Finance

Amazon was expected to prevent Brits from using a Visa-issued credit card on its platform from Jan. 19.
In a statement Monday, the firm said the change “will no longer take place.”
The move was interpreted by experts as a way for Amazon to get some bargaining power over Visa to lower its fees.

An Amazon warehouse in Warrington, England.
Nathan Stirk | Getty Images

LONDON — Amazon has scrapped plans to stop accepting Visa credit cards in the U.K.
The e-commerce giant was expected to prevent Brits from using a Visa-issued credit card on its platform from Jan. 19. But in a statement Monday, the firm said the change “will no longer take place.”

“We are working closely with Visa on a potential solution that will enable customers to continue using their Visa credit cards on Amazon.co.uk,” an Amazon spokesperson told CNBC by email.
Amazon initially made the shock announcement in November, citing “high fees Visa charges for processing credit card transactions.” Visa at the time said it was “very disappointed” in the move and would work toward a resolution with Amazon.
The two companies have locked horns in the past, with Amazon announcing plans to introduce a 0.5% surcharge on Visa credit cards in Australia and Singapore last year.
It’s not yet clear why Amazon made the U-turn on its plan to ditch Visa credit cards in the U.K., nor whether the decision is final or temporary.
“Amazon customers can continue to use Visa cards on Amazon.co.uk after January 19 while we work closely together to reach an agreement,” a Visa spokesperson told CNBC by email.

Following Brexit, Visa and rival payment processor Mastercard have hiked interchange fees, the cut they take on digital transactions between the U.K. and European Union. Card networks were allowed to raise their charges after an EU cap on interchange fees ceased to apply in Britain.
However, Amazon and Visa say the dispute is not related to the U.K.’s withdrawal from the EU. Instead, the move was interpreted by experts as a way for Amazon to get some bargaining power over Visa to lower its fees.
David Ritter, a financial services strategist at IT firm CI&T, said the about-face from Amazon “comes as no surprise.” He argues the move would have proven difficult given that customers’ Visa credit cards may be tied to digital wallets like Apple Pay, Google Pay and PayPal, as well as Amazon’s own Prime subscription service.
“Amazon is a retail giant so it has some leverage, but there’s no way it won’t accept Visa cards,” said Ritter. “It’s more likely that Amazon has been applying pressure tactics. Major players in the retail space tend to have bespoke rates with payment firms, rather than paying published rates. The move by Amazon is likely a way to negotiate a longer-term agreement on rates, or even to push for a freeze to its current rates.”
Amazon is not the only company complaining of the high costs associated with major card networks — another notable example was grocery chain Kroger’s, which temporarily banned Visa credit cards at a number of its stores.
Meanwhile, Visa and Mastercard are facing growing pressure from financial technology upstarts like Klarna and Afterpay, which offer “buy now, pay later” services that let shoppers split the cost of their purchases over a period of monthly installments.
“This latest twist in the saga certainly shows the power of the Amazon brand,” said Roger De’Ath, head of U.K. at fintech start-up TrueLayer. “Irrespective of the final decision or the solution offered, its initial announcement has now pushed the debate around card fees for merchants into the mainstream.”

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China’s central bank unexpectedly cut loan rates on Monday — a move that will likely put more downward pressure on the Chinese currency, one analyst said.
“What has happened this morning won’t help the [Chinese yuan’s] case. And should contribute to further downward pressure on CNY,” Gareth Berry, Macquarie Group’s foreign exchange strategist, told CNBC on Monday, adding that it could push up the range toward 6.55 yuan per dollar.

Banknotes of Renminbi arranged for photography on July 3 2018 in Hong Kong.
S3studio | Getty Images News | Getty Images

China’s central bank unexpectedly cut loan rates on Monday — a move that will likely put more downward pressure on the Chinese currency, one analyst said.
“What has happened this morning won’t help the [Chinese yuan’s] case. And should contribute to further downward pressure on CNY,” Gareth Berry, Macquarie Group’s foreign exchange strategist, told CNBC on Monday, adding that it could push up the range toward 6.55 yuan per dollar.

The Chinese yuan is currently trading at about 6.34 to the dollar on Monday.
In an attempt to boost the economy, the Chinese central bank said it will cut the interest rate on 700 billion yuan ($110 billion) worth of one-year medium-term lending facility (MLF) loans to 2.85% — 10 basis points lower, according to Reuters.
This was the first time People’s Bank of China cut the MLF rate since April 2020.
While the rate cut was in line with market expectation, it also shows Chinese policymakers are concerned about economic growth, said Zhiwei Zhang, chief economist at Pinpoint Asset Management, in a note.
“Economic growth is clearly under pressure, recent omicron outbreaks in China exacerbated the downside risk. The lower inflation opened policy room. We think China is at the early stage of a rate cut cycle,” he said.

