubra are budding Lebanese cryptocurrency entrepreneurs, and they radiate seriousness in their endeavor. As a journalist, one is inclined to consider an entrepreneur serious if they answer a series of probing interview questions without losing their temper at the intrepid—or sometimes just intractable—media type across the table. A more general measure of seriousness in business, especially in a new fintech startup, is if the enterprise is founded with personal money.

Yazbek and Soubra pass the test on both counts. They set aside over an hour to detail their value proposition and enterprise development plan to Executive, and last year, they invested their own money into their first cryptocurrency venture: a cryptocurrency mine—a facility with serious computing power that is dedicated to the production of cryptocurrency coins in—of all places cold and far, Iceland.

They do not disclose how much capital they committed to the venture—the partners only volunteer that their investment was 100 percent their own, and “above six digits and below seven digits” in dollar terms. Nor do they agree to disclose where they incorporated their offshore company for their initial foray into the global cryptocurrency realm, but it is clear that this tech startup has not been kissed by funding under the provisions of the famous Circular 331 from Banque du Liban, the Lebanese central bank.

“You have to put your money where your mouth is when you want to talk with an investor,” Soubra says, explaining the pair’s funding strategy. His partner, Yazbek, adds that they both learned the importance of an entrepreneur’s personal financial commitment when they were working in asset management for large Middle Eastern conglomerates and sitting on the buy side of the table, across from entrepreneurs looking for investment.

Rather than divulging further details about the legal and financial information related to their first venture, the partners instead emphasize that they are determined to develop a new brand, under which they want to bundle as many as six diverse cryptocurrency-related services. “We have just registered our new brand under the name Crypten. This will be the umbrella for all that we aim to do; it is designed to stand for confidence and transparency, and the brand name will stay with us even as our verticals evolve. Above all, we want to build a brand that will inspire trust as we strive to be the continuous partner in crypto for stakeholders,” Yazbek tells Executive when confirming the launch of their corporate identity upon registration of their new brand in the last week of January, two weeks after the initial interview.

During the first interview, he had explained that the facility they established in Iceland constitutes the first of six pillars, or business units, that they want to build under their brand. The other pillars will range from consultations on crypto assets for asset managers, high net-worth individuals, family offices, and financial professionals, to the for-profit provision of education and information seminars on the cryptocurrency economy.

Gate to crypto

Yazbek and Soubra chose to invest in Bitcoin mining and cryptocurrencies as their initial pillar because they perceived it as “a more stable business model” and value proposition than other segments of the cryptocurrency realm. They also reasoned that their mine would provide traditional investors with an “entry gate” to the crypto world, as it involves tangible investments into hardware that are well suited for presenting to prospective investors and clients, and because operating their own mining facility gives them the opportunity to acquire hands-on experience in this realm.

Going forward, the business plan is for the mining facility to grow organically and be kept under Soubra and Yazbek’s full ownership. The plan, however, includes added options for mining. One option is to rent out mining capacity to clients who want to produce their own cryptocurrency coins without exposing themselves to the large investment expenditures required to set up their own mine. Other possibilities are to develop and manage a custom mining facility for a single investor on the side of the existing one, or to build an additional mine through a Crypten fund, attracting investors who are not necessarily interested in cryptocurrencies but are involved in tech investing.

The two partners say they became friends while studying economics at the American University of Beirut in the late 1990s. After having acquired about 15 years of experience in the finance field since they graduated in 1998, they separately discovered their passion for the crypto-economy about two to three years ago. When they reconnected in Beirut in 2016, they decided to team up.

“We truly believe in the advantages of cryptocurrencies and are both in it for the long term. This specifically means Bitcoin, but [beyond this] all cryptocurrencies in general. However, when I say this, I want to exclude many of the initial coin offerings, or ICOs, and new tokens that are just coming out. These are mostly rubbish because their underlying aspects are not strong enough,” Yazbek explains. (See glossary of cryptocurrency terms). Soubra adds, “Cryptocurrencies have real advantages, and sooner or later, even though there will be road bumps and some people will get burnt, the advantages of cryptocurrencies will impose themselves.”

Their skepticism about the current ICO hype notwithstanding, the partners are not opposed in on principle to initial coin offerings. They envision creating an ICO consultancy as one of the pillars that they want to develop—possibly later—as part of the Crypten brand. “We believe that if ICOs are better regulated with a better framework, more companies are going to want to go [the ICO route]. We want to help these companies conceptualize their own tokens, write a white paper, and go to market. Crypten would perhaps underwrite part of the tokens and help them find investors in their tokens,” they explain.

They estimate that rollout of an ICO consultancy might still be a few years away and come after the crypto economy has acquired some greater regulatory maturity. Other pillars of the new Crypten brand might see the light sooner, and initially as tech consultancies. According to Yazbek, the planned asset-management pillar will initially provide technical advice and research, but will refrain from giving investment advice in the manner of a private bank. “We want to help any asset manager to understand [cryptocurrency] technology better, and we want to explain to them all different ways how to invest. So think of us as tech consultants for asset managers,” he emphasizes.

The second pillar, labeled as a brokerage pillar, will likewise commence as a consultancy, with a focus on solving problems people have in relation to cryptocurrency trading. Yazbek points out that it is very difficult for many people, locally and in other jurisdictions, to find out how to go about this business. The plan for the brokerage pillar is to show clients how they can participate in the cryptocurrency market and place even small amounts without succumbing to hype and scams or engaging in wild speculation. Another activity under this pillar will be the provision of storage for cryptocurrency wallets, either as “hot” or “cold” storage, meaning with or without online access to a client’s coins.

Like other experts on the matter, the pair found themselves spending a lot of time explaining to people what the whole crypto realm was about. They were confronted with a contradiction, or even paradox, when they would encounter people who were greatly under-informed about the crypto realm, but were already involved or wanted to get involved. This is the story behind the new brand’s pillar for providing training and education. “There is a huge gap in information and knowledge [among potential Crypten clients]. If we want to make a business out of cryptocurrency involvement, we realized that we have to bridge this gap through education. We need to educate our clients before we can have a large number of interactions about the crypto world with them. This is where the idea of [a consultancy] originated,” Yazbek says.

A vision to bridge gaps

The brand’s overall governing philosophy will stress objectivity, Soubra explains. “We want to be perceived [to be] as objective as possible because the whole thing we’re building is a trustworthy brand that is not partisan for one coin or the other,” he says. As to their competitive advantage in an area of economic activity that is expected to rapidly fill up with providers, Soubra says, “We feel that our main advantage is that we’ve been involved with the crypto world and with the younger, tech-savvy generation for a while now. We feel that we speak their language. At the same time, we speak the languages of traditional financial institutions because we both come from this background.”

Soubra and Yazbek are setting their primary sights on winning clients among asset managers and high net-worth individuals, in family offices, finance houses, and banks. “We will be open to retail [clients] but we are not here for the hype. The goal is to take our knowledge and skill and use it to handhold potential investor clients or institutions interested in allocating funds to crypto,” in what they perceive as an unfolding paradigm shift in the entire world of finance, Yazbek says.

The ability to bridge the communication chasm between the new tech world and existing financial market leaders will be especially tested in the fifth Crypten pillar. This pillar is planned as blockchain consultancy with a mission to offer to financial institutions all the resources to understand how evolutions in the new technology affect them and which blockchain applications apply to them.

Knowing the importance of performing within the highly fluid environment of this paradigm shift, Soubra and Yazbek point out that the verticals or pillars of Crypten are not immutable. The venture’s organizational chart is not set in stone at this point, and verticals might be adapted and developed in response to market conditions. They are likely to also evolve along with the planned acquisition of licenses that the enterprise will need in order to give investment advice and move beyond a tech-consulting focus for some of the brand’s pillars. Some pillars might even be totally changed over the coming few years, the company founders acknowledge.

To them, flexibility is crucial, as no one can be certain how and in which direction the entire crypto realm will evolve. However, they are certain in their determination to build a trusted brand and also firmly convinced that cryptocurrencies will survive and stand tall, after having emerged from the expected phase of brutal adaptation. On top of that, they see cryptocurrency development as a chance for Lebanon to strengthen its economy, provided that the government adopts a proactive regulatory regime that sits well with the Lebanese central bank. “Let there not be a void; let the regulators decide on what they are comfortable with under the level of risks they see, but let there be something,” Yazbek states empathetically.

As Yazbek and Soubra see it, Lebanon has benefited greatly from BDL’s fostering of the country’s entrepreneurship ecosystem. This entrepreneurial edge, in conjunction with the country’s well-known competencies in the fields of banking and finance could, in their view, be developed into a powerful and fortuitous triangle by adding in the beam of virtual money. Says Soubra, “We feel that adding the field of cryptocurrency into the Lebanese mix will give us in this country a huge edge compared to our competitors, wherever they are.”

February 16, 2018 0 comments

Cover story Cryptocurrency Q&A

Seeking crypto transparency

by Thomas Schellen February 15, 2018

written by Thomas Schellen

The concepts and realities of digital currencies are, at best, confusing. To understand more about the Lebanese cryptocurrency community, and the opportunities that the cryptocurrency economy opens for Lebanese business and banks—including the idea of a sovereign digital currency issued by Banque du Liban, Lebanon’s central bank—Executive sat down with Stéphane Abichaker. A locally well known advocate for adopting of digital currency, Abichaker is a lecturer at Saint Joseph University in Beirut, a blogger on bitcoin, and partner at CDC Blockchain, a startup launched in November 2017 that works on electronic currency solutions.

