DFC

Norbert Gehrke has written up a summary of the terms of engagement for participating in the Bank of Japan's (BoJ) central bank digital currency (CBDC) prototyping work. (The BoJ calls it a "pilot" but there are no end users taking part, so it sounds more like "prototyping" to me.) "The BoJ will select participants and contractors for developing the experimental system, proceeding with discussions and explorations with the participants and the development of the system."

"Cryptocurrency firm Tether estimates it will make $700 million profit in the March quarter, taking its total excess reserves to over $1 billion, the company’s technology chief told CNBC, revealing the latest figures for the first time."

"Many central banks considering potential implementation of CBDC deem offline functionality as an important requirement, citing reasons such as resilience, crisis, financial inclusion, cash resemblance, privacy, accessibility as well as others. The requirement for and degree to which offline functionality will be provided or utilised will likely vary significantly by country, region, demographics, scenarios as will the solutions that best meet diverse needs. The Nordic Centre is now inviting solution providers to participate in a technical deep dive. The findings of the deep dive may help guide central banks in understanding the applicability, suitability and readiness of the variety of solutions available, the risks and trade-offs and the maturity of the solutions."

SWIFT published the results of their experimental central bank digital currency (CBDC) interlinking solution in a sandbox environment with 18 central and commercial banks. It was successfully tested across almost 5,000 transactions between two different blockchain networks and a traditional fiat currency. SWIFT concluded that their solution can meet the needs of CBDC interoperability, ensuring CBDCs can be successfully used in cross-border payments.

"A large and growing body of academic research supports the finance curse analysis: academics sometimes call it the “Too Much Finance” (TMF) literature. The core proposition is that as a country’s financial sector grows it helps the local economy, but only up to an optimal point, after which it turns bad. Most advanced countries, and some developing countries, passed that point long ago."

The Central Bank of the United Arab Emierates (CBUAE) has engaged with G42 Cloud and R3 as the infrastructure and technology providers respectively for its central bank digital currency (CBDC) implementation. The first phase, which is expected to complete over the next 12 to 15 months, comprises (1) the soft launch of mBridge to facilitate real-value cross-border CBDC transactions for international trade settlement, (2) proof-of-concept (PoC) work for bilateral CBDC bridges with India, and (3) PoC work for domestic CBDC issuance covering wholesale and retail usage.

"Digital currencies provide a potential form of liquidity competing with bank deposits. We introduce digital currency into a macro model with a financial sector in which financial frictions generate endogenous systemic risk and instability. In the model, digital currency is fully integrated into the financial system and depresses bank deposit spreads, particularly during crises, which limits banks’ ability to recapitalize following losses. The probability of the banking sector being in crisis states can grow significantly with the introduction of digital currency. While banking-sector stability suffers, household welfare can improve significantly. Financial frictions may limit the potential benefits of digital currencies."

from the Ontario Securities Commission: "We would not expect to provide consent in respect of a VRCA (stablecoin) that is not fully-backed by an appropriate reserve but rather maintains its value through an algorithm. Also, a CTP providing a PRU, or a registered CTP, may not be able to satisfy their PRU commitments or regulatory obligations in respect of VRCAs that maintain their value through an algorithm, including know-your product, account appropriateness or other PRU commitments or regulatory obligations to clients."

"The following policy principles reflect Circle’s real-world experience operating the world’s leading regulated dollar digital currency, USD Coin (USDC), which stands at more than $54 billion in circulation. USDC has safely powered more than $5 trillion in on-chain transactions and is available through a global network of thousands of digital wallets, exchanges and other products and services in more than 190 countries, lowering the fundamental cost of payments and financial services and establishing dollar payments utility as a native feature of the internet.

