The International Monetary Fund’s (IMF) latest Global Financial Stability Report highlights myriad risks for the global financial system.
3 min
The International Monetary Fund’s (IMF) latest Global Financial Stability Report highlights myriad risks for the global financial system. They include the war in Ukraine, high debt, and soaring inflation.
But the report also warned about the impact of decentralized finance, or DeFi, an emerging set of financial services applications that are based on blockchain and other crypto technologies and don’t involve banks other traditional financial intermediaries
Citing possible systemic risk, the IMF wants governments to impose regulations because, the report says, DeFi results in the “buildup of leverage, and is particularly vulnerable to market, liquidity, and cyber risks.”
DeFi may not be a mainstream vehicle yet, but that doesn’t mean financial advisors don’t need to know about it.
What is DeFi?
It’s a kind of financial application that uses “smart contracts,” to operate on a blockchain platform, usually Ethereum. These software programs allow for fully automated, peer-to-peer financial transactions without intermediaries like banks or brokers, which generally means faster settlements of trades.
“With DeFi, users are able to perform most functions that a bank can,” says Jeremy Almond, founder and CEO of Paystand, a B2B payments platform. “This includes earning interest, borrowing, lending, buying insurance, trading derivatives, and trading assets.”
Supporters of DeFi say it offers the potential to democratize financial services for the unbanked. This is a key reason the Federal Reserve is looking at creating a digital currency.
The world currently has around 1.7 billion people who are unbanked, according to Yubo Ruan, founder and CEO of DeFi provider Parallel Finance. “Some of the reasons include a lack of government-issued IDs, problems with credit history, restrictive bank requirements, or a lack of banking infrastructure within a country.”
How easy is it to use?
It can actually be cumbersome. You need several applications to accomplish what may seem like routine transactions if done at a bank, and the jargon and concepts can get complicated.
“A combination of highly technical requirements, high fees, and confusing user interfaces are putting off potential users,” says Jackie Bona, CEO of Valora, a mobile crypto wallet. “This is making it difficult for people to get started in DeFi, scaring away those who need these apps the most.”
What are the risks?
According to Archie Ravishankar, CEO and founder of mobile banking app Cogni: “Regular consumers in this space lack the regulatory protections they’re accustomed to in traditional finance.” So if you lose money, you have no consumer protection, such as the Federal Deposit Insurance Corp. True, you could bring a lawsuit, but the target DeFi organization may be an offshore entity.
Another issue is volatility. Just look at so-called stablecoins such as Luna. Within a week, its value plunged from $80 to virtually zero, tantamount to a run on the bank.
So should financial advisors suggest clients avoid these applications?
Generally, the answer is yes. DeFi is an emerging category of finance and it can be difficult to perform due diligence on new and decentralized technologies. Even those applications that are backed by venture capitalists have seen breaches.
When it comes to clients, DeFi is for those that have a high tolerance for risk. And if they are interested in investing, they should allocate a small part of their portfolio to it.
Can DeFi disrupt traditional financial services?
Even if it takes only a relatively small portion of the global market, the impact would be substantial.
“DeFi certainly has the potential to disrupt traditional finance across the board, and in some ways it already has—on a small scale so far,” says Liam Kelly, Europe news editor for Decrypt, a cryptocurrency news site. But he adds, “a lot of this hinges on breakthroughs in scalability and cutting reasonable lines between things like centralization and decentralization or opaqueness and transparency. Another possibility is that these technologies simply get absorbed by financial institutions to a point where to the consumer, nothing has changed at your brokerage account, except now on the back end it’s running on Ethereum or another blockchain network.”
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China is launching the first regular Arctic cargo route to Europe, offering faster journeys and lower fuel costs as melting ice and Red Sea risks reshape global shipping.
4 min
Shipping cargo through an Arctic shortcut never made economic sense—until now.
Climate change and war in the Middle East are flipping the math that previously kept ships plying longer routes from Asia to Europe. A Chinese company on Saturday is starting the first regular cargo service to Europe through Arctic waters, seeking to reap the benefits of quicker travel time and less fuel use.
