Cover storyCryptocurrencyQ&A

Seeking crypto transparency

by Thomas Schellen
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.

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CommentCover storyCryptocurrency

The bitcoin revolution

by Stephane Abichaker
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.”

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Cover storyCryptocurrencyExplainer

Disruptive technology

by Thomas Schellen
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.”

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Cover storyCryptocurrencyOverview

The crypto challenge

by Thomas Schellen
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.

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BusinessQ&A

CA Indosuez Wealth Management

by Yasser Akkaoui
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.

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Oil & GasSpecial Report

Q&A with LPA

by Jeremy Arbid
written by Jeremy Arbid

Lebanon is approaching a milestone nearly eight years in the making. In December, cabinet awarded two separate exploration licenses to a consortium of three companies: France’s Total (the operator), Italy’s Eni, and Russia’s Novatek. Contracts were signed at the end of January, leaving the consortium and the government about one year for preparatory work ahead of the first exploratory drilling in 2019. Executive met with Walid Nasr, president of the board of the Lebanese Petroleum Administration (LPA), the sector’s regulator, to find out what comes next.

E   At the end of January, the government signed exploration and production agreement (EPA) contracts. What happened between awarding the licenses and signing the contracts?

Finally, we have reached a point to start operations. After the approval of the cabinet to award the two blocks to the consortium, the companies are requested to provide the work commitment guarantee and parent company guarantee. These are two very important documents required to have [the] full commitment of the companies to actually implement their programs through the work commitment guarantees. And the parent company guarantee is very important because if anything goes wrong, the mother companies, who are fully in line with the prequalification requirements in terms of their financial capacities, would actually cover any losses or damages or anything coming up from operations. This is a safeguard to the government that we have such guarantees. The guarantees are uncapped.

E   Can you outline the aspects of the work commitment guarantee?

The consortium has proposed a technical offer with an exploration program with minimum work commitments, and the LPA has put in the tender protocol. It is published and known that there is a minimum commitment of one well for every exploration period. We have two exploration periods, [the] first one for three years and the second one for two years. So companies were required to drill at least one well in every period, and this is what the companies have actually submitted.

The companies need to estimate a budget to be able to implement their exploration program, and that budget will be covered by a work commitment guarantee issued by their bank. So in case, for any reason, the companies do not fulfill their work commitment as agreed upon in the offer, and then in the exploration plan that will be submitted soon, the government will have access to the money and the work commitment guarantee for the government either to implement it itself, or to bring another company to implement it. This would safeguard the targets set by the government to actually drill. So if the consortium fails to drill, the government has access to funds that would enable the government to do the work.

E   Have the guarantees been finalized and submitted?

The guarantees will be provided very soon. After that, it’s administrative work, but also a lot of technical work and preparing logistics, because the companies will have to prepare themselves to be able to drill in 2019. We have a firm commitment from the consortium to drill one well in Block 4 and one well in Block 9 in 2019, meaning a lot of additional assessment, studies on the geology, on the technical side, on where and how to drill. Then, logistically, because based on the regulations the companies need to operate from Lebanon, they will need to open offices in Beirut or [elsewhere] in Lebanon … [and] prepare all the logistics needed, including a supply base in. So 2018 will be a very busy year for the government and the consortium to make sure that all the preparations are done in terms of permitting administrative work, technical work, logistics, and all types of studies to be able to reach our goal of drilling two wells in 2019.

E   Did the companies offer to conduct more seismic surveys in their bids—would they need more data to narrow down exactly where they will drill?

In the offers themselves, the companies didn’t provide additional seismic surveys, and this [is] a very good indication that the seismic surveys conducted by the servicing companies [contracted in the past] by the Ministry of Energy and the LPA, were satisfactory for the companies. The companies were required to buy licenses to use the data of the seismic [surveys], and they have done so. They prepared the offers based on the interpretation of the seismic surveys that they have done before, and they were very satisfied with the quality of the survey and their coverage.

All our blocks are covered with 2D and 3D data. Accordingly, they have done their assessment and the prospect of our offshore [fields]. That is why they applied and provided an offer for that. And they even provided details on how they want to drill and where. The companies did not commit to seismic surveys because they assessed they don’t need them. Now they still have the option to do seismic surveys if they think they’re needed to have a better exploration program. When they submit the exploration plan in the coming 60 days, then they will identify what type of studies they are doing and whether they need to do seismic surveys or not.

E   In December, Executive incorrectly reported that the strategic environmental assessment (SEA) was to be completely redone, and also incorrectly reported how it was to be contracted and carried out. Can you explain what is happening with the SEA in terms of an update and its expected completion?

