DFC

Sveriges Riksbank has concluded the e-krona proof-of-concept (PoC) work that began in spring 2020 with the aim of testing technical possibilities for an e-krona and deepening its focus on the relevant policy issues. The project’s work on evaluating a digital krona was carried out in an isolated IT environment where, for example, the possibilities to make off-line payments and streamline cross-currency payments have been tested (hence not a "pilot" as the Riksbank calls it). The project now enters a new phase focusing more on the design of an e-krona that can be issued, and investigating the amendments required to legislation should the Riksdag decide to issue an e-krona.

The Reserve Bank of Australia (RBA) and the Digital Finance Cooperative Research Centre (DFCRC) published a report on the findings from a joint research project that explored potential use cases for a central bank digital currency (CBDC) in Australia. 16 use cases participated in the project, with many of the use cases leveraging the ability to make programmable payments to facilitate multi-party, conditional or escrowed payments, or to enable atomic settlement of transactions in tokenized assets. The four key themes that emerged are highlighted in the infographic below. However, the report concluded that there are still lots of policy questions to be addressed in determining whether there is a case for issuing a CBDC in Australia.

The Central Bank of Mauritania (CBM) is exploring the potential benefits of launching a central bank digital currency (CBDC) including how it can improve the efficiency and safety of payment means and systems. Beyond promoting the financial inclusion, CBDC could help protect the Mauritanian economy from any other digital currencies or cryptocurrencies that are not regulated or are regulated by other countries. The digital version of the Ouguiya (Mauritania’s national currency) aims also to help the CBM apply its monetary policies preserving the stability of the Mauritanian financial system and the health of the economy. [Source: CBM staff]

"Overall, it is anticipated that the financial industry could generate significant efficiency gains from the interplay of distributed ledger technology (DLT) and the digital representation of assets it makes possible (referred to as tokenisation), as well as digital money. Using DLT allows different companies to use the same database, and through the automated settlement of processes via what are known as smart contracts, reconciliation costs and ultimately back office costs, too, are spared, explains Martin Diehl, payment expert and co-author of the Monthly Report article on digital money. However, in order to fully tap the potential offered by DLT, it must be possible to integrate cash leg settlement into the relevant processes." [Deutsche Bundesbank]

"The immaculate adoption doctrine is wrong. CBDC will probably just be a middling payments product. Existing options like cash, insured deposits and fintech balances work just fine for most folks, CBDC adding no extra features to the mix. It's just not possible to take a middling payments product and launch it, effortlessly and immaculately, into wide adoption. A big and expensive marketing push from central banks will be required if CBDC is to ever be adopted, Jamaica's Jam-Dex being a good example. And even then there's no guarantee of success."

"The Digital Tenge project is exploring different dimensions of such interoperability. From the creation of well-structured APIs to collaboration with international payment systems’ networks, we are paving the way for a seamless experience. Excitingly, some of these innovations will be launched this November in production-grade mode. The team is also working on the development of an interoperability layer, allowing end-users to transact with CBDC within our network and with users outside the network."

"To bring a greater understanding of the benefits and limitations of CBDCs and how to implement them in a way that is safe, seamless and useful, Mastercard is convening a group of leading blockchain technology and payment service providers to join its new CBDC Partner Program. It’s designed to foster collaboration with key players in the space so they can drive innovation and efficiencies, says Raj Dhamodharan, head of digital assets and blockchain at Mastercard."

The Digital Euro Association (DEA) Digital Euro Regulation Working Group has produced a commentary on the EU's Proposal for the establishment of the digital euro. This comprehensive document delves into the proposal's nuances, highlighting challenges, opportunities, and the broader implications for the European financial landscape.

On July 18, 2023 the European Central Bank (ECB) New Technologies for Wholesale settlement Contact Group (NTW-CG) held its second meeting. The Group is exploring how to settle DLT transactions with central bank money, including a wholesale CBDC. The pilots will be open to financial institutions with access to the TARGET payment system, with the onboarding to start later in 2023 and tests to commence in Q2 2024. Three interoperability-type solutions will be tested. Deutsche Bundesbank and Banca d’Italia will test two different non-CBDC solutions that initiate payments on TARGET and use trigger chains to instruct the DLT-based securities settlement platform to transfer ownership of securities as soon as payment is confirmed. The Banque de France will test a wholesale CBDC token option based on its previous trials, in which settlement will be enabled through interoperability with multiple other DLT ledgers.

