Bank of Japan, Finance ministry hold first digital yen CBDC meeting
The Bank of Japan and the Ministry of Finance reportedly held their first(!) meeting to discuss a potential digital yen on January 26, 2024. The meeting also involved representatives from the Cabinet Office and National Police Agency. Observers from the Fair Trade Commission and the Personal Information Protection Commission. The Ministry outlined the need to ensure a CBDC can coexist with existing private sector digital payment firms, enhance payment convenience and protect users' personal information. https://www3.nhk.or.jp/shutoken-news/20240126/1000101448.html
Bank of Russia plans to launch direct support for CBDC
The Bank of Russia reportedly plans to launch a direct support line for digital ruble end users. They published a request for proposals stating that it wants “to assess the cost of performing work to create a multi-channel digital complex for recording telephone conversations, organizing the reception of calls, recording them, using and storing records as part of the launch of the first line of customer support for the Bank Russia. https://www.kommersant.ru/doc/6466071
Understanding the Post-pandemic Demand for Australia's Banknotes
The Reserve Bank of Australia (RBA) published an article that examines the value of banknotes used for each component of cash demand and how it has changed since the COVID-19 pandemic. The estimated share of banknotes used for transactions in Australia has declined by around 5 percentage points since early 2020. We estimate that of all the banknotes currently in circulation, 9–26% are used for transactional purposes, 5–9% are lost, 7–11% are used in the shadow economy, and 55–80% are hoarded domestically or internationally.
Response to the digital pound Technology Working Paper
The BOE and HMT also published the responses to the digital pound technology working paper also published in February 2023. There was broad support for the six technology design considerations – privacy, security, resilience, performance, extensibility and energy usage. Respondents also suggested additional considerations, such as interoperability, usability, accessibility and scalability. A few respondents suggested models that the BOE judges to not be compatible with the stated policy objectives or design principles, for example models based on anonymous bearer instruments, which will not be taken forward. Most respondents agreed that government or central bank-initiated programmable money should not be pursued, but that user-initiated programmable payments and smart contract functionality would be important for a digital pound system.
Responses to the BOE/HMT digital pound consultation paper
The Bank of England (BOE) and HM Treasury (HMT) published a summary of the responses to their February 2023 digital pound consultation paper. The Bank and HMT received over 50,000 responses, with many respondents raising concerns about access to cash, users’ privacy, and control of their money. In the summary paper, the BOE and HMT said that the they would not have access to personal data. Private-sector payment interface providers (PIPs) would anonymize personal data before transactions are processed and settled by the BOE. Also the BOE and HMT would not pursue government or central bank-initiated programmable functions. However, PIPs could program digital pound payments but only with user consent, and be subject to robust regulatory requirements in this regard .Although commercial bank respondents called for individual holding limits of £3,000 to £5,000, the BOE and HMT are sticking with a £10,000 to £20,000 range for now.
Tether’s Ascent: Breaking Down the Dominant Stablecoin's Growth
"In this week’s issue of Coin Metrics’ State of the Network, we delve into Tether’s remarkable ascent, exploring its primary avenues of growth, adoption, the nature of its usage and reserve holdings to gain a holistic understanding of the stablecoin juggernaut through on-chain data."
Florida man slams 'tyranny' of CBDCs in re-election bid
A Florida man has chosen the next cultural wars flashpoint he will rally behind in an effort to mobilize the 2024 US presidential electorate: central bank digital currencies (CBDCs). "Such a currency would give a federal government, our federal government, the absolute control over your money," the former Wrestlemania star declared of CBDCs from a rally in Portsmouth, New Hampshire, on Wednesday. "They could take your money – you wouldn’t even know it was gone. This would be a dangerous threat to freedom." The busy former reality television host and American president took a moment away from his E. Jean Carroll defamation damages trial to attend the rally where he promised his CBDC blocking actions would "protect Americans from government tyranny."
