Russia advances law to use tokenized digital assets for payments
The Russian State Duma will consider a draft law on February 27, 2024, that will legalize the use of tokenized assets for cross border payments. Russia already has a legal framework for tokenized financial assets, which it refers to as digital financial assets (DFA). These regulated assets include tokenized commodities, trade finance and other structured products. However, DFAs were explicitly not allowed to be used for payments. However, Russia is now looking for alternative ways to settle cross border transactions, in light of sanctions imposed following Russia's invasion of Ukraine.
Rise of Digital Money: Implications for Pacific Island Countries
The IMF published an overview of the development of digital money and payment systems in twelve Pacific island countries (PICs), assessing potential benefits and risks, with a focus on how they can harness digital technology to enhance financial inclusion and payment efficiency while minimizing risks. The paper also examines the prerequisites for successfully adopting various forms of digital money and proposes a strategic framework for policy decisions (see Figure 10). It advocates a gradual, well-informed approach, tailored to PICs' unique monetary and financial circumstances, including the presence of national currencies and the maturity of payment systems. Moreover, the paper suggests that a regional approach could help address capacity and scalability challenges in introducing new digital money forms and payment methods in PICs.
Managing the transition to central bank digital currency
De Nederlandsche Bank (DNB) published a paper that studies the transition from a steady-state without central bank digital currency (CBDC) to one in which the home country issues a CBDC using a two-country dynamic stochastic general equilibrium (DSGE) model with financial frictions. In the new steady state, the availability of CBDC, which is liquid and storage-cost-free, improves welfare. During the transition, however, demand for CBDC and money overshoot, thus crowding out bank deposits and leading to initial declines in investment, consumption, and output. However, these negative effects can be reduced with binding caps, with an optimal level of around 40% of the CBDC demand in the steady state. A two-tiered remuneration scheme is also effective in smoothing the transition if the penalty interest rate is extremely high (e.g., a negative 300% interest rate on holdings above 50% steady-state demand).
City of St Gallen to issue CHF 100 million digital bond on SDX
The Swiss City of Saint Gallen will use the SIX Digital Exchange (SDX) to issue a CHF 100 million, three year digital bond. This is the fourth municipality to issue a digital bond on SDX in the last three months. It coincides with wholesale central bank digital currency (CBDC) trials conducted by SDX, where the wholesale CBDC issued by the Swiss National Bank is used to settle the bond issuances.
Bank of England and HM Treasury RFI on digital pound privacy
The Bank of England (BOE) and HM Treasury published a digital pound request for information on privacy, meaning the protection of users’ personal and transaction data, and ensuring they have control and visibility over who can process their data and for what purposes. However, the digital pound would not be anonymous because the ability to identify and verify users is needed to prevent financial crime, but the BOE and government will not access users’ personal data in a digital pound ecosystem. In that regard, the BOE is exploring technological solutions to prevent it from being able to access personal data via the core ledger. The deadline for responding is March 12, 2024. https://www.bankofengland.co.uk/the-digital-pound/digital-pound-working-groups
Digital euro: Debunking banks’ fears about losing deposits
In parallel to yesterday's VoxEU article, the European Central Bank (ECB) posted an article by the same three senior officials that debunked fears that a commercial bank customers might withdraw deposits to hold digital euro. "Banks are barking up the wrong tree when they rely on studies that overlook the outlined design features of a digital euro. In doing so, they ignore the many other challenges they need to address to ensure stable funding through deposits. Banks need to offer attractive products and services that incentivize customers to hold their deposits with them instead of migrating to new and powerful private competitors."