The SEA was completed in 2012, before an SEA decree was [completed] by the Ministry of Environment, standardizing how an SEA should be done. The SEA has identified different scenarios [for] what may happen during the development of the petroleum sector in Lebanon, and it had a set of recommendations [for] what needs to be done next after preparing the SEA. The LPA had taken the recommendations of that study and has done a lot of work to actually implement these recommendations, for example, preparing a national oil spill contingency plan. Now, in 2017 and 2018, we thought it was time to update the SEA with anything new since 2012—most importantly, to include any additional environmental data available in our analysis. This will be done soon. It will also include environmental management plans for the sector.

E   A draft law for a sovereign wealth fund (SWF) has been submitted to a parliament subcommittee for debate. What role does the LPA have in contributing to this draft law?

The concept of the SWF is laid down in the Petroleum Resources Law 132, which says that all revenues coming from petroleum activities need to be put in the SWF. Now, the LPA is not an institution mandated to establish the SWF, nor to manage [it]. Our role is to basically give guidance to other institutions in the government related to the technical part of the input needed for the petroleum sector. So what we’ll be doing is that we’ve been coordinating with the Ministry of Finance and now, as you mentioned, this will be discussed in the Parliament and specialized committees. So the LPA will take part in those discussions in those parliamentary committees to provide any technical advice or input needed for the parliamentarians to discuss the SWF.

E   Are there specific revenues that have already incurred?

The revenues incurred so far are the revenues from sales of the licensing of the seismic data. And this is now put in a separate account in the central bank, [and] again this is a decision of the Parliament of how to use this fund, and whether this can be seed money for the [SFW].

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Oil & GasSpecial Report

One eye open

by Diana Kaissy
written by Diana Kaissy

In the midst of Lebanon’s first offshore oil and gas licensing round, the Lebanese Oil and Gas Initiative (LOGI), an independent NGO aiming to develop a network of Lebanese oil and gas experts, commissioned a study about the 52 companies that had prequalified to bid. This research allowed LOGI to evaluate the companies based on six criteria covering two main areas: corruption track records and anti-corruption policies, and environmental track records—critertia not assessed by the government.

The licensing round ended in October, and a consortium made up of three companies—France’s Total (the operator), Italy’s Eni, and Russia’s Novatek—was the only bidder, submitting two separate offers (Block 4 and Block 9). The Council of Ministers awarded the bids in December and tasked the energy minister with signing contracts by the end of January. In this one-bidder scenario, it is crucial to revisit the findings of our report, with regard to these three companies. We found that none have a completely clean record.

The report found that while Total discloses its beneficial owners—the entities or individuals that ultimately own the company—there are still transparency issues that the company must address. Our research found that Total was involved in a number of bribery incidents, such as one in Iran in 2013 where the company admitted guilt in return for a deferred prosecution agreement with the US Department of Justice for paying third-party bribes for work. Total is also listed in the TRACE corruption database as engaged in anti-bribery lawsuits. On the environment, Total were fined after failings led to a gas leak in one of its plugged wells in the North Sea.

Eni, for its part, has a publicly available anti-corruption policy, yet in 2010, the US Securities and Exchange Commission brought corruption charges against the company related to a bribery scheme in Nigeria involving construction contracts. It also has  other ongoing corruption lawsuits according to TRACE.

Novatek, a Russian firm, does not disclose its beneficial owners. But a review of available literature revealed that one is Gennady Timchenko, a Russian billionaire and member of Putin’s inner circle. For a country such as Lebanon, where foreign political players have substantial influence on all internal political dynamics, it is critical to know whether politically exposed people are associated with international oil companies working in Lebanon.

Based on these findings, LOGI proposes that Lebanese regulatory authorities publish the signed EPA contracts, establish a monitoring mechanism for negotiations between the government and the companies that includes a civil-society watchdog, and publish the outcomes of the negotiations to select a final winner.

In addition, LOGI strongly recommends that the Extractive Industry Transparency Initiative, a tool to facilitate the disclosure of information, be implemented as soon as possible, and that the draft law presented by MP Joseph Maalouf entitled “Strengthening Transparency in the Oil and Gas Sector in Lebanon” be passed. The main aim of the due diligence report was to push the Lebanese government to adopt criteria that LOGI included in its evaluation of companies applying to prequalify for bidding in subsequent licensing rounds, both offshore and onshore.

LOGI also recommends that Novatek’s beneficial owners—both actual and economic beneficiaries—is published by the government.

Further, LOGI recommends that the current Strategic Environmental Assessment, a policy prepared in 2012, be updated as soon as possible so that newly available data can be used as a baseline for future Environmental Impact Assessments. These assessments should be mandatory during the exploration phase because critical environmental planning, as well as health and safety measures, need to be put in place prior to the start of any exploration activity.