"This paper examines the financial stability risks associated with tokenized cash, a subset of stablecoins fully reserved with cash and cash equivalents. Using a combination of on-chain data together with uniquely collected wallet address labels, we construct empirical measures of liquidity ratios and run off rates on the largest cash token and characterize its users and their behavior. The overall circulation of tokenized cash is largely insulated from crypto price movements, though price changes correlate with re-balancing between smart contracts and private wallets. A liquidity ratio calculation, similar in concept to Liquidity Coverage Ratio (LCR), indicates that tokenized cash has at least two times the amount of High-Quality Liquid Assets (HQLA) when compared to the worst observed gross outflow over 30-day ahead periods. We discuss the implications of tokenized cash on safe asset creation, credit supply, and monetary policy transmission. The adoption of tokenized cash can reduce moral hazard risks from public guarantees and expand credit provision through market-based lending enabled by smart contracts. "

The IMF published a paper on the potential impacts of central bank digital currency (CBDC) on monetary policy, through their effects on money velocity, bank deposit disintermediation, volatility of bank reserves, currency substitution, and capital flows. Countries most vulnerable are those with banking systems dominated by small retail and demand deposits, low digital payments usage, and weak macro fundamentals. Caps on CBDC holdings and zero remuneration can moderate disintermediation risks, but they are not sufficient. Jurisdictions with Islamic banking systems could be more vulnerable to deposit disintermediation because of the predominance of unremunerated deposits and retail deposits in banks. The underdeveloped nature of Islamic financial markets and Sharia’h compliant liquidity management tools could also limit the central banks’ scope to respond to liquidity shocks.

The IMF published a paper that analyzes cash usage in 14 advanced and emerging market economies, using two measures; currency in circulation (CIC) and the value of cash withdrawn from ATMs. It finds that, while the CIC metric continues to rise, ATM withdrawals are declining rapidly. The main reason for this is that CIC includes cash used for payments, hoarding, and illegal use while ATM cash is focused much more on the use of cash for payments alone. As well, CIC is not adjusted for the turnover of cash for payments while ATM cash already includes it. The 14 countries in our sample account for half of the world’s population and two-thirds of its GDP.

"The digitisation of payment instruments increases the number of people in a situation of monetary exclusion. Digital payments have now become essential to fully participate in socio-economic activity, although they are not necessarily accessible by all."

The European Stability Mechanism (ESM) published a paper that analyzes the usefulness of digital currencies for wholesale financial transactions in Europe. It identifies the risks impede broad adoption of distributed ledger technology (DLT), despite potential widespread debt capital market efficiency gains from DLT-based smart contracts. A wholesale central bank digital currency (CBDC) on a private permissioned blockchain could overcome these risks and impediments and lead to significant efficiency gains in the financial system.

Lipis Advisors in partnership with Crunchfish published a paper that outlines the key security aspects relating to offline digital currency payments. Unlike other offline payment platforms that operate in various devices' secure elements, Crunchfish advocates a software-based approach that operates in smartphone trusted execution environments (TEEs). The need for hardware-based digital cash (e.g., on cards, wearables and feature phones) is acknowledged, but as peripheral bearers that need to be able to exchange digital cash with the smartphone as the main bearer, even in full offline-mode.

"The Swiss Bankers Association (SBA) has published a white paper on a digital Swiss franc, in which it outlines various designs of “tokenised” deposits on the blockchain. If issued by regulated banks, a deposit token could make an important contribution to Switzerland’s future competitiveness and innovative power, as well as bolster its sovereignty."

The Reserve Bank of Australia (RBA) published a paper on Australians' cash usage. It finds that the use of cash for day-to-day transactions continues to decline. Although the acceptance of cash by merchants remains at a high level, it is a little lower than prior to the pandemic. Nevertheless, some communities, particularly in rural areas, are increasingly susceptible to a decline in cash access if there were to be further removal of cash access points. Furthermore, many merchants indicated plans to discourage cash payments at some point in the future.

The United Nations High Commission for Refugees (UNHCR), the Stellar Development Foundation, USDC stablecoin issuer Circle, and cross-border money transfer company MoneyGram have rigged up a system for sending aid directly to Ukrainian refugees using crypto-assets. The UNHCR delivers USDC hosted on the Stellar network, to a digital wallet that can be accessed via smartphone, even to people without bank accounts. The recipient then exchanges their USDC for local currency at any MoneyGram facility. Because the USDC is hosted on decentralized infrastructure and in the custody of individual wallet owners, funds cannot be withheld.

