DFC

The Chinese government has reportedly launched a central bank digital currency (CBDC) industrial park to bolster the e-CNY ecosystem and payment solutions using the digital yuan. Residents are incentivised to move to the park for up to three years of free rent and loans. Commercial banks are being offered up to 20 million yuan to settle there, and start ups are offered up to 50 million yuan.

The Centre for Economic Policy Research (CEPR) published an article by Dirk Niepelt that makes a case that a CBDC-based financial system can be a less costly than current two-tier regime that features non-banks that transact with bank deposits, and banks that settle payments with central bank reserves. The slightly lower direct costs of fractional reserve banking are more than offset by its "social" costs such as the fiscal resources and regulation needed to address the former's inherent frictions and instability. Furthermore, the paper argues that the interest rate on the digital currency should differ from zero and from the rate of interest on reserves.

Reserve Bank of Australia (RBA) Assistant Governor Brad Jones provided an update on the RBA's central bank digital currency (CBDC) proof-of-concept work. First, the project highlighted a range of areas where CBDC could add value in wholesale payments, including by facilitating atomic settlement in tokenized asset markets. Second, it highlighted opportunities for a wholesale CBDC to act as a complement to new forms of privately issued digital money, such as tokenized bank deposits and asset-backed stablecoins. Third, further applied research is needed to better understand operational design issues for new forms of ledgers.

The Reserve Bank of India (RBI) reportedly started using its central bank digital currency (CBDC) in the call money markets for interbank lending. In November 2022, the RBI launched its first wholesale CBDC pilot to settle government bond transactions, but it fizzled out soon after. There's more hope for this new one because the blockchain-enabled instant atomic settlement and programmability means that if one bank lends to another, funds will automatically be returned at specific times without delays. Additionally, there's the potential to tokenize the collateral used for loans. However, none of this has been officially confirmed.

The European Central Bank (ECB) is inviting payments experts to participate in technical talks on options for the secure exchange of payment-related data between payer and payee for digital euro transactions. The talks will center around the latest retail payment market innovations that can ensure the secure exchange of end-user data between payment initiation and payment acceptance devices, and the key considerations for a secure exchange of front-end data for the envisaged digital euro use cases, form factors and core and optional services.

The Canadian Securities Administrators (CSA) indicated that it may allow, subject to terms and conditions, the continued trading of stablecoins or "value-referenced crypto-assets” (VRCAs). The interim framework sets certain standards to help ensure that investors receive the information they need about the assets they are purchasing, including the risks associated with them. Such information includes the composition and adequacy of reserves and their governance.

[Old news - May 2023] The Bank of Korea (BOK) and Samsung will reportedly work together to develop central bank digital currency (CBDC) technology that enables transactions to be made without internet access. In the BOK's proof-of-concept CBDC testing last year, Samsung worked out an offline technology which allows transactions and payments between mobile devices through near field communication (NFC) without online connection, using an embedded secure element security chip. They will continue this work on Samsung's Galaxy smartphones and watches.

Bank of Ghana (BoG) in collaboration with EMTECH has launched an eCedi hackathon, to provide opportunities for Fintechs, developers and innovators to design innovative solutions that explore various use cases of a central bank digital currency (CBDC). The event is set to run for 12 weeks, during which innovators will brainstorm to come up with solutions to address financial inclusion challenges in Ghana. The proposed innovations are expected to leverage eCedi tokens and APIs to prototype solutions or develop tools that address various use cases.

The digital ruble pilot is going as planned and the Russian central bank is preparing to expand it in 2024 adding new participants and widening its functions. The pilot, which started in August, is testing operations, the opening of wallets, transfers between citizens, and QR codes payments. 13 banks are actively participating in the pilot and preparations are being made to expand the project next year by adding new participants and new clients, including transfers between legal entities.

Dubai’s Virtual Asset Regulatory Authority (VARA) and Dubai International Financial Center (DIFC) published updates to their crypto regulations. VARA updated its virtual asset rulebook and added new fiat-referenced virtual asset (FRVA) (or fiat-referenced stablecoin) regulations. VARAs exclude stablecoins pegged to the United Arab Emirates (UAE) dirham, which will remain under Central bank of the UAE regulation, and crypto-assets that reference central bank equity claims, central bank digital currencies (CBDCs), or tokenized bank deposits for interbank settlement purposes. [Read more at VARA] DIFC proposed a new securities digital asset law in a new consultation paper.