The oil and gas industry worldwide has been, and will continue to be, among the top industries associated with corruption, conflicts, and increases in poverty and unemployment rates. Managing these resources, from awarding rights to sustainable use of revenues, in a transparent and accountable manner will render prosperity to its owners, the Lebanese people. For Lebanon to ensure good governance at the early stages of awarding licenses it must adopt stricter criteria for the prequalification of companies, and better hold contractees to account.

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Oil & GasSpecial Report

Environmental impact

by Jeremy Arbid
written by Jeremy Arbid

Five years ago, Lebanon was ready to invite companies to explore for oil and gas offshore. A law organizing offshore exploration had been passed, an environmental study—known as a Strategic Environmental Assessment (SEA)—to study and mitigate the effects of exploration on the environment had been prepared, a regulator had been appointed, and the bid round announced. Then politics got in the way. The government could not agree on issuing needed decrees to move forward, and the licensing round was, effectively, put on ice.

Around this time last January, the bidding round was awoken from its cryogenic slumber. The needed decrees were issued and a roadmap to accepting bids laid out. By December 2017, the government awarded two separate exploration licenses, for Block 4 and Block 9, to a consortium of companies made up of France’s Total, Italy’s Eni, and Russia’s Novatek. At the end of January, contracts were signed.

Environmental concerns set oil and gas back

But during the licensing round’s four-year hibernation, the factors affecting oil and gas exploration changed. New exploratory data became available, and the Ministry of Environment issued new rules requiring and standardizing SEAs.

In May 2017, an analysis of the SEA found that it contained too many problems to be an effective planning tool. The report, published by the Lebanese Oil and Gas Initiative (LOGI), urged the government to overhaul the SEA, and to do so in parallel with the licensing round. Its author, environmental consultant Klemen Strmšnik, summarized the report’s findings in a January email to Executive: “The SEA was not fully implemented and was based on a lack of data. Stakeholder involvement was limited, and the SEA report was not presented to the public through public consultations. Additionally, national legislation on SEAs was substantially changed, and the current SEA report simply does not satisfy the standards set by new environmental legislation. [Therefore], it does not provide all needed answers and cannot represent a sound decision-making tool.” (Full disclosure: The author of this article is a co-founder of LOGI and sits on its board of directors.)

Given Lebanon’s track record on other national environmental problems, such as waste management, water pollution, and the destruction of wildlife habitats, it is easy to doubt the state’s capabilities to regulate and enforce environmental measures on large multinational oil and gas companies. And it is worth remembering that inadequate regulation can have huge financial costs for petroleum companies, and catastrophic consequences for ecosystems. BP, which was responsible for the Deepwater Horizon spill in the Gulf of Mexico in 2010, has had to pay a total of $67 billion for the spill, the Financial Times reported in January. According to the National Ocean Service, a US government agency, the Deepwater Horizon disaster killed 11 workers and spilled 134 million barrels of oil into the Gulf over nearly three months, killing thousands of marine mammals and sea turtles. LOGI’s SEA critique painted a portrait of a regulator unconcerned with environmental protection, and its recommendation was clear: Plug the data gaps, address new environmental rules, implement recommendations found in the original SEA, and do more to get the public’s feedback.

Assem Abou Ibrahim, head of the Lebanese Petroleum Administration (LPA)’s Quality, Health, Safety, and Environment Department, told Executive that some recommendations have already been addressed: In 2013, the government issued decrees as part of the Petroleum Activities Regulations, defining the SEA’s scope in line with the new environmental rules, and, in 2016, the LPA published a National Oil Spill Contingency Plan—a guideline to prevent and respond to oil spills.

In December, Executive incorrectly reported that the government would be commissioning a new SEA from scratch and that such a contract would be directly awarded. This is not the case. Some sections of the SEA will be updated and the work carried out by the LPA with support from the European Union. “Based on our assessment of all these developments and their expected implications on the SEA study, the Ministry of Environment agreed with the LPA’s evaluation for not modifying the scope of the existing SEA but rather to implement some updates to sections affected with the current information availability and to integrate the various management and planning initiatives into a comprehensive plan,” says Abou Ibrahim, “The SEA will as well be an opportunity to further engage with affected stakeholders. We are currently assessing the possibility for initiating the SEA update work through a technical assistance project implemented at the LPA and funded by the EU.” He added that the SEA update should take around four months to finish, with an expected completion date toward the end of Q2 2018, ahead of exploratory drilling beginning in 2019.