The central bank also cut the seven-day reverse repurchase rate, another lending measure. The PBOC also injected another 200 billion yuan of medium-term cash into the financial system.
Zhang predicted there will be more cuts in the reserve requirement ratio and interest rate in the first half of the year. The reserve requirement is the amount of money banks must hold as reserves with the central bank.
“The omicron outbreak has become the top risk in China,” he said.
“We think risk to Q1 GDP growth has shifted to the downside. The rate cut itself is a small step in the right direction,” he added, referring to Monday’s policy loan rate cut — “but the economic outlook largely depends on how effectively the outbreaks can be contained.”
On Monday, China reported that its economy grew by 8.1% year-on-year in 2021, according to official data from the National Bureau of Statistics. GDP in the fourth quarter rose 4% from a year ago, faster than analysts expected.

… policymakers now are much more concerned about growth and we should see concerted action going forward.

Johanna Chua
Citi Global Markets Asia

China’s zero-Covid policy, aimed at limiting the virus outbreak, prompted renewed travel restrictions within the country including the lockdown of Xi’an city in late December. 
The larger than expected 10 basis points MLF rate cut rate seems to suggest China is concerned about its economic slowdown, Johanna Chua, head of Asia economics and strategy at Citi Global Markets Asia, told CNBC’s “Street Signs Asia” on Monday.
“Which really suggests, I think, policymakers now are much more concerned about growth and we should see concerted action going forward.”
She said the country is not likely to abandon its zero-Covid policy anytime soon.
— CNBC’s Evelyn Cheng contributed to the story

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Fourth-quarter GDP rose by 4% from a year earlier, according to China’s National Bureau of Statistics. Analysts polled by Reuters had expected China to report fourth-quarter GDP growth of 3.6%.
However, retail sales missed expectations, growing by 1.7% in December from a year ago. Analysts polled by Reuters had predicted a 3.7% increase.
For the full year, China economists had expected an average of 8.4% growth in 2021, according to financial data provider Wind Information.

Volunteers wearing personal protective equipment (PPE) arrange food deliveries on Nov. 26, 2021, for a Shanghai residential area that’s under restrictions to halt the spread of Covid-19.
Yin Liqin | China News Service | Getty Images

BEIJING — China’s economy grew by 8.1% in 2021 as industrial production rose steadily through the end of the year and offset a drop off in retail sales, according to official data from China’s National Bureau of Statistics released Monday.
Fourth-quarter GDP rose by 4% from a year ago, according to the statistics bureau. That’s faster than the 3.6% increase forecast by a Reuters poll. For the full year, China economists expected an average of 8.4% growth in 2021, according to financial data provider Wind Information.

Industrial production rose by 4.3% in December from a year ago, the bureau said, also beating Reuters’ forecast of 3.6% growth. Notably, auto production grew for the first time since April, up by 3.4% year-on-year in December.
Fixed asset investment for 2021 grew by 4.9%, topping expectations for 4.8% growth. Investment in real estate rose by 4.4%, while that in infrastructure rose by 0.4%.
Investment in manufacturing grew by 13.5% in 2021 from a year ago, with that in special purpose machinery rising the most, up by 24.3% year-on-year, according to data accessed through Wind.
However, retail sales missed expectations and grew by 1.7% in December from a year ago. Analysts polled by Reuters had predicted a 3.7% increase.
“We must be aware that the external environment is more complicated and uncertain, and the domestic economy is under the triple pressure of demand contraction, supply shock and weakening expectations,” the bureau said in a statement.

The urban unemployment rate in December matched the average for the year of 5.1%. The unemployment rate for those aged 16 to 24 remained far higher at 14.3%.
“The better-than-expected GDP data doesn’t change the big picture: China’s economy is under multiple headwinds for now and a policy easing cycle is underway,” Larry Hu, chief China economist at Macquarie, said in a note.
Hu pointed to how the People’s Bank of China on Monday cut the borrowing cost of medium-term loans for the first time since April 2020. He expects the central bank to lower the benchmark loan prime rate on Jan. 20.