E When did you first get interested in Bitcoin?

That was in 2013 and it was by accident. I even downloaded the Litecoin software at that time and wanted to start mining on my laptop, but then I got busy with other things and totally forgot about it. I rediscovered cryptocurrencies in February 2015 through an article in an online magazine, which said that blockchain might revolutionize finance. Reading tons of material about it for six months, I really got the virus. From that point onward, I had the intellectual debate with myself, started blogging and exchanging ideas about it, and giving conferences and talks on the subject.

E In your view, is Bitcoin easy to understand?

No I think on the day when it becomes easy to be used and understood by many, it will probably be worth 10 times what it’s worth today. It’s very difficult to understand: It goes against what we learn at university, and it also goes against the mainstream finance system: behavior, transactions, etc. In my point of view, it poses a new paradigm, and therefore, is complex and difficult to grasp, [for all including] myself.

E There nevertheless is a community of people in Lebanon who have this virus that you referred to, and are interested in bitcoin and blockchain [the public ledger of cryptocurrency transactions]. How large is this community?

I would say that active people, who are very curious about this subject and who are interacting with each other, number a few hundred, measured by the [size of online] groups I participate in, which are the largest groups on this subject in the country. Then you have a core of about 50 people who are either IT professionals, bankers who do not disclose that they are bankers, or startup people and entrepreneurs, who are really deeply involved in this [cryptocurrency] space in terms of mining, trading, and discussing.

E Is it legal in Lebanon to mine, to trade, and to discuss Bitcoin, blockchain, and so on?

That is an excellent question which we ask ourselves every week on the groups. What we know today is that there is a sort of red flag that was raised by Banque du Liban in an announcement from December 2013, reminding banks of earlier circulars, which said that digital money is prohibited in Lebanon and cautions explicitly that Bitcoin and other [cryptocurrencies] are unregulated and dangerous. The governor [of Lebanon’s central bank, Riad Salameh,] recently stated at events that nobody controls Bitcoin and said it is not an asset and not a currency, but probably a kind of commodity. As a commodity, the governor said in public, he would not prohibit buying and selling Bitcoins, but that BDL is definitely against using it as a currency, as a means of exchange. That is the official stance today. Now, in practice, we as a community are seeing, very simply, that all bank accounts in Lebanon are prohibited from interacting with international market platforms in the crypto environment. There is a form of enforcement of prohibition.

E There’s a practical barrier that has been created and is enforced, but it is not a formal barrier?

Yes. That is what we are perceiving.

E Are these discussions about cryptocurrencies very vibrant and open, running along ideological frontlines, or characterized by behavioral factors, such as clinging to old concepts of finance and resistance to change?

The debate today, first of all, is very timid, because of the stance by BDL that we just talked about. The BDL is at the forefront of the digital revolution in Lebanon, thanks to Circular 331, [a policy that incentivized investment in technology startups,] and due to the fact that this very subject [of cryptocurrencies] concerns BDL. Thus, the debate has only recently been revived, thanks to the [governor] saying that BDL want to launch their own digital currency.

[On the community level] one also finds many people in Lebanon who are attracted to get-rich-quick schemes. There is ICO [initial coin offering] excitement, and belief that “this Bitcoin thing will make me a millionaire.” Much interest and appetite exists from that angle, not really from the angle of debate on the thought level. Having said that, one very interesting and positive aspect that I personally experienced in the community is that in going on online debate groups you debate with many [types of] people. You might find yourself exchanging ideas with a Lebanese teenager who is an IT genius or with a guy in the Bekaa valley who has inherited a place where he can install mining equipment and would exchange ideas about how to mine more efficiently. The range goes all the way from the BDL undercover individual in the discussion who wants to have an idea of what is going on in the Bitcoin community, to the university professor who will not emphasize his title in the debate and will be challenged like anybody else.

E Much of the debate today deals with one or all of three cryptocurrency areas: Bitcoin, ICOs and altcoins—non-Bitcoin cryptocurrencies—and blockchain. Do you have an order of preference among the three?

I would definitely classify them in the following order: Bitcoin, then blockchain, and then altcoins and ICOs. Bitcoin was the first implementation [of a crptocurrency] and has first-mover advantage. Also, because Bitcoin is open source, any innovation in altcoins, or other ICOs that is worth considering, would be absorbed into Bitcoin[’s] code. Blockchain comes with the idea of being a network where you dematerialize assets, and where you’ll have ideal traceability, no single point of failure, etc. Blockchain is a word that has been used more and more to describe the technology as a whole, and there are lots of promises on that front. Nothing has materialized today, but it would be ridiculous to close the door on [the idea that] any innovation will come from this space. The third level are altcoins and ICOs, because I very frankly think that altcoins are variations on a theme, whereby a group of people would try to profit from the overall excitement [around cryptocurrencies], more often than not with a motivation to make money and accumulate riches.

E Do some altcoins or ICOs break laws, according to your understanding?

You can assume that they are breaking laws, because the Securities and Exchange Commission in the United States has said that ICOs have to do with offers of securities, and any offer of securities is regulated by the SEC, [which] has said that ICOs should be regulated and come under their supervision.

E In Lebanon, would ICOs be considered security offerings and regulated as such? Lebanon’s Capital Markets Authority, CMA, is eager in regulating every fund and every offering of securities, so should this, in your opinion, have to apply to ICOs?

It may also apply to ICOs [in Lebanon], but I have a question in this regard, which concerns the pace of progress and the quickness in which you can issue an ICO with very few technological prerequisites to do so. I wonder if the CMA and BDL are equipped to tame or control this market.

E You sent me a paper that you wrote last July on the idea of having a regional collaboration of central banks in issuing a joint cryptocurrency. In this paper you spoke of quasi- or pseudo-decentralized cryptocurrency as a possible way forward. What does this mean?

What I tried to reconcile is the principle of central banking—centrally issued and managed money—with decentralized issuance of money or currency. Under game-theoretical perspectives, I’m sure that central banks would lose part, or all of their seigniorage rights, and in my point of view, this is where we’re going. They’re losing [seigniorage, the authority to issue legal tender and profit from its issuance] because they’re abusing it, and people have seen that they have a power which they’ve been abusing since 2007 or 2008. I would say that on the left hand, central banks are condemned to lose part of their power, and on the right hand, you cannot go for a totally decentralized system because then you would have no regulation and control.

Bitcoin is not unregulated; it is regulated by code, but it is controlled by consensus. The reason why we today have six or seven versions of Bitcoin is that people do not always agree with each other. How do we control that? How do you reconcile? What you can do is a hybrid blockchain which is permissioned, meaning you need to be vetted to participate in the network. For example, it would be distributed among central banks in the region on the aegis of what was once called the Gulf Cooperation Council [GCC] unified currency, or even the Arab world currency. You can revive this idea and say, let’s do a regional cryptocurrency that is mined by the region’s central banks. Each one would lose part of its seigniorage rights, but they would make up for this by clubbing together and issuing a cryptocurrency that would be perceived by people as less exposed to abuse [or the potential for abuse].

E But if we go into the history of joint GCC currency projects—since such a common-currency concept was first modeled on the euro idea—we see that the project of a GCC Monetary Union (GMU) did not progress very far beyond the question where the central bank for policymaking in their GMU would be located. Given the overweight of Saudi Arabia in the regional economic context, whether as share of regional GDP or market capitalization of all Arab securities exchanges, wouldn’t other countries, such as Jordan, which one time talked about joining the GCC, end up being very little brothers to a very big brother? How do you envision to solve this problem in an Arab context?

If the principle of a proof-of-work cryptocurrency is adopted, you would put as many means as you can to participate in the network. In that sense, your relative weight in the unified regional cryptocurrency would be proportional to your material means to invest in hardware. The two interesting aspects of such a scenario are that you first have central banks as players in this blockchain, but you also may have national banks as participants in this overall blockchain. It thus would resemble something decentralized, but at the same time, the weight of each player, in terms of transforming themselves into miners and nodes, would be proportional to their capacity.

E Would that require a political decision to set a regulatory limit on the maximum share in the mining capacity?

I think that pertains to what could be called the monetary policy of this cryptocurrency. This monetary policy definitely has to be defined and agreed on. We may be very doubtful of such a system because it would require heavy political discussions and agreements and whatever. But [on the other hand] the challenges for central banks are growing in the economic contexts of the global digital economy, and of the real economies of nations, regions, and world. Central banks are going to find themselves confronted with mounting pressure to unify and agree and go this kind of route, a recent example of which is the declaration by an official from [the German central bank] Deutsche Bundesbank, who said that we need a global agreement on regulating Bitcoin and other cryptocurrencies. If you draw a parallel to this statement, it would be easier to say we do something regional rather than global, not in terms of regulation, but in creating a cryptocurrency. Otherwise, especially in developing countries, the challenge posed by decentralized cryptocurrencies would only be mounting and mounting.

E If I understand you correctly, you say that a global umbrella of regulation is needed, and perhaps even a first-ever global monetary policy system since Bretton Woods, and under this umbrella you would have regional central banks that are well advised to team up in issuing joint regional cryptocurrencies?

