DFC

"The current interest rate environment has had dramatic effects on the profitability and risk profile of banks’ funding and investment strategies. First, as a result of the higher interest rates, longer term maturity assets acquired by banks when interest rates were lower are now worth less than their face values. The result is that most banks have some amount of unrealized losses on securities. The total of these unrealized losses, including securities that are available for sale or held to maturity, was about $620 billion at yearend 2022. Unrealized losses on securities have meaningfully reduced the reported equity capital of the banking industry. The good news about this issue is that banks are generally in a strong financial condition, and have not been forced to realize losses by selling depreciated securities. On the other hand, unrealized losses weaken a bank’s future ability to meet unexpected liquidity needs. That is because the securities will generate less cash when sold than was originally anticipated, and because the sale often causes a reduction of regulatory capital."

USDC stablecoin issuer Circle announced that it will “cover any shortfall” caused as a result of the $3.3 billion in its funds held by the collapsed Silicon Valley Bank (SVB). Circle said it is legally obliged to “stand behind” USDC and will cover any shortfall using corporate resources—and external capital if necessary. USDC is currently collateralized 77% ($32.4 billion) with short-term U.S. Treasury Bills and 23% ($9.7 billion) with commercial bank deposits ($5.4 billion with BNY Mellon, $3.3 billion at SVB, and $1 billion at Consumer Bank). Circle also maintains USDC transaction and settlement accounts with Signature Bank.

"The lesson might be that there are some industries that are bad to bank. Imagine that it was 2021, and someone was like “do you want to start the Bank of Crypto? What about the Bank of Venture-Backed Tech Startups?” You’d be tempted, right? Those industries had so much money! They seemed cool. If you were their bank — if you were the specialized bank that exclusively focused on those industries — influencers on Twitter would tweet nice things about you, and you’d get invited to fancy parties. Also, as their bank, you’d probably find a way to get a cut of growing industries with lots of potential. Provide banking services to tech startups, get warrants in those startups, get rich when they go public. Provide banking services to crypto exchanges, start some sort of blockchain-based payment network, get rich through the magic of saying “blockchain” a lot. "

Circle’s USDC stablecoin, the second-largest stablecoin at $42 billion of market cap, depegged from the USD, trading as low as $0.88 on Coinbase this morning (March 11, 2023). This followed Circle's announcement that $3.3 billion of USDC's reserves were held at Silicon Valley Bank (SVB) which was shut down yesterday by the California Department of Financial Protection and Innovation and taken over by the Federal Deposit Insurance Corporation (FDIC). Also, Coinbase announced that USDC redemptions would be temporarily suspended.

SWIFT announced further progress on its experimental solution for interlinking central bank digital currencies (CBDCs), reporting that 18 central and commercial banks found “clear potential and value” in the API-based CBDC connector after a comprehensive review. SWIFT published the findings of the 12-week period of collaborative sandbox testing, in which almost 5,000 transactions were simulated between two different blockchain networks and with existing fiat-based payment systems. Sandbox participants included the Banque de France, the Deutsche Bundesbank, the Monetary Authority of Singapore, BNP Paribas, HSBC, Intesa Sanpaolo, NatWest, Royal Bank of Canada, SMBC, Société Générale, Standard Chartered and UBS. Over the coming months SWIFT will develop a beta version of the solution for payments that can be tested further by central banks. A second phase of sandbox testing will also be held, in which the SWIFT community can collaborate further with a focus on new use cases.

IMF staff concluded that a central bank digital currency (CBDC) "could offer an untapped opportunity for promoting the development of the financial sector as well as financial inclusion in the West African Economic and Monetary Union (WAEMU)." However, the staff report warned that a CBDC presents significant challenges, and should not be viewed as a financial inclusion "silver bullet". "In particular, it would be important to assess the extent to which private sector initiatives— particularly those related to e-money—could deliver similar results in terms of inclusion, efficiency, and safety, if adequately regulated.

