DFC

JP Morgan is participating in the Regulated Liability Network (RLN). Earlier in September 2023, the UK arm of the RLN shared the findings of its latest work without mentioning the participants. The network aims to bring together banks and central banks to support different types of digital currency on the same network. That includes central bank digital currency (CBDC), deposit tokens and regulated stablecoins. In July the US RLN published a report involving several other U.S. banks, the New York Federal Reserve’s innovation arm and Mastercard. The premise that underpins the RLN is interoperability so that banks don’t need to use the same type of blockchain to transfer tokens between them.

PayPal's PYUSD on-chain dollar-denominated stablecoin 100% backed by U.S. dollar deposits, short-term U.S Treasuries, and similar cash equivalents, is available on Venmo to select users and will be rolling out fully in the coming weeks. Transfers between PayPal and Venmo users are fast and free, connecting two wallets with millions of users each. Individuals using compatible external wallets, and merchants accepting payments in PYUSD, will also be able to receive transfers from Venmo users. Blockchain network fees apply. Also, PYUSD has been greenlisted by the New York State Department of Financial Services, making it easier for virtual currency entities licensed in New York to support PYUSD.

The Bank for International Settlements (BIS) and the Inter-American Development Bank (IDB) are joining forces to foster innovation and financial inclusion in Latin America and the Caribbean by exploring and developing technology that can help to modernise the region's financial systems. The first collaboration between the two institutions will be on Project FuSSE (Fully Scalable Settlement Engine, pronounced as fyooz). Project FuSSE aims to design and test backend functionality that can be adapted to multiple types of infrastructures, allowing them to process a continuously growing number of transactions. FuSSE aims to test highly scalable systems in three dimensions: the number of transactions, the types of assets and the number of participants. The technology could support payment systems, security settlement systems or even central bank digital currencies.

"CBDCs would imperil Americans’ financial freedom, privacy, and prosperity while devastating community banks. With its power of the purse, which includes the authority to administer and regulate our currency, Congress has the authority to protect the American people by stopping the creation and use of a CBDC. Five bills and one resolution have been introduced thus far in the 118th Congress to prevent the issuance of a CBDC."

The IMF published a paper that develops a CBDC-specific project management methodology that establishes a common terminology and offers guidance to development teams on best practices for addressing the complex requirements and risks associated with CBDC. It is centered on an original five-step approach called the “5P Methodology”: preparation, proof-of-concept, prototypes, pilots, and production. The methodology emphasizes a phased approach to CBDC research and development, with strong focus on research preparation, experimentation and testing, risk management, stakeholder engagement, and cyber resilience.

The IMF published a paper that proposes a dynamic central bank digital currency (CBDC) decision-making framework under which the central bank can make decisions under uncertainty. A phased and iterative approach could allow central banks to adjust the pace, scale, and scope of their CBDC projects as the domestic and international environment changes. If designed appropriately, CBDCs could allow central banks to modernize payment systems and future-proof central bank money as the pace and shape of digitalization continues to evolve. However, the decision to proceed with CBDC exploration and an eventual launch would need to be jurisdiction specific, depending on the degree of digitalization of the economy, the legal and regulatory frameworks, and the central bank’s internal capacity.

The U.S. Federal Reserve (Fed) published a paper that explores whether distributed ledger technology (DLT) based wholesale central bank digital currency (CBDC) is essential for new platforms that process wholesale payment transactions. Central bank money currently exists for wholesale transactions in the form of depository institution balances at the Fed used for Fedwire Funds Service. Examining the key technological characteristics and potential arrangements of tokenized distributed platforms and comparing them with existing settlement assets, transfer mechanisms, and balance sheet entries, the paper argues that DLT-based wholesale CBDC is not essential for a tokenized wholesale payment system.

The National Bank of Kazakhstan announced the next steps in its digital tenge (DT) central bank digital currency (CBDC) project. Initially it has focused on developing a retail CBDC, but has now sprouted several sub-projects and initiatives covering wholesale applications and usage, including securities settlement, stablecoin-related initiatives, and cross-border and social payments. In this regard, two separate environments of the DT platform, industrial and experimental (R&D), are planned for 2023. The industrial environment will implement the DT's main functionality of the DT and its subsequent operation, and the R&D environment will test several use-case scenarios.