Let me be very clear: What you refer to is what I think is emerging, not what I defend or am a fan of. I’m saying this is the only way for mainstream finance to tackle the cryptocurrency revolution. I’m deeply convinced about Bitcoin dominance. Bitcoin will have first place among many in my opinion, but for the traditional central banking system, this is the only way forward.

E Would not Lebanon—by virtue of its benign foreign-reserves position, its deposit base in the banking system, and the relatively high sophistication of its central bank mindset and banking industry skill base—be quite well positioned for playing a role in the development of a regional joint cryptocurrency?

I think it’s a historic chance because there is this window of opportunity that should be seized. Whether in terms of available human capital, or by the fact that Lebanon’s central bank has proven itself over the last decades, there is a historic opportunity to seize, and to transmit the message to the region that this is not a challenge that will disappear tomorrow. This cannot be tamed, and we have to react [as regional central banks] by taking inspiration from blockchain. It does not help to reject or deny it.

E What best advantage could you envision for BDL if they chose to take this road and say we want to super-innovate in the cryptocurrency realm?

Digital currency is not the long-term solution, and all central banks are today equal on the starting line, because nobody has found the solution for this challenge. The opportunity for Lebanon is first of all that this country is accustomed to dealing with many currencies. According to the head of IT at BDL [Ali Nakhle], our systems at BDL are by default constructed to cope with a multi-currency environment, not like, for example, the European Central Bank that deals only with the euro. The very systems of BDL are multi-currency. The idea of issuing a cryptocurrency thus would be easily absorbed in the system. Second, the intellectual environment: You have youngsters that are encouraged by Circular 331 to go the way of innovation. So within BDL, the window is open to innovation, new ideas, and technology. These are two advantages, and third, from a political standpoint, it would be easier to have a regional cryptocurrency proposal brought to the table by Lebanon, as outsider to the Gulf Cooperation Council, rather than a member coutry.

E You speak of juxtaposing opposites in form of decentralization and deflation in the Bitcoin system versus the existing system of centralization and inflation. How would that be digested in our economy without causing all manner of disruption and upheaval?

If you go for a hybrid solution, you have your monetary policy that you can include in the blockchain and cryptocurrency that you would create in the code. And then, instead of setting a limited supply, as Bitcoin does, you set a progressively increasing supply that, however, is set from the start as being constant in the rate of increase, avoiding arbitrary increases in interest rates or a programmed decrease of supply. This could be debated and decided by the participants and written into the code of the central banks’ cryptocurrencies.

E How could this code be protected against illicit modifications and hacking by malicious foreign governments, cybercrime organizations, or such?

This is where the hybrid part comes into play. It would not be a permissionless, but a permissioned, blockchain. So you first could not access the system unless you’re authorized to do so. Secondly, the IT protections that exist for such a platform would be similar to ones that exist today to protect IT systems in BDL and other central banks.

E But if you look at the recent evolution of organized crime on the internet and of state-sponsored hacks, you find for example the intrusion into the central bank of Bangladesh, and $1 billion in partially successful fraudulent transfers in 2016, with alleged links to cash-strapped North Korea. Also, this region is not exactly known as the center of global cyber-defense expertise, judging from past virus assaults against large oil companies in the Gulf or Iranian nuclear facilities.

Yes, but the difference to the centralized system is that it would be a distributed network among all banks and central banks of the region. Any attacker would have to be able to calculate faster than 51 percent of the calculation power of the whole network of [aligned] central banks and commercial banks in the region in order to modify the transactions on the database. This is remote as a possibility.

E Would this be enough to resist all imaginable cyber-attacks, for example if two or three foreign states would collaborate in such an attack?

The answer is to expand the system by inviting other developing countries to join the network, because by the mere increase in network size, you’re protecting yourself from attacks which would aim to modify the integrity of data on your distributed databases.

February 15, 2018 0 comments

Comment Cover story Cryptocurrency

The bitcoin revolution

by Stephane Abichaker February 15, 2018

written by Stephane Abichaker

In a white paper sent to a cryptography mailing list on October 31, 2008, an unidentified individual (or group) using the pseudonym Satoshi Nakamoto described what the paper’s title called “Bitcoin: A Peer-to-Peer Electronic Cash System.” This paper was soon followed by a software implementation of the cash system believed to have been compiled by Nakamoto. The software was released in open-source form January 9, 2009, on a platform called SourceForge. Since then, Nakamoto’s invention has grown to the point where the market value of Bitcoin in circulation was estimated at $235 billion on January 14, according to coinmarketcap.com. This was not even the peak for the month: Bitcoin is prone to high, even extreme, volatility (especially in December 2017).

The rise of cryptocurrency

This volatility should not detract from the fact that Bitcoin, the oldest and most established of an ever-expanding array of cryptocurrencies, has proven over the last nine years a capacity to fulfill the three main functions of money: First, it has the potential to be a reserve of value, since, its price has appreciated (significantly) since its creation, and its volatility is relatively decreasing. Secondly, it is now increasingly clear that Bitcoin could become a significant means of exchange if a solution is adopted to scale it—that is, to allow more transactions to take place and at a lesser cost. Thirdly, its global nature and increasing recognition may well lead to it becoming a fully fledged unit of account that would facilitate international payments and accounts to be processed in a single currency.

Bitcoin’s situation vis-à-vis the three functions of money has led many to suggest that it is a currency in the making. But Bitcoin and other cryptocurrencies enjoy multiple unique features that fiat currencies do not possess.

It starts by solving the very paradox that any currency issuer, be it a king from the Middle Ages or a modern central bank, has had to cope with: How do you convince users to trust your money when you are a creator of scarcity? What would prevent you from abusing people’s trust and creating more and more money, thus rendering it less and less scarce? Cryptocurrencies like Bitcoin solve this paradox by outsourcing money creation, management, and control to a computer program and a distributed decentralized network. In that way, users do not have to trust each other, or even a third party, to transact with confidence.

Cryptocurrencies, according to the serial entrepreneur and well-known cryptocurrency advocate Andreas Antonopoulos, make up an “internet of money.” They are a programmable form of money that offer endless possibilities to set and execute complex, conditional monetary transactions.

The promises of blockchain

The word “blockchain” does not appear in Nakamoto’s paper: he mentions “the chain of blocks” only once. The word only began being googled in earnest in 2012. Blockchain is the technology used by Bitcoin, namely a distributed ledger of time-stamped transactions that achieves consensus among its users through a proof-of-work (or other) algorithm. Its proponents believe it can revolutionize money, finance, and trust-based transactions in general.

Blockchain promises to extend the idea of a token representing a currency—the basis of Bitcoin—to encompass different possible uses of the token, from the most straightforward to the complex.

First, blockchain tokens can be used as money. As explained above, Bitcoin, the cryptocurrency that enjoys the highest market value and widest use, already serves as a store of value, and thus fulfills the first function of money. Its use as a means of exchange received a boost by Japanese authorities in April 2017, when they officially recognized it as a kind of “prepaid payment instrument.” It ultimately needs wider acceptance and diffusion to become a unit of account, the third function of money, but, Bitcoin’s potential to fulfill the three functions of money, and by extension the potential of any other cryptocurrency that may succeed in the future to do so as well, is palpable. Cryptocurrencies like Bitcoin are growing at such a pace that their emergence as a viable alternative to money could be measured in years, not decades.

Second, blockchains may be used as repositories of digital assets. A digital asset could be any token of a blockchain to which a special meaning is attached. A title deed issued by a land registry or a diamond certificate issued by a jeweler, for example, may be exchanged over a blockchain, which may serve as the ledger and the market for such dematerialized assets.

Third, blockchains could also become repositories and executors of smart contracts and decentralized autonomous organizations (DAO). Smart contracts and DAOs can be defined as agreements—or a series of agreements—that would be programmed to run automatically on a blockchain backbone infrastructure. The Ethereum blockchain has been built with this goal in mind, among others. Nonetheless, the utility, technical soundness, and robustness of a smart contract or a DAO remain to be demonstrated. The Ethereum blockchain—the first instance of a DAO—has been hacked on at least two different occasions, leading the Ethereum founders to suggest and implement a re-writing of their blockchain history.

The “Initial Coin Offering” hype

Between August 18, 2010, soon after the first cryptocurrencies came into being, and January 14, 2018—a span of less than seven and a half years—the compound annual growth rate of cryptocurrencies’ market value reached a staggering 637 percent. In other words, the total market value of cryptocurrencies was multiplied over the period by a factor of 2,702,050.

The attractiveness of such explosive returns is the main driver behind the hype over Initial Coin Offerings (ICOs), an appellation coined (excuse the pun) by mimicking the Initial Public Offering (or IPO) of stocks. The current rush to obtain non-binding funding through the issuance of “coins” loosely related to the blockchain technology, and squarely antithetical to cryptocurrencies, has been compared to the dotcom mania at the turn of the century. ICOs are typically launched as follows: Write a white paper stuffed with cryptographic jargon, hire a team of coders and industry veterans from the sector your coin belongs to, market your “coin” as being the next big thing among cryptocurrencies or blockchain apps, and receive bitcoins or fiat money in payment for your coins.

The overwhelming majority of these coins is centralized in a form or another. They might have a team promoting them, or a limited network of users, or an algorithm that has not been proven to be able to build and protect consensus among the network participants. The bottom line is that there is no need in the first place for these coins to use blockchain technology, since a centralized model would be much more efficient and secure for these specific uses.