China’s zero-Covid policy hits spending

China’s zero-Covid policy aimed at controlling the pandemic prompted renewed travel restrictions within the country — including the lockdown of Xi’an city in central China in late December.
In January, other cities were also locked down in full or partially, to control pockets of outbreaks tied to the highly transmissible omicron variant. Analysts have started to question whether the benefits of China’s zero-Covid strategy outweigh the costs, given how contagious and potentially less fatal the omicron variant is.
Goldman Sachs cut its forecast for China’s 2022 GDP growth based on expectations the zero-Covid policy will cause increased restrictions on business activity. However, the analysts said the greatest impact would be on consumer spending.
Retail sales dropped 3.9% in 2020 even though China’s overall economy grew amid the pandemic. Consumer spending has since remained sluggish, partly as travel restrictions have kept a damper on tourism.
In 2021, overall retail sales grew by 12.5% from the prior year’s contraction, and also topped 2019 levels.
However, only urban areas saw an increase in retail sales last year versus 2019 levels. Consumer spending in rural areas last year remained 1.8% below 2019 levels, according to CNBC analysis of Wind data.

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Business employees’ incomes generally went up between 2020 and 2021, especially in labor-intensive industries like catering and manufacturing, Christine Peng, head of the Greater China consumer sector at UBS, said during a media call last week.
But she noted that rising uncertainty has resulted in consumers delaying purchases of discretionary goods, such as new air conditioners. Peng said consumers were also thinking longer term, and that within households, female consumers were more willing to buy insurance or other financial management products.
Within December’s retail sales data, autos saw the greatest decline — down by 7.4% year-on-year —followed by a 6% drop in home appliances and a 3.1% decline in furniture. Sales of daily necessities saw the greatest increase last month, up 18.8% from a year ago.
“The pandemic could continue to be a drag on the revival of consumer spending – although the situation in China remains relatively under control … compared with other large economies,” Bruce Pang, head of macro and strategy research at China Renaissance, said in a statement. He expects consumption will remain under pressure in the first quarter.
“We think China has the option to ease COVID restrictions, which could boost consumption and market confidence; but it would be highly unlikely for it to abandon the no-tolerance approach before the Beijing Winter Olympics and the Two Sessions [annual parliamentary meeting in March], in our view.”
China’s gross domestic product grew by 2.2% in 2020 from the prior year. That’s according to the latest figures from the National Bureau of Statistics, which in December released an annual data revision that reduced 2020 GDP growth by 0.1 percentage point.
Compared with the initial release earlier in 2021, real estate, transport industries and accommodation and restaurants saw the greatest downward revision. Renting, leasing activities and business services saw the greatest increase, followed by manufacturing.
Correction: This story was corrected to reflect that Goldman Sachs revised its 2022 forecast for China’s GDP. A previous version misstated the year.

