DFC

The Bank of Russia and Russian Ministry of Finance are reportedly considering piloting the use of digital rubles for some social payments to citizens and subsidies to businesses, to ensure the targeted use of budget funds. In addition, the pilot would test the use of digital rubles for payments to the government.

Kazakhstan authorities are planning to pilot the use smart contract-powered digital tenge to ensure that funds related to public procurement and government subsidies are spent precisely for their intended purposes. The Ministry of Finance and Anti-Corruption Agency as well as other key entities have signed a roadmap to collaborate with the National Bank of Kazakhstan on this particular central bank digital currency (CBDC) use case. This is made possible through the integration with government databases and registries, maintaining white and black lists of legal entities, goods and service categories.

To better understand trends in payment methods accepted by Canadian businesses, including cash acceptance and the impact of innovations such as mobile payments, the Bank of Canada conducts the Merchant Acceptance Survey, a survey of small and medium-sized businesses. It finds that 96% of these businesses in Canada accepted cash in 2023. Acceptance of debit and credit cards has increased since 2021 to 89%, and acceptance of digital payments has increased as well. However, the vast majority of merchants (92%) have no plans to go cashless in the future.

The European Central Bank (ECB) published a technical note on the potential impact of users holding multiple digital euro accounts. Under the European Commission’s proposed digital euro regulations digital euro users would be able to hold multiple digital euro payment accounts with the same or different payment service providers (PSPs). This entails technical difficulties regarding the interplay of these accounts with the management of a consolidated holding limit. The analysis shows that it is technically feasible to provide users with multiple accounts in conjunction with an individual holding limit, but trade-offs would be necessary, mainly in terms of user experience as well as technical and operational implementation for PSPs.

SWIFT says a new round of sandbox testing has found that its central bank digital currency interlinking technology can enable financial institutions to carry out a wide range of transactions using central bank digital currency (CBDC) and other forms of digital tokens, easily incorporating them into their business practices. Over six months, SWIFT worked with 38 global institutions and over 125 sandbox users, and made more than 750 transactions, including simulated digital trade, tokenized asset and FX networks, as well as CBDCs for payments. The testing showed that SWIFT’s CBDC connector has the potential to simplify and speed up trade flows, unlock growth in tokenized securities markets, and enable efficient FX settlement, while allowing financial institutions to continue to make use of their existing infrastructure.

The graphic at the top left is particularly nice, but make sure to toggle the zoom setting.

Banco Central Chile (BCCh) published its second report on the issuance of central bank digital currency (CBDC). It gives an account of lessons learned from different stakeholders and indicates that it will continue with the exploration process, which will include proofs of concept. However, the continuation of exploration should in no way be understood as a decision to issue CBDC nor is it aimed at eliminating or replacing traditional means of payment, in particular cash, since the BCCh continues to consider that there is not yet sufficient information to make a final decision regarding its issuance.

Payment stablecoins, a type of stablecoin fully backed by high quality and liquid assets, are used proportionally less in crypto trading than fiat dollars are used in the trading of traditional assets. The adoption of digital token money such as payment stablecoins for general use in real-time gross settlement (RTGS) could potentially mitigate risks associated with concentration and liquidity in the current payment systems. Greater integration of payment stablecoins with fiat payment rails, through appropriate regulation and limited access to central bank accounts, can preserve the singleness of money and mitigate against financial stability concerns. (Gordon Liao, Circle)

This paper proposes a decentralized CBDC that is controlled by many central banks together or countries in the world. It is only for international transactions between member countries. While domestic transactions continue to use the national currency of each country. A decentralized CBDC can explore the advantages of digital technologies more deeply than the centralized ones by making reconciliations between central banks in real-time. Furthermore, this system provides international liquidity for all (member) countries in the world sustainably and free of charge. This system eliminates global imbalances, makes the exchange rate more stable, and so makes the whole international monetary system naturally more stable. In doing so, the system does not require economic integration so that all countries in the world may join without many conditions.