Nigeria's eNaira Soars to N10.26 Billion in Circulation
"Nigeria's digital currency, eNaira outstandings have reportedly reached N10.26 billion as of September 30th, 2023. This 302% growth in just nine months indicates a rising acceptance of Africa's first Central Bank Digital Currency (CBDC), launched by the Central Bank of Nigeria (CBN) in October 2021." Unfortunately, I can only find 2022 data on the CBN website. https://www.cbn.gov.ng/documents/Statbulletin.asp
EU Parliamentary Committee votes in favor of 'digital euro' CBDC
"The European Parliament's Committee on Civil Liberties and Justice (LIBE) reportedly has overwhelmingly voted to endorse the latest digital euro report backing the European Central Bank's (ECB) proposed digital euro, taking the bloc one step closer to a central bank digital currency (CBDC). The draft legislation would make a proposed CBDC legal tender and was passed by a resounding 48 in favor of with only six against (and with seven abstentions)."
ECB argues digital euro won't disintermediate banks
The Centre for Economic Policy Research's VoxEU published an article by Ulrich Bindseil and two other senior European Central Bank (ECB) executives, argued that that commercial bank deposits are unlikely to impacted much by the launch of a digital euro due to its design. This combines a holding limit with the reverse waterfall, which allows instant top-up of a central bank digital currency (CBDC) wallet from the users' bank accounts. Also, merchants and other businesses cannot hold digital euro balances. According to the article, stablecoins and other innovative private sector financial products are bigger threats to bank business models. https://cepr.org/voxeu/columns/digital-euro-after-investigation-phase-demystifying-fears-about-bank
SUERF published an article by Christian Pfister that the notion of legal tender is a “barbarous relic” that is unfit in a digital environment where there is a wide choice of payment instruments. Furthermore, making the digital euro legal tender could even undo some the expected benefits of its launch and entail risks. That is not to say that making a retail central bank digital currency (CBDC) legal tender may be more justified in a context where the wide majority of payments are made in cash and the public authorities wish to encourage the modernization of payments, i.e. in some developing and emerging economies.
Draft digital euro legislation supports permissionless blockchains
The most recent draft of the digital euro legislation being discussed by the European parliamentary Committee on Economic and Monetary Affairs includes support for permissionless blockchains. “Conditional payments in Digital Euros may also be carried out on permissionless distributed ledgers where until now only privately issued assets like crypto-assets or stable coins are available as a means of payment. With the approval and under conditions set by the European Central Bank (ECB), the Digital Euro would be made available as a token to be referenced on these chains.” The ECB and European Council previously stated they don’t want programmable money at the base layer, so the legislation now specifies conditional payments will happen in the “layer above”. https://www.europarl.europa.eu/doceo/document/ECON-PR-758954_EN.pdf
Zimbabwe to Launch ‘Structured Currency’ Linked to Gold
"The Zimbabwean Finance Minister, Mtuli Ncube, has said his government plans to halt the local currency’s freefall by linking it to gold and establishing a currency board. Ncube said these measures could permanently end the local currency’s volatility."
"If Congress wants to make positive changes for the dollar, it should look to strengthening financial privacy, promoting currency competition, and creating a freer financial system."
Why NZ central bank quip about people trusting printed money is dangerous
"During a parliamentary committee hearing, Adrian Orr, Governor of the Reserve Bank of New Zealand made a joke. 'It’s a great business to be in central banking. You print money and people believe it. Touch wood,' said Orr. The Committee laughed." https://vimeo.com/showcase/10758103/video/912104765
The Governor of Bangko Sentral ng Pilipinas (BSP) reportedly expects to put in place within the next two years a wholesale central bank digital currency (CBDC). However, blockchain or distributed ledger technology (DLT) won’t be used, which brings into question whether it is a "wholesale CBDC". Market convention defines a retail CBDC as being technology agnostic (it can be DLT-based or not), but it defines wholesale CBDC as being DLT-based. Otherwise, every non-DLT central bank-run digital payment system (e.g., real-time gross settlement systems) would be on the list of wholesale CBDC projects.
