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Autumn 2021
Scottish independence:
Brexit all over again?
A second referendum may well be on the horizon,
which could lead to a number of difficult regulatory
and economic decisions
Africa Awards Merger Control Securities Tokenisation R&I Report
CONTENTS
6 Africa awards
Brexit all over again?
10 Cover story 28 National Security Quarterly
Regulars Banking and finance Corporate insolvency &
4 Leaders 18 DeFi: a pathway forward
restructuring report
72 Local insights 35 Feature
21 Swiss securities
80 Closing conditions tokenisation 39 Denmark
24 Cross-border financing in 43 Germany
Cover story Switzerland 48 Luxembourg
10 Scottish independence: 53 Mexico
Brexit all over again? Corporate
58 Poland
28 National Security
Quarterly 63 Russia
31 Merger control overview 68 Switzerland
Features
6 Africa Awards winners
Autumn 2021 Vol 92
“It might be that in due course trading patterns look
SUBSCRIPTIONS
UK/Asia hotline
different, it depends on what Scotland’s relationship
Tel: +44 20 7779 8999 with the EU would be, but the idea that Scotland
US hotline
Tel: +1 212 224 3570 would simply rejoin the EU is naïve”
Email: hotline@euromoney.com Economist John Kay discusses Scotland’s options post-independence
AU T U M N 202 1 | I FLR .C OM | 1
EDITORIAL
4 & 8 Bouverie Street, London EC4Y 8AX
Email:
For one last time… [firstname].[surname]@euromoneyplc.com
Customer service: +44 20 7779 8610
EDITORIAL
Managing editor John Crabb
F
or those of you who missed my email in late September, this will be the final john.crabb@euromoneyny.com
print edition of IFLR magazine. After nearly 40 years and hundreds of editions +1 212 224 3402
Senior commercial editor Prin Shasiharan
CONTRIBUTING it is time to call it a day. prin.shasiharan@euromoneyplc.com
EDITORS This wasn’t an easy decision. IFLR magazine has been part of the furniture at +44 20 7779 8004
Commercial editor Lorraine Yardley
Euromoney since 1982. Once a monthly journal, the magazine has evolved over time, lorraine.yardley@euromoneyplc.com
+44 20 7779 8554
changing to a bimonthly and later, a quarterly. Asia editor Karry Lai
IFLR magazine was one of the first things I really noticed when I joined the karry.lai@euromoneyasia.com
+852 2842 6927
company, something that young journalists aspired to be a part of. During my time, Senior reporter Alice Tchernookova
Amanda Baker introductory editorials from Tom Young, Amélie Labbé and later, Lizzie Meager always alice.tchernookova@legalmediagroup.com
Mayer Brown +44 20 7779 8106
set the tone for what would come in the issue and the biggest topics of the moment. EMEA reporter Natasha Teja
natasha.teja@euromoneyplc.com
Geoffrey Belsher Part of me knew that eventually it would be my responsibility to write that introductory +44 20 7779 8373
Blake Cassels & message – but never did I expect to be writing this, the last. Americas reporter Noah Zuss
Graydon noah.zuss@euromoneyny.com
This move may not come as a surprise. The decision to kill print has been taken +1 212 224 3403
Vanessa Blackmore frequently across the industry in recent years, from NME to the Weekly Standard to
Sullivan & Cromwell EDITORIAL ADVISORS
Teen Vogue, there is a long, long list of titles that have taken the decision to ‘go digital’. Peter K Brechan, Simon J Davies, Robert
When Institutional Investor, one of our publisher Euromoney’s flagship titles, took the DeLaMater, Robert Dilworth, Bruce Duncan,
Tim Bratton Phillip Fletcher, David Graham, Ed Greene,
Euromoney step last year, it seemed that the writing was very much on the wall. Philip McBride Johnson, Michael Kenny,
Institutional Investor Paul Kruger, James Leavy, Juhani Makinen,
The decision itself was made following extensive feedback from our subscribers. We John D Moore, Enric Picanyol, Graham
Harry Broadman regularly talk to our readers to help determine how best to improve our offering and Penn, Glen Rae, Gilles Saint Marc, Peter
Siembab, Patricia Sindel, Bertil Södermark,
Berkeley Research ascertain subscriber needs. The IFLR team and I believe these changes will allow us to Philip Wood, Christian Zschocke
Group
provide a better service to you. The pandemic has changed the way we work, and the
Global head of sales, LMG Richard Valmarana
Melissa Butler feedback confirms that most subscribers are no longer receiving copies on desks, and no MD, market intelligence Timothy Wakefield
White & Case UK production manager Luca Ercolani
longer need them.
Production editor Josh Pasanisi
Rodrigo Castelazo Our team wants to ensure that you receive the IFLR content you expect and that it
Creel García-Cuéllar ADVERTISING
reflects this new way of working. Without resorting to clichés, we believe a fully digital Publisher
Aiza y Enríquez
offering is the best way to achieve that. Liam Sharkey
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Lewis Cohen We are also very conscious of global sustainability efforts. While it is only a small act, +44 207 779 8384
DLx Law not printing thousands of copies every quarter to be distributed globally will ensure we BD Manager, Americas
Chris Edouard
maintain the very standards we promote on the website each and every week. More on chris.edouard@legalmediagroup.com
Berkeley Cox +1 212 224 3494
King & Wood that in Closing Conditions on page 80.
