India's Reliance Retail has teamed up with Icici Bank, Kotak Mahindra Bank and Innoviti Technologies to roll out central bank digital currency (CBDC) acceptance at its Freshpik stores. The rest of its locations will follow. Customers that want to pay with the digital rupee, will be given a dynamic digital rupee acceptance QR code that is scanned at checkout. Also Kotak Mahindra Bank rolled out a digital rupee pilot to select customers in Mumbai, Delhi and Ahmedabad, who will be sent an email/SMS invite to download the digital rupee Android app. https://www.livemint.com/companies/news/digital-currency-kotak-mahindra-bank-participates-in-rbi-s-pilot-launch-of-digital-rupee-11675324226856.html
The Banque de France conducted a successful experiment with IZNES
On 17 December 2020, the Banque de France successfully carried out an experiment on central bank digital currency (CBDC) with IZNES as part of the experimental programme launched in March.
Banque de France conducts a new central bank digital currency experiment
(June 25, 2021) "The Banque de France conducted a successful experiment on the use of central bank digital currency to settle the issuance of a French Government Bond (OAT, Obligation Assimilable du Trésor) by Agence France Trésor with a consortium of actors driven by Euroclear."
Cross-Border Cross-Currency CBDCs and Automated Market-Making
R3 published a report on the application of automated market makers (AMMs) to cross-border and cross-currency central bank digital currency (CBDC). AMM structures, which are are common in the decentralized finance (DeFi) ecosystem, increase price transparency, work for low liquidity instruments, and bring the process of trading and settlement closer together. Such outcomes could benefit segments of today’s FX market. However, adapting AMM to spot FX markets will need to answer questions including: who would run it, what formula might be appropriate for larger transactions, and how to incentivize participants.
"Although the terminology used to define stablecoins is currently ambiguous, they can be broadly defined as a specific type of crypto-asset that aims to maintain a stable value relative to a specified currency, asset, or pool of currencies/assets. This paper characterises different types of stablecoins according to the stabilisation mechanism used and analyses the current stablecoins’ market. It also describes the regulatory framework applicable to stablecoins in a few selected jurisdictions. The main focus of the paper is the identification of the main risks associated with stablecoins, particularly the so-called global stablecoins, i.e., those stablecoins with a potential to be adopted across different jurisdictions and achieve a substantial volume. Finally, the paper concludes that continuous monitoring of the stablecoins’ market should be pursued, given their increasing relevance and potential impact on the financial sector."
"The Riksbank is investigating whether it is possible to issue a digital complement to cash, a so-called e-krona. Just like cash, the e-krona would be issued by the Riksbank and be available to everybody. As yet no decision has been taken to issue an e-krona. "
Conclusion of HKMA discussion paper on crypto-assets and stablecoins
The Hong Kong Monetary Authority (HKMA) issued the consultation conclusion to the discussion paper on crypto-assets and stablecoins. Respondents were supportive of regulating stablecoins with a risk-based and agile approach. The respondents also broadly supported the need to take into account the latest market developments and draw reference from the discussion of international regulatory bodies when developing the relevant regulatory regime. he HKMA will announce the regulatory arrangements and next steps in due course.
The Committee on Payments and Market Infrastructures (CPMI) published a brief that documents the acceleration of consumers' and businesses' migration away from cash and checks towards electronic payments, and a growing use of contactless and fast payments. The Covid-19 pandemic was likely responsible for the surge but at the same time, public demand for cash remains steady, both as a means of payment and as a safe haven.
Stablecoins: Growth Potential and Impact on Banking
"In this paper, we discuss the current use cases and growth opportunities of stablecoins, and we analyze the potential for stablecoins to broadly impact the banking system. The impact of stablecoin adoption on traditional banking and credit provision can vary depending on the sources of inflow and the composition of stablecoin reserves. Among the various scenarios, a two-tiered banking system can both support stablecoin issuance and maintain traditional forms of credit creation. In contrast, a narrow bank approach for digital currencies can lead to disintermediation of traditional banking, but may provide the most stable peg to fiat currencies. Additionally, dollar-pegged stablecoins backed by adequately safe and liquid collateral can potentially serve as a digital safe haven currency during periods of crypto market distress. "
The Central Bank of Iran will reportedly make its CryptoRial central bank digital currency (CBDC) available to the public on February 7, 2023, following its pilot phase, of which little is known. Bank Melli, Bank Mellat and Bank Tejarat were involved in the experimental stages of the project, and Bank Melli and Bank Mellat conducted the pilot. If anyone out there knows more about the pilot, or upcoming launch, please let me know!
Montenegro starting work on a central bank- or government-issued stablecoin
Prime Minister Dritan Abazovic, announced that, in collaboration with Ripple and the central bank, the government is starting work on a digital currency or stablecoin for Montenegro. Montenegro uses the EUR, despite not being a member of the Eurozone, although it is a candidate country for European Union (EU) membership.