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CHINA HAS not enjoyed much success at the sport of curling, which will feature in the Beijing winter Olympics beginning on February 4th. But China’s economic policymakers could draw inspiration from the obscure event. Like curlers, they have a difficult target to hit: they are thought to be aiming for growth of 5% or more in 2022. And just as the curlers must slide a “stone” (a kind of oversized puck) with enough force to reach the target, but not so much that it crashes off the ice, so China’s policymakers must give a slowing economy enough oomph to grow by 5%, but not so much that it exceeds its limits, contributing to inflation and speculation.Policymakers are grappling with the impact of the Omicron variant of covid-19, which was reported in Beijing for the first time on January 15th. Unlike other countries, China has no intention to “live with” the virus, even if its latest iteration is less severe than earlier ones. A wide-ranging lockdown was imposed on the city of Xi’an in central China after its officials failed to contain a covid outbreak quickly enough. Narrower lockdowns elsewhere have so far left China’s manufacturing supply-chain largely intact. But the country’s overseas customers worry about what would happen if a Xi’an-style lockdown were to be imposed on a city closer to the heart of its export machine. Mandatory testing in the port city of Tianjin, for example, has already forced Toyota to suspend carmaking at its joint venture in the city.How much help does the economy need? According to figures released on January 17th, China’s GDP grew by 8.1% in 2021, its fastest pace since 2011. “Nominal” GDP, which does not adjust for inflation, grew even more quickly: by about 12.6%. And because China’s currency also strengthened, its GDP surpassed $17.7trn (at market exchange rates), an increase of 20% over the year before. Judging by these numbers, the economy would seem to have all the momentum it needs.But the pandemic so weakened China’s economy in early 2020 that the following year was always going to look unusually strong by comparison. As 2021 progressed, growth ebbed. In the last three months of 2021, it was a more modest 4%, compared with the same period of the previous year (see chart). That was higher than expected, but lower than China’s rulers would like.Intermittent restrictions on travel and gatherings have hampered retail spending, which shrank, in real terms, in December compared with a year earlier. Economic growth in the latter part of 2021 was also hurt by coal shortages, environmental limits on energy intensity, regulatory crackdowns on consumer-facing tech companies, and strict curbs on borrowing by property developers, which forced several to default, spreading unease to homebuyers. In curling, teams of skaters frantically sweep debris and other impediments out of the stone’s way to smooth its passage across the ice. In China, policymakers have been doing the opposite, sweeping one regulatory obstacle after another into the economy’s path.What explains this regulatory zeal? After the economy bounced back quickly from the first wave of the pandemic, China’s policymakers may have concluded that it was a good time to curb some of the negative side-effects of growth, such as pollution and property speculation, because economic momentum seemed assured. Exports in particular boomed as people around the world spent less on face-to-face services during the pandemic and more on goods to keep them safe (masks), slim (exercise bikes) and sane (games consoles).But this external source of growth may ebb in the year ahead. Foreign spending may switch back to services, as covid-19 becomes endemic. And even if Omicron keeps people in their shells, there is little reason to expect consumers to binge all over again on lockdown comforts. Customers who bought a games console or exercise bike in 2021 probably will not need an upgrade in 2022.China’s export boom may also be a little less impressive than it seems. In the past, China’s exporters would understate their sales to avoid value-added tax. They now have less reason to do so, because of the more generous tax rebates China offers. If they understate exports less now than in the past, their exports will look as if they have grown faster than they really have. This change in reporting may have exaggerated China’s export growth by more than two percentage points in 2021, according to Thomas Gatley of Gavekal Dragonomics, a consultancy.Somewhat belatedly, policymakers have now realised that growth needs stabilising. On January 17th China’s central bank cut the interest rate on its one-year loans from 2.95% to 2.85%. Another seven-day rate was lowered by the same amount. These reductions follow a cut last month in the reserve requirements imposed on banks.The government is also easing fiscal policy. It has extended income-tax breaks, including favourable treatment for year-end bonuses. It is encouraging local governments to issue more “special” bonds (which are meant to be repaid out of revenues from the infrastructure projects they finance). It is also hastening construction of 102 infrastructure “mega-projects” outlined in the country’s five-year plan for 2021-25. China’s state grid will, for example, build 13 ultra-high-voltage transmission lines in 2022. Increased infrastructure investment could add at least a percentage point to GDP growth in the first half of 2022, according to Morgan Stanley, a bank.Analysts at Morgan Stanley are relatively optimistic about the government’s chances of meeting its growth target this year, as long as policymakers bring about a soft landing for the all-important property market. Home sales fell by almost 18% in December, compared with a year before. To arrest this trend, government officials have tried hard to reassure homebuyers that the flats they have bought in advance will be built, even if the developer that sold them goes bust. Mortgage rates have edged downwards. And a number of cities have experimented with subsidies and tax cuts to encourage homebuying. Rosealea Yao, also of Gavekal, thinks sales will improve in the first quarter compared with the previous three months.But although China’s national rulers are now committed to stabilising the economy, they are still wary of overstimulating property, which is prone to worrying speculative bubbles. Beijing wants local governments to do enough, but not too much. After the northern province of Heilongjiang promised an “all-out sprint” to revive the property market, the exhortation was soon removed from the internet, points out Ms Yao. The measured art of curling, not sprinting, is the better metaphor for the government’s aims.For more expert analysis of the biggest stories in economics, business and markets, sign up to Money Talks, our weekly newsletter. More

Robo-advisors automate investing by using an algorithm to generate portfolios for users. They may soon manage more than $1 trillion of Americans’ wealth.
Services began appearing around 2008, around the advent of the iPhone and an ascendant digital culture.
They may be better than human financial advisors in some cases, especially for those who are new to investing, don’t have a lot of wealth or complex financial lives.

Robots want to be your next financial advisor.
Not too long ago, that notion may have smacked of sci-fi whimsy — “Star Wars” cyborg C-3PO in a power suit on Wall Street, perhaps.

But robots, or so-called “robo-advisors,” may soon manage more than $1 trillion of Americans’ wealth.
These aren’t actually tangible robots; they’re algorithms companies have developed to automate digital investing. Plug some details (age, savings goals, risk comfort) into a computer or phone app and the algorithm assembles and manages a personalized investment portfolio just for you.
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But is a robo-advisor right for all investors? Is a human better-equipped for the task of money management and financial planning?
“It’s suitable for some people and not for others,” Ivory Johnson, a certified financial planner and founder of Delancey Wealth Management in Washington, D.C., said of robo-advisors. “If you play golf, it’s just a different golf club.

