DFC

The US Fed published a paper that explores whether there could be a first-mover advantage for a jurisdiction issuing a central bank digital currency (CBDC) compared to other jurisdictions that subsequently issue their own CBDC. The academic literature provides a framework by which one can assess a CBDC in the domestic payments market, the international payments market, and the technology markets that support payments. However, a CBDC may be more than just a means of payment and thus first-mover advantage is examined for both the asset component of reserve currency and a future financial system built on CBDCs. Overall, the first mover literature does not suggest that there is a compelling first-mover advantage for issuing a CBDC.

According to the New York Fed's Antoine Martin, “instead of issuing a retail central bank digital currency (#CBDC), central banks could support stablecoins by allowing them to be backed one-for-one with balances in a central bank account. They could also facilitate a bankruptcy remote legal structure to ensure that end-users are paid in full even if the issuer becomes bankrupt. Such stablecoins could be a close substitute for central bank digital money, while balances in a central bank account are risk free and could earn interest. Though stablecoin issuers should be subject to some oversight in exchange for access to a central bank account.”

Crunchfish and the Central Bank of Nigeria (CBN) have entered into a Development and Demonstration Agreement for a proof-of-concept of Crunchfish Digital Cash. Crunchfish will deliver Digital Cash for iOS and Android and support CBN throughout this process. The Proof-of-concept will integrate Digital Cash into the eNaira Wallet and backend to fully evaluate the user experience in a potential commercial deployment.

The Bank for International Settlements (BIS) published a paper that analyses the development, motivations and concerns of central bank digital currencies (CBDCs) in Africa. While all of those surveyed are analyzing CBDCs, only few have projects at advanced stages (pilot or live). Some countries, in particular in East and West Africa, stand out as promoting fast payment systems through mobile money, but half of the surveyed central banks think that CBDCs can provide a superior solution. A key motivation for African central banks is achieving greater payment system efficiency. In addition, a higher proportion than in other regions see potential benefits for monetary policy, an important consideration for a region where the transmission mechanism is weak. Central banks in Africa also place more emphasis on financial inclusion. At the same time, they are more worried than other regions about cyber security risks and cross-border spillovers and are also concerned about high operational burdens... And speaking of high operational burdens,  only just over 40% of respondents favored a two-tier business model, with the central bank at the core, but private agents (banks and payment service providers) interacting with users (e.g., performing customer onboarding, including KYC/AML functions). Almost all central bank CBDC explorers I follow have dismissed the direct model in which the central bank does all of the "donkey work". However, it should be noted that almost all of the other 60% or so of respondents were simply undecided about the business model at this point. The preference for a two-tier model is strongest among central banks for which financial disintermediation is a top concern. Bringing banks – and other PSPs – on board would encourage them to accept CBDCs. A two-tier model would facilitate collaboration and potentially draw on synergies with the private sector.

"Stablecoins could offer central banks a shortcut to having their own digital currencies, according to the NY Fed's Antoine Martin. “Instead of issuing a retail [central bank digital currency], central banks could support stablecoins by allowing them to be backed one-for-one with balances in a central bank account... Adapting our regulatory and legislative environment to support stablecoins is already a formidable task, but it is probably easier than managing a CBDC for retail use, especially as the private sector currently provides all retail digital means of payments on legacy technology."

"With an increasing focus on anti-money laundering and counter-terrorist financing, it is extremely unlikely that the opportunity will not be taken here to reduce the level of anonymity that currently exists. That said, privacy is a closely intertwined matter, and the adoption of a risk-based approach can help address privacy concerns whilst supporting regulatory objectives around prevention and detection of financial crime. "

"China is challenging the predominance of the American dollar by adopting digital currencies, which significantly reduce transaction costs and allow for smoother exchange in the marketplace. Efforts to strengthen the dollar must recognize the growing influence of digital currencies on the international landscape while understanding the importance of stability and predictability. The Fed should establish a wholesale digital currency to capture the importance of technological innovation while ensuring that volatility does not jeopardize the dollar’s predominance." [Kevin Warsh, AEI]

The Hong Kong Monetary Authority (HKMA) published a paper on volatility spillover from asset-backed stablecoins to money market instruments, focusing on Tether. Stablecoins bear liquidity mismatch risks similar to money market funds, which may expose them to a fire-sale of reserve assets in times of crypto ecosystem instability and in turn increase the volatility of these reserve assets. It finds that, in extreme circumstances, these fire-sales could have material impacts on the traditional financial system such as the money market. The paper proposes regulations that require stablecoin issuers to provide standardized and regular disclosures of their reserve assets holdings, and possibly imposing restrictions on the composition of reserve assets and requiring well- defined redemption rights