On February 19, 2024 I reported on the English version of the Türkiye Cumhuriyet Merkez Bankası (CBRT) report on the first phase of its digital Turkish lira testing (originally published in Turkish in December 2023). The report said that “pilot” testing had been done, without providing enough information as to whether the pilots are really pilots. However, thanks to Central Bank Payment News, we now have that clarity to label the CBRT phase one testing as pilot testing. Here’s CBRT Deputy Executive Directors Zeynel Abidin Avcı and Bilgehan Kürşad Öz: “The pilot tests involved real users and specific sale-points, such as cafes, restaurants, and giftshops. In total, the two pilot tests ran for close to a month, and more than 2.000 users, who are not central bank employees, made their payments and transfers. By doing so, they have tested the systems and provided valuable feedback.”

The Bank of Canada published a paper that examines the optimal amount of user anonymity in a CBDC in the context of bank lending. Anonymity, defined as the lender’s inability to discern an entrepreneur’s actions that enable fund diversion, influences the choice of payment instrument due to its impact on a bank’s lending decisions. The paper shows that moderate anonymity in CBDC leads to an inefficient pooling equilibrium. To avoid this, CBDC anonymity should be either low, reducing attractiveness, or high, discouraging bank lending. Specifically, the anonymity should be high when CBDC significantly benefits sales, and low otherwise. However, competition between deposits and CBDC may hinder the implementation of low anonymity.

In March 2023, the CBUAE announced the launch of its CBDC strategy, the first phase of which was expected to be complete June 2024. It included a soft launch of the BIS Innovation Hub led mBridge cross-border wholesale CBDC platform, proof-of-concept work for bilateral CBDC bridges with India, and proof-of-concept work for domestic wholesale and retail CBDC. The CBUAE aims to ensure the readiness of the UAE to integrate CBDC-based payment infrastructures with the future potential tokenization world.

The Central Bank of the UAE (CBUAE) is reportedly operationalizing its domestic digital dirham central bank digital currency (CBDC). It is encouraging all UAE commercial banks and payments processors to participate in a pilot integration with the CBUAE digital dirham issuing node and has decreed digital dirham adoption by all UAE licensed financial institutions (LSIs) by 2026. In the immediate term, those LSIs are being encouraged to develop digital dirham use cases in the CBUAE sandbox.

"Swift has a long history of working with the financial services community to solve challenges and facilitate industry-wide innovation. We continue to demonstrate this by participating in industry initiatives such as the RLN, and by driving activities such as our recent central bank digital currency (CBDC) sandbox and blockchain interoperability experiments."

Blockchain developer Gluwa is exploring the possibility of building a central bank digital currency (CBDC) for Liberia. The firm's CEO met with the President of Liberia to discuss enhancements to the country's financial infrastructure, but no mention was made of central bank engagement, so the latter's engagement in the project is unclear.

Sveriges Riksbank published the fourth and final report on its e-krona proof-of-concept (PoC) work that focuses on offline payments ( the report calls it a "technical pilot" but a "pilot" involves real users transferring real central bank digital currency (CBDC) in limited ways). The solution reserves e-krona for offline use in a "shadow" wallet in the online system. The payment instrument in the form of a payment card records the shadow wallet's balance and subsequent offline transactions. The actual e-kronas issued by the Riksbank never leave the online system and only change hands when the payment instruments are synchronized. The report concludes that offline payments are viable, but "a secure and functional offline solution requires a lot of development work on technology, regulations and processes".

"I could imagine holding bank-issued stablecoins in my digital wallet, but I have a suspicion that in time most people will drift towards tokens backed by central bank reserves. In other words, in a world with a Digital Pound, it’s not clear why anyone would hold Barclays Bunce, CapOne Cabbage, Wells Wonga or Lloyds Lolly."

The European Central Bank (ECB) is establishing seven new workstreams to develop the various sections of the digital euro rulebook and has issued calls for candidates for each, inviting experts in payments infrastructure and architecture, technical specifications and scheme management to apply. Last year three workstreams were launched, covering the scheme’s compatibility with standards, as well as technical requirements, and identification and authentication. The workstreams will report to the Rulebook Development Group (RDG) that represents consumers, retailers, and intermediaries. Each applicant will need to be nominated by an RDG member.