There is no doubt the music will stop at a certain point, and one can safely assume that more than 99 percent of the existing cryptocurrencies (at the time of writing, there are 1,429 and counting, according to coinmarketcap.com) will fade away. ICOs, in their prehistoric form in the mid-2010s, used to be called fundraising rounds for startups, but at least in those days investors had a minimum of guaranteed rights and protections.

Large amounts of R&D, venture capital, and even ICO amounts (believe it or not, some ICO money did not go to the pockets of their promoters) have been invested into blockchain-related activities, with no breakthrough application emerging yet. Only time will tell which blockchains and cryptocurrencies will be to the ecosystem what Apple, Amazon, or eBay have been to the internet after the dotcom bubble crash.

There are mounting signs that regulators and governments are looking to reign in cryptocurrencies, possibly in a concerted effort. These efforts may well provide cryptocurrencies with credentials that accelerate their adoption. Otherwise, restrictive regulations may well open a round of confrontation between the Bitcoin ecosystem and the establishment. Nonetheless, in the case of Bitcoin, it has so far proven that the more it is attacked and downplayed, the more it thrives. This antifragile nature is intimately linked to the fact that cryptocurrencies are, in their purest form, an idea. As Victor Hugo wrote in Histoire d’un crime: “One withstands the invasion of armies; one does not withstand the invasion of ideas.”

February 15, 2018 0 comments

Cover story Cryptocurrency Explainer

Disruptive technology

by Thomas Schellen February 15, 2018

written by Thomas Schellen

In the long run, which will be the bigger B? Will the banking industry do to blockchain, and thus to the soul of Bitcoin, what in recent years it started doing to feeble fintech operators: acquire challengers and digest unwanted competitors before they can threaten legacy players? Or will the blockchain bacterium lead to a total mutation of the entire banking sector to the point that the banking business models of 20 or 100 years from now would be unrecognizable for today’s bankers?

“Cryptocurrencies could possibly be the single most disruptive technology to global financial and economic systems” by virtue of the fact that current financial and legal structures were designed with a completely different mindset and purpose, wrote Peter DeVries, a professor of information systems at the University of Houston in Texas, in an article published in September 2016 in the International Journal of Business Management and Commerce. “If cryptocurrencies became the global norm for transactions, long-standing systems for trade would need to be completely reformed to deal with this type of competition,” he stated in the introduction to an analysis of Bitcoin and cryptocurrencies.

The academic’s view is not spectacular in itself, given that the birth of Bitcoin at the height of the great recession of 2008 and 2009 appears to have been anything but a coincidence. The author, or authors, of the original white paper published under the pseudonym Satoshi Nakamoto “addressed a very serious question: If the banking system and central banks were not able to avoid such a big crisis, is there something we can do?” says Henri Azzam, director of the Master of Finance program at the Olayan Business School of the American University of Beirut. “The whole idea was to come up with a payment, clearing, and settlement system which is decentralized, rather than centralized in the way of going through banking or going through central banks.”

By this description, one of the roots of Bitcoin was the global financial crisis, and the desire—boosted by a historic economic crisis that was spurred by rampant mismanagement in the financial industry—to develop a payment system that would not fail the world. The targets of Bitcoin anarchists’ greatest disdain (besides governments and central banks), unsurprisingly, are commercial banks of all flavors. Moreover, it is the conventional wisdom of the period after the great recession that the systemic faults underpinning the freezing of financial liquidity in 2008 and 2009 were at best partially remedied. It, therefore, becomes more understandable when critics of current monetary affairs hail the importance of digital currency alternatives, such as when Jim Rickards—who wrote the books Currency Wars (2011) and The Death of Money (2013)—said that Bitcoin’s “widespread adoption can be taken already as a sign that communities around the world are looking for alternatives to the dollar and traditional fiat currencies.”

Given the clear intentions of decentralization and change in the global order of money, plus numerous signals that the financial and banking sector is likely to experience both, the first and the largest disruption comes from the rise of everything crypto. It is curious that international bankers and their institutions tend to come down on both sides of the debate over cryptocurrency. Sometimes bankers have even had to make an about-face turn after a rash statement, such as the infamous “Bitcoin is a fraud” remark of September 2017 by Jamie Dimon, the chief executive of JP Morgan Chase, the largest multinational bank headquartered in the United States. (He came out in January to say he “regretted” his fraud remark.)

Bulls and bears

More concerning than Dimon’s one-eighty was that he was on record telling Fox News in the same interview, “I’m not interested that much in the subject at all.” In another example of emotional dissociation with the cryptocurrency challenge, this one from a prominent European bank, Credit Suisse CEO Tidjane Thiam was quoted by Reuters as telling a news conference last November, “I think most banks in the current state of regulation have little or no appetite to get involved in a currency which has such anti-money laundering challenges.”

According to a selection of quotes from central bankers, bankers, noted investors, and fund managers compiled by Bloomberg under the heading Bitcoin Bulls and Bears, bears outnumbered bulls about two to one in the 30-plus comments recorded since March 2017. However, the majority of statements avoided total clarity or a great passion for cryptocurrency. Almost all the quotes, whether from bulls, bears, or people leaning toward neutrality, focused on short-term issues, mainly giving opinions about the present Bitcoin and dotcoin bubble phase, and the related potentials for gain or loss.

The real question about the current state of relationships between banks and cryptocurrencies may not hinge on people’s word choices, but rather whether established financial professionals and banking executives are paying enough attention to this issue. Comments in this direction seem to be rare, with a statement by International Monetary Fund Chief Christine Lagarde from last September one of the exceptions. “Virtual currencies are in a different category [from digital payments in existing currencies], because they provide their own unit of account and payment systems,” she told a Bank of England conference then. The existing weaknesses and technological challenges of virtual currencies such as Bitcoin could well be addressed over time, and “it may not be wise to dismiss virtual currencies,” she said, advising the conference-goers “to think of countries with weak institutions and unstable national currencies,” of which some might see a growing use for virtual currencies.

It seems indeed prudent for banks to prepare for the eventuality that cryptocurrency will turn out to be more than just a favored narrative of economists on the anarcho-capitalist fringe and an obsession of a bunch of crypto weirdos who flash their cyber implants at nerdy events. If cryptocurrency is not just a new technology hype that is exploited by mongers of greed, fear, and assorted crimes, polite disinterest from mainstream economists and financial influencers is not a promising approach—especially as no one can rule out that the next financial emergency could be in the making, while elites in the US congratulate themselves about their genius tax reforms, and international elites celebrate the current “synchronized momentum” of the global economy.

It seems that the best many global banks can say for themselves in relation to the cryptocurrency discussion is that they are members in groups dedicated to the development of distributed ledger variants that can be of use to the financial industry. Blockchain associations go by a confusing number of names with a broad range of targeted industries, such as Wall Street Blockchain Alliance (WSBA) for Wall Street firms in New York City, the Blockchain in Trucking Alliance (BiTA) for the logistics industry, or the more recently Blockchain Interoperability Alliance founded by specialized tech companies to construct a global interconnected network of blockchain protocols. Some blockchain clubs are more in the sights of banks, such as the Linux Foundation’s Hyperledger Project, whose members include Wells Fargo, ABN Amro, China Merchants Bank, BNY Mellon, and BNP Paribas; the one-year old Ethereum Enterprise Alliance (EEA), whose members include UBS, Credit Suisse, Santander, ING, Scotiabank, and JP Morgan; and the R3 CEV consortium, which claims to serve over 100 financial institutions and regulators. R3 was established with the participation of major banks in 2015 and aims to serve the needs of banks and the financial industry with its Corda blockchain platform.

These initiatives and their cousins in the academic and non-profit space, such as the UK-based Blockchain Alliance for Good (bisgit), do not presently appear to attract the sort of attention that Bitcoin and altcoins get due to their price trajectories and, as LAU professor Saifedean Ammous emphasizes in the manuscript of his upcoming book, so far have nothing much to show that actually works. But at least they exist.

Although scores of banks are in one global blockchain club or other, no Lebanese bank appears to be on any such alliance’s membership roster, nor do local bankers radiate with willingness to go on record with cryptocurrency opinions. Anecdotal evidence gathered by this writer since autumn 2015 during official interviews and off-record chance encounters with bankers, as well as industry conversations and info bytes shared with Executive, all betray a great silence. Given the size and importance of this global, albeit young, debate, it seems almost unnatural how little local bankers have to say on the matter, other than making reference to the stance of the central bank and citing a handful of comments by Governor Riad Salameh.

One exception to this blast of silence in the local banking intelligentsia is AUB’s Azzam, who is a regional banking veteran. In an interview with Executive, he readily outlines his views on Bitcoin and his take on the role of blockchain and cryptocurrencies in relation to banking. The central question on Bitcoin to him is its nature and role in the economic system. “The big question is if Bitcoin is a currency—and I argue no, is it an asset—what is left is [the question]: Is Bitcoin a speculative bubble? And I will argue yes,” he says.

Asset or currency?