The IMF discussed Banco Central do Brasil's digital currency (CBDC) initiative in its 2023 Article IV consultation staff report. It describes the digital real (RD) as a "smart" platform for financial services based on distributed ledger technology (DLT) that leverages the digital representation of assets (tokenization) and programmability, seeking to foster innovation. At an initial stage, it will be used for deposits/accounts and other financial assets (e.g., federal government securities), while at a later stage more complex assets will be tokenized such as vehicles and real estate ownership titles, as well as rural financing solutions based on tokenized agricultural produce. The IMF report warned that a transition to a tokenized world will require changes in the legal framework that ensure a reliable bridge to reality, and additional legal provisions may be needed to ensure that holders have an actual right over a real-world asset or service.

The Düsseldorf Institute for Competition Economics (DICE) published a paper that investigates the macroeconomic effects of different retail CBDC regimes in a New Keynesian model with a heterogeneous household sector. Generally, it finds that the introduction of a retail CBDC increases economy-wide utility as it allows higher consumption. Moreover, the shock absorption capability increases in an economy with retail CBDC. This particularly applies to the case when the central bank uses the retail CBDC as a monetary policy instrument. By adjusting the maximum amount of retail CBDC, the central bank can stabilize prices more effectively after adverse shocks. However, this stabilization implies distributional effects between households.

Banco de la República (Banrep) published a working paper that concluded that assessed the need for and potential consequences of introducing a retail CBDC in Colombia. Based on an extensive review of the CBDC literature, it concluded that there is not currently a convincing case, but this conclusion does not exclude the possibility that one of these might justify the issuance of the retail CBDC in the future. That could be the case under a sudden popularization of unregulated stablecoins or a retail CBDC issued by another country, which could reduce the transmission of monetary policy, lead to a fragmentation of the payment system, and represent potential risks to financial stability. However, the paper stressed that the central bank has not taken a final decision on CBDC issuance, instead aiming to roll out a fast payment system by 2025.

The European Central Bank (ECB) published a paper that analyzed the impact of the introduction of a digital euro on the ECB and commercial bank balance sheets, based on a theoretical model applied to Q3 2021 balance sheet data from over 2,000 euro area banks. It found that the impact depends on i) the number and speed of deposit withdrawals, ii) the liquidity available within the banking system at the time of the digital euro introduction, iii) the liquidity risk preferences of the markets and supervisors, iv) the bank’s business model, and v) the functioning of the interbank market. The paper found that a €3,000 digital euro holding limit per person, would have been successful in containing the impact on bank liquidity risks and funding structures and on the Eurosystem balance sheet, even in extremely pessimistic scenarios.

[November 15,2022] The IMF reported on the digitalization of Oman's financial system in the Oman 2022 Article IV Consultation Staff Report. The Central Bank of Oman (CBO) was continuing to develop the Fintech ecosystem by launching the Fintech Regulatory Sandbox Framework and testing the use of blockchain technology for trade finance. It was also developing an open banking strategy and exploring adopting a central bank digital currency (CBDC), which are currently at early stages.

Banco Central do Brasil (BCB) published an FAQ on its under-development Drex central bank digital currency (CBDC). "Drex will bring more speed, practicality, and lower cost to various contractual and financial transactions... In the same way that Pix - the Brazilian instant payment ecosystem - has democratized access to payment services, Drex arrives to democratize access to financial services, such as credit, investment and insurance." Programmability through smart contracts on distributed ledger technology (DLT) networks will be a key part of Drex’s platform. In the current testing phase, Drex is being developed on Hyperledger Besu.

"America is an odd place when it comes to payments. It seems incredible to me that there is a business case to be built around taking cash and converting into cards at a ball park, but there you go. Interestingly, one of the providers of reverse ATMs in America speculated that in the future there might be no need to dispense a physical card from the machines, instead offering customers “a virtual card on your smartphone”, much as they did in Russia all those years ago!" [David Birch]

The Reserve Bank of Zimbabwe (RBZ) has said it is now “at an advanced stage in preparations for the rolling out of gold-backed digital tokens (GBDTs) for transactional purposes.” The central bank said the rollout would see the gold tokens complement the U.S. dollar “in domestic transactions as retailers will be offered a safer, more convenient, and value-preserving medium of exchange.” This will be Phase II of the Zimbabwe Gold (ZiG) project. The RBZ reports that "GBDTs have proved to be an effective monetary policy instrument with strong potential to help restore normalcy to the domestic financial and capital markets within the short term." GBDTs, fully backed by physical gold held at the RBZ, were introduced in May 2023.

G+D Filia is intermittently offline. Payments are instantly settled offline, with occasional online reconciliation. But most importantly: funds received offline can be spent offline (consecutive offline payments). Our token format is the same online and offline, therefore the payment protocols are similar across different kinds of wallet (e.g., online wallets hosted at banks and hardware wallets). No conversion between online or offline ledger is needed. Tokens in hardware wallets are stored in tamper-resistant Secure Elements. Each wallet is equipped with a certificate, ensuring end-to-end encryption for every payment transaction. As an additional safety net, wallets keep a record of offline operations to detect counterfeiting.