Canada's Centre for International Governance Innovation (CIGI) Digital Policy Hub published a paper by Ori Freiman on central bank digital currency (CBDC) governance, focusing particularly on programmability and privacy/surveillance. Although programmable money and payments can support social policies, they also raise questions about the authorities’ influence and control, and how to ensure there is no abuse of power. Privacy is a significant CBDC design challenge because meeting financial integrity (e.g., AML/CFT) requirements while offering cash-like anonymity seems incompatible. Authorities’ access to citizens’ data could lead to state-level surveillance, threatening civil liberties and human rights. Even if safeguards are put in place, CBDC infrastructure could be changed and initial safeguards overridden, rendering this risk a time-consistency problem. Eleven policy recommendations are suggested on privacy and data rights, accessibility, public participation and oversight, prohibiting programmable money, legislation protecting cash and more.

"We present a scalable architecture for electronic retail payments via central bank digital currency and offer a solution to the perceived conflict between robust regulatory oversight and consumer affordances such as privacy and control. Our architecture combines existing work in payment systems and digital currency with a new approach to digital asset design for managing unforgeable, stateful, and oblivious assets without relying on either a central authority or a monolithic consensus system. Regulated financial institutions have a role in every transaction, and the consumer affordances are achieved through the use of non-custodial wallets that unlink the sender from the recipient in the transaction channel. This approach is fully compatible with the existing two-tiered banking system and can complement and extend the roles of existing money services businesses and asset custodians."

"An important motivating factor in the development of retail CBDC is the decline of the popularity of central bank money for retail purchases and the increasing use of digital money created by the private sector for such purposes. The debate about how retail CBDC would be designed and implemented has led to many proposals, which have sparked considerable debate about business models, regulatory frameworks, and the socio-technical role of money in general. Here, we present a critical analysis of the existing proposals. We examine their motivations and themes, as well as their underlying assumptions. We also offer a reflection of the opportunity that retail CBDC represents and suggest a way forward in furtherance of the public interest."

The European Central Bank (ECB) published the learning strategy and key performance indicators (KPIs) proposed for its exporatory work on new technologies for central bank money settlement of wholesale financial transactions. The work is focused on three interoperability-type solutions, (i) trigger (ii) TARGET Instant Payment System (TIPS) hash link, and (iii) full distributed ledger technology (DLT) interoperability. The first two solutions involve the market platform interoperating with the existing TIPs platform. Only the last one (full-DLT) involves what the rest of the world calls wholesale central bank digital currency (wCBDC), in which the payment instrument is DLT-based central bank money (CeBM).

Quantitative Finance and Economics (QFE) published a paper that, based on a quantitative questionnaire among 682 Chinese citizens, explored the impact of privacy concerns on e-CNY central bank digital currency (CBDC) adoption. It found that several antecedents significantly influenced privacy concerns that negatively influenced e-CNY usage, particulary perceived vulnerability and self-efficacy concerns. Perceived vulnerability may arise from concerns related to the security of the technology, the potential misuse of personal information, and the risk of financial losses. Self-efficacy realtes to potential e-CNY user confidence that they can securely and manage associated privacy risks.

The Hong Kong Monetary Authority (HKMA) launched phase 2 of the e-HKD pilot programme. Phase 1 was completed in October 2023 and had studied domestic retail use cases in various areas such as programmable payments, settlement of tokenized assets, and offline payments. Phase 2 will delve deeper into select pilots from phase 1 where an e-HKD could add unique value, such as programmability, tokenization and atomic settlement, as well as explore new use cases that have not been covered in the previous phase. Organizations interested in participating in phase 2 have been invited to submit applications by May 17, 2024.

Banca D'Italia published a paper on financial technology providers and their crucial role in enabling firms - even small ones - to become more efficient and keep pace with innovation. It draws attention to how interdependencies between such providers and financial entities may pose new systemic risks, deserving the attention of financial regulators and overseers. Although it doesn't cover central bank digital currency (CBDC) explicitly, all of the points it makes seem relevant to the role such technology providers play in CBDC launches and pilots.

The European Banking Authority (EBA) has initiated a consultation on the guidelines for the orderly redemption of asset-referenced or e-money tokens in the event that the issuer fails to fulfil its obligations under the Markets in Crypto assets Regulation (MiCAR). For example, the draft guideline calls for the clarification of the main principles governing the redemption and distribution plan, such as the equitable treatment of token holders, and describe the main steps for the orderly and timely implementation of the plan.