Hello and welcome to the Fides Weekly Update. Take a look at this week’s key trends, moves and developments in legal and compliance.
1. Six global banks edge closer towards launching their own digital currency
The world of digital currencies and blockchain is on the cusp of entering the mainstream financial market as a new digital currency is being developed by six of the largest banks.
The consortium, pioneered by UBS, which initially consisted of global banks Deutsche Bank, Santander, BNY Mellon, as well as broker ICAP, developed the “Utility Settlement Coin” (USC), a new digital currency that is able to use blockchain technology to clear and settle securities trades in financial markets.
After gaining significant momentum, the group has more recently seen six new banks entering the fold, including Barclays, Credit Suisse and HSBC.
The project has entered the next stage of development, as members begin in-depth discussions with central banks with the aim to secure and finalise data privacy and cyber security protections.
There have been a number of digital and virtual currencies entering the market since their inception, the most famous being Bitcoin introduced in 2009, but the issues surrounding price volatility and lack of confidence in the decentralised system (that is where no individual party oversees the transaction) has led to a number of obstacles for growth.
(For a more in-depth explanation of blockchain technology, please see this article by the Wall Street Journal)
However, USC concentrates more on the use of blockchain technology than it does acting as a widespread currency. It will be linked to global currencies and the central bank, which will provide stability for the digital currency unlike some others which are publicly issued, such as Bitcoin. The currency will be used to speed up transaction and clearing processes as cash from a trade will be converted into utility settlement coins, to then be placed on a distributed ledger (i.e. the blockchain) and immediately exchanged for the financial securities being traded. The ledger bypasses the need for third-party verification, and enables trades to be carried out in a matter of seconds as opposed to two or three days.
They first announced the development of USC in September 2015 and have been testing the coin in a real market environment. The banks are hoping to launch the product in late 2018.
Regulation of fintech products such as digital currency and blockchain has been the largest question when implementing these new technologies in financial markets. Integrating digital currencies to current securities transactions may leave a number of grey areas that could cause failures if they were to be introduced too soon. Regulators need to be certain that the complex, sophisticated workings of blockchain technology will comply with rules already laid out, and if not, how regulation needs to be adapted in order to incorporate the potential risks involved.
The FCA is the leading regulator in Europe to focus on new technology and enabling start-up fintech businesses, as demonstrated by the revolutionary Project Innovate. It’s widely praised “Regulatory Sandbox”, which allows new technology and businesses to be tested in a live market under predetermined parameters, has allowed London to remain the fintech hub across Europe. It is key for the development of the banking system, which is still antiquated in its technology and speed of process that new digital currencies such as USC are allowed to develop whilst also being fit for purpose.
Financial crime is another crucial element to consider with digital currencies. Without full regulatory coverage, these currencies can become attractive for criminal activity, such as money laundering and terrorist financing. On the other hand, it has been said that the blockchain technology used to operate these currencies, if executed correctly, can in fact play a major role in the fight against financial crime. It would introduce complete transparency across all parts of a financial transaction, and in turn reduce fraud, by providing a common, visible platform for transactions.
If the Utility Settlement Coin does become an industry standard, used in transactions by all major banks and financial institutions, it could pave the way for further use of blockchain technology within financial services as well as other industry sectors generally.
2. Quinn focuses on retention through new ‘loyalty’ bonuses
A new bonus pool will be coming into play at Quinn Emanuel Urquhart & Sullivan, revealed in a memo by firm chairman John Quinn that presents an outside the box approach to retaining associates.
The new form of compensation, titled an “associate longevity bonus pool”, is additional to existing bonuses, and will only concern second through to six year associates. The amount will be based upon firm performance, with one percent of Quinn Emanuel’s total profit going towards the new bonus pool.
These earnings however, can only be reaped if associates remain at the firm for a further three years after they’re awarded. Published in Above the Law, the following excerpt from Quinn’s memo explains how the new bonuses will be paid out:
“A qualifying second year associate for 2017 will get a provisional award in March 2018. That award will be paid in March 2021 as long as the associate is still with the Firm at that time. The same associate will be eligible to receive an award in March 2019. That award would be paid in 2022. The same associate would also be eligible for an award in March 2020 which would be payable in March 2023, and so on until the associate’s 7th year at which point the associate is no longer eligible for new awards but can keep collecting old awards as long as the associate does not resign before an award is due to be paid.”
It certainly is a creative attempt to attract and retain associates, but begs the question of how Quinn’s current retention rate looks. With such an extensive length of time to wait before gaining access to this extra compensation, this proposal may well show signs of retention struggles amongst mid-level associates.
On the other hand, the firm has experienced rising revenues and solid profits, as it has previously shown with $35,000 signing bonuses for third-year law students and most notably a hike in last year’s PEP that surpassed $5 million. The significant growth of its London offering also shows no signs of abating, with last year’s profit increasing by 21% to £32.8m.
Nevertheless, for a US heavyweight with significant standing in the market to be introducing such a tool, it will be interesting to see whether UK firms, who increasingly experience associate departures to US firms with Quinn’s brand, will adopt the same approach.
Movers & Shakers of the week
Capital markets partners Julian Stainer and Gareth Jones have both left Berwin Leighton Paisner to join Pinsent Masons in the firm’s London office
Anand Damodaran is set to join Kirkland & Ellis from Ropes & Gray as a partner in its Investment Funds group in London
Allen & Overy’s Washington office loses partner and co-head of global competition John Terzaken to Simpson Thacher & Bartlett