BD Manager, Asia
Mallesons When the planning for this edition started, there was of course the option to issue a Anicette Indiana
anicette.indiana@euromoneyasia.com
backward-looking magazine that summarised the last four decades of IFLR magazine +852 2842 6966
Antony Dapiran
Davis Polk & Wardwell and highlighted some of the best editions, covers and features. Perhaps this might have BD Manager, EMEA
Sanawa Mtalo
been the correct approach, but in the spirit of being a forward-looking, reactive sanawa.mtalo@iflr.com
Jeremy Duffy publication that does not hold on to the past, we took a different path. +44 207 779 8339
White & Case
With that in mind, for this last ever IFLR cover story I took it upon myself to put SUBSCRIPTIONS
Sui-Jim Ho together an article that couldn’t be much more forward looking, an in-depth analysis Subscriptions hotline
Hussein Shirwa
Cleary Gottlieb Steen into the annals of Scottish independence. Before the referendum, the concept of Brexit Tel: +44 20 7779 8626
& Hamilton hussein.shirwa@legalmediagroup.com
as it pertained to legal and financial journalism seemed so alien that the very thought of
Joel Hogarth it seemed impossible. After it happened, the rush to cover the nitty gritty details started CUSTOMER SERVICES
Reliance Group Tel: +44 20 7779 8610
in earnest and has barely slowed some five years later. Who is to say if the same won’t be
Posit Laohaphan said for Scottish independence in a decade’s time? International Financial Law Review
is published four times a year by
Latham & Watkins Many of you may doubt that Scotland will ever separate from the United Kingdom, Euromoney Institutional Investor PLC,
it may well never happen. But, to assume the status quo will remain in place when such London. The copyright of all editorial
Ward McKimm matter appearing in this Review is reserved
Shearman & Sterling a large portion of a population supports something is verging on arrogance. It may well by the publisher. No matter contained
herein may be reproduced, duplicated or
happen, and this time – like so many times before – IFLR has done its homework. So, copied by any means without the prior
Jeffrey Singer on page 10, we take a closer look at all the regulatory and legal implications that the consent of the holder of the copyright,
Stikeman Elliot requests for which should be addressed to
financial markets of the UK and an independent Scotland would face in the run up to the publisher. No legal responsibility can
Clive Wells and after, a vote for independence. be accepted by Euromoney Institutional
Skadden Arps Investor, International Financial Law
Elsewhere in the issue are some old favourites. On page 4, our journalists give their Review or individual authors for the articles
opinions on the topics of the moment, we highlight all of the winners at the recent which appear in this publication. Articles
that appear in IFLR are not intended as
Africa Awards on page 6, and as ever we have included a litany of excellent contributed legal advice and should not be relied upon
as a substitute for legal or other
content, starting on page 18 with a close look into decentralised finance. professional advice. The views expressed
This change can only be for the better. IFLR has evolved. What we have become will by contributing authors do not necessarily
reflect the views of the firm they work for.
be far brighter and far better for everyone, myself included.
So, without further ado and for one last time. Enjoy the issue. Directors Leslie Van De Walle (Chairman),
Andrew Rashbass (CEO), Wendy Pallot,
Jan Babiak, Colin Day, Imogen Joss, Lorna
John Crabb, Managing Editor Tilbian, Tim Pennington
@johncrabb_ Printed in the UK by Buxton Press, Buxton,
England
International Financial Law Review 2021
ISSN 0262-6969
2| I FLR .C OM | AU T U M N 202 1
ONLY ONLINE
PODCAST IFLR Podcast: Hope Jarkoswki
In this edition, John Crabb speaks to the head of equities at the New York Stock Exchange about the
state of the US capital markets, the IPO market, SPACs and the general regulatory landscape
EMEA Concerns with UK plans to diverge from EU GDPR
The British government recently announced plans to revamp its data rules, marking a significant
point of divergence from the EU since Brexit
ASIA Archaic laws stunt SPAC growth in India
Business friendly tax laws are necessary to prepare Indian startups as potential SPAC targets, if the
country wants to attract the popular IPO route
EMEA Digital euro enters the next phase
The project enters the next phase of its inception but questions surrounding regulation, design and
use of distributed ledger technology remain murky
AMERICAS End in sight for Puerto Rico’s debt restructuring saga
The Caribbean island’s sluggish economy is stunted by territorial debt, choked by population loss, and
battered by natural disasters, but there may be brighter days ahead
DEAL Thai Union’s sustainability-linked bond explained
The first-of-its kind deal introduced step-up and step-down coupon rate features linked to
sustainability targets
AU T U M N 202 1 | I FLR .C OM | 3
LEADERS
AMERICAS harder, and therefore make the nation better
and more thoughtful on a myriad of critical
QUOTES Time to shut issues.
Yet, the US economy remains the paragon
OF THE MONTH revolving doors for the world, capital markets are strong, and
the sector contributes significant portions to
The so-called “revolving door” between the gross domestic product. We don’t want to
“So far, I have not seen regulators and business has polarised critics hamper it.
evidence to suggest that and defenders. Former US financial regulators But in times of financial stress and
banning payment for order are not bound by the strictest rules for moving economic downturns the spectre again is raised.
flow is going to be beneficial between government and private business, Champions for greater regulation and stronger
and this has presented a paradox – ̶ rules will note that systemic failures – ̶ most
to retail investors”
particularly for combating climate change – ̶ recently the 2008 great financial crisis – ̶ are
Hester Peirce, SEC Commissioner, when former regulators have moved to worsened if not stem from inadequate
discusses the PFOF debate lucrative private business positions at law transparency and oversight, possibly emanated
firms and large financial firms. from a too-chummy relationship and cross-
The phenomenon has led to worries over pollination between regulators and business.
“This open access approach regulatory capture and influence peddling
supports a vastly more from the private sector to favour light-touch ASIA
inclusive type of financial regulation and decreased scrutiny for the
innovation, but has raised
finance industry. China’s bond defaults
Investor advocacy groups, including Better
concerns among Markets, have criticised this revolving door. have come of age
policymakers that it could at Dennis Kelleher, president and CEO of
some point give rise to an Better Markets, said one career move earlier Chinese corporate bond defaults hit a record
this year was exemplary of an epidemic of high of RMB116 billion ($18 billion) in the
alternative financial system” “regulators selling out” to the highest bidder. first half of 2021 and are expected to rise in
Lewis Cohen and Alex Lipton discuss the “Congress should outlaw it by prohibiting the months to come. Defaults are also
promise of DeFi on page 18 former regulators from working directly or getting bigger, with defaulters having
indirectly for any entity within their jurisdiction RMB8.7 billion onshore bonds outstanding
while they were in government for not less than on average, according to Fitch. This is 1.6
“What will be surprising to five years,” he wrote in a statement. times the size of defaults in 2020 and three
most observers is that the While one-offs like this may be jarring times that of 2017. While these are worrying
greatest number of and raise hackles of investor protection types, signals for investors in the Chinese bond
at the very least, the optics of that particular market, there are also signs that regulations
notifications to CFIUS in hire were awful: they smacked of a back- and infrastructure for market-oriented debt
2019 and 2020 involved slapping boy’s club financial in-crowd that has resolutions are developing, albeit slowly.