Jeremy Arbid is the co-founder of the Lebanese Oil and Gas Initiative (LOGI) and a member of its board of directors , in addition to Economics and Policy Editor at Executive Magazine.

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Heritage buildingsReal estate

A lifeline for heritage out of thin air?

by Scott Preston
written by Scott Preston

Each year, a new series of coffee-table books feeds Lebanon’s nostalgia with vintage photographs and cityscapes that celebrate the country’s rich architectural past. Today, the old Lebanon survives through a dwindling number of heritage buildings, now barely unrecognizable compared to the images of the city when in bygone decades. Having survived the war, the remaining structures have been left to decay, collapse, and make way for larger, modern developments amid a growing scarcity of buildable land.

Lately, a long-awaited draft law to protect heritage buildings—which had lain untouched for over a year on the government’s doorstep—is beginning to gain traction. If enacted, the new law would incentivize owners of heritage building to maintain their properties. The law targets older buildings that are indexed on the Ministry of Culture’s heritage list. In principle, this list safeguards structures with heritage value by restricting the disbursement of demolition permits, thereby prohibiting their destruction. What it does not address, and what the new law hopes to assist with, is maintaining and restoring these buildings.

Since the creation of the heritage list in 1996, its limitations have drawn the ire of a number of interest groups, none more outspoken than the owners of the historic buildings themselves. Proprietors complain that the ministry has denied them the full value of their land, as market prices are dependent on potential constructability. Built-up properties are of little interest to developers without the ability to raze them and lay new, more lucrative foundations.

But the difference between a property’s actual value and its potential value, known as the rent gap, has surged in the decades since the end of the civil war. Eager to liquidate their estates for large profits, heritage building owners have found a workaround: While the demolition of the buildings is prohibited, leaving them to collapse of natural causes is not.

“The fact was that these buildings were being destroyed, either with or without permission,” says Minister of Culture Ghattas Khoury. “Because if you have an old house on a piece of land in Beirut, and you want to build a tower, then you neglect that house, and through neglect it will fall down. This was what was being done all year, either by illegal attempts of bringing it down [or by neglect], so we made a law that will encourage the owners of these houses to preserve them.”

Something in the air

The new law would incentivize the owners of heritage buildings to save their aging properties by allowing them to sell their lot’s unconstructed space as if it were buildable area. The amount of space that can be sold, along with its market price, is primarily set by the potential constructibility of the property, which is determined in part by the zoning density of the location. This potential building size is expressed by what is known as the exploitation factor.

For example, a 1,000-square-meter plot with an exploitation factor of three would allow for the construction of a 3,000-square-meter structure. If a heritage building on the property takes up an area of 800 square meters, then the property owner would be left with 2,200 square meters of saleable area. This area, known as the property’s air rights, would be apportioned to the owner by the Ministry of Culture in the form of certificates that represent the dimensions of the unconstructed space.

These air rights could then be shifted from the initial heritage property to another location through a process known as the transfer of development rights (TDR). Developers can buy certificates from owners of heritage properties, allowing the companies to exceed the previous exploitation factor for their project by the amount of the air rights they purchased—up to 20 percent extra. At the same time, zoning regulations and development controls, such as building height limits, will remain in effect. Under the law, transfers can only be made from small heritage sites to large, empty parcels in mainly non-heritage zones.

Although the certificates are denominated in square meters, the value of the area being traded will vary from place to place. “One hundred meters in Basta are not equal to a 100 meter air right on the seafront,” explains Khoury. “Because the seafront is very expensive. So if you want to transfer 100 meters from Basta to the seafront you have to take into consideration that these 100 meters might become 25 meters.” Khoury adds that the value calculation would be appraised by a committee involving the culture, interior, public works, and finance ministries. 

When it comes to the sale of the air rights, that would be subject to the dynamics of supply and demand. Abdul-Halim Jabr, an architect and urban-design consultant who helped draft the law, says, “If I have a property, [and] I aspire to sell it at $5 million, I have a better chance of selling it in a good market—if there is a booming economy and people are building. If the entire market is in a glut, I have fewer chances of selling the property. The same applies for air rights.”

Through the transfer of development rights, heritage building owners could profit from the permanent sale of their air rights, while keeping their old homes. Furthermore, a portion of the revenues generated in the transfer would have to be invested into the maintenance and refurbishment of the heritage structure. The exact dollar figure would also likely be specified by the Ministry of Culture and would be evaluated on a case-by-case basis, depending on the repairs that are required. “If it’s just minimal, it can range between $200 per meter or $1,000 per meter. If it’s completely destroyed and you’re rebuilding it again, it’s $1,000 per meter. If it’s just, you know, façade and internal partition, it’s about $400 to $500 per meter,” says Khoury.