"Like bank deposits that make up over 90% of the money in use today, tokenized deposits can support a variety of use cases including domestic and cross-border payments, trading and settlement, and provision of cash collateral. In a token form, commercial bank money becomes a programmable instrument that operates 24/7 and can be transferred instantly, without relying on intermediaries. These technical features allow “deposit tokens” to express sophisticated payment operations and to act as collateral that travels within minutes."

The Bank of Japan (BoJ) published a paper on privacy-enhancing CBDC technologies, comparing methods for privacy-preservation, such as homomorphic encryption and zero-knowledge proofs (ZKPs), and discusses how important other central banks rank privacy within their CBDC projects. As part of its CBDC research, the BoJ will continue to research and study privacy protection related to digital currencies with a wide range of stakeholders.

"The CBDC Pilot Project has selected a few of the 140 use case submissions for transactional trial using CBDC that is a real liability of the RBA."

The European Central Bank (ECB) published a presentation on the digital euro compensation model. The digital euro is seen as a public good and should be free for basic use by private individuals, but there should be economic incentives for payment service providers (PSPs) to distribute the digital euro in order to generate network effects. PSPs will be allowed to charge merchants, as with cash and other payment methods today, and such fees could be determined by market forces. However, legislation might establish an expectation on merchant pricing considering the current levels for comparable retail payment solutions.

WeChat has reportedly added China's central bank digital currency (CBDC) to some of its payment services, following rival Alipay in offering support for the digital yuan since December 2022. WeChat Pay now allows digital yuan payments on certain apps, such as ordering food from McDonald’s and paying bills. Direct CBDC transactions between WeChat users are expected to follow.

"In principle Tether has a very good and easy business, but in practice it is weirdly difficult, and issuing USDT in exchange for Bitcoin collateral might in fact be easier and safer than issuing USDT in exchange for dollars in the bank. To get dollars in the bank, you need a bank."

"CBDCs may be popular among central bankers, but money is ultimately a tool for the people. So long as the risks outweigh the benefits, it's unlikely any CBDC will gain traction in Africa or elsewhere."

The Bank for International Settlements (BIS) Innovation Hub and the and the central banks of Israel, Norway and Sweden,  concluded Project Icebreaker, which studied the potential benefits and challenges of using retail central bank digital currencies (CBDCs) for cross-border payments. In the Icebreaker model, a cross-border transaction is broken up into two domestic payments, one in each domestic system, so the CBDC never leaves its own domestic system. Foreign exchange (FX) providers buy one currency in one system and sell the other currency in the other system. Settlement is via a coordinated payment-versus-payment (PvP) arrangement using hash time locked contracts (HTLC), going a long way towards eliminating counterparty risk in the FX transaction. FX providers submit FX rates to the Icebreaker hub, which selects the best rate to be presented to the payer for each payment request. The number of connections between retail CBDC systems are kept to a minimum by the hub-and-spoke approach. The Icebreaker hub only routes payment messages and does not act upon them. The only information it acts upon is the data from FX providers, which are used when identifying and selecting the best FX rates for the payer.

Iran has reportedly completed preliminary research for the launch of a potential digital rial, including a pre-pilot development phase, according to the central bank's Monetary and Banking Research Institute. However, this should be taken with a big "grain of salt" because there have already been two, apparently false, reports that pilot launches were imminent, e.g., in January 2022 and February 2023. So I will be "demoting" the Iranian central bank digital currency (CBDC) from "piloted/launched" to "proof-of-concept" in my next retail CBDC update.

"SECURE TRANSACTION SYSTEM BETWEEN TERMINALS [001] The invention relates to a secure system and method for transactions between terminals. The invention also relates to a payment terminal for the production of this system as well as an information recording medium for implementing this process."

"Comments on why offline CBDC would be a welcome addition to the payment landscape usually revolve around three main arguments: financial inclusion, preparedness, and innovation. At closer inspection, none of them are particularly convincing."