Japanese-sourced deals” harmed the fortunes of both retail investors From property developer China
Harry Broadman, partner at Berkeley and Main Street. Evergrande to China Huarong Asset
Research Groups, discusses the 2020 A likely counterargument to bolstering Management, bond defaults, especially of
CFIUS report on page 28 rules is that this would limit choices for state-owned enterprises, have caused jitters in
former regulators. It would. A former the global market. Zombie companies and
regulators’ employment options would be insolvent local government financial vehicles
circumscribed for five years, but not to an are common default candidates but the real
“We cannot afford to have a injurious degree, and they are not barred from estate sector could be hit hard.
split focus to investing or business for life. All eyes are on Evergrande, which is sitting
providing funding for a new If the revolving door is so deleterious, on a $300 billion mountain of liabilities, and
sub asset class, any shouldn’t the financial system fall apart? Not whether the Chinese government will decide
infrastructure that we're exactly. Besides, that’s an unnuanced to bail out the debt-laden company. As China’s
argument and a low bar for doing anything. state-owned banks are the biggest creditors of
looking to finance or develop Regulation lives in greys, it is not a matter the company, they rank high on the liability
has to – nine times out of 10 – of black and white. Besides, former regulators’ waterfall and will be prioritised before private
be sustainable” options are not inherently limited by some investors, including bondholders.
Kome Johnson-Azuara, associate vice- faceless and malevolent force. While the practice of government bailouts
president at the Africa Finance If one firm could not hire a former US may have been frequent in the past, China is
Corporation, stresses the importance of regulator for a longer period, there could be shifting gears towards more tolerance for
sustainability good results, like others having a turn. That defaults of unfit firms in an effort to push for
would likely bring in fresh thinking or market opening and discipline. State-owned
individuals from historically underrepresented enterprises have long been favoured by the
groups. Increased diversity and hires with government and benefited from implicit debt
different experiences make everyone think guarantees. By drawing a line between what is
4| I FLR .C OM | AU T U M N 202 1
LEADERS
systemic and what is not, the central company’s struggles may signal wider
government is injecting more credit risk into regulatory concerns for crypto asset and crypto
the financial system and pushing investors to exchange firms. There seems to be a
OFF THE
think about their risk appetite, rather than
relying on the government to bail out
worldwide push from regulators demanding
further transparency from crypto exchanges. RECORD
distressed borrowers. It is also sending a signal In South Korea, authorities raided the
to companies that they can no longer rely on offices of Bithumb and Coinbit over
“The UK could easily go to
the government to help them out. allegations of fraud. Crypto scams have not
The momentous task the Chinese only been rising in the country but elsewhere Iceland, Ireland, Cyprus or
government now faces is to ensure that in the world, driving regulators to take on a Malta and say, ‘come and join
defaults happen in an orderly fashion in its de- microscopic view on crypto. Recent moves in us and we'll protect you’, but
risking campaign. A number of initiatives are China to ban cryptocurrency transactions if you're starting to arbitrage
being taken to clean up the bond market. altogether highlight how far some
The primary focus is on cleaning up the governments are willing to go.
states like that it is
rating agency sector. In August, five central completely the opposite
government bodies, including the China AML concerns discussion of what it's
Securities Regulatory Commission and the It’s not just regulators that have showed packaged up as being, which
China Banking and Insurance Regulatory concern with Binance and crypto more
Commission, issued rules for rating companies generally, a number of large banks have revoked
is Scottish independence”
detailing standards for disclosures, corporate Binance’s access and vowed to review their London based private practice lawyer on
governance, and business operations. They are approach to crypto at large. Both regulators and Scotland joining the EU on page 10
required to be stringent about rating scores banks have cited the risk of money laundering
based on the probability of defaults and reduce as a key reason for these actions. “The Commission is very
the proportion of high-rated bonds, a practice The UK recently announced proposed focused on consolidated tape,
that has been common for domestic rating changes to its anti-money laundering rules
which will provide investors
agencies that want to attract potential clients. (AML), placing a key focus on cryptocurrencies.
Another priority is to develop the legal Among the key proposals is a requirement that with more visibility on the
infrastructure for courts to deal with defaulters. any virtual asset transfer over $1,395 be performance of different
Court restructurings of defaulters are accompanied by detailed personal information trading mechanisms, thereby
beginning to take shape as the market starts to on the originator and beneficiary. improving best execution and
accept court-led workouts. However, legal These increased regulations have spooked
precedents for bankruptcy proceedings are still some crypto firms because it undermines the
showing which kinds of
new. For offshore bondholders, the process is ease and unregulated nature of crypto trading infrastructure are
slow and arduous. What will help in the future exchanges themselves. Nevertheless, Binance’s optimal for them”
is streamlining of documentation, whether it story is a warning to other crypto firms that A source close to the European
is for transfer or liquidation, to ensure that their days operating in a regulation-free zone Commission told Practice Insight
investors can do repatriations. It remains a are nearly over.
challenge for offshore bondholders to find
“This is about evolution – not
recourse when they are structurally Stifling innovation
subordinated to onshore claimants and face While it’s universally agreed that having robust revolution. We played a
challenges such as delaying tactics and lack of anti-money laundering (AML) and central role in devising EU
transparency in the legal process. countering terrorist financing (CTF) measures rules over the past decades. We
in place is essential, there’s always been a key have no intention of turning
EMEA concern that too much regulation could stifle
innovation. Nevertheless, with crypto the
our back on those, or to engage
Binance crackdown opposite could be true. in a race to the bottom”
Businesses are found to be more willing to UK Treasury official on post-Brexit
has wider implications partake in business if they can enjoy the divergence
comfort of knowing there is a robust
In recent months, cryptocurrency exchange regulatory framework to cushion potential “While this issue will not be
Binance has faced increasing regulatory problems. “Clarity is key in driving innovation
scrutiny worldwide. The company has even – if Her Majesty’s Government sets out a clear
completely unique to Asia-
been forced to cease operations in the UK, framework it could actually encourage Pacific, it may be amplified
Singapore, Australia and South Korea. The innovation and investment into the UK,” said here because of the
UK’s watchdog, the Financial Conduct Chris Bostock, director of Deloitte’s forum for prevalence of the use of US
Authority (FCA), has said that Binance tackling illicit finance.
