Tim’s Tech Tidbits #7

Photo by Dmitry Demidko on Unsplash

Hi friends,

Whose side are you on? Over the last two weeks, divisive views on the Russian-Ukraine conflict have been bombarding my feed on social media platforms. On one side, there is NATO and its allies, who believe that the invasion was not justified and assert their rights to intervene in a series of sanctions designed to cut Russia from the global economy. The other end, there is Russia, who feels threatened by what they deem as “broken promises” of NATO and its increasing sphere of influence across Eastern Europe. It is also worth noting that foreign powers have historically invaded Russia through Ukraine in both world wars.

The topic has polarized many people on social media into two camps on diametrically opposite ends of the spectrum. The outcome of this has also festered an extremist mindset of “either you are with or against us.” I am of the belief that a highly complex and nuanced situation requires a balanced assessment and careful consideration of both side’s perspectives. In this vein, I will be presenting opposing viewpoints in today’s topics and hope you will walk away with a better and more holistic understanding on each topic.

Today’s topics

1. The flip side of sanctions on Russia — its effectiveness and impact
2. Gold versus Bitcoin — which is the real safe haven? (Part 2)
3. The case for including BNPL into credit scores

The flip side of sanctions on Russia

• Russia’s invasion of Ukraine has led NATO and its allies to impose a series of economic sanctions designed to disconnect Russia from the global financial system. These include cutting Russian banks off SWIFT, freezing access to Russia’s $640 billion foreign exchange reserves, and banning US citizens and businesses from dealing with Russian central bank
• The purpose of these sanctions is to apply pressure on the Russian government with the hopes of making Russia bend to the will of NATO and its allies. The leader of a country is almost never directly impacted by these sanctions. Rather, the goal is to inflict pain on the nation’s citizens with the hopes that they will rise up to remove their leader from power. In essence, sanctions were sadly designed to inflict maximum hurt on the most vulnerable segment of the population. Sanctions may actually empower the very regimes they intended to weaken by turning them into the sole provider for a desperate population
• While economic sanctions may neutralize short-term risks associated with the Russian-Ukraine conflict, it might actually inflict longer term damage on the US and the US dollar system. The sanctions forces Russia (and presumably other countries watching on the sidelines) to develop their own financial infrastructure to reduce their dependence on the US dollar. Ironically, this erodes the dollar’s dominance and may give rise to alternative systems based on other currencies

Gold versus Bitcoin — which is the real safe haven? (Part 2)

• In the prior newsletter, we talked about the flight from risk towards gold and away from bitcoin, and how the markets may have fundamentally gotten this wrong. This peculiar phenomenon appears to be playing out over the past week. As Russian citizens saw their savings evaporate with the ruble declining almost 30% against the US dollar, there was a surge in demand for bitcoin. A similar situation played out in Ukraine where there was a flight towards cryptocurrencies over concerns of a financial system collapse in light of the war
• On surface, the news appears to be bullish for bitcoin and crypto in general and validates the thesis that more and more people believe in crypto as a store of value. We might look forward to a proper “decoupling” of the stock and crypto performance in the near horizon. In fact, bitcoin was trading at an eye popping 40% premium on local crypto exchanges in Russia! Heck, there was even a panic buying of luxury goods as people tried to find alternative ways to preserve their wealth. That said, imagine for a moment that you were stuck in a similar situation — would you (A) buy bitcoin and transfer to a cold wallet in a few clicks and have it with you at all times or (B) drive to the nearest luxury boutique, buy a bunch of watches and bags and lug it around? I hope the answer is clear here otherwise you NMGI 🙂
• Given crypto is a decentralized technology that is made available to everyone, there is a possibility that Russia may rely on crypto to circumvent the sanctions. We have seen an increasing number of precedents, from Iran to North Korea. Such an event may be the last straw for the US government and prompt them to clamp down hard on crypto to close out loopholes that undermine the effectiveness of government policies. Depending on the extent of regulations, this could either accelerate regulatory clarity and hence mass adoption, or impose a blanket ban which would be hugely bearish for crypto industry

The case for including BNPL into credit scores

• The three main credit reference agencies will soon include Buy Now, Pay Later (BNPL) data into customer credit details given the increasing popularity of such services over the last few years. Equifax, Experian and Transunion have announced plans to start including BNPL loans to its credit reports within this year, in a move that would provide lenders with a more comprehensive picture of the borrowers’ financial position
• One of the unique selling points of BNPL has been the lack of credit implications. Integration with credit reference agencies could negatively impact the kind of loans struggling customers can get, though this begs the question of whether this is the most prudent thing to do, particularly when BNPL providers typically partner merchants for non-essential spending, such as fashion and retail brands
• That said, BNPL could also function as a way for consumers with shaky credit histories to get back on track or for new consumers to start building their credit score by taking out a BNPL loan and paying the installments in full and on time. This would help support financial inclusion and wider access to credit, providing greater fairness and transparency for consumers and creditors alike. This is especially relevant in developing countries where a majority of the population is unbanked or underbanked, and consumers have little to no formal record of credit repayment, which creates a vicious cycle whereby credit never becomes accessible

If you like to discuss any of the themes, trends or topics further, please feel free to reach out. I would also love to get any thoughts and suggestions on the above.