“Sometimes I use my 7-iron and sometimes I don’t — it just depends on where I am.”

‘They’re everywhere’

Robo-advisors for the everyday investor began popping up around 2008, the year after the iPhone made its public debut.   
Just over a decade later, robo-advisors were managing about $785 billion, according to Backend Benchmarking, which specializes in research on digital advisors.
Dozens of firms have built their own models to capitalize on popularity and an ascendant digital culture.

They include independent shops like Betterment, Personal Capital and Wealthfront; traditional Wall Street brokerages like Fidelity Investments, Merrill Lynch and Morgan Stanley; and those like Financial Engines that cater to 401(k) plan investors.
Established players that have historically focused on an older, wealthier client base can also leverage the technology to court a new class of younger investors, who’ve shown an enthusiasm for the digital financial realm via online stock trading apps like Robinhood and for assets like cryptocurrency.  
“They’re everywhere now,” David Goldstone, research and analytics manager at Backend Benchmarking, said of robo-advisors. “Just about every major bank and discount broker launched one in the past decade.”

Who’s a good candidate?

Robots tend to be especially well-suited to newer investors who haven’t yet built much wealth, and who would like to outsource money management to a professional for a reasonably low cost, according to industry experts.
For one, robo-advisors offer a low barrier to entry, due to low or nonexistent account minimums.
Acorns, Fidelity Go, Betterment and Ellevest, a robo service for women, let clients sign up for their baseline digital service without any prior wealth. Merrill Edge Guided Investing, SigFig, SoFi, Vanguard Group and Wealthfront have minimums ranging from a few dollars up to $3,000.
Meanwhile, traditional firms tend to manage money for clients with at least $250,000 to invest, Goldstone said.
It’s perhaps unsurprising that the average robo user skews younger. For example, about 90% of the 470,000 clients at Wealthfront are under 40, said Elly Stolnitz, a company spokeswoman. Their average balance is about $60,000.

I think it attracts people who want to delegate away management of their portfolio.

vice president of behavioral finance and investing at Betterment

That demographic trend is also a function of a greater digital affinity among millennials and Generation Z, who largely grew up as digital natives and may be more attracted to a robo service as a result.
“[Our users] want to be able to manage money the same way they manage other things, like [online food delivery via] DoorDash,” Stolnitz said.
Betterment also has an average user younger than 40, with a $55,000 to $60,000 account, according to Dan Egan, the firm’s vice president of behavioral finance and investing.
But age and wealth aren’t the only factors at play, he said. The company has clients in their 60s and 70s with multimillion-dollar portfolios; the oldest user is over 90.
“I think it attracts people who want to delegate away management of their portfolio,” Egan said.

Fees for that management are typically much lower than for a traditional financial advisor charging 1% a year on client assets. The typical robo charges 0.25% to 0.35% annually for their advice service — about a fourth of the cost, Goldstone said.
In dollar terms, that means an investor with $100,000 would pay the typical human $1,000 a year for their services, and $250 to the average robo. (Of course, not all human advisors charge a 1% fee. Some have shifted to monthly subscription fees or one-time consultation fees, for example.)
Some robo-advisors like Charles Schwab and SoFi don’t levy any advice fee; others like Fidelity and SigFig only charge on balances of more than $10,000.
Investments in the portfolio — often low-cost index mutual funds or exchange-traded funds — do carry an additional fee. Some firms invest clients in their name-brand funds, which boosts their revenue via fund fees. They may also levy higher account minimums or fees for tiered service levels.
“If you don’t have a lot of money, you’re in your 20s and 30s, the portfolios are pretty damn good,” said William Whitt, a strategic advisor at Aite-Novarica Group, a consulting firm.

Trade-offs

Using a purely digital service may come with trade-offs.
While digital services do a good job of automating important investment functions (fund choice, the stock-bond-cash mix, and regular portfolio rebalancing, for example), human advisors lament the relative inability of algorithmic programs to talk clients through situations on demand.
Those may include the reasoning behind a specific strategy recommendation, or handholding in daunting times like job loss or a cratering stock market.
Financial planners also believe they’re better suited for proactivity and delving into needs of some clients beyond money management — whether tax, estate or business planning, which may prove too complex or nuanced for an online questionnaire, for example.
“We do a lot more than just investing,” said Johnson at Delancey Wealth Management.
Helping a client choose whether to exercise stock options, buy long-term-care or liability insurance, or set up a business as an LLC or another type of entity are likely beyond the scope of a digital advisor, Johnson said.

