CBDCs in emerging market economies
"Papers in this BIS volume were prepared for a meeting of emerging market Deputy Governors organised by the Bank for International Settlements on 9–10 February 2022. "
How To Resist CBDCs—5 Ways You Can Opt Out of This Dystopian Future
"There’s an excellent chance governments worldwide will soon force their citizens to use central bank digital currencies (CBDCs). CBDCs enable all sorts of horrible, totalitarian things."
Central Bank Digital Currencies: Five Lessons From Three Trailblazers
FinDev Gateway published a paper that draws on the growing number of central bank digital currency (CBDC) launches, pilots and experiments since 2013, as well as findings from the latest Alliance for Financial Inclusion (AFI) report on the role of CBDCs for financial inclusion in the developing world, to consolidate key learnings to empower decision-makers on their CBDC journeys.
Why Fight the Cashless Society
"It's good to see people getting more critical about cashless society, but often their main concern is about governments doing surveillance of our digital payments. In reality, there are at least 9 other reasons to fight cashless society, all of which are just as important" [Brett Scott]
Russia to roll out CBDC pilot with real consumers in April
The Bank of Russia will reportedly launch a digital ruble CBDC pilot on April 1, 2023. It will involve 13 local banks and several merchants, with transactions involving person-to-person transfers and payments to merchants. In the first phase the banks will enter the pilot with chosen customers, after which Bank of Russia will determine how to scale the pilot further. The testing of foreign exchange capabilities and the opening of wallets to non-residents may occur from 2024. https://tass.ru/ekonomika/17074007 https://tass.com/economy/1576055
Slouching towards Britcoin, part 2: Quids Game
"In part one, we looked at the Bank of England’s difficulties establishing the “need” for a digital pound (“Britcoin”). Here we’re moving on from the cheap thrills of theorisation to the fibrous goodness of pragmatics."
Slouching towards Britcoin, part 1: Threadneedy Street
"If you build it, maybe they will come, maybe not. Or maybe you don’t care, and you just want to build it anyway. That seems to be the attitude being taken by the Bank of England, which launched its consultation on a ‘digital pound’ — which, painfully, appears to have assumed the moniker Britcoin — to mild fanfare last week."
Bank of Japan to ramp up its digital yen proof-of-concept work
The Bank of Japan (BoJ) will be ramping up its digital yen central bank digital currency (CBDC) proof of concept (PoC) work in April 2023. It will extend its technical feasibility work to modeling a CBDC ecosystem with the participation of private companies. No actual retail transactions will be made during the pilot, only simulated ones, so it is not a "pilot" as described in the announcement. In the new PoC phase, alternative data models, architectures for offline payments and other vital elements of the system will be tested, and a CBDC forum will be created. https://www.boj.or.jp/en/paym/digital/dig230217b.pdf
Banco Central do Brasil Digital Real
To advance in the design of Real Digital, on 11/30/21, BC launched a special edition of the Real Digital Challenge Laboratory of Financial and Technological Innovations, the LIFT Challenge Real Digital, which aims to evaluate its use cases and technological viability . Based on the results obtained in the challenge, BC will advance in a pilot phase, which should start in the second half of 2023 and extend throughout 2024.
Proof of reserves is proof of nothing
"Proof of reserves is all the rage on crypto platforms. The idea is that if the platform can prove to its customers' satisfaction that their deposits are fully matched by equivalent assets on the platform, their deposits are safe. And if the mechanism they use to prove this uses crypto technology, that's even better. Crypto tech solutions have surely got to be much more reliable than traditional financial accounts and audits - after all, FTX passed a U.S. GAAP audit. No, they aren't. Proof of reserves as done by exchanges like Binance does not prove that customer deposits are safe. It is smoke and mirrors to fool prospective punters into relinquishing their money, just like claims that exchanges and platforms are "audited" or have "insurance". There are no audits in the crypto world, there is no insurance, and as I shall explain, proof of reserves proves absolutely nothing." [Frances Coppola]
Stablecoins: Sailing without a Rudder
"For stablecoins to flourish as widely used payment vehicles they require a proper regulatory framework. A good starting point is to adhere to the principle of “same risk, same activity, same regulation.” Another worthwhile principle is to not recreate the wheel. With this in mind, this Commentary offers some suggestions as to how stablecoins and their issuers could be regulated using the existing regulatory frameworks that are applied to retail payments-system providers and deposit-taking institutions. These existing frameworks include the Bank Act, its provincial statutory counterparts, and the relatively recent Retail Payments Activities Act. We paraphrase the Financial Stability Board’s high-level recommendations for global stablecoins – many of which apply in a domestic setting as well – and assign the legislation/recommendations/authority based on the Canadian context." [Jeremy Kronick & Mark Zelmer, CD Howe]
Central Bank digital currencies in Africa: catching up
SUERF published an abbreviated version of the 2022 BIS paper on African CBDC developments. Like their peers, a key motivation for African central banks is achieving greater payment system efficiency, but they place more emphasis on financial inclusion and potential benefits for monetary policy. But Africans are more worried than other regions about cyber risks and cross-border spillovers and are also concerned about high operational costs.
