DFC

[October 31, 2024] The Bank of Israel (BOI) concluded its Digital Shekel Challenge with presentations by the 14 entities selected to develop innovative use cases for the digital shekel. The use cases presented demonstrated the potential of the digital shekel to help create advanced payment solutions and lead innovation in Israel's payment system. First place was awarded to Siara for a platform for returning debtors to an economic growth path, second went to Paypal for a smart payroll payments system, third to IDEMIA for an offline payments solution, and the "People's Choice" to QEDIT for a platform that enhances trust for digital transactions using advanced cryptography.

The Official Monetary and Financial Institutions Forum (OMFIF) Digital Monetary Institute (DMI) published its annual Future of Payments report, based on a survey of 34 central banks, 13 from advanced and 21 from emerging market economies. It found that platforms based on multi-currency central bank digital currencies (CBDCs) are emerging as alternatives to existing cross-border payments systems, with Project mBridge being the most advanced, although liquidity issues and governance concerns still pose limitations for widespread adoption. CBDC interoperability will be a key consideration for global payments going forward, with a hub-and-spoke model being favored by survey respondents. Standardization (e.g., migrating to ISO 20022 standards) is helping to reduce the costs and frictions in cross-border payments, but implementation is patchy. However, instant payments systems are rapidly growing in importance, with 47% of survey respondents selecting it as the most promising avenue for improving cross-border payments.

The European Central Bank (ECB) is inviting leading experts in branding and communication with advanced knowledge of payments and digital money to contribute to the brand rules workstream. This workstream is the part of the Rulebook Development Group that is to develop a proposal for brand rules that participants in the digital euro scheme, i.e. supervised payment service providers (PSPs), will adopt for their end-user solutions. This excludes brand strategy, expression and the visual identity of the digital euro.

The Yidindji Reserve Bank acts as the sovereign monetary authority for the Yidindji Nation. It may issue its own currency or develop alternative systems of exchange that reflect Indigenous values and economic priorities under instruction from the Office of Chief Minister & the Department of the Treasury.

"Last week the Financial Services Agency (FSA) presented some ideas relating to cryptocurrency and stablecoins to the Financial System Council Working Group on Payment Services. The FSA is reluctant to allow banks to issue stablecoins other than trust banks. For trust bank issued stablecoins, it wants to relax the reserve requirements which currently require all assets to be held in bank demand deposits. However, it also wants to impose the travel rule, requiring KYC for trust bank issued stablecoin transfers."

The Bank for International Settlements (BIS) published reports on retail central bank digital currency (CBDC) system design and legal considerations. They were written by a group comprised of the BIS and seven central banks (Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, the Board of Governors of the Federal Reserve System, Sveriges Riksbank and the Swiss National Bank). The system design paper provides perspectives on overall system design and four key issues: privacy, cyber security (including quantum computing), offline functionality and point of sale considerations. The legal paper examines key legal questions, focusing on four areas: the legal classification of retail CBDC; the obligations and liabilities of participants in the retail CBDC ecosystem; privacy and financial crime and cross-border issues.

As part of the ECB wholesale DLT settlement trials, Crédit Agricole CIB simulated cross border payments using a tokenized correspondent banking model with the interbank settlement conducted with the Banque de France's pilot CBDC on its DL3S platform. This experiment tested the potential for corporate clients to manage their real time treasury cash balances 24/7 across jurisdictions.

The Centre for Economic Policy Research (CEPR) posted an article by several Bank for International Settlement (BIS) and European Central Bank (ECB) staffers that explores the reactions of stablecoin capitalization and money market fund assets under management (AUM) to crypto-asset market and US monetary policy shocks. Following a crypto shock, the money market fund AUMs barely budge whereas stablecoin capitalization drops significantly. After a monetary policy tightening, prime money market fund AUMs rise while stablecoin market capitalization substantially declines. As monetary policy tightens, crypto prices fall, the market turns bearish, and investors demand less stablecoins for speculative purposes. This brings into question the role of stablecoins as a crypto safe haven from either crypto or monetary policy and traditional financial market shocks.

Sveriges Riksbank called for the modernization of its retail payments infrastructure and the creation of processes for secure, efficient and accessible retail payments. More specifically, the central bank argued that the infrastructure for clearing (compilation and processing of payment orders) and settlement (finalization) of retail payments in Swedish kronor needs modernization. It presented its view of the way forward over the next five years. Interestingly, no mention was made of an e-kronor retail central bank digital currency (CBDC).