He then elaborates on definitions and required characteristics of a currency, namely being used as unit of account, useful as store of value, and of broad practicality as means of exchange. Denying all three uses and pointing out that Bitcoin today is far too expensive to use as a medium of exchange, he goes on to discuss the character of an asset under conventional economic definition. For something to be considered an asset, it should generate a cash flow or the prospect of a cash flow as well as facilitate the determination of its fair value. In his view, nobody can think of a fair value of Bitcoin. “Only for an asset with a cash flow or the promise of a cash flow can you come up with a fair value. It is therefore not an asset and not a currency. It is something that people are buying for only one reason: because they expect the price to go up,” he says, explaining that is the very definition of a bubble.

Azzam says the best way to describe Bitcoin is “digital gold,” yet he asks, rhetorically, “But what does this mean?” He also acknowledges its scarcity by design, but argues that scarcity by itself does not necessarily signify value. The fact that something is rare—for example, a signed photograph of someone who is famous in your family but unknown on any larger scale—will not translate into market value unless there is someone who is willing to buy it. “Human beings, of course, have created value out of nothing throughout history, but to create value, but you need someone who is willing to pay for it. The market creates value,” he says.

According to Azzam, the issue of control over the mining process and the concentration of Bitcoin capital could be more important than Bitcoin’s pre-determined scarcity (21 million coins, each with 100 million sub-units known as satoshis). “What Nakamoto wanted was a decentralized ledger, [later named blockchain], that was permission-less, so that everyone can go and be an active miner on the distributed ledger,” he says. But what ended up happening, Azzam says, was the opposite of decentralization. Because of the mix of increasing costs of mining due to predesigned and incremental increases in the amount of computing power needed to mine a coin and a resulting combo of growing hardware and electricity costs (mainly for cooling the CPUs in a mining facility), “It costs a lot of money today to validate a transaction [on the Bitcoin blockchain]. Thus only the big guys are today able to continue playing the game. So we started with decentralized and ended up with 100 whales who actually control all of this as miners,” he explains, questioning whether this will lead to monopolistic or oligopolistic cartel behavior of a small group instead of decentralization and democratization.

Only fools rush in

The time-tested method of seeking to counter oligopolies and remedy imperfect competition in markets is regulation from outside, but this hardly agrees with the design of a completely decentralized blockchain and the rejection of governmental authority. For Azzam this is where the story of Bitcoin goes off the rails and the story of blockchains takes over. “The whole story of Bitcoin, in my view, is the blockchain, and the fact that there is use for a blockchain,” he says, pointing to the concept of a central bank-issued digital currency and its advantages as a supplement for existing money: the potential to expand financial inclusion of the unbanked population, the efficiency of instant clearing, and the reduction of transaction costs in financial systems. “We are looking [at] how to use these advantages by using the central-bank digital-currency idea,” he says.

This would not affect commercial banks in their lending activity and management on behalf of customers, but it would alter their role as facilitators of payments. By implementing a central bank-issued digital currency and creating digital wallets that will be hosted by central banks, commercial banks “will realize that they are not making as much money and don’t need as many branches and as many ATMs. This will definitely disrupt the banking sector, but on the side of payment,” Azzam says, suggesting this would necessitate a revision of strategies for retail networks and require a further evolution of banks, not only because of the arrival of digital currencies but also because of other much-discussed fintech innovations, from crowdfunding to robo-advisors and even initial coin offerings in the crypto realm. “Banks have to be ready for all of those challenges. They cannot say that they will be doing business as usual, because the writing is on the wall—business will not be as usual,” Azzam emphasizes.

Pointing to countries such as Sweden, where mobile and internet transactions are already market dominant and bank branches are closed or redesigned to be cashless, and emerging economies such as China and India that are pushing forward in similar directions, he adds that banks in Lebanon are “aware and talk about it in our board meetings, but the perception is that this is not happening tomorrow, so we have time. Banks here think they can continue doing what they are doing.”

Denial of new technology can be a dangerous game, and high-profile central-bank initiatives toward the creation of digital currencies, in Azzam’s view, would force banks to be more serious about the issue. He also notes, however, that there are strong reasons why central banks would take their time in unleashing the digital currency shift, even as they regard it as the future. They are unlikely to rush into any partial conversion of reserves into Bitcoin, for example, because central banks are not in the business of speculation. They might also take more time than technically required in launching their own digital currencies, because huge disruptions of banking structures through abrupt deployment of citizens’ e-wallets at central banks and the reduction in numbers of current accounts at commercial banks would result in survival challenges for many of these banks.

With all this, a lose-win-win result of the cryptocurrency challenge to banks seems somewhat unlikely. A potential outcome of the banking-Bitcoin-blockchain game scenario could be win-lose-win, if it does not come to a perfect non-zero-sum game of win-win-win for all three. But according to Azzam, there seems to be no way that banks could achieve a win-lose-lose and wiggle out of embracing some type of distributed ledger system. This modified distributed ledger system, he says, “is a different kind of blockchain that is faster and efficient. It is an instant-clearing payment system, which we don’t have now, and it is the technology of the future. It is post-internet and we need to be ready for it.”

February 15, 2018 0 comments

Cover story Cryptocurrency Overview

The crypto challenge

by Thomas Schellen February 15, 2018

written by Thomas Schellen

For years, the world has been engulfed in accelerating debates full of fear and fascination about Bitcoin, altcoins, and blockchain economies. Just look at January 2018, which brought threats and announcements of state regulation over cryptocurrency in some jurisdictions, bans of exchanges, rumors of impending restrictions alongside news pointing to the opposite, reporting on both startups and legacy companies that are venturing into initial coin offerings (ICOs), and speculation on the intentions of governments seeking to create their own blockchain economies, crypto-coins, or sovereign digital currencies. (See glossary for an explanation of these cryptic terms).

A peculiar noise this past month emanated from the cryptocurrency trade. It is so replete with extreme volatility that January seemed to be accompanied at every turn by warnings that the cryptocurrency skies were falling and that the Bitcoin crash had arrived, or was just around the corner. This clutter of chatter was aided by, on the one hand, the reality of excessive fluctuation in Bitcoin, and on the other hand, the cryptocurrency trade environment, which lacks any visible interruption by holidays or off hours.

Bitcoin, the market-capitalization leader in the crypto realm, went up and down like a yo-yo throughout the month, adding roughly $70 billion in market cap between January 1 and 7, only to see it drop by $72 billion in the following week—and so forth. By late January, when some trade augurs were waxing lyrical about Fibonacci lines, a momentary environment of relative calm seemed to exist and Bitcoin was trading in the range of $11,000 a coin.

As for the cumulative market cap of cryptocurrencies, since the beginning of the coinmarketcap.com time display on May 1, 2013, the estimated value grew from $1.4 billion to $8.4 billion on May 1, 2016—or almost sixfold over three years. The next year saw a massive acceleration: By May 1, 2017, the market cap was cited at an eye-popping $37.9 billion, having grown more than fourfold in a single year, followed by the really crazy rise to $600 billion at end of last year. At the end of January, the market cap was $550 billion.

Moves by the second and nanosecond

Notwithstanding that the trading of cryptocurrencies in the last few years has seen periods of almost normal market insanity, what truly matters in this domain is not the year and day, but the minute, or even the second, that you look at this market. Regardless of its degree of volatility at any time, the intensity of this market remains disturbing, unless you happen to be an algorithm. Even if one, for example, were aiming to implement a contrarian strategy in the current heap of cryptocurrencies (of which at least 70 percent, but possibly over 90 percent, appear to move in lockstep, while their overall number is growing daily), how could such a strategy be designed and implemented with human capacities to process information and act with a human mixture of experience, technical knowledge, information, and people-reading skills?

Further adding to this muddled trading environment are marketing departments screaming of the next ICO and counting down its presale “offering” in pop-up ads on numerous sites dedicated to digital-economy news (with unknown percentages of fake news presumably strewn in), blatantly partisan cryptocurrency opinionating, and annoying coin promotions. To complete January’s chaos, just mix color into the picture in the form of mutually contradicting comments by economic celebrities, from Facebook CEO Mark Zuckerberg to investor legend Warren Buffet to popular economist Robert Shiller.

Zuckerberg praised cryptocurrency as a way to “take power from centralized systems and put it back into people’s hands.” Buffet appeared in a brief TV interview in mid-January with the ominous prediction that cryptocurrencies “will come to a bad ending” (while mainly saying that he has other investments and will not partake in a sector about which he knows little, nor will he take positions on cryptocurrency futures). And Shiller said in a debate at the World Economic Forum that Bitcoin was an “interesting experiment” after oracling in interviews that Bitcoin was in a bubble state, but that bubbles with strong narratives could last thousands of years.

It seems daring to assume that a load of brief cryptocurrency remarks to media will contribute to clarity, rather than just pile more noise onto the shaky ground of digital money and the historically incomparable reality of an already confused world’s digital transformation. But certainly not all economic noise is bad noise that merely obfuscates and distracts from core cryptocurrency concerns.

Some good things can come from noise

One important value of the recent hype lies in increasing the general curiosity about cryptocurrencies. Back after the first wave of attention to Bitcoin in 2013 and 2014, when its use for buying drugs on the online Silk Road marketplace and the shuttering of then-leading Bitcoin exchange Mt. Gox in Tokyo made news, cryptocurrencies were considered by some to have evolved from a subcultural phenomenon to a reference point in mainstream public debates. However, according to media reports and the Statista website, polls from December 2013 suggested that basic awareness of Bitcoin’s existence was below half the population in the United States at 48 percent, and between 13 and 45 percent in a number of developing countries. Moreover, responses in the US indicating willingness to invest in Bitcoin were far below basic awareness; only 13 percent said they would prefer Bitcoin investing over gold investing.