Stablecoin Shadow Banks
"Let’s take a look at one of the biggest stablecoins in crypto, the USDC token. Using a few specific examples, we will show: (1) stablecoins are regularly used by dubious actors to move massive sums of money internationally with minimal oversight, (2) stablecoins are regularly used in fraudulent transactions, and (3) stablecoin issuers provide shadow banking services for other crypto entities that are unable to access traditional banking services. "
Ukraine Speeds Up Digital Hryvnia Project, Plans Pilot for This Year
Ukraine’s Ministry of Digital Transformation and Deputy Prime Minister Mykhailo Fedorov has reportedly instructed the National Bank of Ukraine (NBU) to launch its e-hryvnia central bank digital currency (CBDC) pilot this year, instead of the originally planned 2024. The NBU published an e-hryvnia concept note in November 2022, and in January 2023 Tascombank carried out CBDC tests on the Stellar network.
Reserve Bank of India's global hackathon targets CBDC, blockchain scalability
The Reserve Bank of India (RBI) launched the HaRBInger 2023 hackathon that includes retail CBDC use cases. These include the disbursal of social benefits, and offline usage where the wallets must be able to independently verify the authenticity of transactions without communicating with the server during the transactions, while mitigating the risk of double spending. Registration runs from February 22, with proposals due by March 24. The first prize is Rupees 4 million ($48,000), with winners to be announced mid-August. https://www.rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=55218
Stablecoins and the Financing of the Real Economy
The Banque de France (BdF) published a paper on the impact of stablecoins on the financing of the real economy. The largest stablecoins manage their peg with the US dollar by holding safe short-term assets such as US dollar-denominated commercial paper (CP). The paper suggests that US CP isssuers react to the increasing demand for stablecoins by issuing more CP. The authors exploit the fact that reserve asset policies vary across stablecoins and over time to confirm that the relationship between stablecoins and CP market is effectively due to the purchase of CP by stablecoin issuers.
Central Banks Dabbling in Crypto Smacks of Mission Creep
"Digital currencies put central banks on a slippery slope towards unjustifiable infringement of civil liberties and encroachment into the marketplace. For once, both big commercial banks and startups have aligned interest here to resist the regulatory overreach. The disruption to the banking system is potentially vast, if retail money suddenly flooded into a central bank depository, when the next unseen crisis surely comes. Regardless, be afraid of the consequences of choking off competition in the financial system, let alone stifling fintech entrants. "
Stablecoins Are Not New. So Why Are Regulators Attacking Paxos?
It’s clear regulators prefer interacting with banks because banks are centralized and easy to control. Reading between the lines, the real risk stablecoins pose is creating a system less amenable to government efforts of control. But technological progress is not going to stop. Economic activity is simply going to move elsewhere in the world if we continue down this path. United States regulators believe they face a choice between allowing or banning stablecoins, but in reality they face a choice between allowing stablecoins onshore or having them be primarily offshore. Already, the biggest winner of the current U.S. attack on crypto is likely Tether, the largest stablecoin issuer with a less-than-reputable past. Stablecoin tether (USDT) is growing again while Circle’s USDC and the Paxos-issued BUSD, both of which are more transparent, more regulated and safer for consumers, are shrinking.
How We Back Binance-Peg BUSD (and Explaining Historical Discrepancies)
"Recent news reports have shone a light on Binance-Peg BUSD (“PBUSD”) and how it doesn’t always appear to have been completely backed by BUSD issued by Paxos. PBUSD is minted on several blockchain networks including BNB Chain, Avalanche, Polygon, and TRON. PBUSD has always been, and continues to be, 100% collateralized. However, the collateral has not always been stored in a single, dedicated wallet in real time so that the 1:1 backing was not always immediately visible to users. Binance undertook a project to centralize the collateral in a single, dedicated wallet; this was completed on 04 January 2023 so that users have visibility into the 1:1 backing of PBUSD. Minting of PBUSD now only takes place after collateral is added to the dedicated wallet. Centralization of collateral for all Binance-backed tokens into dedicated collateral wallets will be completed by 09 February. This will be visible in the Proof of Reserves system that we are continuing to develop."
Understanding BUSD and Binance-Peg BUSD
"BUSD is natively issued on Ethereum, thus limiting its usage outside of the Ethereum ecosystem. In order to extend BUSD’s utility to other blockchains, Binance offers a wrapped version of the stablecoin, Binance-Peg BUSD, which is designed to track the value of the original, ERC-20 BUSD at a 1:1 ratio. “Wrapping” tokens is blockchain lingo for creating versions of the original asset that are transportable to other chains for the sake of increasing interoperability and the interconnectedness of the digital asset space. Normally, the value of wrapped tokens is secured by locking the collateral of the original asset, which is the case with Binance-Peg BUSD."
Same brand stablecoins can carry different risks
Binance issues BUSD on other chains, including its own-brand blockchain Binance Chain. Together these amount to about a third of the total issuance of BUSD. It doesn’t create it out of thin air but uses the Ethereum BUSD as the 1:1 backing asset. This wrapping of a token to make it usable on another blockchain network is commonplace in crypto, but not without risks. The obvious ones are who has keys to the wallets and how to ensure the 1:1 backing is in sync. It turns out that BUSD on other chains was not always 1:1 backed in the past, although Binance said it rectified the process last year. It claimed the issues were a timing difference and it now rebalances more regularly.