Alistair Berg | DigitalVision | Getty Images

It’s also a challenge to automate client psychology.
The online questionnaires robo-advisors use to determine the best portfolio for a client can’t probe answers and body language in the same way a human advisor might, Whitt said.
Even determining what makes a client happy — in essence, the purpose behind their money — may be beyond the scope of robots, according to some experts.
“Financial advisors can ask follow-up questions to fill out a picture and understand,” Whitt said.
The Securities and Exchange Commission, which conducted a recent review of robo-advice services, also questioned whether they always recommended appropriate portfolios given clients’ stated risk tolerance. (The agency didn’t name specific firms it examined.)
Of course, not all human advisors are necessarily performing these functions appropriately, either. Some may purely manage client investments, without assessing goals or other complex financial-planning details — and in this case, clients might get more value from a robo-advice relationship.
“I think there’s value humans provide,” said Brian Walsh, SoFi’s senior manager of financial planning. “But on the investment side, I think robos have a huge advantage in being cost-efficient.”

Evolution

Robo platforms have also evolved to account for some criticisms and cater to a broader pool of investors.
For one, many have expanded to offer more intricate levels of “goals-based” planning; they can assemble investment and saving recommendations based on short- and long-term goals like saving for a home, vacation, college fund or retirement.
Many now offer a “hybrid” offering that provides access to one-off interactions with a financial planner or even an ongoing relationship with a human advisor.
Charles Schwab’s premium service, for example, charges $300 up front for a planning consultation and a $30 monthly subscription fee for access to human advice, which supplements its digital investment management.
Even at Wealthfront — which considers it “a failure of our product if you have to call us” — users are able to call a hotline to speak with accountants, CFPs and financial analysts if they have a question, Stolnitz said.
Ultimately, whether a robot or a human manages your money comes down to what an investor wants from the relationship.
“I think robo-advisors are good — it gives investors more options,” Johnson said. “I’d hate a world where people could only invest one way.”
Disclosure: NBCUniversal and Comcast Ventures are investors in Acorns.