More recently, surveys from late 2017 in South Korea, Japan, and the United States—which are currently the three leading countries in the global cryptocurrency economy—indicated that basic awareness in both South Korea and Japan was around 90 percent, with the combined medium or high understanding of Bitcoin (but not blockchain) in South Korea exceeding 45 percent.

A November 2017 survey from Ditto, a cryptocurrency-focused public-relations firm in the United States, showed that almost three-quarters of a panel of 500 people polled via Google Surveys had heard of Bitcoin, but that 70 percent also responded that they were “not familiar” with cryptocurrencies. According to Ditto, relatively few respondents had heard of cryptocurrencies other than Bitcoin, and only 10 percent of all survey participants said they knew what an initial coin offering was.

When also taking into account anecdotal evidence from conversations in Lebanon with financial professionals and others, the impression at this time is of strong curiosity about Bitcoin and comparatively low but growing interest in the rest of the cryptocurrency realm. There appears to be a huge amount of space for further education on all aspects of the issue, especially if coming months and years see continued price rises of Bitcoin or future periods of boom following retrenchments.

But it is not all about enabling new players. An announcement of an upcoming initial coin offering illuminates that legacy companies, under specific circumstances, can ride the wave to their advantage. Eastman Kodak, a corporation with an exceptional history in photography throughout the 20th century, saw its regular shares receive a substantial boost immediately after the company declared on January 9 that it was planning to release KodakCoin, a “photo-centric cryptocurrency” on the basis of blockchain technology in conjunction with a platform for managing rights to digital images.

Notably, the Kodak share price soared from $3.10 on January 8 to $10.70 on January 10, and the stock kept trading above or around $10 until the time of writing on January 27. This boost seems even more noteworthy considering that the company had languished for quite some time since it emerged from bankruptcy protection in 2013. It reached a relative peak in January 2014 at $36.88, but had been on a long decline from there and saw shares trade in the $3 dollar range throughout the fourth quarter of 2017.

[media-credit name=”Ahmad Barclay & Thomas Schellen” align=”alignright” width=”945″][/media-credit]

Beneath the noise

Partially obfuscated by the noise around cryptocurrencies are the three development streams of technology innovation and technologically enhanced human behavior that underlie the cryptocurrency issue. The first of these streams is the Bitcoin stream which is rooted in cryptography. In the knowledge economy and information age, the art of encryption and decryption has become immensely sophisticated, and it makes up the crypto part of any cryptocurrency.

The second element in the successful creation of Bitcoin was the quest for a digital system able to substitute for money as means of value transfer. The concept of creating money for use in make-believe environments has fascinated human game creators and innovative minds throughout various phases of capitalism—and might have especially spurred them on during periods when capitalism was in one of its great crises. One can perhaps regard the Monopoly board game’s initial rise in the 1930s Great Depression as an indicator of the attractiveness of private money.

The quest to develop virtual money or online currencies was part of the narrative of the New Economy up until the bubble burst in the early 2000s. The idea of virtual money lost some gloss in the real world immediately afterwards, as online finance initiatives dwindled, but virtual money and virtual gold continued to thrive in the realms of strategy video games and massive multiplayer online games.

In the narrative of Bitcoin that tends to wander into the realm of urban myths, it is the pseudonymous Satoshi Nakamoto who is associated with the successful crossbreeding of cryptography and virtual money, boosted by the external impact shock of the Great Recession, into the first true cryptocurrency.

Taken from technological and economic points of view, the third element, blockchain and ICOs, are much lighter fare than Bitcoin, even as, in technical terms, the pure variety of the former is inextricable from the Bitcoin idea, and the latter appears to be largely a derivative of its success. Blockchain technology is still in flux and its economic and social uses have yet to be seen (see comment and interview). The relationship between blockchain and banking is also closer to an engagement for marriage than to unbridled marital bliss as of yet (see explainer).

The trajectory of the ICO story, on the other hand, strongly suggests that digital progress can do nothing to modify human behaviors away from patterns that have tormented men and women (while negatively impacting male behavior more directly than female behavior) throughout the history of boom-bust capitalism and recurrent bubbles. There is no eradicating overconfidence and irrational exuberance; thus, it simply looks as if the short history of the internet will see its second bubble not too far into the future.

As an added concern, initial coin offerings, as they are currently handled absent supervision, could weaken the process of sorting out bad business ideas and channeling investments into startups that, by existing criteria, deserve to be funded. “The problem is that you allow lousy startups to fund themselves,” says Henri Azzam, director of the Masters of Finance program at the Olayan Business School of the American University of Beirut.

Azzam argues that an uncritical process of indiscriminately churning out coin offerings, on for example the Ethereum blockchain, can facilitate the funding of inefficient startups and the creation of zombie companies, resulting in detrimental impacts on the larger economy. “An initial coin offering is a crazy idea that startups, instead of selling part of their business to investors so that the investors become shareholders, are selling them coins with the promise: ‘You can use these coins to buy my services as soon as I am up and running.’ I want good startups, people who can pass criteria of selection,” he says.

The Bitcoin worldview

When compared with the dangers and the potentials of altcoins, ICOs, and quasi-decentralized but existentially third-party controlled blockchains, Bitcoin and its original blockchain are in a wholly different ontological category. Bitcoin is underpinned by libertarian anarchist thought, and thus is situated outside of the realm of most of the concerns that have plagued the 20th century. The question in regard to Bitcoin is whether it is just another hare-brained idea like almost all grand concepts to explain the world out of human comprehension, a viable alternative to the current rule of government-issued money, or even, more simply, a better option for money. Does Bitcoin compel humankind to use it because it is superior to the previous forms of money that humans created almost instinctively and without the a priori deliberation that would be able to hold water when compared with the consequences of the monetary creation, such as fiat money?

This question is a non-starter for Saifedean Ammous, a professor at the Adnan Kassar Business School of the Lebanese American University, who thinks of Bitcoin as a take-it-or-leave-it proposition. Ammous, who is currently finalizing a book on Bitcoin in the context of the history of money as he sees it, tells Executive, “Bitcoin removes trust from the issuance of money. It takes us from a world where we elect people, and then pray that they will not be corrupt as we entrust them with our money in the hope that they will create a financial future for us, and moves from there to making [money] into a force of nature as it was with gold.”

His arguments, laid out in his book that is slated to be published in April as “The Bitcoin Standard,” more than hint at a perspective on Bitcoin that is based on a concept of it being digital gold. One has to accept, in order to fully embrace this book, that one of the worst mistakes of the last 150 years was to give up the gold standard as the firm foundation of “sound money” and the foolish selection of “easy money” that can be printed or issued at will in paper or electronic forms by the governments that control them.

In his view, many of the world’s problems can be attributed to the very existence of governments as they are today. Problems such as misfiring World Bank interventions in national economies anywhere, or an over-reliance on credit for financing of consumption, will be no-brainers once there is no way in which governments can control money. “In the world of Bitcoin, the power of credit comes from saving, while right now, the power of credit comes from government,” says Ammous, explaining, “The whole point of Bitcoin is not that it easy to transact because it’s fast; the whole point of Bitcoin is that nobody can control it.”

From this perspective, Bitcoin is “zero percent trust and 100 percent verification,” he writes in his upcoming book. He posits that anyone who does not understand the value proposition of this sound money is free to refuse it, but will see his world crumble, while the world built with Bitcoin will see investors into Bitcoin rewarded. “If we move the world to a Bitcoin system, people who use it will see their savings rise, while people who stick to the old system of conventional money will see it collapse. This is based on the assumption that government power is not effective against ideas and technology,” he enthuses.

The specificity in Ammous’s approach is not so much a matter of like or dislike. But it comes across as intellectually bipolar: partly 21st century, with excellent comprehension of Bitcoin’s technical and economic complexity, and partly an expression of concepts that preexisted not only cryptocurrencies, but the entire internet. Thus, some of these views are not novel—and some of the arguments that are presented by Ammous in discussion are borrowed from writings by economists such as Friedrich Hayek and Murray Rothbard (each referenced multiple times in The Bitcoin Standard), of whom the latter was said to have coined the happy term anarcho-capitalist, which appears well suited to labeling Ammous.

In explaining the concept and some implications of Bitcoin that he sees as desirable, Ammous provides not just food but a whole banquet for thought, and more insights than a gazillion cute YouTube cryptocurrency tutorials, “documentaries,” or media stories that lack in everything but inadequate simplifications. One does not have to share the views that drive his perspective on the history of money, the value of Marxist thought (“I don’t consider anything that has ever come from any Marxist to be worthwhile of study”), Keynesianism and monetarism, and contemporary academics—whose original sin to him is that they have succumbed to government, their ultimate employer, and thus cannot talk about the problem that is government.

What he tells Executive about his views of the World Bank and International Monetary Fund (“Communist organizations”) is, at the very least, refreshingly different from the statements one hears at World Bank meetings. Ammous has unshakable views on the role of governments. After governments took control of money in 1914, “the world went to shit,” he declares, saying categorically, “Government creates a problem, then pretends to solve it and makes it worse.” This view is perfectly logical as a continuation of his saying earlier in the interview, “I refuse the idea that the state is the representation of anything good in society,” but instead the “highest expression of sociopathy, the narcissism in people, and the evil in people.”