The Bank of Japan (BOJ) will reportedly begin preparations to conduct a retail central bank digital currency (CBDC) pilot next Spring (2023) year. According to Nikkei Asia, "after spending two years verifying whether there are any problems with bank account deposits and withdrawals, the BOJ will decide whether to go ahead with a digital yen in 2026." However, it's not clear yet whether this is a "pilot" (testing in the "wild" with real live users) or a proof of concept (tested among financial institutions in a "laboratory" setting).

The LSE Business Review published an article by the Center for Evidence-Based Management's Martin C. W. Walker that reviews the Central Bank of the Bahama’s Sand Dollar CBDC experience. He documents the Sand Dollar's very low take-up and opines that it was aimed at solving a financial exclusion problem that was not really a major problem, and it didn't do it very well. Also there did not seem to be an objective evaluation of alternatives solutions, such as encouraging greater use of bank issued debit cards and more efforts to educate the older generation in the use of electronic payments.

For fans of "straw man" arguments, the Cato Institute published a digital dollar takedown. Most of the report is actually quite good, and I agree with most of the things the authors say about the dubious case for a US Fed-issued central bank digital currency (CBDC). But starting on page 7, they go down the privacy/control rabbit hole by assuming that a digital dollar will be designed as a control/surveillance coin, completely ignoring the possibility that it could be designed to offer the same privacy and user control as physical cash (see my IMF F&D article). Rather than completely diss CBDC, they could have made their paper a call for action to insist that at least one layer of the digital dollar offer complete offline usability and privacy, or lend support to the ECash Act.

"Crunchfish partner with a financial platform provider to create a Turnkey Offline Payment Solution for banks and payment services. The financial platform provider has almost 100 existing integrations with Indian banks already. Roll-out of Crunchfish Digital Cash is expected to accelerate with this turnkey solution as it may be used by any bank or payment service."

The Banca d'Italia published a paper that, based on data from a 2019 ECB survey of consumers, studies the determinants of Italian consumers' payment choices at the physical point of sale (POS). The study also assesses the reasons why consumers mainly use cash for their payments although they would prefer to use other instruments, such as cards. The acceptance of cashless instruments at the point of sale and the value of the transaction are the main factors influencing payment choice. Men and residents in Northern and Central Italy pay with cards more than women and residents in Southern Italy, but these gaps narrow among people with digital skills. Consumers pay in cash, even though they would prefer to use a different payment instrument, due to a lack of acceptance of cashless instruments by merchants.

"Engineers introducing the designation identity to describe objectives or operational aspects of technology, must establish a functional definition of the term identity before committing the concept to source code. As such the objective of this taxonomy project is to provide a peer-reviewed library to serve as a reference for engineers in general, and software engineers aiming to facilitate legally relevant (commercial) activities in particular."

The Financial Stability Board (FSB) published its report to the G20 on the framework for monitoring progress toward meeting the targets for the G20 Roadmap for Enhancing Cross-border Payments, to achieve cheaper, faster, more transparent, and more accessible payments. The framework includes key performance indicators defined across the 11 targets for the three market segments – wholesale, retail, and remittances. Notably, the definitions of the wholesale and retail market segments have been adjusted to more clearly separate the differing use cases and end-user experiences and better align the definitions with those most typically used by the payments industry and end-users. Wholesale transactions were defined as those between financial institutions, and retail transactions as those that were neither between financial institution end-users nor in the third market segment - remittances. Going forward, the wholesale market segment will include all payments with a value equal to or exceeding a specified threshold regardless of whether the end-users are financial institutions. The threshold will be set at a level that captures the use cases in this market segment, such as high-value corporate business-to-business. Relatedly, retail payments will be payments with a value less than the specified threshold, not including remittances.

"The Regulated Liability Network (RLN) is a contribution to the global debate on the future of money offered by a group of industry participants. It explores the technical, legal and business characteristics necessary to provide on-chain, 24*7 programmable, final settlement in sovereign currencies, consisting of the liabilities of both public and private regulated financial institutions. These activities could enable a more functionally rich financial system that is compliant with all existing laws and regulations."

eCurrency has entered into a long-term partnership with Bank of Jamaica to provide technology services for the national rollout of its JAM-DEX CBDC.