dollar in the international
cannot be properly supervised and poses a Ultimately, the UK’s AML/CTF
significant risk to customers. Other countries framework is not intended to limit commercial syndicated loans market”
have echoed the same criticisms. growth. It’s a mechanism that’s intended to International bank source discusses the
While it may seem that Binance has been ensure safety and integrity within commercial use of SOFR outside of the US
the key target for regulatory scrutiny, the transactions.
AU T U M N 202 1 | I FLR .C OM | 5
IFLR AFRICA AWARDS 2021
All the winners from IFLR’s Africa awards 2021
I
FLR is delighted to announce the winning deals, teams,
law firms and individuals for the second edition of its
IFLR Africa Awards.
This announcement follows months of research by the
team and careful deliberation by the editors and IFLR
journalists that make up the internal judging panel.
The core objective of the awards is to recognise legal
innovation in cross-border transactions. To be considered,
all deals must have reached financial close between June 1
2020 and May 31 2021, as well as meet pre-defined criteria
to be considered cross-border and jurisdictionally African.
The most significant theme running through the IFLR
Africa Awards research this year was that of resilience. Legal
innovation and cross-border deal making is invariably
complex, but the global pandemic and associated knock-on
effects fully tested the abilities and perseverance of all
stakeholders. In the face of this adversity, law firms and
practitioners getting deals done on the continent rose to the
challenges admirably.
There was a raft of pioneering work analysed by our
research team that reached across all areas of Africa, and the
list of winners below reflects the innovative, cross-border
legal advice that allowed the most transformative business
transactions to reach completion.
6| I FLR .C OM | AU T U M N 202 1
IFLR AFRICA AWARDS 2021
The winners’ award presentation, in Cliffe Dekker Hofmeyr National firm
which we reveal the winners and talk about Clifford Chance
some of the highlights from the research, Conyers Dill & Pearman awards
can be viewed below. Webber Wentzel
To find out more about business Werksmans Angola
development and marketing related to the ASP Advogados
awards, please contact: Liam Sharkey: Project finance
lsharkey@iflr.com Beitbridge border post modernisation Botswana
On behalf of the research team, thank project Bookbinder Business Law
you to everyone who took the time to Allen & Overy
contribute through submissions and BLC Robert & Associates Ethiopia
interviews, and congratulations to all the Bowmans Aman Assefa & Associates Law
winners. DLA Piper Africa, Mauritius ( Juristconsult
Chambers) Ghana
DLA Piper Africa, Zimbabwe (Manokore JLD & MB Legal Consultancy
Regional awards Attorneys)
Eversheds Sutherland Kenya
International law firm of the Gill Goldlonton & Gerrans Anjarwalla & Khanna
year Harneys
Clifford Chance Herbert Smith Freehills Mauritius
Werksmans BLC Robert & Associates
In-house team of the year
African Export–Import Bank Restructuring Mozambique
(Afreximbank) TAV Airports restructuring CGA – Couto Graça & Associados
Cabinet Donia Hedda-Ellouze Ellouze &
Legal network of the year Belajouza-Felli Morocco
ALN Ciftci Law Firm Clifford Chance Morocco
Clifford Chance
Meziou Knani & Khlif Namibia
Deals of the year NautaDutilh ENSafrica
Shearman & Sterling
Capital markets Sibel Ertekin Law Office Nigeria
Banque Ouest Africaine de Aluko & Oyebode
Développement sustainability bond Editor’s choice impact award
Dechert African Vaccine Acquisition Trust OHADA
White & Case (AVAT) Covid-19 vaccines Asafo & Co
Appleby (Mauritius)
Domestic Slaughter and May Rwanda
Nigerian Stock Exchange ENSafrica
demutualization
Aluko & Oyebode Teams of the year South Africa
Bowmans
Loans Capital markets
Trade and Development Bank White & Case Tanzania
pandemic relief loan ALN Tanzania|A&K Tanzania
Clifford Chance Loans
White & Case White & Case Tunisia
Donia Hedda-Ellouze, Ellouze &
M&A M&A Belajouza-Felli
Stripe / Paystack Payments Clifford Chance
Aluko & Oyebode Uganda
Fenwick & West Private equity ALN Uganda MMAKS
Orrick Herrington & Sutcliffe Clifford Chance
The New Practice Zambia
Project finance Bowmans
Private equity Herbert Smith Freehills
Capitalworks / Peregrine Zimbabwe
Bedell Cristin Partnership Restructuring DLA Piper Africa, Zimbabwe
BLC Robert & Associates Clifford Chance (Manokore Attorneys)
AU T U M N 202 1 | I FLR .C OM | 7
IFLR AFRICA AWARDS 2021
Capital markets firm of the Loans firm of the year: Project finance firm of the
year: Nigeria South Africa year: Nigeria
Aluko & Oyebode Templars
Allen & Overy
Capital markets firm of the M&A firm of the year: Nigeria Project finance firm of the
year: South Africa Aluko & Oyebode year: South Africa
ENSafrica Bowmans
M&A firm of the year:
Loans firm of the year: Nigeria South Africa
Aluko & Oyebode Webber Wentzel
Individual Awards
Rising stars of the year award In-House Market Maker
Okechukwu Okoro – G Elias & Co Magase Mogale – Africell
Tiwalola Osazuwa – Aelex
Lifetime achievement award
IFLR Women Dealmakers Iqbal Rajahbalee – BLC Robert &
Hall of Fame Associates
Brigette Baillie – Herbert Smith
Freehills
8| I FLR .C OM | AU T U M N 202 1
COVER STORY
Scottish independence:
Brexit all over again?