Tailored CBDC technical assistance in emerging markets
Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ) published a stocktaking paper that I co-authored on the degrees of central bank digital currency (CBDC) technical assistance (TA) support for lower- and middle-income countries (LMICs). It highlights the different options for CBDC support for LMIC authorities in their general-purpose/retail and wholesale CBDC exploration journeys. It also shows how demand outstrips supply in fit-for- purpose assistance and the important role of development partners in closing this gap in order to ensure that CBDCs can meet the expectations in relation to achieving the sustainable development goals (SDGs). Also the paper highlights the remaining gaps in optimally equipping authorities in LMICs in their CBDC pursuit.
Traditional Banks Set to Dominate Crypto Stablecoin Market as Regulatory Certainty Grows
My SODA colleague Chris Ostrowski and Chris Hayes, in another CoinDesk article, make three predictions on the landscape for CBDCs and stablecoins in Europe and in the U.S. based on the trends they’ve seen through engagement with central bankers and policymakers.
I moderated a couple of sessions on offline central bank digital currency (CBDC) at the International Telecommunication Union (ITU) DC³ From Cryptocurrencies to CBDCs Conference on January 27, 2023. The first session was on the importance of offline payments for CBDCs and financial inclusion at which cases were presented by Lars Hupel (G+D), Razvan Dragomirescu (WhisperCash), Joachim Samuelsson (Crunchfish) and Jerome Ajdenbaum (IDEMIA). The second session was a deep dive into offline CBDC implementation and risk management presented by Lauren Del Giudice (IDEMIA) and Stuart Smith (VISA). [Both sessions were recorded and are available at the ITU]
Federal Reserve issues policy statement to promote a level playing field for all banks with a federal supervisor, regardless of deposit insurance status
The Federal Reserve Board issued a policy statement to promote a level playing field for all banks with a federal supervisor, regardless of deposit insurance status. The statement makes clear that uninsured and insured banks supervised by the Board will be subject to the same limitations on activities, including novel banking activities, such as crypto-asset-related activities. The statement also makes clear that uninsured and insured banks supervised by the Board would be subject to the limitations on certain activities imposed on national banks, which are overseen by the Office of the Comptroller of the Currency. The equal treatment will promote a level playing field and limit regulatory arbitrage... The Board generally believes that issuing dollar- denominated tokens (dollar tokens) using distributed ledger technology or similar technologies on open, public, and/or decentralized networks, or similar systems is highly likely to be inconsistent with safe and sound banking practices. The Board believes such tokens raise concerns related to operational, cybersecurity, and run risks, and may also present significant illicit finance risks, because—depending on their design—such tokens could circulate continuously, quickly, pseudonymously, and indefinitely among parties unknown to the issuing bank. Importantly, the Board believes such risks are pronounced where the issuing bank does not have the capability to obtain and verify the identity of all transacting parties, including for those using unhosted wallets.
Balancing Privacy & Compliance to Ensure High Privacy for CBDC Payments
Are There Tech Solutions to the Privacy and Compliance Trade-Offs for CBDCs? Users will likely demand cash-like privacy protections for central bank digital currencies, which may be thwarted by regulations. However, new technology solutions may enable high degrees of privacy while complying with regulations.
Crunchfish and Lipis Advisors pubished a guide to offline payments design, providing insights to how offline payments relate and can interoperate with online payment system. It provides a way of categorizing offline payment solutions by three design choices which provides the payment ecosystem with a better understanding of the nuances of offline payments:
-Online Payment Rail: (i) distributed ledger technology (DLT) based or (ii) centralized account-based. (The paper incorrectly labels DLT-based as token-based (see the 20xx New York Fed article on this misnomer).
-Offline Security Protocol: (i) native (layer-1) or (ii) non-native (layer-2) tokens security protocol, described in relation to the underlying online payment rail.
-Offline Trusted Environment: (i) hardware-based or (ii) software-based.
Credit Rater Moody Preps Crypto Stablecoins Scoring System
Moody’s is reportedly working on a scoring system for stablecoins that will include an analysis of up to 20 stablecoins based on the quality of attestations on the reserves backing them. The project is still in early stages and apparently won’t represent an official credit rating.
PEReDi: Privacy-Enhanced, Regulated and Distributed Central Bank Digital Currencies
"In this work, we put forth a new model for CBDCs and an efficient construction that, for the first time, fully addresses privacy and regulatory compliance simultaneously. Moreover, recognizing the importance of avoiding a single point of failure, our construction is distributed so that all its properties can withstand a suitably bounded minority of participating entities getting corrupted by an adversary. Achieving all the above properties efficiently is technically involved; among others, our construction uses suitable cryptographic tools to thwart manin-the-middle attacks, it showcases a novel traceability mechanism with significant performance gains compared to previously known techniques and, perhaps surprisingly, shows how to obviate Byzantine agreement or broadcast from the optimistic execution path of a payment, something that results in an essentially optimal communication pattern and communication overhead when the sender and receiver are honest. Going beyond "simple" payments, we also discuss how our scheme can facilitate one-off large transfers complying with Know Your Transaction (KYT) disclosure requirements. Our CBDC concept is expressed and realized in the Universal Composition (UC) framework providing in this way a modular and secure way to embed it within a larger financial ecosystem."
