The ‘Old Lady of Threadneedle Street’ Is Not for Turning

In 1980, British Prime Minister Margaret Thatcher gave a notoriously defiant speech to her party conference in which she said, ‘the lady's not for turning’, in response to calls for a change of policy.

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The Bank of England (whose nickname refers to its location in the City of London) is showing similar stubbornness by sticking to its plan to limit stablecoin ownership in the UK. Despite claims that the limits will ‘mitigate financial stability risks stemming from large and rapid outflows’, the central bank has been urged to take a leaf out of the book of another famous British leader – Cnut – and acknowledge that when it comes to protecting the conventional money system, even the most powerful cannot hold back the tide.

In addition to limiting the holdings of individuals, stablecoin issuers in the UK will be obliged to park 40% of the assets backing the cryptocurrency with the Bank of England in accounts that will not pay any interest.

One of the main concerns for market participants in the UK and across Europe is that dollar-denominated stablecoins will become dominant in much the same way that the greenback exerts disproportionate influence on currency markets and global trade payments.

According to Bank of England Deputy Governor Sarah Breeden, there are a number of reasons why the UK requires different rules to other jurisdictions such as the US, where the Trump administration is pushing cryptocurrency at every opportunity.

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She says the 40% collateral requirement – which, while considerable, is significantly lower than the 100% proposed previously – reflects concerns over depositor behaviour in the aftermath of the demise of Silicon Valley Bank, when Circle’s USDC stablecoin subsequently lost its dollar peg. Supporters of this strategy point out that stablecoin issuers will be able to hold the majority of their backing assets in short-term government debt.

In Breeden’s defence, her point about the UK financial system being more dependent on bank finance, and therefore more vulnerable to a run on the banks than its US counterpart, is well made.

Are Investors Blowing Another Bubble?

Markets are full of investors who see themselves as akin to a modern-day Nostradamus, 21st-century soothsayers who accurately predicted previous downturns. A very small number have some kind of track record, while the majority can be likened to a broken clock in that they are only right some of the time.

AI has become the latest sector to get the ‘are we heading towards a crash’ treatment. Shares in companies that develop, produce or implement artificial intelligence now account for more than 40% of the value of the S&P 500, up from a quarter three years ago.

Few have hung their hat on this trend turning into a bubble, though. Peter Oppenheimer, Goldman Sachs Research’s chief global equity strategist, says that while valuations of the technology sector are becoming stretched, they are not yet at levels consistent with historical bubbles.

Read more: Robinhood’s Next Experiment - Retail Access to Private AI Unicorns

Among the tech bros, Jeff Bezos reckons AI is an ‘industrial bubble’ that will generate long-term value for society, while OpenAI CEO Sam Altman believes it will be a ‘huge net win’ for the global economy. Meanwhile, Jim Cramer describes NVIDIA as the ultimate ‘own it, don’t trade it’ stock.

As discussed last week, US investor borrowing for stock purchasing has reached record levels. However, many analysts are relaxed about margin debt exceeding $1 trillion (arguing that it should be viewed in the context of an S&P 500 market cap of just over $57 trillion), while others merely suggest that these assets are worth what someone is willing to pay.

But the fact that the latter figure has gone up by more than 17% in the last 12 months, fuelled by the seemingly inexorable rise of stocks such as NVIDIA with strong correlation to AI, should be enough to at least induce a degree of nervousness. Artificial intelligence may be smart, but even it cannot predict its own future.

Online Trading Platform Hopes to Boost Wealth Distribution

The historical character from which Robinhood takes its name was known for taking from the rich to give to the poor. While this was a laudable aim during the medieval period, when wealth distribution was skewed towards a small handful of landowners, it wouldn’t be a great slogan for a modern-day brokerage firm.

However, the trading platform does hope to make at least some of its UK customers wealthier by allowing them to trade more than 40 different CME Group futures products. CME Group's most-traded futures products (including equity indices, cryptocurrencies, major FX pairs and commodities) have been available to Robinhood customers in the US since early this year at lower execution fees than the platform’s competitors.

It will be interesting to see how the likes of Interactive Brokers and IG Group respond to increased competition in the futures space, as well as the extent to which Robinhood is able to apply the user-experience lessons it has learned in the US in terms of interface, functionality and educational content.

According to BrokerChooser, while it scores well on trading fees, Robinhood has a below-average futures trading score based on a combination of account futures trading fees, the potential number of futures products available, and the quality of the broker's trading platform – a metric that includes charting and other research tools.

The firm will also face some of the same challenges that the UK government is trying to overcome in persuading traditionally risk-averse UK investors to allocate a larger proportion of their funds to speculative investments rather than fixed-return savings products.

Its success in reducing barriers to entry for stock investing in its domestic market means it would be brave to bet against Robinhood replicating this formula in the UK, though. Maybe it should offer a future for those willing to take that bet…

Source: Finance Magnates