For this edition of IFLR, Managing Editor John Crabb looks at the
financial and regulatory implications that could arise from Scotland
leaving the United Kingdom
By John Crabb
I
n 2014, the question of an independent Scotland was
supposed to be put to rest for a generation. Those against
edged out those in favour by 55.3% to 44.7% and the issue
was deemed resolved: Scotland would remain a part of the
UK, as it had been since 1707.
Except, just under two years later the terms upon which this vote
had been made were drastically changed. When the Leave campaign
voted to remove the UK from the European Union, the prospects
for Scotland’s future outside of the bloc did too.
In the five years since, there has been a growing dissent within
much of Scotland and that which ought to have been put to bed,
the question of independence, has been a constant point of
contention.
Despite failing to win an outright majority in the Scottish
parliamentary elections earlier this year, the ruling Scottish National
Party (SNP) claims that there is a growing mandate for a second
referendum, which they refer to as ‘Indyref2’, and continues to push
the UK parliament in Westminster to grant it.
However, in an attempt to maintain the integrity of the union
and keep Scotland united with the rest of the nation, and to avoid
being the leader to ‘lose Scotland’, UK prime minister Boris
Johnston has publicly quashed the idea and outright rejected this
request. Yet, with a significant majority of the ‘yes’ voting Scottish
public falling into younger age categories it seems likely that a
second referendum will arise at some point. It is a question of ‘when’
and not ‘if ’, suggest experts.
So, with the much-heralded COP26 event in Glasgow nearly
upon us, which will turn the world’s eyes momentarily onto
Scotland, for this final edition of IFLR magazine we have decided
to focus on the implications of Scottish independence for the
financial markets, of course with a legal and regulatory twist, as we
do best at IFLR.
Like Brexit before it, the financial implications of Scotland
leaving the UK would be huge and would likely take years or even
decades to iron out. Key debates would focus on how to break up
the UK’s existing debt implications fairly; what currency an
AU T U M N 202 1 | I FLR .C OM | 11COVER STORY
“It’s only when you are de jure
independent that – formally speaking –
you can apply to accede to the EU”
– Andrew Wilson
independent Scotland would adopt; whether euro, remove the need to rewrite an entire happens prior to independence and what
the new country would be granted rulebook of civil laws and regulations, and happens the day after. The first step would
membership into the EU and how long that generally ease the financial burdens that a be to set up a central bank and a debt
might take; establishing a central bank, and fledgling country might face. management office that mirror existing
the not-so tiny issue of what would happen Were it not for Spain, there would be fiscal rules and regulations in the UK so as
to the established global asset management little to stop this from happening. Except, to avoid legal divergence and a potential
and banking institutions currently domiciled perhaps, from within England. meltdown.
in Scotland but by not confined to its “It would not be easy at all, it would be a Assuming the Scottish central bank
borders in terms of activities. very serious thing indeed and I don’t know would be the regulator of Scottish financial
This is by no means exhaustive and does how the UK would react - I suspect institutions, very quickly this would lead to
not even consider some of the other – extremely strongly,” one well known anti- significant balance sheet issues. “Most of the
hugely difficult – concerns such as independent voice tells IFLR. Scottish financial institutions that are off
establishing a border or how to handle trade “The UK could easily go to Iceland, scale have already said that they will
with England (or the rest of the UK), Ireland, Cyprus or Malta and say, ‘come and technically redomicile to London for the
currently Scotland’s biggest trading partner. join us and we’ll protect you’, but if you’re purposes of regulation for their overall
starting to arbitrage states like that, if you’re business,” adds Wilson, who adds that this
The 28th State having that sort of discussion it is would not lead to job losses for Scotland.
Among the most prominent debates is completely the opposite discussion of what “If you are a banking group the size the
whether an independent Scotland would be it’s packaged up as being, which is Scottish former RBS group was or even NatWest
able to join the EU following its divorce independence.” now, the bulk of your assets (loans) and
from the UK. It has been touted as an The only way of making independence activities are outside Scotland and are
obvious solution by the SNP and those in viable, they continue, is to have Scotland regulated where they are focused, in this case
favour of independence, but is certainly not rejoin the EU, which he suggests would be London. The Scottish central bank would
a simple proposition. deemed constitutional arbitrage. focus on the domestic Scottish activities of
It is by no means a secret that one of the If Scotland were unable to negotiate banks in Scotland.”
biggest roadblocks hindering the Scottish terms of joining the EU prior to leaving the It is hard to see how losing your biggest
independence movement is the objections of UK, it would put the country into a financial players would be good for a new
Spain, the fourth-largest economy in the transitionary period during which it would country’s financial system, but in reality the
EU. The Spanish region of Catalunya has have to establish its own financial system prospects of a financially independent
been debating independence for decades but independent of both the UK and the EU. Scotland – comprising just over 5 million
is yet to be granted so much as a legitimate This is not necessarily a roadblock. people – would be nowhere near that of the
referendum of its own, despite numerous “It’s only when you are de jure super power that is London, and nor would
unofficial victories for the separatist agenda independent that – formally speaking – you it need to be.
and a significant backing from its can apply to accede to the European Union,” Like the UK has in the years following
population. The Spanish government will says Andrew Wilson, former Member of the Brexit, an independent Scotland would be
not entertain the idea of an independent Scottish Parliament and shadow minister for able to build on the systems and regulations
Catalunya and fervently opposes Scottish finance and founding partner at Charlotte already in place. “There is a recognition that
independence to avoid precedence. Street Partners. “Countries may be able to there would need to be a central bank and a
This is a major issue for Scotland and its have informal talks in advance, and may be financial regulator, the assumption is that
separatist movement. able to accelerate the process, but some they would build upon what is already there
EU membership would solve a lot of the academics say it could take up to five years.” in terms of expertise,” says Stephen Phillips,
issues that an independent Scotland might Scotland would need to establish a partner at CMS in Edinburgh. “For
face. It would allow the country to adopt the financial policy position, deciding what instance, the Financial Conduct Authority
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(FCA) actually has quite a big establishment equivalents, which would be hugely
in Edinburgh. beneficial to Edinburgh’s asset management
In the early days, it would be very much cluster,” she says. “The issue is in the process
the case of Scotland trying to mirror what of joining the EU, the evidence suggests that
the UK was doing and not trying to deviate that is a very long process.”
