DFC

U.S. Treasury Secretary Janet Yellen convened the President’s Working Group on Financial Markets (PWG), joined by the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation, to discuss stablecoins. In the meeting, participants discussed the rapid growth of stablecoins, potential uses of stablecoins as a means of payment, and potential risks to end-users, the financial system, and national security. The Secretary underscored the need to act quickly to ensure there is an appropriate U.S. regulatory framework in place. The group also heard a presentation from Treasury staff on the preparation of a report on stablecoins, which would discuss their potential benefits and risks, the current U.S. regulatory framework, and the development of recommendations for addressing any regulatory gaps. The PWG expects to issue recommendations in the coming months.

"A major driver behind stablecoins’ popularity is their pseudonymity. Folks don’t have to provide ID to use them. By failing to close this pseudonymity loophole early on, regulators themselves have sponsored the “incredibly fast” growth that they are now so worried about. If they continue to ignore the pseudonymity issue, their job will get only more complicated."

"As for the consumer benefit of private versus public money, one only has to consider what happened after the free banking episode in the U.S. Monetary issuance was centralized in the hands of the state, which promptly inflated away everyone’s savings during the Civil War. Curiously, the central bankers touting the benefits of public money omit that part of the story. "

Based on lessons learned from history, Gary Gorton and the Fed's Jeffery Zhang argue that privately produced monies are not an effective medium of exchange because they are not always accepted at par and are subject to runs. They present proposals to address the systemic risks created by stablecoins, including regulating stablecoin issuers as banks and issuing a central bank digital currency.

"We develop a dynamic model of stablecoins and crypto shadow banking, where the stablecoin issuer transforms risky assets, including cryptocurrencies, into digital tokens of stable values. Both the stablecoin issuer's reserve assets and users' collateral back the stablecoin. However, even under over-collateralization, a pledge of one-to-one convertibility to a reference currency can be fragile. The distribution of states is bimodal: A fixed exchange rate may persist, but once the stablecoin breaks the buck, the recovery is slow. When negative shocks drain the issuer's reserves, debasement allows the issuer to share risk with users, but it triggers a vicious cycle of depressed stablecoin demand, lower transaction volume and transaction fees, slow rebuild of reserves, and a persistent need for debasement. Stablecoin management requires the optimal combination of strategies commonly observed in practice, such as open market operations, dynamic requirement of users' collateral, transaction fees or subsidies, re-pegging, and issuances of ``secondary units'' that function as the stablecoin issuer's equity. Our model lends itself to an evaluation of regulatory proposals (e.g., capital requirement) and sheds light on the complex incentives behind the stablecoin initiatives led by the network companies (e.g., Facebook)."

"This analysis has highlighted that stablecoins have features that differ from conventional e-money. But it’s hard not to conclude that each point is just a symptom of one primary difference: stablecoins are issued on a public blockchain."

El Salvador’s government is reportedly planning to release a U.S. dollar stablecoin. The currency would be issued by the central bank, pegged to the value of the U.S. dollar and backed by reserves of real U.S. dollars. The cryptocurrency would be called the “Colón-Dollar,” a reference to the country's former national currency that was replaced with the U.S. dollar in 2001. The president’s brothers reportedly met with representatives from Cardano, WhizGrid and Algorand at different times.

"You may believe that all those mortgages and credit card loans are meaningless assets. You may believe the US government will not be able to collect enough taxes to roll over those Treasury bills. If you are right, then yes, the dollar has no value. But we’re still not talking about trusting anyone’s fiat. We’re talking about credit analysis. So, please: let’s stop calling it fiat money. Let’s start calling it what it is: credit money. "

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The European Central Bank (ECB) has decided to launch the investigation phase of a digital euro project. The investigation phase will last 24 months and aim to address key issues regarding design and distribution. It will examine the use cases that a digital euro should provide as a matter of priority to meet its objectives: a riskless, accessible, and efficient form of digital central bank money. The project will also shed light on the changes to the EU legislative framework which might be needed.

The National Bank of Ukraine (NBU) surveyed 100 financial market experts to determine the market niche and potential use cases for an NBU-issued central bank digital currency. Most respondents believe retail cashless payments and cross-border payments and settlements to be the most promising use cases for e-hryvnia. Second came G2P welfare payments, featuring smart contract technology to restrict the CBDC’s use to specific purposes or during a special period of time. There was also considerable interest in the potential of e-hryvnia as an instrument for virtual assets settlements.