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TO BELIEVERS, OPEN, public blockchains provide a second chance at building a digital economy. The fact that the applications built on top of such blockchains all work with each other, and that the information they store is visible to all, harks back to the idealism of the internet’s early architects, before most users embraced the walled gardens offered by the tech giants. The idea that a new kind of “decentralised” digital economy might be possible has been bolstered over the past year as the applications being built on top of various blockchains have boomed in size and functionality.Perhaps the most significant part of that economy has been decentralised-finance (DeFi) applications, which enable users to trade assets, get loans and store deposits. Now an intensifying battle for market share is breaking out in this area. Crucially, Ethereum, the leading DeFi platform, seems to be losing its near-monopoly. The struggle shows how DeFi is subject to the standards wars that have broken out in other emerging technologies—think of Sony Betamax versus VHS video cassettes in the 1970s—and illustrates how DeFi technology is improving lightning fast.The idea behind DeFi is that blockchains—databases distributed over many computers and kept secure by cryptography—can help replace centralised intermediaries like global banks and tech platforms. The value of assets stored in this nascent financial system has climbed from less than $1bn at the start of 2020 to more than $200bn today (see chart).Until recently the Ethereum blockchain was the undisputed host of all this activity. It was created in 2015 as a more general-purpose version of Bitcoin. Bitcoin’s database stores information about transactions in the associated cryptocurrency, providing proof of who owns what at any time. Ethereum stores more information, such as lines of computer code. An application that can be programmed in code can be guaranteed to operate as written, thereby removing the need for an intermediary. But just as Ethereum improved upon Bitcoin, it too is now being usurped by newer, better technology. The fight resembles competition between operating systems for computers, says Jeremy Allaire, the boss of Circle, a firm that issues USD Coin, a popular crypto-token.Current blockchain technology is clunky and slow. Both Bitcoin and Ethereum use a mechanism called “proof of work”, where computers race to solve mathematical problems to verify transactions, in return for a reward. This slows the networks down and limits capacity. Bitcoin can only process seven transactions per second; Ethereum can only handle 15. At busy times transactions are either very slow or very costly (and sometimes both). When demand to complete transactions on Ethereum’s network is high, the fees paid to the computers that verify them climb and settlement times grow. Your correspondent has paid as much as $70 to convert $500 into ether and waited for several minutes for a transfer from one crypto-wallet to another to take place.Developers have long been trying to improve Ethereum’s capacity. One prong of that is, in effect, rewiring it. Plans are afoot to shift Ethereum to a more easily scalable mechanism called “proof of stake” later this year. Another idea is to split the blockchain up (through a process called “sharding”). The shards will share the load, expanding capacity. Some developers are also working on ways to bundle transactions, reducing the number of them that must be directly verified.The problem is that each advance comes with costs. DeFi’s supporters tout the virtue of being able to conduct transactions securely and without centralised intermediaries. But scale must be traded off against a loss of security or of decentralisation. Pooling transactions before they reach the blockchain tends to be done by centralised entities. And it might be easier for hackers to attack a single shard of a blockchain than the entire thing. As a consequence, Ethereum developers have been slow to make changes.This sluggishness has made the network vulnerable in a different way—by encouraging rivals. In early 2021 nearly all of the assets locked in DeFi applications were on Ethereum’s network. But in a recent research note JPMorgan Chase, a bank, estimates that the share of DeFi applications using Ethereum fell to 70% by the end of 2021. A growing number of networks, such as Avalanche, Binance Smart Chain, Terra and Solana, now use proof of stake to run blockchains that do the same basic job as Ethereum, but much more quickly and cheaply. Avalanche and Solana, for instance, both process thousands of transactions a second.The experience of USD Coin illustrates these shifts. The token was launched on Ethereum just over three years ago, but has since been launched on a number of competitor networks, including Algorand, Hedera and Solana. Mr Allaire says that whereas transactions on Ethereum are subject to cost and speed limitations, those on Solana can handle “Visa-scale volumes” with “settlement finality in about 400 milliseconds and a transaction cost of about a twentieth of a penny”. Other DeFi applications, like SushiSwap, an exchange founded on Ethereum, have also launched on several other blockchains.With the planned changes to Ethereum likely to take at least a year, if not longer, “the risk is that…the Ethereum network will lose further market share”, wrote Nikolaos Panigirtzoglou of JPMorgan. For Mr Allaire, the picture is pleasingly competitive.“ Just like with the web, where Windows, iOS and Android all compete, there are competing blockchain platforms too.” He thinks the ultimate victor will be the network that attracts the best developers to build applications and therefore reaps network effects.But the operating-system metaphor may only extend so far, in part because of the nature of open, public blockchains. Anyone can access the data they produce and view their operating code, making it possible to build bridges or applications that work across many blockchains, or which aggregate information from different blockchains. Some applications, like 1inch, already scan exchanges on various blockchains in order to find the best execution prices for various crypto transactions. “Multi-chain” blockchains, like Polkadot and Cosmos, act like bridges between different networks, making it possible to work across them.For as long as decentralised finance holds promise, competition to be the network of choice will naturally be fierce. But the idea that the winner will take everything, gaining overall control over the digital economy and how it develops, may one day seem as outdated as the video cassette.For more expert analysis of the biggest stories in economics, business and markets, sign up to Money Talks, our weekly newsletter. More

The Federal Reserve is in line to get three new governors, a new vice chairman, a new banking chief and likely a couple new regional presidents.
President Joe Biden is expected to nominate Sarah Bloom Raskin, Lisa Cook and Philip Jefferson to the governors’ positions.
Raskin is expected to be the biggest change agent as she will take on the Fed’s supervisor of the banking industry.
The new Fed officials also will weigh in on monetary policy during a time of surging inflation.

Sarah Bloom Raskin
Andrew Harrer | Bloomberg | Getty Images

In what likely will be just a few months’ time, the Federal Reserve will look a lot different: Three new governors, a new vice chairman, a new banking chief and likely a couple new regional presidents.
But while the parts of the institution’s upper echelon may change quite a bit, the whole could look pretty much the same.

That’s because Fed-watchers think ideologically there probably will be little change, even if Sarah Bloom Raskin, Lisa Cook and Philip Jefferson are confirmed as new members on the Board of Governors. White House sources say President Joe Biden will nominate the trio in the coming days.
Of the three, Raskin is thought to be the biggest change agent. She is expected to take a heavier hand in her prospective role as the vice chair for bank supervision, a position until December that had been held by Randal Quarles, who took a lighter touch.

The bankers will be surprised that the rhetoric is going to be maybe a little bit more extreme. But the substance? What are they going to do to these guys?

Christopher Whalen
founder, Whalen Global Advisors

But while Raskin could ramp up the rhetoric on the financial system, there are questions over how much that actually will translate into policy-wise.
“She’s a former regulator. She knows this stuff. This is not something she’s going to screw up,” said Christopher Whalen, founder of Whalen Global Advisors and a a former Fed researcher. “The bankers will be surprised that the rhetoric is going to be maybe a little bit more extreme. But the substance? What are they going to do to these guys? It’s not like they take a lot of risks.”
Indeed, the level of high-quality capital U.S. banks are holding compared to risk assets has progressed continually higher since the financial crisis of 2008, from 11.4% at the end of 2009 to 15.7% as of the third quarter in 2011, according to Fed data.

