Bitcoin Rival to Swiss Bank Accounts – Patrick Tan
A victim of their own success, Swiss bank accounts are no longer as attractive as they once were. Could Bitcoin provide an alternative?
Dato’ (a Malaysian honorific title) Lawrence Tan (not his real name), tightens his five-thousand dollar Burberry trench coat on an unseasonably blustery early autumn day in Zurich, the Swiss banking capital.
Dato’ Tan draws little comfort in knowing that at least he’s getting some wear from his Burberry trench (this is only the second time he’s ever worn it since purchasing it last year) — Malaysia’s tropical climate makes such outerwear superfluous, though you wouldn’t be able to tell the way Malaysian politicians dress.
Bracing himself against the piercing wind, Dato’ Tan’s driver opens the door to his Mercedes-Benz Mayback limousine which whisks him down the winding cobbled streets of Zurich’s old city to a non-descript back entrance.
Behind an unmarked door, with seemingly out of place and elaborate camera surveillance and biometric entry systems, Dato’ Tan is led down a series of well appointed corridors before he is led into a sumptuous waiting room, paved in Italian marble (supposedly shipped in by truck and cut from a complete block of Calacatta from the only quarry able to produce the stone in Carrara, Italy) and draped in sumptuous furnishings.
On a Zanotta side table (which retails at about US$5,000), sits a pre-chilled glass of 2006 Dom Perignon and a bottle resting in an ice bucket nearby, should Dato’ Tan require a top up.
But today, Dato’ Tan is in no mood to drink. He shouldn’t even be here to meet his Swiss private bankers — these visits only draw unnecessary attention and scrutiny.
Dato’ Tan, whose Malaysian business interests run the gamut of fisheries, mining and timber, has had a longstanding relationship with the Swiss private bank whose luxurious offices he has helped to furnish through lavish fees over the years — the fees have been a necessary evil, given the at times clandestine nature of his business interests.
But as international pressure on Swiss banking secrecy laws has been brought to bear from both the United States as well as the European Union and with greater international scrutiny on Malaysian businessmen since the 1MDB scandal roiled the international banking community, Dato’ Tan has had to make more frequent personal trips to make deposits in Switzerland.
And to make matters worse, Dato’ Tan is now having to pay the Swiss bankers for the privilege of holding on to his money.
More Money More Problems
Given the prolonged period of negative interest rates, it was only a matter of time before Swiss banks started passing the effect of these rates on to their biggest account holders.
Led by Swiss banks UBS and Credit Suisse, lenders have started passing on the effect of negative interest rates to some of their most well-heeled customers, much to the chagrin of Dato’ Tan and his ilk.
And while the practice may be unusual, these are also unusual economic times.
Nearly a decade since monetary authorities across Europe started experimenting with negative rates, the practice quickly spread to banks.
Despite what may amount to a form of expropriation from savers, banks are now starting to pass on the effects of negative interest rates to depositors.
Denmark’s Nationalbank (the central bank) started charging lenders 20 basis points for cash parked in its deposit facility as far back as 2012, as a defense of the peg between the Danish krone and the euro, a move that was quickly copied by other European central banks.
Since banks know that they have to pay for holding money above a certain threshold with the central bank, they generally do something more useful for monies above that threshold — for instance lending it out to companies to fund growth and expansion — or so the theory goes. In practice though, results have been far more mixed.
With the European Central Bank the standard bearer for negative rates, cutting deposit rates to -0.1% in June 2014 before lowering it again three more times in the next two years and with indications that it may drop rates again this September to -0.4% against the backdrop of a struggling eurozone, banks have started to buckle.
There are just so many things to lend out money for.
Too Much Liquidity & For Too Long
For the longest time, banks preferred to take a hit on their profits rather than passing the effects of central banks’ negative rates on to depositors, but this is changing.
UBS has announced that it will charge its Swiss clients a yearly fee of 60 basis points for deposits above half a million euros, down 50% from an earlier limit of 1 million euros. Credit Suisse will charge 40 basis points on accounts of more than 1 million euros.
Julius Baer, Switzerland’s third largest wealth manager said that it would be passing on negative rates to depositors on a case-by-case basis — leaving ample discretion for those depositors who need the bank more badly than the bank needs them.
For depositors who have prized Swiss bank secrecy (which has been progressively eroded over the past decade), the additional cost of deposits will be a shock to their economic sensibilities.
Which is what has driven some to consider deposits in Bitcoin instead.