A paper by Rhys Bidder, Timothy Jackson and the Deutsche Bundesbank's Matthias Rottner examined the impact of CBDC on banks and the broader economy drawing the Bundesbank's Survey on Consumer Expectations using a structural macroeconomic model with endogenous bank runs. Based on the survey, they show that a substantial share of German households would include CBDCs in their portfolio in normal times - replacing, in part, commercial bank deposits. That is, there is hypothetical evidence of "slow" disintermediation of the banking system. In addition, during periods of banking distress, their willingness to shift to CBDC is even larger, implying a risk of "fast" disintermediation. They map the model to Euro area data under the status quo and in a hypothetical situation where CBDC is introduced. The model implies that slow disintermediation shrinks a banking system that is prone to runs with positive welfare effects. However, CBDC promotes fast disintermediation, and for reasonable calibrations, the second effect dominates and the introduction of CBDC decreases financial stability and welfare. However, complementing CBDC with a holding limit or pegging remuneration to policy rates can reverse these results, implying that CBDC is welfare improving. The paper finds that optimal holding limits lie between EUR1500 and EUR2500. Such policies retain the gains of increased stability arising from slow disintermediation, but limit the downside of fast disintermediation.
BIS Innovation Hub Announces First Six Projects for 2024
The Bank for International Settlements (BIS) announced the first batch of six new projects in its 2024 Innovation Hub work program including experimentations on digital payments cyber security and central bank digital currencies (CBDCs). Project Leap starts its phase II, aiming to "quantum-proof" payment systems, after successfully establishing a quantum-safe communication channel between the central banks of France and Germany in its first phase. Project Aurum enters a new phase in which it will study the privacy of payments in retail CBDCs. The recently started Project Promissa tests the feasibility of tokenizing promissory notes, financial instruments that help fund multilateral development banks and other international financial institutions. All these new initiatives will be added to existing projects that various Innovation Hub Centres will continue to develop this year: FuSSE, Gaia, Mandala, mBridge phase III, Nexus phase III, Pyxtrial, Rio and Viridis. https://www.bis.org/about/bisih/about.htm
For what it's worth, likely U.S. Presidential candidate Donald Trump has jumped on the anti-CBDC clown show: "As your president, I will never allow the creation of a central bank digital currency. Such a currency would give our federal government absolute control over your money."
The Bank of Jamaica (BOJ) is reportedly working to upgrade user-facing payment infrastructure to ramp up acceptance of its JAM-DEX central bank digital currency (CBDC). That will include funding the upgrade 10,000 of the more modern point-of-sale (POS) machines to support the JAM-DEX QR codes. Once the upgrades are done, the BOJ will relaunch its JAM-DEX marketing campaign to hopefully jump-start the underwhelming reception so far. However, the POS upgrades will still leave over 40,000 older machines that are not upgradable. https://www.centralbanking.com/benchmarking/financial-stability/7960528/richard-byles-on-jamaicas-inflation-targeting-baptism-of-fire
Reportedly, according to a study by the Information and Decision Support Center of the Egyptian Council of Ministers, the Central Bank of Egypt will issue a digital pound (E-Pound) by 2030. The aim is to enhance the competitiveness of the national currency and increase the efficiency of monetary policy, and exploit opportunities provided by digital transformation to further develop the Egyptian financial sector. Here are the relevant documents in Egyptian, but they're too large for Google Translate: https://idsc.gov.eg/PeriodicReports/details/83
SODA CEO and co-founder Chris Ostrowski and I wrote an article for CoinDesk on the “test and deploy” approach to retail central bank digital currency (CBDC) project management. The “test and deploy” aims at narrow use cases, allowing for an abbreviated and more agile product development cycle, with rapid iterations through the proof-of-concept, prototype and pilot phases. This allows retail CBDC to be issued to real end users in a safe and controlled manner to offer insight into user demand and experience.
R3 published a short primer on how Regulated Liability Network (RLN) tokens would work within the structure of the R3 digital currency sandbox. It first describes the proposed technical architecture of the RLN along with where it sits within the existing sandbox. It then look into the specifics of how issuance and payment operations would work were RLN tokens to be issued in a Corda environment.
