DFC

The Bank of England published its supervision of financial market infrastructures 2022 Annual Report. It reports that the Financial Services & Markets Bill, published in July 2022 and scheduled to complete in 2023 seeks to bring systemic stablecoins into the Bank’s regulatory remit, and bring the UK regime in line with standards discussed. The Bank is now working on a regulatory framework for systemic stablecoins and plans to consult on this in due course. Alongside regulation, another key component of a stablecoin regime is the potential application of the FMI Special Administrative Regime to systemic stablecoin firms. The Bank, working with His Majesty's Treasury, will continue to develop this regime to ensure it reflects international CPMI-IOSCO guidance.

The European Central Bank (ECB) published the second progress report on the investigation phase of a digital euro. It outlines the developments made since the first progress report, which was published in September 2022. The report details a second set of design and distribution options that were recently endorsed by the Governing Council and describes the roles of the Eurosystem and supervised intermediaries in the digital euro ecosystem. In 2023 the ECB will further assess a number of design and distribution options and in the second half of the year present the overall design of a digital euro to the Governing Council.

The National Bank of Kazakhstan (NBK) and the Payment and Financial Technology Development Center of the Bank of Kazakhstan published the English version of their report on the second phase of their digital tenge central bank digital currency (CBDC) feasibility study.The second phase was comprised primarily of proof-of-concept work involving select financial institutions, merchants and final users. The report calls it a "pilot" but is silent on who the selected final users were. If they were central bank employees, it is a proof-of-concept by most CBDC exploration workflow taxonomies, but if users were selected from the general public, then it's a pilot. In any case, the report recommends a phased rollout starting in 2023 with a gradual expansion of its functionality and step-by-step introduction into production scale by the end of 2025.

The European Central Bank (ECB) published a collection of papers presented at the September 5-6, 2022 European System of Central Banks (ESCB) Legal Conference, including three on the legal aspects of central bank digital currency (CBDC) interoperability. A paper by Jess Cheng and Joseph Torregrossa discusses the concept of “legal interoperability” in the domestic payment system and its relevance to the retail CBDC context, particularly as the necessary legal foundation for transferability and convertibility. The second by Panagiotis Papapaschalis makes the case for exposing and overcoming technical and legal obstacles to interoperability ex-ante and early on, rather than trying to tackle them ex post, i.e. only when the various, diverging, CBDCs have gained momentum. The third paper, by Seraina Grünewald, focuses particularly on the prospects and challenges for the legal interoperability of a digital euro.

"Crunchfish in partnership with HDFC Bank and one additional Indian bank have been working together to develop a solution for Offline Retail Payments that will be demonstrated in a pilot to Reserve Bank of India (RBI) in their Regulatory Sandbox program*. The project, if successful, will provide the basis for RBI’s guidance and regulatory support in providing Offline Retail Payments, based on Crunchfish Digital Cash platform, to the payment ecosystem of India. "

"Fiat-referenced cryptoassets have seen tremendous growth in recent years. Since these types of cryptoassets have the potential to perform many of the functions of money, they could become more widely used to pay for everyday goods and services. Fiat-referenced cryptoassets could make payments faster and more efficient due to features of the novel technology they are built on. However, they could also pose financial stability risks, some of which were illustrated in the market turmoil of May and November 2022, highlighting the need for adequate regulation and supervision. Work is underway, domestically and internationally, to develop a robust regulatory framework to mitigate the risks these types of cryptoassets can pose to holders, the financial system and the economy. A timely and comprehensive regulatory approach in Canada will ensure that fiat-referenced cryptoassets can deliver potential benefits without posing unnecessary risks."

The Bank of Canada published a paper on the utility of stablecoins for retail payments. It finds that certain stablecoin arrangements offer end users greater control of their privacy, facilitate more rapid innovation and have the potential to increase transaction speeds, particularly for cross-border payments. At the same time, stablecoins may provide less consumer protection for fraud, present higher risks to the payment system and to efforts to combat financial crime, and be costlier relative to traditional payment arrangements. The paper's findings suggest that stablecoin arrangements do not currently serve as substitutes for the suite of traditional payment arrangements but instead address niche use cases or user segments that value their benefits and can accept their risks or costs.