Canadian CBDC study asserts bank deposit switching will be just 12% without limits
"Economists at the Bank of Canada ran a model to assess the impact of introducing a retail central bank digital currency (CBDC) on bank deposits. It’s widely expected that a proportion of bank deposits will switch to a CBDC. The economists believe that most assessments neglect the fact that banks provide products that complement deposits, such as mortgages and credit cards. If you assume consumers don’t care about the other products their bank offers, then 39% of deposits could be crowded out by CBDC. "
The Bank of Canada (BOC) published a paper that uses a structural model where each household chooses which financial institution to deposit their digital money with, to estimate the extent to which a central bank digital currency (CBDC) competes with bank deposits. It uses a unique Canadian dataset which contains information on households’ bank choices for a rich set of financial products. The paper finds that non-interest-bearing CBDC that does not provide complementary financial products can substantially crowd out bank deposits only if it provides an extensive service network. Also, a Canadian CBDC that uses post offices as service locations would benefit rural households more than a CBDC that uses bank branches as service locations.
Indian CBDC pilot progresses to programmable, offline usage
The Reserve Bank of India (RBI) plans to add programmability and offline payments to its central bank digital currency (CBDC) pilot. "Programmability will facilitate transactions for specific/targeted purposes, while offline functionality will enable these transactions in areas with poor or limited internet connectivity." It sounds like programmability will take the form of "purpose-bound money" that embeds ("bounds") programming logic denoting its use based on programmed conditions that becomes "unbounded" once those conditions are met. https://www.rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=57277
A chapter published in a legal conference volume published by the European Central Bank (ECB) investigated the potential rationale for the introduction of a central bank digital currency (CBDC) to preserve monetary sovereignty. It concluded that the introduction of a CBDC as a protective measure when the currency substitution is caused by unfavorable economic conditions is neither effective nor appropriate for such purposes. And it identified only a very limited set of circumstances when the issuance of a CBDC might be appropriate to push back on the use of technologically superior foreign money. And more bluntly, it concluded that "a digital euro might help defend the monetary sovereignty of the euro area Member States by facilitating cross-border payments as a conduit, mitigating dependence on foreign infrastructure for pan-European payments, serving as a catalyst for the promotion of technologically new payment functionalities and offering a digital complement to cash. In its planned form, however, the digital euro is not (yet) fit for purpose. Its statutory privilege compared to cash and its holding limits will prevent it from fulfilling its anchoring function. Its issuance would thus weaken rather than strengthen the euro area’s monetary sovereignty in the long run." [starts on page 165]
The Eurosystem policy response to developments in retail payments
The Eurosystem has a mandate to promote the smooth functioning of the payment system from a holistic perspective. From the perspective of retail payments, the smooth functioning of the payment system means ensuring that, in their tangible interaction with the euro, people and businesses are able to make safe and efficient payments and thus their trust in the currency is maintained. To this end, the Eurosystem is responsible for issuing public money, currently in the form of cash, which may possibly be complemented by a digital version, i.e. a digital euro. In addition, the Eurosystem can act: (i) as a catalyst for change, promoting efficiency in the field of retail payments; (ii) as overseer, setting retail payment standards and rules and ensuring compliance; and (iii) as an operator, having the possibility to set up public infrastructures. The trends at work in the retail payments landscape have the potential to bring benefits to consumers and businesses alike. However, they also carry risk and will require the Eurosystem to take action in its different capacities. This article looks at the changing retail payments ecosystem, before turning to the Eurosystem’s multi-faceted policy response and providing perspectives on the way ahead.
Issuing a Wholesale Central Bank Digital Currency: Why and How
Intereconomics published a paper by Christian Pfister on the whys and hows of issuing distributed ledger technology (DLT) based wholesale central bank digital currency (CBDC). The whys focus on the provision of a safe and liquid settlement instrument that would be directly available in a DLT environment, thus preserving the anchoring role of central bank money in this environment. The hows focus on the potential perimeter of the use of wholesale CBDC (e.g., whether to integrate with a "regulated liabilities network) , the consequences for monetary policy and precautions central banks should take.
