DFC

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 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.

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.

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.

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.

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 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 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.

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.

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.

"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."

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.

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."

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.

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.