According to Bank of Ghana Governor Ernest Addison, a successful implementation of the eCedi CBDC will further advance financial inclusion, strengthen policy transmission, promote efficiency in the payment system, and provide a safe alternative to private digital assets. 38. After taking the necessary preparatory steps, a three (3) staged pilot was implemented in Accra and Tarkwa in collaboration with CAL Bank, Fidelity Bank,Vodafone Cash, IT Consortium and ExpressPay to test the online version of the eCedi, while an off-line version was tested in Sefwi Asafo. The initial findings from the pilot have provided the Bank with deep insights on the possible implementation process for the eCedi, and these results will soon be shared with industry players.

The US Federal Reserve Board (FRB) published a note that describes the general lifecycle of a stablecoin from its issuance to its redemption. It then categorizes various stabilization mechanisms and discuss how they work in practice. A key observation is that, although several stablecoins may peg their value to the same real-world asset, stabilization mechanisms can vary greatly in terms of maintaining stability with the reference asset, and so may have varying susceptibilities to the risk of runs from the stablecoin to the reference asset.

"The Riksbank is continuing to investigate the possibility of issuing a digital complement to cash, known as the e-krona. This would preserve public access to government-issued money even if cash were to be marginalised further. In addition, the e-krona could strengthen the resilience of the payments market. No decision has yet been taken to issue an e-krona.

In January 2023, the European Central Bank (ECB) will invite market participants to take part in market research to obtain an overview of options for the technical design of possible digital euro components and services. The market research will consist of a set of questions to obtain technical input, as well as cost and time estimations. Participation will not be remunerated. It will not have any impact on eligibility for future procurement procedures related to a digital euro or any other procurement procedures. Nor will it imply any pre-selection for a potential subsequent tender. The ECB intends to publish the findings of the market research in the second quarter of 2023.

The Banque de France in partnership with HSBC and IBM demonstrated the use of a wholesale central bank digital currency (CBDC) to enable transactions across borders and technology platforms whilst facilitating the lifecycle of digital assets and currencies in wholesale markets. A combined proof of concept tested the issuance and distribution of a CBDC, bond subscription in primary and secondary markets followed by coupon redemption, and execution of cross border and cross network payments. It proved that each transaction flowed correctly through the network of systems, automatically triggering the required events, whilst retaining visibility and control over the CBDC in circulation.

"I’ve been asked at least 5+ times today what is going on with BUSD, why USDC withdrawals were halted, what wrapped/pegged/bridged BUSD is, why [insert stablecoin here] is going to zero, and other increasingly hysterical questions."

Where the relationship between citizens and the state has a trust deficit to begin with, technology may offer better solutions than institutions. One such idea comes from the world of polling. The election officer (read, the monetary authority) signs a sealed envelope that carries your secret ballot (the payment details); carbon paper (cryptography) carries the signature to the vote inside. So when the envelope is opened (the payee is credited), all that the receiver’s bank sees is the signature attached to the ballot, not where the vote (the funds) came from. You, however, will know what you did or didn’t intend to do. If a terror financier steals your wallet, you’d go to law enforcement to show them where your tokens are. You might even get them back.

"Michael Bordo and William Roberds consider the debut of a new monetary instrument, central bank digital currencies (CBDCs). Drawing on examples from monetary history, they argue that a successful monetary transformation must combine microeconomic efficiency with macroeconomic credibility. A paradoxical feature of these transformations is that success in the micro dimension can encourage macro failure. Overcoming this paradox may require politically uncomfortable compromises. They propose that such compromises will be necessary for the success of CBDCs."

Tether has pledged to stop the practice of lending out funds from the reserves that back its USDT stablecoin. The move is likely in response to a Wall Street Journal report earlier this month alleging these loans were risky, claiming that the “company may not have enough liquid assets to pay redemptions in a crisis,” even though Tether claims that the loans are over-collateralized and covered by “extremely liquid assets." Tether said that starting from now, throughout 2023, it will reduce secured loans in its reserves to zero.