According to Jabr, homeowners whose buildings are not already on the heritage list will have an added incentive to register their buildings for heritage status protections. Those that voluntarily list their buildings as heritage sites, should they qualify, will be authorized to sell all of the air rights that their property is eligible for, whereas property owners whose homes are already on the list will only benefit from a maximum of 75 percent of the air rights they have available.

The 100-percent entitlement may be complicated by the addition of a fund that the Ministry of Culture has attached to the bill following its initial submission. Maintaining the fund would require that 5 percent of air-right certificates be collected from each transaction and sold at the ministry’s discretion, Khoury said. The funds would be used to revitalize heritage buildings in rural areas, where air rights may be insufficient to finance the maintenance costs due to the low-density zoning outside of the city.

Mixed reviews

Over the past 20 years, several attempts have been made to legalize TDR frameworks. Jabr said the idea was first introduced in Lebanon in 1997, when he and other part-time academics were called upon to review the Ministry of Culture’s first heritage list. He notes that the first attempt to pass a TDR law was undertaken in 2000 by then-Minister of Culture Ghassan Salame. That effort, failed along with another initiative from Minister of Culture Tarek Mitri in 2008. The latest version was submitted in July 2016, and initially looked as though it would share the fate of its predecessors. Then, in October 2017, news broke that the cabinet had suddenly negotiated approval of the law.

Now that the draft has made it past the Council of Ministers, lawmakers say that they will try to fast-track the legislation. Member of Parliament Mohammad Kabbani, head of a joint committee on public works, transport, energy, and water, said he will attempt to pass the law before elections take place in May. Khoury raised the possibility that Speaker of Parliament Nabih Berri might take the draft directly to a vote in the general assembly.

Despite this sudden sense of urgency, the TDR law may still face a number of legislative hurdles, from homeowners to politicians. In an interview with Executive, Kabbani called on the government to compensate heritage homeowners with bankers’ checks as opposed to air rights certificates. He also suggested that the government should arrange for real estate companies to purchase the air rights directly from the owner.

Many heritage activists also cautiously support the law, but have their own concerns.

For years, civil-society organizations have lobbied to reduce zoning densities and rein in building sizes to human scale, a goal that they believe could become politically impossible if property owners feel entitled to air rights. Mona Fawaz, professor of urban planning at the American University of Beirut, notes that owning land does not automatically confer the right to develop it and that the government has the legal authority to reduce exploitation factors without compensation.

Fawaz clarifies that she is not opposed to the entirety of the draft, but  says that “[TDR] tends to be the main point of contention for everybody, because this is where, the advocates of this law say it wouldn’t have passed if it wasn’t for this, and those who are saying this is risky businesses are saying what you’ve just passed is likely to create a precedent, which is 10 times worse than not protecting heritage.”

“I agree,” says Jabr, citing these critiques, “but I tell them, look, I’ve been struggling for 20 years. I’m limited. This is the most I, or we, came up with. If you can come up with anything better that can bridge the divide, I’ll be your first supporter. But nobody has gone through the trouble of balancing the act and trying to make sense of black and white [and turn it] into some kind of middle grey the way we did.”

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Economics & PolicyFiscal policy

Where is the money going?

by Jeremy Arbid
written by Jeremy Arbid

In November 2017, Parliament ratified a state budget for the first time in over a decade. For  fiscal year 2017, the state’s total spending allocation was almost $16 billion (LL23.9 trillion).

This represents a nearly 140 percent increase in public spending compared to 2005, the last year for which a budget was passed, when spending allocations totalled $6.6 billion (LL10 trillion).

In 2017, almost half of public spending—$7.6 billion (LL11.5 trillion)—went to common expenses, such as paying for interest on public debt, salaries and pension payments, and to subsidize the failing electricity utility Electricité du Liban.

The Ministry of National Defense, which is responsible for the finances of the Lebanese Armed Forces, was the highest-spending ministry in 2017 at $1.9 billion (nearly LL3 trillion), followed by the education ministry, which oversees the finances of the public school system and Lebanon’s public universities, at $1.1 billion (LL1.7 trillion). The next-largest allocation went to the Presidency of the Council of Ministers, which oversees public institutions like the Council for Development and Reconstruction, at $1.02 billion (LL1.5 trillion). Rounding out cabinet’s billionaire club was the interior ministry, responsible for domestic security forces, at just over $1 billion (LL1.5 trillion) in allocated spending. Health was the next-largest spending priority, with the Ministry of Public Health allocated $470 million (LL709 billion).

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

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