too far away from that again. While the end point of having single
“That will spill out if there is much more market access would be valuable to the
divergence between the UK and the EU industry, there would be a significant period
because of Brexit. It would be an issue for an of uncertainty while that was worked out.
independent Scotland because there would Regarding the UK banking system,
be more of a pull towards Europe,” he adds. Nicholas Macpherson, Baron Macpherson of
“There would certainly be an attempt by Earl’s Court, and former permanent secretary
Scotland to try to keep and keep as close as to the Treasury from 2005 to 2016, does not
possible to the UK regulatory methods but think “Scotland gives a damn any more about
at the same time it would probably to try to banks because they are all in London anyway”,
leverage off the fact that it would be seeking but agrees that there are issues around the
to join the EU, or at least have a closer
relationship with Europe.”
“If independence Edinburgh asset management industry and
what happens to Standard Life, Abrdn, Baillie
Scotland could look for market access, meant Scotland Gifford, etc. Most of their assets are not in
and perhaps even “act as a bridge between Scotland, despite being headquartered there,
the two”, he adds. became a member but there would be issues.
Banks planning to serve the Scottish “The big players might re-headquarter to
market would also have to establish state, then obviously London while having serious businesses in
subsidiaries within the country to serve the Scotland, just as Baillie Gifford have opened
Scottish market, but given that Scottish financial institutions an office in Dublin to deal with aspects of
banks deposit ratios are healthy in terms of
safety – which impacts regulation – excessive
in Edinburgh would leaving the EU – a lot of businesses would
ride two horses,” he says. “In the process,
regulatory change would be unlikely.
“You wouldn’t see change in regulatory
be able to passport Scotland would lose out more than London
has lost out in leaving the EU.”
standards at all, it would be in everyone’s again, rather than “At the moment, business regulation is
interest to keep things the same and to sort effectively tied to EU regulation, and
of grandfather the UK position into relying on Scotland would be tied to that,” he adds.
Scotland, providing stability for the financial “Obviously it would have to set up its own
sector through the transition period,” adds equivalents, which agency and depending on plans to join the
Wilson. EU it could actually tie its regulation to the
In 2014, the financial situation in would be hugely UK’s, but for Britain, ‘taking back control’
Scotland looked very different to how it
does today. While it is important to note
beneficial to means it is about to go out on its own and
carve out its own approach to regulation.”
that RBS has already confirmed intentions
to leave the country in the case of
Edinburgh’s asset In the end, most regulatory issues will
not be hugely problematic, Scotland would
independence, following the bank’s merger
with NatWest it already moved a large part
management either choose to follow the British approach
or to follow the EU approach. The EU sets
of its operations south of the border. cluster” its own regulatory parameters, and it will be
“The argument in 2014 was that the up to an independent Scotland to interpret
small Scottish economy could not withstand – Sarah Hall them in a way which it sees fit.
the burden of this financial instability, Currently, that would not require any
because the balance sheet was 15 times work at all. Whether that changes would
larger than the GDP of Scotland,” says activity, with large institutions such as very much depend on how long
professor Emilios Avgouleas, chair of Abrdn and Scottish Widows currently based independence would take and how much
international banking law and finance at the there. divergence there has been in the meantime
University of Edinburgh’s Law School. Sarah Hall, professor of economic between the UK and the EU.
“Without this, financial stability is much, geography at the University of Nottingham,
much less of a problem now than it was in suggests that there would be significant The issue of money
2014.” benefits for the asset management industry, One of the fundamental questions
Despite London’s dominance in the but it would not be an easy ask. surrounding independence concerns is
banking sector, the city of Edinburgh has an “If independence meant Scotland currency; namely, what currency an
established financial services sector. The became a member state, then obviously independent Scotland would use. There are
asset management sector, for instance, has financial institutions in Edinburgh would be three potential options: keep pound sterling,
seen some relocation of financial services able to passport again, rather than relying on adopt the euro, or come up with an alternative.
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Economics aside, each of these options However, given the political gains that waivers in certain circumstances – it would
comes with its own set of legal issues and the independence movement has made in have to agree to work towards joining the
contractual conundrums that make the the aftermath of Brexit, it seems unlikely euro.”
question hard to answer without some form that a referendum would be fought on any The euro has evolved over the years and
of pushback. In 2018, the Sustainable grounds other than rejoining the EU as has become a very stable, major currency,
Growth Commission – convened by SNP quickly as possible. This would be no easy which would offer its advantages. The
leader Nicola Sturgeon and chaired by task and would require significant economic downside would be that Scotland would
Andrew Wilson – recommended that an change, including the act of joining the become a very small part of the bigger
independent Scotland kept the pound Economic and Monetary Union (EMU) European markets.
sterling as its currency for a “possibly and therefore adopting the euro. “The other difficulty that would arise if
extended transition period”. “In the current world, an independent Scotland were to join the euro, or to create
“In the longer term, if it were in the Scotland would make no sense whatsoever his own currency, would be the technical and
rounded economic interests of Scotland to unless there is an arrangement with the EU legal difficulties of taking contracts that
develop its currency arrangements Scotland that their membership would be fast were originally written in pounds, and
would, of course, be able to introduce its tracked,” adds Edinburgh Law School’s converting them into a new currency,” adds
own currency. The Commission Avgouleas. “Fast track membership for Sampson. “This would be a huge
recommends that such a future decision Scotland would mean that the country joins undertaking. But it can be done.”
should be based on a formal governance the euro.” “The difficulties involved in creating a new
process and criteria set out clearly in advance “This would resolve the issue of bank currency mean it is probably the riskiest option
of voters making a decision on regulator – it would have to be the ECB for Scotland. Investors and holders would be
independence. Such an approach is an [European Central Bank],” he adds. worried that the currency would lose value in
absolute necessity to maximise certainty and The conditions for becoming a member, the initial days and weeks of independence, or
stability and to minimise risks,” reads the referred to as the Copenhagen criteria, insist that there would be a run on the currency and
report. prospective countries have “the ability to Scottish people earning money in the new
From a legal perspective, taking into take on and implement effectively the currency would end up much poorer than they
account contracts within Scotland that obligations of membership, including previously were,” he adds.