Agility in the design and development of CBDCs: From discovery through launch
Amazon Web Services (AWS) published their views on best CBDC design practices through an agile development lifecycle. This framework aligns the design of a CBDC to the goals of a particular central bank and its stakeholders. Each stage throughout this process encourages reflection on a central bank’s policy vision and only recommends proceeding with a CBDC if alignment remains with all relevant policy goals.
The Digital Euro Association (DEA) published actionable recommendations for enhancing privacy in CBDC systems, but the DEA provided a punchier version on Twitter.
UK Treasury is Looking for CBDC Head as it Explores Digital Pound
The U.K. Treasury is seeking a "Head of Central Bank Digital Currency" to lead its work on a potential digital pound. The CBDC chief will lead the Treasury team as it works with the Bank of England on the government's soon to be issued consultation on the digital pound, the listing continues. This role will fit into the existing Payments and Fintech Team and is a separate from the current head of crypto-assets and digital currencies.
Who comes after us? The correct mindset for CBDC design
"We argue that an account-based design cannot meet the ECB’s stated design goals and that the ECB needs to fundamentally change its mindset when thinking about its role in the context of the Digital Euro if it wants the project to succeed. Along the same lines, the French National Council for Digitalization published a report on "Notes and Tokens, The New Competition of Currencies" [DGTV21]. Here, the authors make related incorrect claims about inevitable properties of Central Bank Digital Currencies (CBDCs), going as far as stating that a CBDC is not possible without an eID system. Our paper sets the record straight."
"There is no law that bans U.S. banks from issuing paper or digital private banknotes, American Institute for Economic Research senior fellow Thomas Hogan writes."
Saudi Central Bank Continues CBDC Experimentations
The Saudi Central Bank (SAMA) is working on a phase of a project that focuses on domestic wholesale central bank digital currency (CBDC) use cases in collaboration with local banks and fintechs. SAMA stressed that although no decision has been made regarding the introduction of CBDC in the Kingdom, it continues to focus on exploring the benefits and potential risks of implementing CBDC.
The digital euro: our money wherever, whenever we need it
"Our priority for the digital euro project has always been clear: to preserve the role of central bank money in retail payments by offering an additional option for paying with public money, including where this is not possible today, for example in e-commerce. The digital euro would not replace other electronic payment methods, or indeed cash. Rather, it would complement them. And by doing so, it would safeguard our monetary sovereignty while strengthening Europe’s strategic autonomy."
Project Rosalind Phase 2 TechSprint - Invitation for Expressions of Interest (EOI)
The BIS Innovation Hub London Centre has launched the Project Rosalind TechSprint, inviting expressions of interest to come up with retail central bank digital currency (CBDC) use cases. Participants will be required to develop feasible prototypes by using the set of application programming interfaces (APIs) developed in phase one of Project Rosalind. It aims to develop prototypes of an API platform for the distribution of retail CBDC. The purely experimental setup is based on a two-tier distribution model, comprising a central bank at the foundation of the retail CBDC system and with customer-facing activities carried out by the private sector payment interface providers (PIPs).
Universal digital payments network for stablecoins, CBDCs launches at Davos
"Multiple global banks will participate in use case proof of concepts (POCs) this month, to show how the UDPN will integrate digital currencies into daily businesses, banking and payment. The first two POCs will involve two banks testing UDPN’s digital currency cross-border transfer and swap capabilities, and how financial institutions can execute anonymous stablecoin transfers through the “travel rule” function." https://www.udpn.io/home
National Australia Bank Becomes Second Australian Bank to Build Stablecoin
The National Australia Bank (NAB) aims to launch an Australian dollar-pegged stablecoin (AUDN) in the middle of 2023. Its purpose would be to allow its customers to settle transactions in real-time using Australian dollars, and several other purposes including "carbon credit trading, overseas money transfers and repurchase agreements." The stablecoin will launch on the Ethereum and Algorand blockchains. NAB is the second major Australian bank to be involved in the creation of a stablecoin. Earlier, Australia and New Zealand Banking Group (ANZ) teamed up with crypto custodian Fireblocks to mint a stablecoin pegged to the Australian dollar.
A Digital Euro Association working group of global experts delved into the topic of CBDC Privacy, examining the importance of privacy in CBDCs and how it impacts the successful adoption, usage, and implementation of digital currencies. Their paper examines privacy-preserving technologies and provides recommendations for ensuring privacy and security in a CBDC system.