The shipper Sea Legend will dispatch the Dubai Tower from Ningbo, China, to Felixstowe in the U.K. on what it calls the Arctic Express, following a route along Russia’s north coast. The voyage by the vessel, which is capable of carrying 1,740 20-foot containers, is the biggest commercial step in the Arctic since a Maersk containership first completed the route in 2018.
Global warming is a big factor behind the new route, but it is not the only one. Nearly half the Arctic region’s summer ice—an area four times the size of Texas—has melted over five decades, clearing a fairly reliable path in the summer months. Meanwhile, high oil prices and attacks by Houthi rebels in the Red Sea have made the traditional routes costlier and more dangerous.
Beyond that, Beijing has ambitions to play a role in the Arctic’s future, lending a geopolitical dimension to the Chinese company’s shipping route.
Last year Sea Legend completed a trial run from Asia to Europe in a record 20 days. That is roughly half the time of a voyage via Africa’s Cape of Good Hope that many carriers now take because of the Red Sea uncertainty.
Fuel accounts for 70% or more of the costs while at sea, said Alan Murphy, a former Maersk analyst who runs research firm Sea-Intelligence.
Saving fuel by shortening the journey doesn’t automatically make a route profitable. Insurance premiums for the Arctic are 40% higher than the Cape of Good Hope route, said Jonathan Steenberg, an economist at credit insurer Coface. Sea Legend’s Arctic vessels are relatively small. And even after warming, an icebreaker is still sometimes needed to help the cargo ship.
But if the ship can go without an icebreaker, Coface said the Arctic route is now cheaper than a Cape of Good Hope voyage in some circumstances. It estimated that at current oil prices of around $90, the cost of shipping liquid bulk such as liquefied natural gas could drop roughly 33% compared with the Cape of Good Hope route, while dry bulk goods such as cereals would cost about 8% less.
The route is only passable in the summer and fall. Sea Legend plans eight voyages between August and late October, before conditions get too icy.
“It’s not the Suez Canal but it’s a significant number for the Arctic. It shows there is potential,” said Malte Humpert, founder of the U.S.-based Arctic Institute and author of a book on Chinese shipping in the Arctic.
Even in summer, ships have to navigate around dangerous ice floes and deal with rapidly changing weather. By the end of the shipping season in October, the sky is dark most of the time.
A Russian tanker suffered serious damage to its hull while sailing along the Arctic route despite being assisted by an icebreaker, its insurer, AlfaStrakhovanie, said Thursday, adding that it paid out roughly $650,000.
Coface estimates 3.5% of trade among East Asia, Europe and North America will be able to use Arctic routes within the next five years, representing $64 billion in goods.
Last summer, a record 23 cargo ships transited the Northern Sea Route, which hugs Russia’s north coast. That is tiny compared with the Suez Canal, where more than 30 ships transited daily.
Western companies that want to follow in Sea Legend’s path have to navigate treacherous politics. Russia claims sovereignty over the entire Northern Sea Route and permits for ship traffic are issued by its state-controlled nuclear operator, Rosatom.
“Western companies are in a tricky position,” said Humpert of the Arctic Institute. “At what point do they jump back in the water? When does it become economically necessary, and how do you weigh that against environmental risks and the political dimension?”
An alternative Arctic route, the Northwest Passage that connects the Atlantic and Pacific oceans via the Canadian Arctic, is less passable because it is dominated by narrow waterways where ice gets bunched up. The highest number of cargo ships completing the passage in a year was 13, in 2023.
China has declared itself a near-Arctic state despite not having access to Arctic waters. It depends on Russia’s goodwill to use the Northern Sea Route.
“Beijing is concerned that if they don’t establish a significant strategic presence in the Arctic now, it’s going to be more difficult in the future,” said Marc Lanteigne, expert in polar geopolitics at the Arctic University of Norway in Tromsø. However, he said, “China needs to be careful not to give the impression that they are trying to challenge the strategic order in the Arctic.”
Sea Legend didn’t respond to requests for comment.
Any polar venture contributes to China’s quest to master Arctic travel. The country also has three icebreakers and a support vessel currently on a monthslong scientific expedition north of Greenland. Scientific and commercial voyages can yield data about natural resources awaiting below melting ice caps and information for positioning nuclear-armed submarines.