reference the pound for example, this option adherence to the aims of political, economic Some, however, do advocate for an
would be significantly more straightforward and monetary union”. While it would not be independent Scotland to form its own
than any other. the case that Scotland would be forced to currency. Lord Macpherson believes that
Scottish economist and Oxford fellow join the euro immediately, all members that despite the fact that Scotland spends more
John Kay agrees that the status quo would have joined the bloc since the Maastricht money relative to its tax base, the SNP could
be the best course of action and would likely Treaty in 1992 are legally obliged to adopt implement independence reasonably
cause the least problems. the euro once they meet certain criteria. successfully, if it took tough decisions on tax
“The financial issues that worry me seem Sweden, which joined in 1995, is and spending.
to be greatly exaggerated, the currency issue required to join at some stage. “The SNP would not say that ahead of
for one is straightforward,” he says. “The “Technically, if you want to join the EU, independence, but I would try to encourage
right thing to do is nothing.” you’re supposed to sign up to joining the them to be fiscally careful so that Scotland
“It might be that in due course trading euro,” says Thomas Sampson, associate doesn’t stand out,” he says. “It all relates to
patterns look different, it depends on what professor at the London School of the currency issue and the fundamental lack
Scotland’s relationship with the EU would Economics. “If the goal is to eventually of clarity around that.”
be, but the idea that Scotland would simply rejoin the EU, then unless Scotland can He adds that he struggles to see the
rejoin the EU is naïve,” he adds. negotiate a waiver – the EU does give benefit for the rest of the UK to enter into a
“It might be that in due course trading
patterns look different, it depends on
what Scotland’s relationship with the EU
would be, but the idea that Scotland
would simply rejoin the EU is naïve”
– John Kay
14| I FLR .C OM | AU T U M N 202 1COVER STORY
“There would certainly be an attempt by Scotland to try to keep
and keep as close as possible to the UK regulatory methods but
at the same time it would probably to try to leverage off the fact
that it would be seeking to join the European Union”
– Stephen Phillips
monetary union with a country that is takeover of RBS by HSBC was actually A 10% increase could influence whether
seeking to become more independent. blocked on the correct grounds that it would companies bother trading at all, or not, he
“Scotland would have a choice, either try to damage the Scottish economy. After that, argues. “Scotland could make a significant
peg the Scottish pound to sterling – which the UK competition policy was changed so advance for the economy if it were to rejoin
could leave you vulnerable to the speculative that the regional issue was not grounds for as a separate country, not just for companies
attacks – or to just make a virtue of necessity blocking M&A. This allowed Irish giant in the country but for small companies in
and float its own currency.” Guinness to acquire the Distillers Company, England which might consider relocation
“A Scottish pound would probably arguably against Scottish interests. based on that decision,” he adds. “Small
depreciate in the short run but in the longer “Independence might mean more of a businesses are mobile these days, a lot of
term if Scotland can establish credibility chance in the future for homegrown firms can move easily. It could prove very
there is actually no reason why it should be Scottish corporates, but who knows, when attractive, not just for indigenous Scottish
weaker than sterling; it is similar to when Skyscanner left for example, they didn’t go firms but for English ones.”
Ireland stopped pegging the punt to to London, they went to Beijing,” says Kay.
sterling,” he adds. The debate tends to focus on wider UK debt share
macroeconomic issues. One of the key economic implications of
Made in Scotland Of course, the impact would not just be Scottish independence would revolve
A further consideration would be how felt by the larger corporates in the country, around the newly formed country’s
Scotland’s corporates would react to this but also SMEs. Ross Brown, professor at St proportion of the UK’s existing debt, and
uncertainty. It is fair to say that if a Andrews, believes that independence would how that debt would be transferred – if at
referendum were to result in a positive vote affect change that could alter Scotland’s all – to the Scottish state.
for independence then many would question economic growth in future years. At the end of 2020, the UK had general
the value of relocating to England to avoid “Scotland would suddenly have quite a government gross debt of £1876.8 billion,
the stresses of a potential Brexit 2.0. range of different policy levers to do things which an independent Scotland would be
Kay, however, would turn that argument differently,” he says. “Rejoining the European proportionality responsible for. A key
the other way. “Historically, one of the Union would be one such distinctive policy question would be formulating exactly how
things Scotland has suffered from has been angle which would be very attractive for all of much of this total was Scotland’s
the migration of large corporates out of the the small businesses that are screaming at the responsibility and how it would be serviced.
country,” he says. If you go back to the moment, they now have non-tariff barriers One solution to this problem would be
1980s, he argues, there was a change to with the biggest single market which amounts for Scotland to pay an annual solidarity
competition policies so that the planned to about 10% cost increase for SMEs.” payment to the UK.
AU T U M N 202 1 | I FLR .C OM | 15COVER STORY
“This would be annual payment to also have a significant bearing on the debts incurred by the previously unified state
service the agreed share of debt interest, so outcome of the shared national debt. have to be allocated between the two newly
that that negotiation would need to weigh If – as is widely suggested – the country formed countries.
up both liabilities and assets which are were to use a pegged version of pound “There is no hard and fast formula for
currently on a report published by the UK sterling, it would mean there was doing that,” he says. “The one thing that’s
government once a year, called Whole of significantly less risk for the holders of the clear is that as your debt was incurred, let’s
Government Accounts,” says Andrew debt that was transferred to the Scottish say to build a hydroelectric dam in the
Wilson. The last published balance sheet sovereign. seceding province, then that debt stays with
shows £4.6 trillion of liabilities, but this “Of course, you would still have to take them, but the debt incurred for general
number will have increased significantly due on the debt, but it would mean less exchange governmental purposes has to be allocated
to Covid-19. rate risk,” says LSE’s Sampson. between them.”