UBS and Deutsche Bank have reportedly simulated tokenized deposit payments between the banks as part of the European Central Bank (ECB) wholesale distributed ledger technology (DLT) settlement trials. The Bundesbank’s Trigger solution, that enables blockchain based systems to link to the Trigger Chain, which in turn initiates a payment on the Target2 payment system in central bank money, was used. Adhara, the technology partner of Fnality, provided the orchestration layer that ensures that all the separate settlement legs of the transaction happen atomically. One of the two trails simulated transactions between Deutsche Bank London and UBS in Switzerland involving pounds and Swiss francs, which were settled using euros.

Banco Central do Brasil has reportedly selected Banco Inter alongside Microsoft Brazil, 7COMm and Chainlink to build a trade finance solution as part of the 2nd phase of Brazil’s DREX central bank digital currency (CBDC) experimentation. The solution leverages blockchain technology and oracles to automate supply chain management and improve trade finance processes. The goal of the pilot is to demonstrate the automated settlement of agricultural commodity transactions across borders, across platforms, and via different currencies.

The Oesterreichische Nationalbank (ONB) published a paper that studies the impact the introduction of the digital euro might on Austrian banks from a financial stability perspective, based on the premise that the digital euro will not bear interest and will be subject to a holding limit. With respect to bank liquidity risk and profitability, it finds substantial effects only for extreme scenarios and high holding limits. Lower holding limits effectively contain adverse outcomes both with respect to interest income losses and liquidity risk. Overall, we conclude that the introduction of a digital euro would not pose a threat to the stability of the Austrian banking system provided the digital euro is subject to a carefully designed holding limit and remuneration model. From a purely financial stability perspective, low holding limits would be preferable to higher ones.

The ECB published a paper (co-written by Ulrich Bindseil) that uses scenario analyses to illustrate the key drivers of the impact of central bank digital currency (CBDC) on central bank profitability. It finds that CBDC will have broadly the same balance sheet and profit implications as the issuance of banknotes. It shows that pure exchange of banknotes for CBDC has no further implications on central banks’ balance sheets, and thus their financial risks, profits and capital. This is different, however, for other exchanges of monetary liabilities, such as commercial bank deposits, which increase the amount of unremunerated central bank monetary liabilities and may require the creation of additional reserves for banks via the corresponding additional central bank assets. The last two points would tend to give rise to higher income for central banks in a positive interest rate environment. However, these risk implications can be managed via well-established frameworks and likely be mitigated by measures to limit CBDC take-up.

Anisa Plepi and Peter Schendner posted a paper that proposes a framework for aggregating and categorizing viewpoints on fundamental issues concerning tokenization, and assessing the causal effects of tokenization on market outcomes, using bonds as an example. The framework starts with a taxonomy of bond tokenization use cases according to the tokenization model, which is fed into a causal model to assess how would the outcomes, characterizing its lifecycle processes change if a bond had been tokenized instead of using the traditional infrastructure. Or alternatively, how would the outcomes of interest change if a bond had been exchanged in the traditional infrastructure instead of being tokenized? The paper then proposes an outcomes matrix to estimate the effects of tokenization on particular outcomes for which there are 25 metrics. The framework then conceptualizes the Swiss National Bank (SNB) Project Helvetia tokenization approach and evaluate its effects on efficiency and liquidity.

The U.K. HM Treasury published its National Payments Vision, in which it committed to continue the design phase for a retail central bank digital currency (CBDC) in partnership with the Bank of England. It reconfirmed that no decision has been taken on whether to implement a digital pound, but any decision to proceed would be accompanied by the introduction of primary legislation, ensuring full Parliamentary scrutiny by both Houses of Parliament, before any launch. Legislation would be preceded by a further public consultation and would guarantee users’ privacy and control of their money. "Irrespective of the final decision, by partnering with the private sector on proofs of concept and experiments, the work will support private innovation in digital currency technologies [and] deepen the retail payments expertise of the UK public authorities.

It seems that more and more central banks in Europe are rediscovering one of the beauties of cash: its resilience. It won’t fail in a power cut or seize up during a cyber attack (although, of course, ATMs might). As Brett Scott, author of Cloudmoney: Cash, Cards, Crypto and the War for our Wallets, notes , any society that runs purely on digital platforms operated by large financial institutions “is going to have major resiliency problems.”