Ripple announced the 15 winners of Phase I of its CBDC Innovate Challenge who will move forward to Phase II, where they will begin building, refining, and developing their applications. The goal of CBDC Innovate 2023 is to build or update a fintech or payments solution utilizing Ripple’s CBDC solutions. In Phase I applicants ideated applications on the public XRP Ledger. In Phase II the 15 finalists, including WhisperCash, will build on Ripple’s Private CBDC Platform.

"Since Emefiele’s arrest, the specter of a CBDC monopoly has disappeared. Those who find electronic money more convenient use it. When that convenience is lost, they will switch to cash or its digital alternative. People now know that there wouldn’t have been such chaos if the currency digitalization was voluntary and not accompanied by cash delegalization. Will Nigeria’s case help other global central bankers and citizens arrive at a similar conclusion? Probably not, so we await the next economic disaster.

The National Bank of Georgia (NBG) will launch a "limited access live pilot environment" (sounds like a proof-of-concept phase to me) to test central bank digital currency (CBDC) system technology capabilities and potential applications. At this stage, the NBG remains technologically agnostic for the Digital GEL project, and has announced a list of nine platform vendors to join the "on field" exploration. Upon selection stage completion, NBG will identify one of the vendors to move to the pilot stage to test the CBDC platform in a limited-time run live environment and evaluate the practical use cases. (There were some surprises to me in the list of vendors!)

The Bank for International Settlements (BIS) published the results of its Project Mariana proof of concept that demonstrated technical feasibility of automated market-makers (AMMs) for cross-border trading and settlement of wholesale central bank digital currencies (wCBDCs). It borrows ideas and concepts from decentralized finance (DeFi) and leverages a public blockchain to design and test a transnational transnational FX interbank market using wCBDCs. Project Mariana is a collaboration between the BIS Innovation Hub, the Bank of France, the Monetary Authority of Singapore and the Swiss National Bank.

Agustín Carstens, General Manager of the Bank for International Settlements (BIS), gave a speech focused on the need for central bank digital currency (CBDC) legal frameworks to advance if CBDC is to deliver on its potential. Unfortunately, in many jurisdictions, outdated legal frameworks could hinder their deployment, and work to address these issues needs to begin in earnest. A CBDC also needs to function within a framework of clearly defined rights and obligations. At least three core elements must be preserved: the privacy of CBDC users and the protection of their data; the integrity of the financial system; and the ability of users to choose between CBDC and other forms of money. These are fundamental issues and the legal framework for CBDC must get them right.

NY Fed staff investigated similarities and differences between stablecoins and money market funds (MMFs), comparing investor behavior during the stablecoin runs of 2022 and 2023 to investor behavior during the MMF runs of 2008 and 2020. They found that, similarly to MMF investors, stablecoin investors engage in flight to safety, with net flows from riskier to safer stablecoins during run periods. However, whereas in MMFs, run risk has historically materialized only in prime funds, with stablecoins, runs occurred in different stablecoin types across the 2022 and 2023 episodes. The analysis also shows that, similarly to intrafamily flows in MMFs, stablecoin flows tend to be within blockchains. A discrete “break-the-buck” threshold of $0.99 was identified, below which redemptions accelerate.

This Clifford Chance briefing explores and analyzes the legal architecture and regulatory framework that may be required to facilitate structures when intermediaries do not hold CBDC (or other assets) belonging to their clients.

Japan's revised Payments Services Act was passed by the Diet and promulgated in June 2022, with the aim of introducing new regulations on stable coins. This amendment has entered into force on June 1, 2023. Under the new regulations stablecoins that can be redeemable in fiat currencies will be regulated as electronic payment instruments (EPIs). Those who are permitted to issue EPIs directly to Japanese residents are limited to banks, funds transfer services providers, trust banks or trust companies that are licensed in Japan. Only licensed EPI business providers (EPIBPs) can sell or purchases EPIs, act as an intermediary for EPI issuance, sales and purchases, or provide EPI custody services. EPIBPs are subject to AML/CFT regulations, including a travel rule. In other words, EPIBPs are required to provide the customer's identification information when transferring EPIs to any other EPIBPs.

Japanese law does not have a unified regime applicable to tokens issued or minted on a blockchain. The legal status of tokens under Japanese law is determined in accordance with their functions and uses. For example, cryptocurrency and utility tokens such as BTC and ETH are regulated as cryptoassets under the Payment Services Act (PSA). A business operator that engages in the business of buying, selling or exchanging cryptocurrencies or intermediating these activities, or managing cryptocurrencies for the benefit of others, is required to register as a cryptoasset exchange service provider (CAESP).