The IMF published a paper that looks at how capital flow measures (CFMs) could be implemented with CBDC, and what benefits, risks and complexities could arise. There are several implications of the analysis. First, CBDC ecosystems should generally be designed such that they can accommodate the introduction of CFMs. Second, thanks to the programmability of the payment infrastructure given by the new digital technologies, certain CFMs could likely be implemented more efficiently and effectively with CBDC compared to the traditional system. Third, implementing CFMs requires central banks to collaborate on practices and standards. Finally, CFMs on CBDC need to operate alongside traditional CFMs.

The IMF published a paper that analyzes the impact of retail central bank digital currency (CBDC) on financial conditions and monetary policy transmission. In general, it finds that the impacts are expected to be relatively small in normal times but can be more significant in a low interest rates environment and when there is financial market stress. CBDC could lead to increased financial inclusion which could loosen financial conditions and strengthen monetary policy transmission. On the other hand, increased competition for bank deposit funding, increased wholesale funding, and lower bank profits would tighten financial conditions. Of course, in jurisdictions with currencies that are pegged to another jurisdiction's, there is little to no ability to conduct independent monetary policy, so the impact of retail CBDC issuance is expected to be minimal.

HSBC and the School of Business and Management of The Hong Kong University of Science and Technology (HKUST Business School) will run a one-week hypothetical e-HKD proof of concept. The bank will use distributed ledger technology (DLT) to simulate programmable money and instant settlement for retail payments. Around 200 HKUST Business School staff will receive hypothetical eHKD to spend at five campus merchants, such as cafes. They can also receive rewards as a digital token. I'm not certain about this, but it may be running as part of the Hong Kong Monetary Authority (HKMA) e-HKD Pilot Programme announced in May 2023.

The Reserve Bank of India (RBI) is reportedly planning to introduce new features to popularize the e-rupee retail central bank digital currency (CBDC), with transaction volumes running  way short of the RBI's end-2023 target (18,000/day versus a one million/day. The features include allowing digital rupee transactions when a customer is offline and linking the e-rupee to India's Unified Payments Interface (UPI). In fact, many banks have already gone live with QR code-based e-rupee UPI interoperability, so at least this doesn't seem to be new news. Also, HDFC Bank is reportedly working with IDEMIA to build an offline e-rupee platform for feature phones.

At the July 26, 2023 meeting of the Bank of England's (BoE's) CBDC Technology Forum Tom Mutton (Chair) explained that they were now at the start of the design phase of the digital pound roadmap, during which they would conduct experiments and proofs of concept, and develop a detailed blueprint. He noted that the design phase was expected to last for 2-3 years, after which a decision would be made on whether or not to proceed to the build phase, during which the Technology Forum is expected to provide ideas and expert analysis that could inform and challenge the Bank of England’s experiments and the eventual digital pound blueprint.

Nigeria's CBDC experience shows that the widespread adoption of digital currencies and the transition to 100% cashless economies, will be difficult. The benefits of adopting CBDC may be outweighed by negative aspects, especially the lack of trust and acceptance by citizens. Politicians focus on highlighting the advantages of digital currencies. However, the example of Nigeria proves that people are well aware of the dangers of depriving them of cash, and thus freedom and privacy. An attempt to impose top-down control over the monetary sphere could trigger unrest and violent social protests with political and economic, and even systemic, consequences that are difficult to predict.

This paper identifies the benefits and risks of issuing CBDC drawing on Nigeria's eNaira experience. It notes that issuing a CBDC in Nigeria offers many benefits, including expanding financial inclusion, cash management cost-reduction, improving tax collection, boosting cross-border trade and remittances, and engendering economic growth. It also discusses some potential risks that policymakers must consider while highlighting some insightful lessons from the issuance and adoption of the eNaira in Nigeria.