Bank of Canada Governor Tiff Macklem reportedly said that next year (2023) the central bank plans to consult the public on a potential central bank digital currency (CBDC). It is moving from the research phase into the development phase to be prepared if the need arises to issue a CBDC. However, the Governor made clear that a decision on whether to issue a CBDC is up to parliament. Macklem outlined three drivers that could result in the launch of a retail CBDC;  a loss of control over the Bank's monetary authority if there is a dramatic switch from cash usage into other digital currencies, or if Canadians heavily adopt a private sector stablecoin, particularly one not denominated in Canadian dollars.

The Canadian Securities Administrators (CSA) is strengthening its approach to oversight of crypto trading platforms by expanding existing requirements for platforms operating in Canada. Also, the CSA announced that it is of the view that stablecoins, or stablecoin arrangements, may constitute securities and/or derivatives. In that context, crypto trading platforms that are registered or that have entered into a pre-registration undertaking are prohibited from permitting Canadian clients to trade, or obtain exposure to, any crypto asset that is itself a security and/or a derivative. Crypto trading platforms are expected to have established policies and procedures to determine whether each crypto asset they provide exposure to is a security and/or derivative.

Reserve Bank of Australia (RBA) central bank digital currency (CBDC) research partner, the Digital Finance Cooperative Research Centre (DFCRC) published an update on the state-of-play regarding the possible CBDC issuance in higher-income economies with good electronic payments systems. It concludes that it is unlikely that there will be actual issuance of retail CBDCs in higher-income countries anytime soon. However, it conjectures that wholesale CBDCs could potentially be implemented sooner, reflecting that, conceptually, they arguably represent only a modest technological modification to the settlement/reserve accounts that central banks currently provide, and might be less of an issue politically than retail CBDCs.

"Tron's Decentralized USDD algorithmic stablecoin slipped further from parity with the US dollar today. USDD dropped to slightly below 0.97 before recovering to around $0.98. This marks the second time the stablecoin has slipped out of dollar parity since it was first founded earlier this year. In June, the stablecoin dipped all the way to $0.96 before bouncing back to its intended value."

"Contrary to what the Barclays note says, placing funds on deposit at the Fed through the ON RRP facility would not make USDC a "closer substitute for insured bank deposits". Since ON RRP deposits are not liquid, it would actually make it less like an insured bank deposit, since it would not be possible to redeem it overnight. "

"By limiting large cash payments, the EU will make it harder for criminals to launder dirty money. An EU-wide maximum limit of €10.000 is set for cash payments. Member states will have the flexibility to impose a lower maximum limit if they wish."

The RBI has said the central bank digital currency (CBDC) will remain anonymous and regulations that are applicable to paper currency will prevail on the e-rupee. RBI deputy-governor T. Rabi Sankar said the central bank was looking at solutions to make CBDC at par with paper currency when it comes to having the key feature of anonymity which has ensured that cash is still used in the developed world. ``The challenge is to ensure the anonymity because the normal understanding is that anything digital leaves a footprint. This can have various solutions,” Sankar said. The RBI is looking at a technological solution and also a legal solution to help assuage the concerns on this problem. Sankar said the start-up or the fintech ecosystem would have to innovate and launch various use cases for the new currency. RBI governor Shaktikanta Das said the rules governing deposits and withdrawal of paper cash will also apply to digital currency.

The Bank of England has put out a request for proposal (RFP) for proof of concept work on a sample central bank digital currency (CBDC) wallet, to help make a potential CBDC product more tangible for internal and external stakeholders, eg. as a prototype for future user testing. It will also support the Bank’s work towards the BIS Innovation Hub’s ‘Project Rosalind’, by testing integration of a front-end with the Rosalind API. Key deliverables will be (1) a mobile wallet app (built on both android as well as iOS); (2) wallet website; and, (3) an example merchant website, and (4) back-end server to serve mobile app and website, including calling the core ledger API and stored user data and transaction history.

Reserve Bank of Australia (RBA) Assistant Governor Brad Jones discussed where the case for a retail CBDC in Australia fits into the wider international debate over the future of money, and provided an update on the RBI's retail CBDC pilot project. On balance, the RBA does not yet see a case for issuing an eAUD, but the central bank is "keeping an open mind" as its eAUD pilot program remains in full swing. The program has not prescribed use cases in advance, instead inviting the applicants (80 of them) to propose their own use cases (140), from which the RBA eAUD project team will select to take forward into the pilot phase in early 2023.