DFC

"It would, however, be a mistake of historic proportions if society stopped using public money and threw away ‘trust’ as a concept. The challenge for central banks and other actors in the existing financial architecture is to create a form of public money on a blockchain that can deliver the promises of a decentralised digital economy. Just as at the beginning of the internet, it can be hard to envisage how the Web 3 world of non-fungible tokens, decentralised finance and cryptocurrencies can be anything more than just a niche fad, but the promise is real and the changes will be far-reaching."

A paper by Yiming Ma, Yao Zeng, and Anthony Lee Zhang analyzes the run risk of USD-backed stablecoins and uncover a dilemma between stablecoins’ price stability and financial stability. They show that panic runs exist even though general investors only trade stablecoins in secondary markets with flexible prices. Run incentives are reinstated by stablecoin issuers’ liquidity transformation and the fixed $1 at which arbitrageurs redeem stablecoins for cash in the primary market. The authors discover that more efficient arbitrage amplifies run risk. This explains why stablecoin issuers only authorize a small set of arbitragers even though it comes at the expense of maintaining a stable secondary price. In other words, the centralization of arbitrage embeds an inherent tradeoff between run risk and price stability. The paper's findings are based on a model and a novel dataset on stablecoin redemptions, trading, and reserve assets. Calibrating the model, the authors find a higher run risk for USDT, the largest stablecoin, compared to USDC, the second-largest stablecoin. However, even USDC bears significant run risk due to its less concentrated arbitrage and more concentrated deposit holdings.

The National Bureau of Economic Research (NBER) published a paper that highlights the trade-offs between physical and digital forms of retail central bank money based on a general equilibrium model. It finds that the key differences between cash and central bank digital currency (CBDC) include transaction efficiency, possibilities for tax evasion, and, potentially, nominal rates of return. It establishes conditions under which cash and CBDC can co-exist and shows how government policies can influence relative holdings of cash, CBDC, and other assets. The paper illustrates how a CBDC can facilitate negative nominal interest rates and helicopter drops, and also how a CBDC can be structured to prevent capital flight from other assets.

An overseas territory or dependency is a region with ties abroad to a sovereign nation—not a completely independent state, but also not a constituent part or administrative subdivision of the parent country. This graphic maps the overseas territories of various countries, using a variety of sources including WorldAtlas, Statista, and official country releases. There are a total of 71 overseas territories listed on the map spread across the world.

"Your own personal estimation for whether to go with a traditional remittance or stablecoins will differ from mine, of course, depending on how cheap your local cryptocurrency exchange is (as well as that of your counterparty), and the availability and price of options like Wise or Western Union. Just make sure you include all stablecoin-related fees so that you're not mistakenly comparing apples to oranges. Stablecoins don't work for me, but they might for you."

Magyar Nemzeti Bank has collaborated with the Sovereign Official Digital Association (SODA) to issue non-fungible tokens (NFTs) on a private blockchain. By successfully participating in financial literacy quizzes, Hungarian coin collectors and NFT enthusiasts are being awarded central bank-issued tokens and then swapping and trading them on the Money Museum mobile application. This is part of a contest to win a set of limited edition commemorative coins. As any member of the public can use the blockchain to collect, swap and register their ownership of the coins, this type of activity – though gamified – this is arguably a central bank digital currency (CBDC) pilot.

The Banco Central do Brasil (BCB) published the details of its digital real central bank digital currency (CBDC) technical testing. It will involve no real transactions (so it isn't a pilot). Its aim is to validate the use of a DLT solution on the Hyperledger Besu platform, evaluating programmability and the ability to comply with legal and regulatory requirements, mainly related to privacy, as well as its technological viability. The details include the criteria for selecting the ten participating institutions.

According to a poll released on May 4, 2023 by Gallup, 48% of U.S. adults are concerned with their money, broken down into 19% who are “very” worried and 29% who are “moderately” worried, despite the fact that the Federal Deposit Insurance Corporation (FDIC) insures deposits up to $250,000 per borrower, per bank. On the other hand, 30% selected “not too worried” and 20% are “not worried at all.” The poll was conducted between April 3 and April 25 following the collapse of Silicon Valley Bank in March. Americans with no college degree tended to be more worried at 54% while only 36% of college graduates expressed concern.

The Reserve Bank of India (RBI) and the Bank for International Settlements Innovation Hub (BISIH) have launched the fourth edition of the G20 TechSprint, a global technology competition to promote innovative solutions aimed at improving cross-border payments. Developers from around the world should submit application from May 04, 2023 to June 04, 2023 and the TechSprint will conclude around August/ September 2023. The 2023 TechSprint will focus on AML/CFT/Sanctions technology solutions to reduce illicit finance risk, FX and liquidity technology solutions to enable settlement in emerging market and developing economy (EMDE) currencies, and technology solutions for multilateral cross-border CBDC platforms.