Circle allegedly complained to regulator re Binance stablecoin
"It’s likely the Circle NYDFS complaint did not refer to the Ethereum stablecoin for which Paxos is responsible. Binance issued pegged stablecoins using the same BUSD branding on other blockchains, which were meant to be backed one-for-one by the Ethereum BUSD issued by Paxos. However, records show they were not fully backed at all times in the past. Binance claimed there was a process issue resulting in timing differences which have been corrected."
Morgan Stanley: Falling Stablecoin Issuance Is Negative Sign for Crypto Trading
“Rising market prices enticed traders to take on more leverage, in the form of borrowing stablecoins, which was then used to buy more crypto,” analysts Sheena Shah and Kinji Steimetz wrote. “Falling market prices were catalyzed by a reduction in crypto liquidity caused by traders closing long crypto positions, followed by redemptions of the stablecoin received.”
The SEC Cracks Down on Crypto
"There are long-running boring debates about whether certain sorts of cryptocurrencies are “securities” subject to the SEC’s jurisdiction. The SEC tends to think that almost everything in crypto is a security; most crypto companies think that almost nothing is a security. (Very few crypto companies register their token or product offerings with the SEC, and the SEC sometimes sues them for doing unregistered securities offerings.) The general rule — called the “Howey test” — is that a security is “the investment of money in a common enterprise with a reasonable expectation of profits to be derived from the efforts of others.” A lot of crypto projects look a lot like that, but you can debate the specifics."
Binance and its stablecoins
"The crypto ecosystem relies on stablecoins as a cheap and plentiful form of dollar liquidity. If all stablecoins were classed as securities, dollar liquidity for onshore crypto exchanges and platforms would dry up as stablecoin issuers either went offshore or out of business. It is very hard to see what would replace it, at least in the short term: U.S. dollars (and other fiat currencies) are not liquid on crypto exchanges, because to move them around requires banks, and non-USD stablecoins have gained little traction thus far. So trading crypto onshore would become much more expensive and considerably riskier. The dollar liquidity drought could also severely impact DeFi, because that relies on stablecoins (or derivatives of stablecoins) as collateral. So the SEC's action could bring down the onshore crypto ecosystem. "
Crypto Firm Paxos Faces SEC Lawsuit Over Binance USD Token
The US Securities and Exchange Commission (SEC) has issued Paxos a Wells Notice for allegedly selling unregistered securities by issuing BUSD. That characterization typically hinges on the Howey Test, under which an investment contract exists if there is an "investment of money in a common enterprise with a reasonable expectation of profits to be derived from the efforts of others." https://paxos.com/2023/02/13/paxos-issues-statement/
Paxos Will Halt Minting New BUSD Tokens
Paxos Trust will stop minting new Binance USD (BUSD) tokens starting from February 21, 2022 in accordance with directions and coordination with the New York Department of Financial Services (NYDFS). All existing BUSD tokens will remain fully backed and redeemable through Paxos until at least February 2024. Customers will be able to convert their BUSD tokens to Pax Dollar (USDP) another Paxos-issued stablecoin. https://www.dfs.ny.gov/consumers/alerts/Paxos_and_Binance
UAE Plans to Issue a CBDC to Promote Digital Payments
The Central Bank of the United Arab Emirates (UAE) is planning to issue a central bank digital currency (CBDC) for domestic and cross-border payments in order to help drive innovation for domestic payments, and address the problems and inefficiency of cross-border payments and respectively. The issuance of a digital dirham is one of nine initiatives of the central bank's Financial Infrastructure Transformation Program. https://www.centralbank.ae/media/mdupathy/cbuae-launches-a-financial-infrastructure-transformation-programme-to-accelerate-the-digital-transformation-of-the-financial-services-sector-en.pdf
Project Polaris: secure and resilient CBDC systems, offline and online
The BID Innovation Hub Nordic Centre Project Polaris is exploring the provision of offline central bank digital currency (CBDC) payments functionality, which could address requirements for resilience, crisis robustness, financial inclusion, cash resemblance, accessibility and other desiderata. Central banks considering the potential implementation of CBDCs with offline functionality must take into account issues such as security, privacy, risks, the types of solution, their maturity and applicability, and operational factors, among others.
What emerging markets can teach about CBDC innovation
OMFIF and G+D: "Everyone should have access to convenient, secure digital payments and other financial services. CBDC has the potential to make this a reality. It is a digital version of physical cash – a ubiquitous and fully inclusive financial instrument that people can use independently from the issuer. For the 1.4bn unbanked adults globally, as well as unbanked children who form the next generation, CBDCs promote participation in the digital economy. This should also inspire developed nations to leverage offline functionality, where a bank account is not needed, and introduce a digital form of public currency that is simple, resilient and universally accepted. CBDCs could ease life for many people by offering a cheaper way for cross-border payments for migrant workers or enabling digital payments for small merchants like rural market vendors."