As he speaks, the impression grows continuously stronger that the story of Bitcoin cannot entirely be appreciated without noting that libertarian thought and refusal to submit to state violence is woven perhaps not into the code, but into the DNA of Bitcoin. This is why Bitcoin appears to qualify as a worldview, perhaps more than anything else.

In practical terms, Ammous very reasonably says that he does not like to see Bitcoin discussed in terms of definitions that date back to days when Bitcoin did not exist, arguing convincingly that it does not make sense to discuss Bitcoin in such terms because it breaks old categories. He considers studying Bitcoin hugely important for Lebanon, and advises that Banque du Liban start thinking about adding Bitcoin to its portfolio of reserves. He agrees with Lebanon’s central bank governor, who warned institutions under its supervision against dealing in Bitcoin. “It’s perfectly reasonable to tell their own financial institutions not to deal with Bitcoin because those financial institutions are guaranteed by the central bank,” he explains. “The point is not to buy it right now. The point is to understand how it functions and try to understand how it can be integrated,” he opines, very conciliatorily.

The question of trust

It opens a whole new can of worms if one pivots to an approach of regarding cryptocurrency from the perspective of it representing a worldview. Not only are the consequences of adopting a worldview very tricky for individuals and societies, but worldviews have figured prominently in history—with very mixed outcomes.

Bitcoin is an ideological challenge to conventional forms of money in two ways: by provoking “sedimented beliefs about money and by exposing the forms of exploitation, risk, and even violence inherent in the existing system of state authorized credit money,” wrote Ole Bjerg of the Copenhagen Business School in 2015, in a contemplation of the philosophical ontology of Bitcoin. The question of interest, then, is: Can digital currencies remedy or ameliorate these aspects of existence, and what will be the trade-offs and societal or ontological costs that have to be considered? More simply, could the challenge of Bitcoin turn out to be that this payment system is shaking the foundations of our ruling monetary mythologies about the human being, society, and state?

In research done for the European Parliament, another academic cautioned in several papers that the most profound impact of cryptocurrency development could be in contributing “to subtle changes in broad social values and structures.” The sociologist Philip Boucher specifically addresses the blockchain concept that technically underlies the existence of cryptocurrency. All technologies come with their strings attached to values and politics, “usually representing the interests of their creators,” he elaborates, so that “each time we use a distributed ledger we participate in a shift of power from central authorities to non-hierarchical and peer-to-peer structures.”

According to him, usage of blockchain, in every case, will contribute to a societal shift toward prioritizing “transparency over anonymity” and “to diminishing trust in traditional financial and governance institutions, and to expect greater levels of accountability and responsibility in all aspects of our lives.”

If digital capitalism will be the coming incarnation of capitalism that is exponentially more dominant in human life than any previous version of capitalism, if we are about to leap from Kaletsky’s capitalism 4.1 to an exponential capitalism 42 in the real, financial, and digital economies, and if cryptocurrencies are to emerge as key enablers of this much more intense capitalism, what societal consequences and new sociological concepts should we prepare for?

How will we handle freedom that does not come at the price of eternal vigilance or with a counterweight of responsibly? What would be needed to be done to achieve realignment of historically entrenched social values when society and individuals undergo a shift toward greater freedom from the state, or even through dilution of interpersonal bonds and into a new trust relationship—camouflaged as verification—with a self-contained, presumably sovereign, technology? What are the ontological, existential, or, if you wish, spiritual implications of money that has aspects of digital gold in combination with aspects of statehood without a government and aspects of credit that is unencumbered by the currency of trust?

These might be naïve questions that will never become acute concerns in anyone’s life, but at the very least it is to be noted here that the real story of Bitcoin, cryptocurrencies, and ICOs is not about transforming electricity and processing power into truth, or about short-term investment prospects, enrichment opportunities, and present-day stability in cryptocurrency market cap, or the absence thereof. Nor is this about accidental losses of hard drives, criminal abuses, dope buyers, and computer hackers, or the possibility to order your pepperoni pizza with Bitcoin, or about early-stage design issues in smart contracts and Digital Autonomous Organizations, details of cryptography, or the deliberate mystification of Satoshi Nakamoto.

It seems the bottom line is that cryptocurrency tech will greatly change our lives, while at the same time more questions and uncertainties are bound to emerge with every further contemplation of the cryptocurrency realm, and the global digital economy. As societal paradigm shifts, affected in part by the digitization of our lives, appear to continue unabated and actually seem prone to further accelerate along with the proliferation of digital capitalism, it may indeed be unwise and counterproductive to keep questioning if Bitcoin is a bubble, how large the volatility in the cryptocurrency market will be next month or next year, or forever ponder academic constructs about the nature of money.

On the other hand, throwing all thought to the wind and just getting down to make some (digital or conventional) money will not bring nations or the global community any closer to drafting, as French President Emmanuel Macron asked for at the World Economic Forum on January 25, a new social contract or set of compacts based on the duty to protect, the duty to share, and the duty to invest, that help improve life in our world. Posing this monumental challenge, he also asked for this process to entail regulation of Bitcoin, cryptocurrencies, and shadow banking in the world of finance, as well as today’s corporate superpowers in the digital realm. Achieving a balance between economies speeding or leapfrogging into greater digital compatibility, managing the rise and use of digital currencies, and creating new ethics, values, and traditions for digitalized societies could well be the tallest order in at least a century, but, in 2018 more than ever, it appears to be a challenge that will not be denied.

February 15, 2018 0 comments

Business Q&A

CA Indosuez Wealth Management

by Yasser Akkaoui February 13, 2018

written by Yasser Akkaoui

Executive sat down with Jean François Deroche chief executive officer of Indosuez, the wealth management arm at Crédit Agricole’s S.A. (CASA), and François Farjallah global head of the Middle East and Africa for Indosuez. In a November 2017 interview, the pair discussed Indosuez and CASA’s governance, international investments, and presence in the Middle East.

E Can you please explain the structure and governance of Crédit Agricole and Indosuez Wealth Management?

JF: We have a very simple structure: There are 39 independent cooperative mutual banks, which together hold 55 percent the majority of Crédit Agricole S.A., and the other 45 percent is listed on the stock exchange.

Crédit Agricole S.A. controls all other corporate activities: investment banking, private banking, insurance, consumer credit, and all retail banking outside of France.

E What was the impact on CASA’s recent simplication of its governance? Who holds the most power on the board today?

JF: Ultimately, the power is always with the 39 regional banks, because together they control 55 percent. The main change does not come from this simplification; the main change comes from the political body of the 39 banks getting together to decide what they want to do. The major change was made to ensure that now people are sitting together. Before, they were separate—you had the 39 banks, in the federation they were appointing people in CASA. Now, the people in charge of CASA.’s and the CEO keep their seat in the political body, and the people in the political body are on the board of CASA, which means you have two organs, but in fact, they’re the same people, and they all meet together.

E So is this better oversight now?

JF: Exactly, because they are together.

E Indosuez had a very bad experience in Greece, which led to the loss of $14 billion dollars And had worse, or equally bad, experience with the subprime crisis, which inflicted another $14 billion in losses. Today, you’re looking to acquire Commerce Bank. What are the lessons learned from the Greece and subprime experiences, and how are you going to mitigate risks associated to acquiring Commerce Bank?

JF: So, in terms of experience, I think Crédit Agricole’s bad experiences, which translated into losses in the beginning of the financial crisis, were not specific to Crédit Agricole. Most of the large banks during the 1990s and the 2000s were in a big expansion mode. They wanted to do everything everywhere. So you buy, and you develop. So on those two aspects, yes, we have been hurt by the subprime crisis, like 90 percent of the very large international banks, and we have made badly timed acquisitions, because I think the acquisition was back in 2006 in Greece, just before the crisis and the explosion.

Unfortunately, some of the other banks had made bad acquisitions in other countries like Russia, some in the US, in Brazil, whatever. I think it was a mistake, but it was a very common mistake done by many banks. What all banks and Crédit Agricole has learned from this crisis is that they become much more prudent in their approach to have more reasonable ambition; to focus on their strengths.

Retail banking is the heart of Crédit Agricole, and the group really wants to develop in markets that are really close to its own culture and geographical reach, so going to Greece was a bit far away. When you acquire, you need to have people sent over there who know the market, who come from the bank. Italy works much better because it’s much closer. In reality, it’s a story that started 20 years ago during the 90s, with Crédit Agricole investing in banks in Italy at that time.

The other retail markets are also markets that have been present for many years. In Morocco, we control Crédit De Maroc, which is one of the big retail banks [there]. In fact, it has been under our control for 30 years, so it’s historic. Other retail markets are much smaller. Yes, we [are involved in the] retail market in Poland, for instance, but it’s a story that began 15 or 20 years ago, with the consultants of a finance company that really extended its product offers to clients, so the group is more productive today.

[On the subject of] Commerzebank, I think what our CEO said was that we can’t not look at Commerzebank; he didn’t say we want to buy Commerzebank. So we’ll see what happens, and just can repeat what our CEO said, of course he said at some point that if the German government decided to sell and was looking for some buyers, that the group would look at it.

E Critics of Crédit Agricole’s international expansion are worried that many of its executives come from a regional level, and that they got catapulted with little global experience. How do you address these critics?

