Crypto and Eurodollars: Europe’s Next Opportunity

Venture capital firm A16z said they will continue to push for more regularity clarity in the US for crypto, following its announcement regarding the opening of its first non-US office in the UK. Almost every crypto company in the US has been the subject of some sort of enforcement action or lawsuit. Even Kim Kardashian…

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Venture capital firm A16z said they will continue to push for more regularity clarity in the US for crypto, following its announcement regarding the opening of its first non-US office in the UK. Almost every crypto company in the US has been the subject of some sort of enforcement action or lawsuit. Even Kim Kardashian has been targeted by the SEC.

In the US uncertainty reigns as to whether cryptoassets are securities, commodities or something else. At the same time, the EU and the UK have been busy creating a regulatory framework for cryptoassets, with MiCA, the HMT Consultation, the DLT pilot and other initiatives. This begs the question of whether there have been historical examples of the US regulatory environment spurring growth and innovation outside the US.

We believe the development of the Eurodollar in the 1950s-60s is one such example.

It started in the Midlands

1955, like today, was a period of significant interest rate hikes, with UK Bank rate reaching a post-war high of 4.5%. Deposit rates were low, Gilt rates were high, so clearing banks like Midland sought to attract dollar funding which were capped by Regulation Q. The dollars came from Marshall Plan funds in European commercial and central banks, as well as the US balance of payments deficit. It converted the dollars into sterling in the FX forward market and lent the proceeds to its clients, a model that quickly spread.

A secondary source of funds were Communist states such as China and Russia who were afraid of having their assets confiscated or frozen by the US, particularly after the 1949 Berlin Blockade and the 1956 Hungarian Uprising. In some ways this is a sentiment shared among BRICS nations and has led to talk of ‘de-dollarisation’. One of the banks used by the Soviets was the Banque Commerciale pour l’Europe du Nord – Eurobank. Allegedly, since this bank’s telex address was EUROBANK, the dollars deposited there became known as Eurodollars.

Luxembourg and Italy

The first Eurobond, a loan to Italy’s Autostrade, was issued on the Luxembourg Stock Exchange in 1963 owing to its attractive tax framework. As a bearer bond with unregistered investors, its holders were exempt from paying tax on interest payments, which was to be a defining characteristic of Eurobonds. Similarly in Italy, beneficial regulations contributed to the accumulation of Eurodollar deposits by Italian banks owing to non-resident foreign currency deposits not being subject to reserve requirements. The first floating-rate note followed in 1970 and Eurocredits soon after.

The Interest Equalization Act, a tax on US purchases of foreign bonds designed to inhibit the flow of dollars out of the US gave further impetus to the new Eurodollar market.

The rising demand for Eurodollars led to another significant financial innovation: London Interbank Offered Rate, which was created by a Greek, Minos Zombanakis. The idea was to form bank syndicates that would lend Eurodollar deposits with interest recalculated by reference banks at regular intervals. The first loan to use the rate was an $80m loan to the Shah of Iran in 1969.

While these innovations took place in Europe, the modern-day US is a paragon of creativity. Many of the leading crypto companies and projects are American. However, with industry and regulators at loggerheads, a judiciary being asked to deliberate and the legislative branch unable to legislate, the prospects in the short-term are not positive.

It’s too early to tell what the implications of this might be, but it certainly presents the rest of the world with an opportunity. It remains to be seen what digital assets can bring but certainly the prospect of placing money, value and wealth on the Internet should create significant benefits for those jurisdictions that choose to embrace it. 

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