The European Central Bank (ECB) published a paper that shows the existence of a central bank trilemma. When a central bank is involved in financial intermediation, either directly through a central bank digital currency (CBDC) or indirectly through other policy instruments, it can only achieve at most two of three objectives: a socially efficient allocation, financial stability (i.e., absence of runs), and price stability. In particular, a commitment to price stability can cause a run on the central bank. Implementation of the socially optimal allocation requires a commitment to inflation. https://www.ledgerinsights.com/ecb-cbdc-bank-run-trilemma/
Venezuela's Petro Cryptocurrency to Cease Operations on Jan 15
Venezuela’s national cryptocurrency, the Petro is set to cease operations on January 15. The Petro was launched as an oil-backed cryptocurrency in 2018 with the goal of helping the country evade U.S. sanctions, but it failed to gain widespread adoption throughout its existence. Domestically, the Petro was never declared legal tender, meaning that its acceptance was not mandatory. the Petro was not a central bank digital currency (CBDC), despite speculation in 2019 that the central bank would create one.
ECB Shows It’s Serious About Enabling Offline Use of Euro CBDC
"The European Central Bank (ECB) is offering a big chunk of cash to contractors who can enable offline payments for a retail digital euro. In calls to find providers for a range of features, including risk management, information security and a user application, the ECB revealed plans to allocate as much as 1.2 billion euros ($1.3 billion) to potential contractors. More than half is earmarked for the offline payments service."
Central bank money settlement of wholesale transactions
The European Central Bank (ECB) published an update on its explorations of central bank money settlement of wholesale transactions on distributed ledger technology (DLT) platforms. Together with interested market players, the Eurosystem intends to test three cross-platform settlement solutions: The first is a "trigger" solution developed by the Deutsche Bundesbank, in which euro central bank money settlement would take place on the existing TARGET settlement system. The second is a "TIPS Hash-Link" solution developed by the Banca d’Italia, in which settlement would take place in an infrastructure based on TIPS, which is currently used for settling instant retail payments. The third is a full-DLT solutions developed by the Banque de France, in which euro central bank money settlement would take place on a DLT platform, operated by the central bank or jointly with other parties.
CBDCs and National Security: Policy Considerations
The U.K.-based Royal United Services Institute (RUSI) published a paper on the potential adverse international security effects of the development of foreign central bank digital currencies (CBDCs). Concerns center on (1) the possibility of China dominating the CBDC market, (2) implications of first-mover advantage (and conversely the implications of the Bank of England delaying domestic development of a CBDC), (3) he role of CBDCs in international sanctions, and (4) the impact of foreign CBDCs on the United Kingdom as a financial center.
CBDC and Bank Lending: The Role of Financial Frictions
"We examine the impact of a Central Bank Digital Currency (CBDC) on bank lending, emphasizing the role of different financial frictions. Within a stylized general equilibrium model, we integrate a banking sector characterized by market power on deposits and leverage constraints, together with liquidity in households' utility. Calibrating the model to US data and simulating a CBDC introduction as a shift in households' preferences for public money, our results indicate that a CBDC increases bank lending when market power is the primary operating friction in the banking sector. However, this outcome reverses when leverage constraints are binding for banks."
Bank profitability and central bank digital currency
The European Commission (EC) published a paper [in June 2023] that analyzes the potential effect of a digital euro on banks’ profitability. It uses a large sample of European Union (EU) banks that span the period from 2007 to 2021 to assess the sensitivity of banks’ profits to the loss of deposits. The results show that, for a large take-up of CBDC, there might be substantial challenges for banks' profitability, especially for small banks, that mostly rely on deposits as a source of funding. The paper recommends that digital euro holdings be capped (e.g., at EUR 3,000) to preserve the inherited profitability that comes from banks' cheap deposit funding.