The Digital Euro Association (DEA) published a paper on the the potential of stablecoins in the European internet-of-things (IoT) and machine-to-machine (M2M) economies. The paper examines the benefits and drawbacks of M2M payments, provides industry use cases that highlight the potential benefits of stablecoin-enabled IoT and M2M payments, and discusses the need for further guidance from regulators to spur M2M payment growth.

The American Civil Liberties Union (ACLU) published a paper that looks at some of the central bank digital currency (CBDC) design options that are being discussed and which would be good for privacy and accessibility. It argues, for a "digital bearer instrument in which money is stored on a device with no party keeping track of balances on a ledger [with] offline and peer-to-peer transactions enabled to the greatest extent feasible." Also, it's important that the CBDC be fully fungible and subject to the rules that apply to physical cash, and not the rules that apply to bank accounts. In addition, the software and hardware infrastructure behind a CBDC should be transparent and subject to external, independent audits (e.g., open source).

Norges Bank, as part of the fourth phase of its central bank digital currency project (CBDC), published a memo that assesses the legislative amendments that are expected to be required in order to introduce CBDC. Other parts of the fourth phase experimental testing of technical solutions in combination with further analysis of the need for and consequences if a CBDC is introduced.

The European Central Bank (ECB) is inviting experts in payments schemes to contribute to the scheme compatibility workstream for the digital euro scheme Rulebook. The main objective of the workstream is to develop a proposal for the Rulebook design in order to facilitate the compatibility of the digital euro with existing scheme solutions. Applicants should be market participants and Eurosystem representatives, nominated by their respective payment stakeholder associations. They are expected to be senior experts in scheme management, preferably with managerial responsibilities in a European payment or payment-related scheme. Participation will not be remunerated, and all intellectual property rights, copyright and rights to development and disposal related to the deliverables of the workstream reside exclusively with the ECB.

"Local authorities in Luohu, a district of Shenzhen on the crossing between Hong Kong and the mainland, installed China’s first digital yuan hard wallet dispenser machines on Feb. 18, which are open only to Hong Kong residents, according to the local government’s social media. Luohu launched the project in collaboration with the Bank of China and Octopus Cards, a smart card for payments in Hong Kong. The goal was to issue 50,000 digital yuan hard wallets from Feb. 22 to Mar. 31, but as of Feb. 26, only 625 visitors had taken up the offer, local media reported on Tuesday."

The IMF's Staff Report for the Nigeria 2022 Article IV Consultation noted that the uptake of the Central Bank of Nigeria's eNaira in the first year has been slow with retail wallet downloads amounting to 942,000 at end-November 2022—only 0.8 percent of active bank accounts. Also, the total number of eNaira retail transactions since the inception (around 802,000) is less than the number of eNaira wallets, which indicates that wallets are not actively used. The IMF report recommended that the eNaira be integrated into the existing mobile payment system to facilitate interoperability between mobile money operators, and optimize the last-mile delivery of social assistance.

The Reserve Bank of Australia (RBA) and Digital Finance Cooperative Research Centre (DFCRC) announced 14 use case proposals, along with their providers, that will participate in RBA/DFCRC central bank digital currency (CBDC) pilots. The cases include offline payments, tax automation and a CBDC for “trusted Web3 commerce,” with participants ranging from banks — such as Commonwealth Bank and Australia and New Zealand (ANZ) bank — to payment providers like Mastercard. According to the September 2022 RBA white paper, use case end users will be selected by the use case providers. A report on the project is expected to be published around the middle of the year.

"In general, the digital euro — as is the case with digital money in general — is desired as many benefits can be envisioned. There are substantial benefits for having digital cash as long as key principles of privacy and freedom rights are not affected. Given this, the digital euro is generally desired — be it in the form of the ECB’s digital euro or in the form of euro-denominated stablecoins. These topics need more investigation, also because the market share of US dollar-denominated stablecoins yields more than 95%. In other words, other currencies besides the US dollar do not play a significant role today with regards to stablecoins."