Lars Ulbricht compared the smart contracts of the PayPal PYUSD and Circle USDC stablecoins. He found that they differ in terms of the degree and method of centralization and intervention. PYUSD's contract exhibits a more traditional approach with more control over the contract and the option to wipe accounts, while USDC enables a decentralization of minting whilst maintaining crucial control mechanisms. It is important to note that how these functionalities will be used will depend on the governance models employed by each organization. So while PYUSD seems to be just a little bit more centralized, the theoretical abuse possibilities don’t differ too much from USDC.

[March 2023] The Centrale Bank van Curaçao en Sint Maarten is among the central banks analyzing the effects of a digital Caribbean guilder central bank digital currency (CBDC). One of the reasons to consider a digital Caribbean guilder is the potential positive impact on financial inclusion. However, the advantages of a digital Caribbean Guilder are not yet convincing given the current state of technology, the experience in other Caribbean countries, and the level of digital literacy of those concerned. Priority has been given to provide everyone access to regular banking services and to the legislative initiative to support this in Curaçao and Sint Maarten.

The US Federal Reserve Board (FRB) published additional information on its program to supervise novel activities in the banks it oversees. Novel activities include complex, technology-driven partnerships with non-banks to provide banking services to customers; and activities that involve crypto-assets and distributed ledger or "blockchain" technology. The Fed also provided additional information on the process for Fed-supervised state banks to follow before engaging in certain dollar token or stablecoin activity, including demonstrating to its Fed supervisors that it has appropriate safeguards to conduct the activity safely and soundly.

The Centre for Economic Policy Research (CEPR) published a paper that argues that, given the limited private incentives to adopt a digital euro, an aggressive marketing and product design strategy should be pursued. However, the pursuit of such an aggressive approach is unlikely as this runs counter to the European Central Bank’s (ECB's) implicit objective of protecting banks’ existing business model. This is evident in plans to impose paltry holding limits for consumers, even lower ones for merchants (zero), and negative interest premia during periods of financial stress. The authors argue that the advent of retail CBDC offers the opportunity to rethink the current monetary architecture and to re-evaluate the financial stability risks of private money creation and fractional reserve banking.

De Nederlandsche Bank (DNB) published a paper about the payment behavior and preferences of Dutch consumers who encounter difficulties navigating this digital world, particularly individuals within groups at risk.  The research focused on people with low digital literacy, disabilities or financial difficulties. Using rich payment diary data it revealed that cash is an important means of payment to many. 7% said they always use cash at points of sale and 28% indicate they cannot do without cash. Cash is especially important for people with low digital literacy, people who are blind or visually impaired, people with limited or no hand function, people with a mild intellectual disability and people who find it difficult to make ends meet on their income.

The Bank of Canada (BoC) published a paper that finds that most adult Canadians do not experience gaps in their access to a range of payment methods, and this would probably continue to be the case in a cashless environment. Some people could, however, face difficulties making payments if merchants no longer generally accepted cash. It suggests that addressing unmet payment needs for a minority of consumers by issuing a central bank digital currency (CBDC) could be challenging, because the minority of consumers with unmet payment needs will only be able to benefit from a CBDC if the majority of consumers experience material benefits and therefore drive its use.

The Bank of England (BoE) and HM Treasury are looking to form two working groups to explore digital pound offline payments and retailer needs. The deadline for experts in these topics to apply is September 3, 2023.

The Bank of England (BoE)  and HM Treasury (HMT) are inviting researchers to join a newly created central bank digital currency (CBDC) Academic Advisory Group. Through this Group, the BoE and HMT seeks academic input and promote interdisciplinary discussions on a range of topics related to retail CBDC, and of relevance to their digital pound work during the design phase.  The application deadline is September 3, 2023.

The Association of Russian Banks reportedly sent a letter of critical concerns regarding the digital ruble to the Bank of Russia. Although the central bank has said that it will not be compulsory to open a digital ruble account, bankers want that legislated. They also want to know whether they will be compensated for acting as intermediaries. Also, according to digital ruble surveys conducted by local media, few people (15%) know of the plans to introduce the CBDC in 2025, and of those that do only about half know the details. Around half of survey respondents struggled to answer why a digital ruble is needed, and only 13% said they would use the digital ruble.

Pilot testing of the Bank of Russia's digital ruble central bank digital currency (#CBDC) on real transactions will be launched on August 15, 2023. It will be carried out with the participation of 13 banks and a limited number of their clients. The first stage will check basic transactions, including opening of accounts and money transfers to them, person-to-person transfers, simple automatic bill payments, and QR code-based payments. The participants will be able to make payments in digital rubles at 30 points of sale located in 11 Russian cities. Assuming successful completion of the stage-by-stage testing, the the digital ruble will roll out for broad use in 2025.