The economic impact of Brexit has been much explored and debated. The OECD and HM Treasury have put forward analysis suggesting that Brexit could negatively impact the country’s GDP by 3% until 2020, while the Bank of England has made occasional statements about other dire scenarios, prognostications some might dub “Project Fear 2.0.”
These predictions include crashing house prices, spiralling interest rates, loan defaults, asset outflows, negative returns on equity and anaemic stock market performance. It is certainly a volatile cocktail and matters could be heading for a perfect storm. And, whatever else, we live in interesting times with new technologies and their associated shifts and disruptions.
Across the Pond, Lael Brainard, a U.S. Federal Reserve Governor, gave a speech at the Peterson Institute for International Economics in Washington, D.C., this Friday stating: “In Europe, there are risks associated with deliberations over Italy’s fiscal and debt trajectory and the United Kingdom’s deliberations on the Brexit deal.”
Of course, in Britain we do not know if there will be any deal right now, nor if the current government will last or if the Tory party will split itself apart. Certainly, Prime Minister Theresa May has a challenge getting agreement in Parliament over the proposed Brexit deal with MPs and those prospects are looking unlikely – hence the delayed vote.
Should MPs in the House of Commons give it the thumbs down, then the chances of a “no-deal” Brexit appear very real. That does not necessarily mean Britain will not leave the European Union (EU) on March 29 next year, but definitely leaves little clarity on what actually happens thereafter. Yet even late last week it seemed that moves on the political front in Westminster suggested the chances of a catastrophic no-deal scenario were fading.
And, at the time of writing today money seemed to be placed on the prospect that the Brexit vote will be “pulled”, which opens up a new front of uncertainty for investors. The pound sunk to its low of the day, giving up the 1.27 handle against the U.S. dollar, amid reports that Theresa May is set to pull the meaningful vote on Brexit.
Neil Wilson, senior analyst at Markets.com noted at midday this Monday: “Sterling remains at the mercy of highly sensitive news flow around Brexit and this morning has been a case in point.” In terms of pulling the vote, it is hard at this point to draw concrete conclusions about what it means as the situation remains very fluid.
But irrespective of one’s views on the actual economic impact of Brexit, surprisingly little public discourse has centered on the opportunities presented by the ability for Britain to pursue a relatively more free industrial strategy.
The early nineteenth century thinkers – David Ricardo, one of the most influential British classical economists, and Friedrich List, a forefather of the German historical school of economics – had much to say about understanding and developing the comparative economic advantages of a nation, with a view towards establishing greater relative growth on a global stage.
Hirander Misra, CEO of GMEX Group, a British-based technology and business services provider for traditional exchanges as well as cryptocurrency and digital token exchanges, commenting said: “The U.K. has an incredible opportunity to support an innovation economy centered on its relative strengths, namely with London as a leading international financial center and, increasingly, as a technology hub with significant international investment.”
Indeed, Apple, Google and others tech firms have all recently increased their presence in the British capital. Add to that there has also been the emergence of several home grown technology firms with valuations over $1 billion (“unicorns”), such as Revolut, amongst others.
Now Blockchain, or Distributed Ledger Technology (“DLT”) to give its full name, is increasingly seen as a path towards delivering a new industrial revolution – dubbed the 4th Industrial Revolution – by providing a means of trusted communication and exchange that can be publicly verified.
The logic behind blockchain is one that is likely to be “as revolutionary as the Internet” in the view of Misra. It is also a view shared by experts such as Matej Michalko, CEO and co-founder of Slovak blockchain venture DECENT focussed on the digital media sector and a “Forbes 30 Under 30” tech pioneer.
And, much work and investment is on-going to develop transformational “use cases” for deployment – not only in the most developed areas of financial services – but also in any sector where information is stored and transferred, including healthcare and real estate among other sectors.
According to Gartner, a leading technology research and advisory firm, the business value-add of Blockchain will surge to slightly more than $3.1 trillion by 2030 – up from some $176 billion by 2025 and around $360 billion by 2026. That rate of growth is massive. And, while Blockchain technologies might one day redefine economies and industries via the programmable economy and use of smart contracts, Gartner noted this year that “…for now, the technology is immature.”
Misra, formerly co-founder and COO of Chi-X Europe (now part of CBOE Global Markets) and co-author of a forthcoming book on the case for a Blockchain economy, asserted in the wake of the start of the 5-day Brexit discussions in Parliament this past week: “Surely the U.K., with its inherent strengths in finance and technology, is well placed to take a leading position in building this innovation economy – and notwithstanding Brexit.”
Against this backdrop, DAG Global, a British- based company seeking to set up the first regulated “digital assets bank” in the U.K. to service both the fiat and crypto banking needs of SMEs, fintechs and crypto companies, has recently published a report with the U.K. All-Party Parliamentary Group (APPG) on Blockchain, together with the Big Innovation Centre.
Established up in January 2018, the APPG Blockchain its stated purpose is: “To ensure that industry and society benefit from the full potential of blockchain and other distributed ledger technologies (DLT) making the U.K. a leader in Blockchain/DLT’s innovation and implementation.”
Their report outlines the current state of blockchain investment in the U.K. as well as the considerable ecosystem which has emerged (with 225 blockchain companies across sectors referenced), and largely without a supportive U.K. industrial strategy. The APPG has incidentally cited GMEX as being one of the leading companies in the U.K. Blockchain economy.