Bully for Bitcoin
Already, a cottage industry in Switzerland, led in particular by Zug, a picturesque city on the banks of Lake Zug, has sprung up to serve wealthy depositors looking for Swiss solutions other than in Swiss francs, dollars, yen or euros.
From dollar-pegged Bitcoin deposits to exotic hedges, all manner of cryptocurrency firm and some of the most storied names in private banking are offering primarily Bitcoin deposits to some of the world’s richest individuals, whether directly or through a series of proxies.
And with nearby Lichtenstein acting as a springboard to rest of the European Union, some Swiss firms are actively adding Bitcoin as a financial instrument to counter the effect of degraded Swiss banking secrecy.
Not so long ago, depositors were actually paid more, the more they deposited and the longer they held those deposits.
The move by banks to pass on negative interest rates to depositors has prompted calls for the European Central Bank to rethink its negative rate policy because it’s too harsh on depositors.
But such criticism may be somewhat disingenuous because central bank money macroeconomic policy will always create “winners” and “losers.”
Interesting Time for Interest Rates
Interest rates will always favor one interest group more than another — when interest rates are much higher than inflation, it’s borrowers who pay the price while savers celebrate.
It simply isn’t right to think that those who put money aside are somehow more deserving than those who take on debt.
Debt in and of itself is not harmful — it is what the resources raised from that debt is applied to that determines the quality of the debt and to that end, it’s important to differentiate between “good” and “bad” debt.
And to that end, perhaps the Bible provides an interesting reference as to how resources ought to be managed, as Matthew 25:14–30 provides,
For it will be like a man going on a journey, who called his servants and entrusted to them his property. To one he gave five talents, to another two, to another one, to each according to his ability. Then he went away.
He who had received the five talents went at once and traded with them, and he made five talents more. So also he who had the two talents made two talents more. But he who had received the one talent went and dug in the ground and hid his master’s money.
Now after a long time the master of those servants came and settled accounts with them.
And he who had received the five talents came forward, bringing five talents more, saying, “Master, you delivered to me five talents; here, I have made five talents more.”
His master said to him, “Well done, good and faithful servant. You have been faithful over a little; I will set you over much. Enter into the joy of your master.”
And he also who had the two talents came forward, saying, “Master, you delivered to me two talents; here, I have made two talents more.”
His master said to him, “Well done, good and faithful servant. You have been faithful over a little; I will set you over much. Enter into the joy of your master.”
He also who had received the one talent came forward, saying, “Master, I knew you to be a hard man, reaping where you did not sow, and gathering where you scattered no seed, so I was afraid, and I went and hid your talent in the ground. Here, you have what is yours.”
But his master answered him, “You wicked and slothful servant! You knew that I reap where I have not sown and gather where I scattered no seed? Then you ought to have invested my money with the bankers, and at my coming I should have received what was my own with interest.”
“So take the talent from him and give it to him who has the ten talents. For to everyone who has will more be given, and he will have an abundance.”
“But from the one who has not, even what he has will be taken away. And cast the worthless servant into the outer darkness. In that place there will be weeping and gnashing of teeth.”
This Bible passage from the gospel of Matthew is often quoted and a favorite passage of many a banker, but perhaps the logic within it is instructive.
Economic activity tends to be driven by those who invest for growth and who take risks. The world as a whole is a better place through the active employment of resources.
Depositors on the other hand can be viewed as passive in the economic cycle of activities and against this backdrop, it makes sense that the rewards should go to those who are proactive in creation, as opposed to those who are passive in collection.
And because the latest push to increase interest rates is now starting to encroach on some of banks’ richest customers, some are arguing that central banks should change course on negative rates.
The irony is so thick you could eat it with a spoon.
Having Your Cake & Eating It
For years, low interest rates were blamed for fostering inequality by inflating asset prices, but wealthy individuals have plenty of options if they don’t want to pay their bank a fee for the “privilege” of holding on to their money.
The rich can split their money across multiple banks, change wealth managers, or put their cash to more productive use — including into cryptocurrencies, which many are doing.
After years of unorthodox monetary policy and inflation in the eurozone nowhere near anticipated levels and far off targets, it’s pertinent to ask just how effective negative rates can be.
Yet negative rates are an opiate that central banks (at this stage at least) can ill afford to wean themselves off.
With the shaky economy in the eurozone and global economic headwinds, rates can be expected to remain negative for the short to medium term and against this backdrop, assets, regardless of how outlandish or “risky” will continue to attract investors who are looking for non-negative returns as well as the potential for upside, something which includes Bitcoin and cryptocurrencies.
Published at Sat, 17 Aug 2019 10:02:49 +0000
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