A digital euro legislative proposal was to be published on May 24, 2023, but it has now been delayed until June 28, 2023.  It will be published alongside documents pertaining to data access in financial services and the revision of European Union (EU) rules on payment services.

"A central bank orchestrated payment system without system-specific payment assets meets most of the central banks’ reasons for issuing CBDCs. It provides monetary and strategic autonomy for a critical infrastructure and meets user demand for digital payment solutions. As the example of Pix shows, such a system can compete successfully with existing and new payment services."

"Changes to the Uniform Commercial Code (UCC) are not usually headline news, but recent changes around the UCC’s definition of money have been catching attention across the country. Concerns have erupted around the idea that states are quietly banning Bitcoin and paving the way for central bank digital currencies (CBDCs)."

"Otranto is a full-service consultancy focusing on strategy, management, technical, and information security advisory services."

"Juniper Research’s new CBDCs & Stablecoins research provides in-depth analysis and evaluation of how these new payment system risk types are being developed and commercialised within financial markets; delivering critical insights on how they will change business models in payments, key vendors driving the evolution of the market and the future prospects for these payment types of digital assets. It provides an evaluation of the development of CBDCs (Central Bank Digital Currencies) and stablecoins across 19 different key countries of interest. The study also contains the Juniper Research Competitor Leaderboard; positioning 15 key CBDCs platform vendors."

"I think banks should be able to issue dollar IOUs on whatever digital substrate they see fit, whether that be an Azure SQL database, an Oracle database, or a blockchain. And they should be allowed to get deposit insurance for any of those dollars, regardless of the substrate on which those dollars are recorded. The medium should be irrelevant."

The Reserve Bank of Zimbabwe (RBZ) will introduce a gold-backed digital currency on May 8. They will not be pegged to any of the country's units of account (Zimbabwe dollars, U.S. dollars and South African rand). The digital coins will be priced 20% above market and marketed as investments. However, digital wallets will be made available in a later phase to facilitate person-to-person payments with them.

The European Central Bank (ECB) announced that the Eurosystem will look into how wholesale financial transactions recorded on distributed ledger technology (DLT) platforms could be settled in central bank money (i.e., wholesale central bank digital currency (CBDC)). The purpose of this initiative is to (i) consolidate and further develop the ongoing work of Eurosystem central banks in this area, and (ii) gain insight into how different solutions could facilitate interaction between TARGET services and DLT platforms.

"Whatever the advantages or disadvantages of central bank digital currency (CBDC), we aren’t going to get one anytime soon because we lack one of the crucial building blocks for a national digital currency that can deliver benefits to the new economy, and that is digital identity. If you want a case study, look at Sweden."

The Bank of Mauritius (BoM) is launching a Digital Rupee retail central bank digital currency (CBDC) in November 2023. It will be non-interest bearing and in the initial phase restricted to domestic use only, with cross-border transactions to be considered in a subsequent phase.  The central bank cited as motivations protecting monetary sovereignty and supporting anti-money laundering and countering the financing of terrorism (AML/CFT) efforts.  Also, according to the BoM, it is the first central bank to benefit from IMF technical assistance in this respect.

"eCurrency Mint Inc. announces the release of the eCurrency Centralized CBDC platform to complement its Decentralized and Hybrid CBDC platforms. With this release, the company can support the full spectrum of central bank CBDC deployment options. eCurrency Mint is the leading CBDC technology provider enabling central banks to securely mint, issue, distribute and monitor digital currency. CBDC is the digital form of legal tender and a direct liability of the central bank. "

In this month’s Central Bank Payment News (CBPN) spotlight, I wrote about past experiments with offline digital payments, technical considerations for offline digital currency, and what the future might hold for offline central bank digital currency (CBDC).

"With cash, central banks already provide a means of payment that is risk-free, widely accessible and easy to use, and that leaves no-one behind. But the rapid digitalisation of our economies requires us to complement cash with its evolution in the digital sphere: a digital euro. As a central bank, we need to be ready for future evolutions and make sure that the money we issue maintains its role as a monetary anchor in the digital era, thereby reassuring us that one euro is one euro whatever form it takes and wherever we go. And it cements people's trust in our currency."

The European Central Bank (ECB) published the 3rd progress report on the digital euro, as well as the findings of focus groups on people’s views on the features of a potential digital wallet. The digital euro will be potentially available initially to euro area residents, merchants and governments, it could be made available via existing banking apps and a Eurosystem app, and offline and person-to-person payments were seen as highly valued.