Countries such as Malta – dubbed “Blockchain Island”– was the setting this November for a DLT summit attended by some 8,000 delegates – as well as Gibraltar, through the Gibraltar Financial Services Commission (GFSC) and Switzerland- have publicly and actively promoted their relative strengths in fostering blockchain innovation. These countries recently putting forward specific financial services regulation setting out permissions for blockchain companies to freely list and trade.
Malta now has comprehensive DLT legislation and regulatory guidance and the Swiss Financial Market Supervisory Authority (FINMA) has issued guidelines for Initial Coin Offerings (“ICOs”), with the latter recently authorizing its first blockchain asset management company in Crypto Fund AG. The firm offers a passive investment vehicle, which tracks the performance of the Crypto Market Index 10 (the “CMI10”) that is calculated and maintained by SIX Swiss Exchange.
Gibraltar’s financial regulator announced a year ago the jurisdiction was to introduce the “world’s first bespoke license” for fintech firms using blockchain/DLT from January 2018, in an effort to attract start-ups to the British overseas territory as it prepared for Brexit.
This has sent an important message to the market that these countries are open for business, and considerable blockchain-related investment has flowed into them- including Binance, a leading crypto exchange, which has moved its global headquarters to Malta.
Nevertheless, as Sean Kiernan, CEO of DAG Global and co-author with Misra in an upcoming book entitled “Tech Meets Trust: Blockchain Britain”, asserted: “The U.K. is better positioned to adopt Blockchain and implement the necessary regulations post Brexit compared to other EU nations, such as Malta, having to deal with the EU as it seeks to introduce overarching blockchain regulations will be a big speed bump, priming the U.K. to be in a better position in the long run as it moves its markets forward independently.
That said, in Britain many existing banks will not service blockchain businesses (let alone anything connected to cryptocurrency!) due to fears of reputational and regulatory risk in facilitating money laundering.
These fears are not by any means baseless, although recent developments in what has been termed as “Blockchain analysis” help to track every single transaction on the reputable public Blockchains, such that flows of funds can be clearly sourced through to origination.
“In this respect, checking flows in blockchain-based digital instruments is more robust than in traditional fiat currency-based transactions, where often it is only possible to trace source of funds only from the immediate prior institution from funds that were sent,” Kiernan stated.
The U.K. Treasury Select Committee in recent months issued a comprehensive report (September 2018), citing: “Regulation needed for ‘Wild West’ crypto-asset market.” The report outlined that the country was tentatively positive on accepting such novel blockchain-based instruments. Still much work remains to develop the regulatory frameworks and standards of governance to promote general acceptance.
Looking at the Cboe’s Brexit Low 50 index, which comprises U.K. companies that mostly operate on a more global scale, it has been outperforming the Cboe Brexit High 50. The latter comprises more U.K.-focused companies in the blue-chip FTSE 100 index.
The distinction is measured by where the majority of their revenue is generated. And, the slump after the referendum and the price of the companies making big profits overseas picked up immediately. For a year or so, there was a clear trend. So, if Sterling was up, global shares in London were down and vice versa.
Furthermore, according to in-depth joint research and analysis conducted by GMEX Group and DAG Global, Britain’s exit from the EU will result in a “loss of 150,000” jobs over five years, with 0.41% annualized negative GDP growth over a 15-year period. But this is not the full picture.
On the upside, 250,000 jobs will be created over five years from Brexit and an annualized GDP growth of 3.82% will ensue as a result of nurturing the digital economy in the Britain, according to analysis from GMEX and DAG Global. Therefore, the net result of focussing on digital innovation is 100,000 jobs created over five years and 3.41% of annualized GDP growth, thus acting as a positive counter measure to Brexit.
According to the firm’s joint analysis, the impacts of capital outflows as a result of Brexit being “counterbalanced or even enhanced” in net GDP terms by the creation of a wider digital economy within the U.K. attracting foreign investment and creating jobs.
Short-term risks associated with Brexit include the economic effects on exchange rates and investment returns. Now with the U.K. losing its influence over the single market’s rules, financial services would lose immediately compared to other sectors.
Over the long term, however, GMEX’s Misra and DAG Global’s Kiernan suggested that negotiating trade deals with emerging markets (see iShares MSCI Emerging Markets ETF -EEM with a NAV total return -13.80% year to date, and Vanguard FTSE Emerging Markets ETF – VWO for performance), could help the U.K.’s financial sector recoup its short- to medium-term losses.
And, over the medium to long term, the U.K.’s GDP is expected to be negatively impacted by Brexit. Falling output means a fall in economic activity and production, which means less business income. According to the Organisation for Economic Co-operation and Development (OECD) and HM Treasury’s estimates, Brexit could reduce the U.K. GDP by 3% by 2020.
The Bank of England put forth some estimates in a July 2016 report that U.K. GDP could increase by 3% by introducing a Central Bank Digital Currency (CBDC). A comparable effort in Estonia was halted recently by the EU given the imperative of retaining the status of the Euro as the unique regional currency. So, the picture is mixed, if not downright foggy.
All that said, Misra, an alumni of the London School of Economics and Political Science, posited: “Perhaps, with vision and some derring-do the impacts of Brexit need not be so negative after all?” Carpe diem.
Misra and Kiernan are currently seeking input to a book they are publishing entitled “Tech Meets Trust: Blockchain Britain”, which will further explore the opportunities outlined above.