The US Federal Reserve Board (FRB) published a paper that provides an overview of the literature on how a CBDC would affect the banking sector, financial stability, and the implementation and transmission of monetary policy in a developed economy such as the United States. A CBDC has the potential to improve welfare by reducing financial frictions in deposit markets, by boosting financial inclusion, and by improving the transmission of monetary policy. However, a CBDC also entails noteworthy risks, including the possibility of bank disintermediation and associated contraction in bank credit, as well as potential adverse effects on financial stability. A CBDC also raise questions regarding monetary policy implementation and the footprint of central banks in the financial system. Ultimately, the effects of a CBDC depend critically on its design features, particularly remuneration.

The National Bank of Georgia reportedly plans to roll out a central bank digital currency (CBDC) pilot. The central bank first announced the digital lari project in 2021 and invited innovators for a public-private partnership for the purpose.

DAML: The Federal Reserve Bank of New York is exploring the feasibility of an interoperable network of digital central bank liabilities and commercial bank digital money using distributed ledger technology (DLT)—powered by SETL and Digital Asset.

In a recent speech, Central Bank of the Bahamas (CBB) Governor John Rolle described four central bank digital currency (CBDC) factors that the Bahamas’ experience suggests are particularly important – and that remain important to its own efforts to encourage CBDC adoption. Those factors are: building a network of merchants that accept and encourage CBDC use; achieving interoperability with the traditional banking system; enlisting participation from the traditional banking sector and credit unions; and the importance of “user education” and “inspiring user confidence”.

"The digital asset industry lacks the standards to ensure digital asset service providers hold enough assets to cover customer deposits. Gaps in trust result in lower rates of adoption and higher counterparty risks. TrustExplorer is an objective third-party that instills confidence providers have sufficient digital assets to meet users’ liabilities and enables validation that account data was included in the review."

State Bank of India, ICICI Bank, IDFC First Bank, HDFC Bank and Yes Bank are reportedly among a shortlist of at least five lenders that the Reserve Bank of India (RBI) has chosen to work on its retail central bank digital currency (CBDC) pilot that is expected to go live soon.

In June 2022 the New York Department of Financial Services (NYDFS) issued formal guidance for NYDFS-approved stablecoin issuers, including upgrades to the amount and quality of information that issuers must provide to the public.

VTB Bank has reportedly become the first Russian bank to add the digital ruble to its mobile application. The integration is currently being tested with accounts set up for legal entities. Select customers will be granted access in the coming months and will be able to join the trials.

The Bank of England is recruiting for Solution Architects within the Technology team of its Central Bank Digital Currency (CBDC) Unit. The CBDC Unit is responsible for analyzing the opportunities and challenges presented by CBDC and developing the design of a CBDC. The Unit’s activities include macroeconomic analysis, work on functional design, exploration of technology options, and engaging private-sector and international counterparts. The responsibility of the job holder will be to explore the technology design and architecture options for a potential retail CBDC.

The Federal Reserve Bank of New York’s New York Innovation Center (NYIC) and the Monetary Authority of Singapore (MAS) announced Project Cedar Phase II x Ubin+, a joint experiment to investigate how wholesale central bank digital currencies (CBDCs) could improve the efficiency of cross-border wholesale payments involving multiple currencies. Project Cedar Phase II x Ubin+ will enhance designs for atomic settlement of cross-border cross-currency transactions, leveraging wholesale CBDCs as a settlement asset.

"Countries from China to Sweden have a variety of rationales for seeking to modernize their payments technologies. Ultimately, however, central banks weighing whether to launch a digital currency must recognize that if they do, they can have confidentiality of transactions or financial stability, but not both."

Significant market volatility this week induced by the collapse of the FTX exchange has impacted stablecoins with many of them depegging temporarily. Tether's USDT temporarily declined to $0.97 on November 10 as redemptions reportedly surpassed $600 million over the previous two days. Circle’s USDC fell to $0.977 very briefly. Both rapidly regained their pegs. Yesterday I reported that USDT had spiked down and USDC spiked up, but different sources tell different stories. Yesterday's USDC graphic sourced CoinMarketCap.com whereas CoinGecko.com tells a different story (see below). with USDC also spiking down like USDT did. In any case, lots of volatility!