The CBDC Tracker team, which I recently joined, has released a new update of its comprehensive open source central bank digital currency (CBDC) database. Along with updated project information, many changes have been made to make it a more accurate, comprehensive, timely, and useful tool for CBDC research.

The Central Bank of the United Arab Emirates (CBUAE) has reportedly made central bank digital currency (CBDC) issuance a priority in its 2023-2026 roadmap. However, I’ve found no evidence of this roadmap on the CBUAE website, and we don’t know whether the focus will be on retail or wholesale CBDC.

This report, prepared by the Committee on Payments and Market Infrastructures, the Bank for International Settlements, the International Monetary Fund and the World Bank, analyses how central bank digital currency (CBDC) could facilitate enhanced cross-border payments, and how practical efforts are taking these considerations forward. It concludes that facilitating international payments with CBDCs can be achieved through different degrees of integration and cooperation, ranging from basic compatibility with common standards to the establishment of international payment infrastructures. The analysis highlights both the need for multilateral collaboration on macro-financial consequences as well as the importance of interoperability between CBDCs.

The Bank of Jamaica will reportedly commence its central bank digital currency (CBDC) pilot in August. The delayed roll-out of the system, which was supposed to have started in May, will commence with a National Commercial Bank pilot, followed by more banks in September to December. The pilot will then be gradually expanded into a full-fledged launch.

JP Koning writes about USD Coin transparency, focusing on the nature of its "approved investments." "What are these investments? How many does it own? Circle, USDC's issuer, has never disclosed much information on them. Because Circle is regulated by 44 state licensing boards, and each board has its own permissible investment rules (some very lenient), it's very difficult to reverse-engineer what USDC's "approved investments" might be comprised of. Responding to an inquiry, Circle said that they own 'cash, cash equivalents and short-duration investment-grade assets.' This gives us a bit more of an idea about the nature of Circle's approved investments. But why not get even more transparent? It would be a big win for stablecoin consumers if Circle provided descriptions of its approved investments in subsequent attestation reports, and broke down what proportion of customers' funds are allocated to each bucket."

"More members of Congress should view a CBDC and fintech regulation through Toomey’s lens. For America’s unbanked to get the best outcome, after the Fed takes its “first significant step toward launching its own virtual currency,” it will take two steps back."

"I’ve listened to all the arguments made for issuing a CBDC in Canada or the US. It seems to me that everything that a CBDC is supposed to fix can already be achieved by another existing process or institution—and these alternatives are typically cheaper and less risky."

"Let me say it again: on both digital currency and payments, we in Europe must be ready to move as quickly as needed or risk an erosion of our monetary sovereignty – something we cannot tolerate. European citizens must have access durably to effective and independent means of exchange."

"Central Bank Digital Currencies are a very special type of digital asset issued by a Central Bank as a legal tender. Everyone agrees that the introduction of a CBDC will increase the power over the national economy of the Central Bank issuing it. As national currencies are routinely used as an instrument of foreign policy, will CBDCs be ever used as offensive weapons?"

"This memorandum reviews this recent FDIC guidance, as well as related guidance from the Securities and Exchange Commission (“SEC”) concerning when a broker-dealer or other intermediary6 may have created a separate obligation to its customers that would be a “security” for purposes of the Securities Act of 1933 (“Securities Act”), rather than merely acting as a custodian for customer assets. In our view, failure to comply with the SEC’s guidance concerning the creation of a separate security would pose a significant threat to the availability of “pass-through” deposit insurance."

Banco Central do Brasil is running a series of public webinars to debate the general guidelines for a Brazilian central bank digital currency (CBDC), and discuss use cases that can benefit from a digital Real and the most appropriate implementation technologies. There will be seven sessions that will run from July 29 to November that will cover potential applications, identity and data issues, offline capacity, smart contracts, operational issues, cross border integration, platform technology and interoperability with existing payment rails.

The Verkhovna Rada, the governing body of Ukraine, reportedly passed a law regulating payment methods that officially puts central bank digital currency (CBDC) on par with cash, bank accounts and electronic payments. The law mentions the “digital money of the National Bank of Ukraine – electronic form of a unit of account in Ukraine, emission of which is run by the National Bank of Ukraine.”