JF: I think this has changed dramatically in the past few years. Yes, our CEO comes from the group, but since he has been appointed, he’s [been] traveling quite a lot. To know what the group is doing everywhere, he’s going twice a year to the American zone, he’s going twice a year to Asia, he’s doing many things. And if you look at the composition, the number two of the bank Mr. [Xavier] Musca does not come from the group; he used to be a civil servant—head of treasury—he was even general secretary of the presidential palace with very [extensive] international experience.

If you look at the level right below the executive committee of the listed vehicle, you have a number of people who don’t come from Crédit Agricoles. They might come from Indosuez, they might come from Crédit Lyonnais—and with much broader international expertise. The CFO of the group, Mr. [Jérôme] Grivet, was from Crédit Lyonnais, which has a large international network. Mr. [Yves] Perrier—the CEO for Amundi, the number-one asset manager in Europe, one of the top eight in the world—came from Credit Lyonnais, and before that Société Générale, with a big international connection. So I think progressively it has become more international; this is probably a critique which had a lot of ground four, five, or six years ago, [but] I think it has been changing. I’m not saying it’s perfect, but it’s changing. If you look at the board, the person in charge of the board’s nomination committee of is an Italian lady, not a French person. So I think the group has realized that and has taken steps to evolve and become more international.

E In France, you are at almost 7,000 branches, which is triple your closest competition: Société Général has around 2,000, and of the other competitors, nobody has more than 2,500. How is this an opportunity, and how is this a challenge, especially since you’re looking at developing your e-banking platforms?

JF: In retail banking, [our] largest competitors are not Société Général or BNP [Paribas]. The largest competitors are other cooperative banks—Bank Populaire or Crédit Mutuel—which have larger number of branches than [Société Générale], BNP, etc. Then you have the other competition, which are the digital banks and those types of affairs. This week, there was a competitor who announced the creation of a new bank and new offer: Orange, the telephone company, a new entrance. So this is the real competition. Existing people, existing banks, new entrance in banks, and new digital players.

The approach of the group is to explain that the reality of this business is still about the clients. So you have people who try to approach the client with a very targeted approach, but usually it’s only a very small segment of the banking relationship you have with the clients.

The new offer from Orange, for instance, just started. They offer something very simple: You go to them and you get the checking account, the saving account, and the credit card, and that’s it. The reality is when a bank is like Crédit Agricole, you can do more things, you insure your house and your cars, you buy investment products, it’s much broader. So the group’s strategy is to develop its digitalization offer, because there is a revolution of the whole industry, but the motto of the bank and is 100 percent digital and 100 percent personal. Because what we believe is that the global relationship with the client cannot be only digital—the client wants to also have physical and direct contact with a banker to discuss various issues.

Private banks in general are lagging in terms of digitalization, because the older clients are less interested in new communication means. Now they’re catching up. And last year, we made a study. We interviewed a number of clients, and we said, ‘Ok, we’re going to launch a mobile app.’ What’s important to you? Is it to look at your account? Is it making transactions off your telephone? Of the two strong things that came out, one is, of course, to have access quickly [to] a view of my portfolio. The second one [is] that they want a very easy and secure way to communicate with their banker. If I do it by phone, it’s a bit old, but if I do it by Skype or FaceTime, this is not as secure, and I don’t like to talk about my bank account. This was a bit surprising for us; it was not what we had thought in the beginning. So we’re launching in 2018 an app by Indosuez, and we realized that the client does not just want the digital experience, they want to have somebody to talk to.

E Is that something you can provide?

JF: Yes, of course we provide that sort of communication, and the retail banking. That’s why Crédit Agricole says that our branches are very important for us, because in the end, this is where people like to [bank]. They might look at the internet and other things, but at some point, they want to walk in and talk to the banker, so this is why the motto is really 100 percent digital and 100 percent personal. And we believe that this is really our differentiating factor compared to people who only have digital.

E Let’s come closer to our part of the world. What are the main changes in the profile or the needs of your clients in the last two or three years, especially in the Middle East, and especially in light of the decrease of the price of oil?

JF: It’s two things. One [challenge] which affected everybody was the fact that we were living for a long while in an environment with very low interest rates. For people who [were] looking for a very secure type of investment to protect their wealth [rather] than trying to be very aggressive with wealth creation, it was very difficult environment because if you were for example just playing in a very secure type of interest rates investment, the yield was very, very low. So that’s one challenge that’s true for every client, including [those in] the Middle East. For the Middle East, I think what’s happening is that with the decrease in the oil price in general in the region, it probably created more need for the client to support their own business. So [clients] have been a little bit more prudent in exporting funds outside because they needed to support their own business; the cash flow might have been not as big as it was in the previous years, which created [the need for the client to support their own business].

Now this trend is being contradicted by another trend, which is the need for wealthy people in the Middle East to diversify, because this is the need of every wealthy person. They like to diversify, not to keep everything in one place. If you take countries like Lebanon, clients are [often] entrepreneurs. They or their families have amassed major fortunes by doing business. Their wealth is really here in Lebanon or the region. If they want to have some secure part of their wealth to be independent from the economic or political situation here, they need to have offshore wealth placed somewhere, which is not correlated with what’s going on [in the region]. In the past two years, as I said, [wealthy people] had to adjust their business to the slowdown due to oil prices. Now, it seems that people have adjusted to the lower price of oil, and can resume as before.

E Saudi Arabia, of course, beyond the decrease of oil prices, is also facing a lot of fiscal and other policy changes, which creates uncertainty for businesses that feel they are going to be targeted. We see a lot of family offices trying to relocate outside of Saudi Arabia, or even businesses trying to get their business or money out, and sometimes even families moving to Geneva or London in a time of uncertainty. Do you consider these as clients? Have you witnessed this type of clientele coming to the bank?

JF: It’s difficult to comment because movement offshore is always in and out, as I explained, all clients are entrepreneurs, so they do movement in both sides. I don’t feel a particular trend, [or anything] very extraordinary happening. You mentioned a big transformation that has started in Saudi Arabia—as you know, we have been present there for many, many years. We have been doing private banking since 1931, and so it’s a very important region for us. Of course we are following this transformation, [and] what seems obvious is that these changes are trying to strengthen the kingdom to make it move into the 21st century. But we didn’t see a particular trend from [our] clients.

E Economic fundamentals in Europe have been changing. For example, Spain, which was witnessing negative 2 percent growth in GDP, is now up to 2.5 to 3 percent, and it looks like it will stay like that for the coming two to three years. Britain increased its interest rate from 0.25 to 0.5 percent, most likely triggering a trend that we will see across Europe. How does this change the offers that you are making to your clients, and what do you expect for the European economy?

JF: I think the European economy is getting better. It went through a very big crisis for almost 10 years. It is promisingly recovering. While the cycles in Europe are not as mild as can be in North America or the Middle East and Asia, usually the move is milder. And its seems [that] right now, we’re entering a period where most of the European countries have a better prospect for the next couple of years—[but] that doesn’t mean that the European growth will become 5 percent. That’s not the type of growth we [will] enjoy, but at least it will be positive, [and] it will be above 1 percent, and, of course, it will create a much better environment.

For us, it doesn’t really change the type of offer that we do. The financial markets in Europe have been performing well anyway. So in terms of a particular investment proposals, etc., it does not make any big change.

E Lebanon is composed of family-owned enterprises. We don’t have huge corporations or corporate treasury account, so estate planning happens on paper here. We have our real estate—which is probably apartments, or land we have inherited or bought—and we have a bit of cash that we have put aside, and we get 6, sometimes 7 percent interest rates from Lebanese banks. Where does your offer, or Crédit Agricole Indosuez, come in to complement this estate planning? What is the pitch of Crédit Agricole Indosuez to the Lebanese client?

JF: You’re right, the main issue for clients with family enterprises is that their wealth creation is coming from their business, and from the investment side, they want to have wealth preservation. When you want preservation, the first thing that you want is safety. Crédit Agricole is one of the biggest and most solid banks in the world. It’s number five in terms of capital, and it’s really one of the top 15 in terms of fiscals very stable. This safety aspect is very important.

If they want to diversify their assets—we’re not trying to make them an offer in Lebanon because there are Lebanese banks—so if you want to diversify, you have to go abroad. If you want to go abroad, we have two [advantages]. First of all, we have [many offerings] in terms of locations, because we are present in Asia, in Europe, and in the American regions, so wherever you choose to diversify you can have a proposal from us. And you are going to get the same type of proposal whatever the product or investment you want to do. You will be able to locate it and book it in Miami, France, Switzerland, Luxembourg, Hong Kong, Singapore—wherever you like it. And the [range] of offers that we have is very large.

So if you look at all these elements, we don’t say that we’re the only bank that you can consider, but certainly amongst the four, five, or six banks that you will have to consider. On the other hand, the knowledge and the understanding of the region that we have is very strong and probably unique, because of the history of Indosuez. There has been presence in the Middle East since the 19th century. Our experience is long, and we’re very stable here. So if you combine everything we believe, then we’re really a good choice for these clients.

FF: And, if I may add, what differentiates our offering is our capability for tailoring things for each individual client. Real estate is one of the very important assets for the Lebanese in particular, so for real estate in Switzerland, France, and in the UK, we’re capable of accommodating these needs for the client. We really look at the needs of the client, we study what is still missing, because the needs that were 10 years ago are not today’s needs.

February 13, 2018 0 comments