ASAP: A Conceptual Model for Digital Asset Platforms
The IMF published a paper that introduces, and illustrates the use of, the ASAP (Access, Service, Asset, Platform) conceptual Digital Asset Platforms (DAP) model. Just as the utilization of a seven-layer TCP/IP model has been fundamental to the interoperability of the internet, it is anticipated that the four-layer ASAP DAP model will similarly promote cross-platform and cross-border interoperability. The model is illustrated through examples and use cases, such as asset tokenization and the concept of purpose bound money (PBM) being explored by the Monetary Authority of Singapore (MAS).
13 U.S. states have now passed, or may soon pass, anti-CBDC legislation. Some are aimed at preventing the state from accepting CBDC as payment, and many many additionally block participation in CBDC trials. Others are excluding CBDC from the definition of money in the Uniform Commercial Code (UCC) so businesses can't use CBDC to discharge liabilities.
17 banks are gearing up to join the Bank of Russia's digital ruble pilot program. They have already signed an agreement with the central bank and are now implementing the necessary systems to participate in the upcoming expanded pilot. Currently, 13 banks are already participating in the pilot, along with around 600 citizens and 30 trading and service companies. https://cbr.ru/press/event/?id=18383
Banca D'Italia published a paper on the channels through which the introduction of a central bank digital currency (CBDC) may affect the banking system and the economy at large. The paper also provides a set of illustrative exercises about the potential impact of a CBDC on the funding structure and profitability of banks using data on the Italian banking system between June 2021 and March 2023. It finds that the impact depends on how credit institutions re-optimize their balance sheets in response to the outflow of deposits induced by the CBDC. It finds that the potential impact could be manageable if there were individual holding limits and the CBDC were introduced in an environment characterized by ample liquidity and stable funding for banks.
Crunchfish published a paper by Lipis Advisors on the challenges of implementing offline payments on smartphones and how to mitigate the risks. Offline payments require a much higher security than what is offered by the smartphone rich execution environment (REE). This higher level of security may be achieved by implementing offline payments as a trusted application (TA) protected by a tamper-resistant element (TRE) that provides a secure runtime and storage for both cryptographic keys and other offline assets, such as the offline balance and risk rules. The TRE can be provided either as a hardware-based standalone TRE or a software-based app-integrated TRE, the trade-off being the higher security of the former versus the greater scalability of the latter.
Methods-of-Payment Survey Report: Cash Use Over 13 Years
The Bank of Canada published the results from the 2022 Methods-of-Payment Survey, including updated payment shares based on a three-day shopping diary. It highlights long-term trends in cash holdings, management and use observed across results from previous surveys in 2009, 2013 and 2017. It also reviews recent trends relating to the COVID-19 pandemic using data from 2020 and 2021. Then the paper assesses various factors associated with long-term trends in cash use.
The impact of a digital euro on financial stability and consumer welfare
The European Banking Federation (EBF) published a paper that examines the impact of different digital euro holding limits on bank deposit outflows. It confirmed that the higher the limit, the greater the outflows, with smaller banks being the most vulnerable, and the effect greater when the banking system is under stress.
The Belarus government-owned Center of Bank Technologies has reportedly initiated the construction of a central bank digital currency (CBDC) platform. The Center also posted a job vacancy for backend developers with expertise in Hyperledger Fabric and smart contract development experience. Plus, last week the National Bank of Belarus Deputy Chairman of the Board reportedly called the digital ruble project a "significant areas of development in the payment sector." https://neg.by/novosti/otkrytj/v-belarusi-nachalas-razrabotka-platformy-dlya-tsifrovogo-rublya/
The Bank for International Settlements (BIS) published a paper on how the promise of par convertibility by various types of stablecoins breaks down. Public information disclosure has an ambiguous effect on run risk. Transparency can lead
to greater run risk when market expectations are pessimistic or when transacting in and out of the coins is easy (e.g., USDC). Conversely, transparency strengthens a stablecoin peg when priors are strong and conversion is costly. The paper doesn't say it, but presumably costly conversion strengthens the peg even if transparency is weak (e.g., as USDT was until recently)?