Project Sela, a joint experiment conducted by the Bank for International Settlements (BIS) and the Israeli and Hong Kong central banks, showed that a retail central bank digital currency (CBDC) ecosystem can combine accessibility, competition and preventative cyber security, while retaining key advantages of physical cash. In Sela, the retail CBDC ledger is operated by the central bank without compromising end user privacy as personal identifiers are obfuscated. Retail payments are therefore settled directly on the central bank's balance sheet in a privacy-preserving manner, meaning instant finality for transactions.

Global Government Fintech published an interview with Magyar Nemzeti Bank's (MNB's)  Anikó Szombati on the central bank's financial innovation agenda. She made particular mention of the MNB's private blockchain-based non-fungible token (NFT) issuance and the associated mobile application platform.  The first series of NFTs were based on six collector versions of a five forint coin. Users obtain the NFTs by solving quizzes. By collecting NFTs containing all six letters of the word ‘forint’, users were able to participate in a prize game in which they could win special physical coin sets. The MNB is now working with SODA (Sovereign Official Digital Association) on a bridging operation between the current private blockchain and a public blockchain.

"Proponents of a digital euro are facing political opposition to their plans for a central bank digital currency (CBDC) – and technocratic central bankers aren’t sure how to respond... That opposition can start with legitimate concerns over privacy and the limits of government power – but can also venture into conspiracy theories that paint CBDCs as part of a much wider, orchestrated program of state control. 'We can assure people you are not traced and we can prove it with audits and whatever, but if outside of the system people start talking about this and convincing each other on social media … then that is a big blow.”'"

The Reserve Bank of India (RBI) reportedly provided an update on its central bank digital currency (CBDC) pilot that started in the wholesale segment in November 2022, followed by a pilot in the retail segment in December. The trial has been rolled out to approximately 1.5 million users, and is is being operated through 13 banks in 26 cities, and over 300,000 merchants as of end-August 2023. The RBI has enabled full interoperability with Unified Payments Interface (UPI) QR codes. Moreover, the RBI is likely to launch a CBDC pilot for transactions for interbank borrowing or call money market by October 2023.

IDEMIA has partnered with Airtel Payments Bank and HMD Global to expand the reach of offline CBDC payments in India. The firms will focus on working together in order to launch an offline payment system in the next couple of months. The new product is set to facilitate the use of the digital INR on featured phones and devices, with the objective of driving financial inclusion. IDEMIA will provide its technology and services in order to provide an offline layer to ensure that the transactions of customers are instant and secure without the need for any kind of online validation.

Fortune magazine published a behind-the-scenes account of Circle's Silicon Valley Bank (SVB) trials and tribultations. Circle's management "devised a plan A, B, and C. The first failed when Circle’s attempted wire to get out its deposits didn’t go through. [They] remained optimistic that the government would guarantee its deposits—plan B. In case that didn’t work out, the executives spent the weekend negotiating deals with companies who would buy Circle’s SVB holdings for $0.85 on the dollar, which, along with Circle’s own balance sheet, would be enough to restore USDC’s reserves."

Circle has "no remorse" over its decision to hold $3.3B at SVB. It was "as diversified as possible" and blames banking for its woes, which is "extremely difficult" for crypto firms. However, Circle's stablecoin competitor, Paxos, didn't have single-bank exposure. As the screenshot below shows, $185.5 million worth of deposits held to back Paxos's USDP stablecoin were spread over thousands of banks using deposit placement networks like IntraFi, and were thus insured by the government. For the remainder, Paxos obtained $72 million worth private insurance. Only $10.9 million in deposits were effectively unprotected, a small 1.3% sliver of USDP's total assets. Rather than keeping 8% of its assets lodged at a second tier bank without insurance, why didn't Circle follow Paxos's risk reduction strategy?

Hong Kong is reportedly actively testing China’s digital yuan and has entered the second phase of technical testing to incorporate a predominant local payment system. The Hong Kong Monetary Authority (HKMA) and the People’s Bank of China (PBOC) have completed the initial technical tests for cross-border payments using the digital yuan in Hong Kong. Currently, they are conducting the second phase of the technical trial, involving more Hong Kong banks and testing the digital yuan wallet’s top-up function through the Faster Payment System.