According to the report of the “It would be subject to negotiation, but Buchheit says that when Yugoslavia
Sustainable Growth Commission, “an if Scotland was still using the pound there broke up, this issue was not handled
agreement should be sought for a would be no risk,” he adds. “Suppose you use particularly well, and that the handful of
mechanism for Scotland to pay a reasonable a new currency and set it up so that one emergent countries are still quarrelling.
share of the servicing of the net balance of Scottish pound is worth one British pound, “As it relates to UK guilds, the UK such
UK debt and assets”. if afterwards that is not what the market as it might exist after Scotland left, would
The Annual Solidarity Payment is thinks it was and the Scottish pound were remain wholly responsible,” he adds. “The
modelled at around £5 billion including to depreciate, then things would look very UK would negotiate with Scotland for what
debt servicing contributions, 0.7% GNP suddenly in terms of the value of that debt.” in legal terms is called a contribution, or
contribution for foreign aid and a further £1 This issue was also central in 2014, with they could say that something like 70% of
billion set aside for other shared services, the Scottish government suggesting that it the guild is now the responsibility of the UK
continued the report. would continue to use the pound as a and 30% is Scotland’s.”
“The calculation would tell us a legacy pegged currency. At the time there was some The Sustainable Growth Commission
sum of money that Scotland would agree to suggestion that Scotland would renege on and its Annual Solidarity Payment suggests
service, which would be very important to its share of the national debt if it was not the second approach.
begin with,” adds Wilson. “Over time, the given access to the pound sterling by “I would be astonished if they deviated
legacy sum of that would be eroded and Westminster. from that if there is another referendum,”
refinanced, and run down.” “They’re still proposing that on some says Buchheit. “The history of these
basis, at least until there is an introduction referenda around leaving is not particularly
Tartan bonds of a new currency,” says Owen Kelly, deputy good in terms of debt.”
An alternative to this would be for Scotland director of the Edinburgh Futures Institute
to transfer and take on a calculated and one time CEO of the Scottish Financial Speculation
proportion of the UK debt directly. This Enterprise, the representative body for Of course, all of the aforementioned
would bring a whole host of legal issues and Scotland’s financial services industry. arguments amount to no more than
concerns, not the least with the calculation “As part of that argument, there was a speculation. The UK remains intact and
of that number. slightly silly suggestion that Scotland would Scotland remains a constituent member of
“The essential issue is that because the refuse to pay its share of any legacy debt, that, regardless of what the pro-
UK government has issued debt to finance unless the UK government allowed Scotland independence population think. The
budget deficit and spending – some of to use sterling on a dollarised basis,” he adds. current UK government appears very
which it can reasonably argue has taken “This could be a point of political unwilling to grant a second referendum,
place in Scotland – a newly independent contention, there might be an attempt to use and the lack of the clear mandate in the
Scotland should assume its fair share of the it as a bargaining chip once you got into the national elections came as a blow to the
debt,” says Neil Shearing, chief economist at business of negotiating the terms of the SNP’s arguments.
Capital Economics. “The question is where separation.” That being said, many of the arguments
to draw that line: is it a share of GDP, a used in 2014 to advocate for unity appear to
share by population, or by government Setting a precedent have dispersed, and the population of voters
spending. Either way, it is going to be a mess Were Scotland to begin the process of who would now vote differently has, without
really.” preparing for independence, it would of doubt, grown. Empty supermarket shelves
“There are no provisions in bond issues course not be the first time that a country and growing despair at the way the
for this sort of event, it is not like UK has seceded nor the first time that national incumbent government in Westminster is
government bonds have clauses that say debt be divided in such a manner. handling the transition away from the EU
what is going to happen in the event of an Lee Buchheit, sovereign debt and the Covid-19 crisis, with the
independent Scotland,” he adds. restructuring veteran and honorary professor interweaving problems that brings, is
What an independent Scotland’s at Edinburgh University, told IFLR that the politically and socially pushing Scotland
currency would look like is a key economic public international law when a constituent away from its southern neighbours.
concern that has been richly debated in the of a state secedes or leaves to join another For now, the status quo remains intact,
years leading up to and following the 2014 state – as happened in 1846, when Texas but in the years to come the pressure for
referendum. The ultimate decision would joined the United States – the rule is that change is only going to grow.
16| I FLR .C OM | AU T U M N 202 1BANKING & FINANCE
DIGITAL FINANCE
DeFi: a pathway forward
Alex Lipton co-founder of Sila, and Lewis Cohen, co-founder of DLx Law,
write about the promise of decentralised finance and
how it intersects with traditional finance
D
ecentralised finance (DeFi) has seen
remarkable growth over the last 18 months and
has quickly established itself as one of the first
true “killer apps” for smart contract networks
like Ethereum, Cardano, Polkadot, and Solana.
DeFi allows parties to create precisely tailored and highly
complex economic arrangements that execute automatically
without the need to rely on a central intermediary or other
trusted party. Even in its current early stages, DeFi raises the
promise of a more decentralised and resilient financial system
capable of embracing both established players and nascent
market entrants.
The value of assets deployed in DeFi, barely $1 billion in
June 2020, grew to over $80 billion at the end of August 2021.
DeFi takes many forms, including secured lending, asset
trading, and a wide variety of derivative transactions, all
occurring almost instantaneously, and all recorded on the
ledger of a public blockchain network. Not surprisingly, most,
if not all, of the activity in DeFi to date has concentrated on
the use of natively digital assets, represented by a plethora of
blockchain-based tokens and “stablecoins” – digital assets
pegged with various degrees of reliability to a fiat currency
(almost always the US dollar); however, proponents are
increasingly looking at incorporating real world assets, such as
real estate, intellectual property rights, traditional equity, and
other fiat currencies, thus dramatically expanding DeFi’s
importance.
The absence of traditional intermediaries also means that
anyone with the know-how and a wallet full of digital assets
can directly access DeFi protocols without undergoing any
prior know-your-customer (KYC) or anti-money laundering
(AML) checks, or sanctions compliance. While this open
access approach supports a vastly more inclusive type of
financial innovation, it has raised concerns among
policymakers that it could at some point give rise to an
alternative financial system, one that allows illicit actors and
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