Indonesia to progress wholesale DLT-based CBDC trials
Bank Indonesia (BI) shared the results of its wholesale DLT-based central bank digital currency (CBDC) consultation. In general, the top-level design of wholesale digital rupiah is in line with public expectations. The project will now enter the proof-of-concept stage, which will be followed by prototyping and piloting/sandboxing. Read English version here: https://www.bi.go.id/en/rupiah/digital-rupiah/Documents/Garuda-Project-Public-Consultation-Report.pdf
Minutes of the BOE October CBDC Technology Forum Meeting
The Bank of England (BOE) published the minutes of the October 2023 retail CBDC Technology Forum meeting. The four subgroups presented their objectives, expected outputs and timelines. Subgroup 1 will look at privacy-enhancing technologies and aliases. Subgroup 2 will focus on alternative models of interaction between payment infrastructure providers (PIPs). Subgroup 3 will explore options for the core ledger design in general terms, rather than the technology or solutions provided by specific vendors. Subgroup 4 will assess what a platform for innovation might look like and explore the possible technology requirements for one.
The British Retail Consortium’s (BRC) Payments Survey 2023 shows that cash transactions grew in 2023 for the first time in a decade, both by volume and value. According to the Bank of England (BOE), cash in circulation has declined very slightly (-0.45%) in 2023, but the value of the £20 denomination which is the most widely used transactional note increased by 3.6%. The BRC says that “this reflects a choice by many households to use cash to budget more carefully during the onset of the cost of living crisis, as well as a natural return to cash usage following the move to contactless during Covid.”
Banco de España (BDE) has chosen two Spanish banks (Cecabank and Abanca) to participate in distributed ledger technology (DLT) based wholesale central bank digital currency (CBDC) tests. The proofs of concept will feature the testing of the processing and settlement of domestic and cross-border interbank payments, and simulating tokenized bond settlements. The BDE has previously noted that this DLT-based wholesale CBDC work is independent of the digital euro project that would cover the eurozone if implemented. Adhara Blockchain will be providing technical services. https://www.boe.es/boe/dias/2024/01/03/pdfs/BOE-A-2024-205.pdfhttps://www.boe.es/boe/dias/2024/01/03/pdfs/BOE-A-2024-206.pdf
ECB issues digital euro vendor call for up to €1.1 billion in contracts
"Yesterday the European Central Bank issued five calls for vendor applications for services relating to digital euro components. A key takeaway is the framework budget is €1.1 billion ($1.2bn) for these five components. That does not include the core central bank digital currency (CBDC) settlement system which will be ‘sourced internally’. "
Update on the work of the digital euro scheme’s Rulebook Development Group
The European Central Bank (ECB) has published a report summarising the progress made by the digital euro scheme’s Rulebook Development Group (RDG). Since the last update in June 2023, the RDG has drafted the first chapters of the digital euro rulebook in line with the legislative proposal and the digital euro design decisions approved by the Governing Council of the ECB. This first draft of the rulebook is an intermediate version which covers: (i) the functional and operational models, including the end-to-end flows describing the functioning of all use cases and services relating to a digital euro; (ii) the technical scheme requirements depicting a high-level architecture and standards which should potentially be considered in a digital euro landscape; and (iii) the adherence model setting out the rights and obligations of scheme members in accordance with the draft legislation.
Calls for applications for digital euro component providers
The European Central Bank (ECB) has issued five calls for applications to establish framework agreements with potential providers of digital euro components and related services. At this stage the ECB is not making a commitment to launch any of the development work listed in the calls for applications. The purpose of the selection process is to establish framework agreements with the most suitable external providers to ensure that the Eurosystem is prepared to start developing a digital euro in the future if warranted.
What London's Oyster cards reveal about central bank digital currencies
According to Martin C W Walker, privacy fears may not turn out to be the greatest obstacle to the rollout of retail central bank digital currencies (CBDCs). What if the simple inconvenience of using CBDC is enough to stop widespread adoption? The evidence from Transport for London (TfL), the body that controls London’s public transport, suggests that convenience is a very powerful force in retail payments. Having to top up an Oyster pay-as-you-go card is considerably less convenient than paying directly from a bank account (via a debit card) or using a credit card. So who would bother to top up the CBDC wallet to pay for things for which they could already use their credit or debit cards?