Still, the banking industry has remained a favorite target of congressional Democrats, led by Massachusetts Sen. Elizabeth Warren, who is thought to have favored Raskin for the supervision role.
Yet the nominee’s biggest impact could come in some of the ancillary places where the Fed had dipped its toes recently, such as the push to get banks to plan for the financial impact of climate-related events.
“The main point of controversy in her confirmation will be around climate policy where she has in the past expressed support for implementing both Fed monetary and regulatory policy in a way that promotes the green transition,” Krishna Guha, head of global policy and central bank strategy for Evercore ISI.

While Guha sees Raskin “adopting a materially firmer line on regulation” than Quarles, he also sees her as being “pragmatic” on issues such as reform in the Treasury market, specifically pandemic-era changes to the Supplementary Leverage Ratio. The SLR dictates the weighting for assets banks hold, and industry leaders have called for changes to differentiate between things like Treasurys and other far riskier holdings.
The financial system also has continued to see unusual trends in the pandemic era, such as dramatically higher liquidity demand from the Fed’s overnight reverse repo agreements, where banks can exchange high-quality assets for cash. The operations set a single-day record on New Year’s Eve in 2021 with nearly $2 trillion changing hands, and Thursday’s activity saw more than $1.6 trillion in transactions.

Monetary policy challenges await

Those issues will demand attention from Raskin, as will broader questions of monetary policy.
Cook and Jefferson are expected to bring dovish views to the board, meaning they favor looser policy on interest rates and other such matters. If confirmed, though, they would come to the board a time when the Fed is pushing toward a more hawkish approach, teeing up rate hikes and other tightening moves in an effort to control inflation.
“We think it would be a mistake to view them as likely to form a hardline dovish bloc on arrival and oppose the hawkish shift in Fed policy underway,” Guha wrote. “Rather, we think they – like [Governor Lael] Brainard and other erstwhile doves [Mary] Daly and [Charles] Evans – will view policy as a game of two halves and explain what this means and how it may play out.”
Daly is the San Francisco Fed president while Evans helms the central bank’s Chicago operation.
They, among multiple other policymakers in recent days, have talked about the need to raise rates. So even if the new trio of officials would come in wanting to hit the brakes on policy tightening, they’d likely be drowned out by a desire to curb price increases running at their highest rate in nearly 40 years. The Fed also is expected to halt its monthly asset purchases in March
Where the board seems less decisive is on reducing some of the more than $8.8 trillion in assets the Fed is holding. Some officials at the December meeting said balance sheet reduction could start shortly after rate hikes begin, but others in recent days have expressed uncertainty about the process.
“People want the Fed to do something about inflation. But as growth starts to slow around the spring, people aren’t going to way to pay higher borrowing costs,” said Joseph LaVorgna, chief economist for the Americas at Natixis and chief economist for the National Economic Council under former President Donald Trump.
“They’re going to be pretty dovish on the rates side, and may indeed push back on the balance sheet reduction,” he added.

Other changes for the Fed will see Brainard likely take over as vice chair of the Federal Open Market Committee, which sets interest rate policy. The position effectively makes her Chairman Jerome Powell’s top lieutenant; statements during her Senate confirmation hearing Thursday indicate she likely will be voted through.
There also are two regional president positions open, after Boston’s Eric Rosengren and Dallas’ Robert Kaplan resigned last year amid controversy over market trades by Fed officials in the early days of the pandemic.
Whalen, the former Fed official, said the new policymakers will have plenty to keep them busy though they aren’t likely to push for wholesale changes.
“I think Fed governors actually may spend more time this year talking nuts and bolts of financial markets than they have the last couple of years,” he said. “It’s very clear they made mistakes. Yet, they’re not very good at saying that.”

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THE 177-PAGE coalition agreement between Germany’s Social Democrats, Free Democrats (FDP) and the Greens contains grand plans to combat climate change and covid-19, and to speed up digitisation. Tucked away on page 73 is a more modest promise, to fund a small part of its public-pension scheme by investing in stocks. Reactions in Germany ranged from the apprehensive to the enraged. “Is our pension safe in stock?” fretted one news outlet. Another asked: “Are politicians gambling away our pension?”Listen to this storyYour browser does not support the element.Enjoy more audio and podcasts on More