"Crunchfish Group CEO Joachim Samuelsson presented Crunchfish’s pioneering Digital Cash solutions for making digital payments robust at Stora Aktiedagen Stockholm on Tuesday, March 14. Watch the presentation via this link."

David Birch: "The travails of Silicon Valley Bank (SVBVB), which went from having an A credit rating to being taken over by the Feds in three days, reminded me of a the words of Morgan Ricks, a professor at the Vanderbilt Law School and a former Treasury official, who said "there's nothing inherently dodgy about stablecoins. But there is something inherently dodgy about banking, which is why countries build elaborate regulatory regimes to protect deposits”. Indeed. We should be encouraging truly stable stablecoins. Most of all, we should be encouraging a digital dollar."

In a new report published by the American Enterprise Institute, we expand on privacy principles published by the digital dollar. Our report includes two clear prescriptions: First, a U.S. freedom coin must not weaken the personal financial privacy available with today’s paper cash. Second, a U.S. CBDC must not become a new, easier avenue for government agencies to surveil citizens, levy fines and enact punishments as can be expected from autocratic governments using surveillance coins.

"We analyze U.S. banks’ asset exposure to a recent rise in the interest rates with implications for financial stability. The U.S. banking system’s market value of assets is $2 trillion lower than suggested by their book value of assets accounting for loan portfolios held to maturity. Marked-to-market bank assets have declined by an average of 10% across all the banks, with the bottom 5th percentile experiencing a decline of 20%. We illustrate that uninsured leverage (i.e., Uninsured Debt/Assets) is the key to understanding whether these losses would lead to some banks in the U.S. becoming insolvent-- unlike insured depositors, uninsured depositors stand to lose a part of their deposits if the bank fails, potentially giving them incentives to run. "

"Yes! I think that post (“Why is finance so complex?”) from Steve Randy Waldman at Interfluidity is a classic, I cite it often, and it was what I had in mind as I was writing yesterday. Waldman describes banking as, broadly speaking, an opacity mechanism for credit, a way for society to take a lot of credit risk without the people taking that risk quite knowing that that’s what they’re doing. My point yesterday was that it is also an opacity mechanism for interest rates, a way for society to borrow short and lend long. Sometimes you need to bulk up the opacity though."

"The total retail central bank digital currency (CBDC) or retail digital rupee (e₹-R) in circulation stood at INR 2.73 Cr as on February 3, 2023, the Reserve Bank of India (RBI) said in response to an RTI query raised by Inc42."

Australia's NAB has completed an intra-bank cross-border transaction using NAB-issued stablecoin on the public and permissionless Ethereum blockchain, involving deployment of stablecoin smart contracts for seven major global currencies. NAB’s AUDN stablecoin will be fully backed one-for-one with Australian dollars and managed as a liability of the bank, will be the cornerstone for NAB’s ambitions in digital assets. NAB claims this is the world’s first use case of a large financial institution leveraging a public blockchain for cross-border payment rails.

"The events of the last few days highlight the risks posed by excessive reliance on centralized infrastructure, and will be certain to inform future decisions. But despite a quickly-evolving regulatory environment in the U.S., some of the basic primitives granted by digital bearer assets such as bitcoin—that they are trivially self-custodied, disintermediated, and provide on-chain transparency—are more acute than ever, echoing a sentiment which sparked a pseudo-anonymous Satoshi Nakamoto to release a new project to the world amid the Great Financial Crisis in October of 2008."

"The events of the last few days highlight the risks posed by excessive reliance on centralized infrastructure, and will be certain to inform future decisions. But despite a quickly-evolving regulatory environment in the U.S., some of the basic primitives granted by digital bearer assets such as bitcoin—that they are trivially self-custodied, disintermediated, and provide on-chain transparency—are more acute than ever, echoing a sentiment which sparked a pseudo-anonymous Satoshi Nakamoto to release a new project to the world amid the Great Financial Crisis in October of 2008."

"The Silicon Valley Bank failure strikes me as a colossal failure of bank regulation, and instructive on how rotten the whole edifice is. I write this post in an inquisitive spirit. I don't know the details of how SVB was regulated, and I hope some readers do and can chime in. "