DFC

The Bank for International Settlements (BIS) published an update on Project Tourbillon, which explores privacy, security and scalability for retail central bank digital currency (CBDC). The experiment proposes a concept of payer anonymity, providing cash-like anonymity to the payer, combining proven technologies such as blind signatures and mix networks with the latest research on cryptography and CBDC design suggested by David Chaum and Thomas Moser’s eCash 2.0 platform. Project Tourbillon explored not only current, but also quantum-safe blind signatures, an important cryptography used in both designs to guarantee privacy and future security. Tourbillon also demonstrated that implementing quantum-safe cryptography is possible, but it severely limits performance.

"The question does not consider that the digital euro is also to make central bank money available across a broader range of financial market infrastructures to ensure access to central bank money remains equitable and supports competition in payments. The question and more so the responses serve as a reminder that central banks seemingly continue to struggle to present a convincing case for CBDC. Arguments appear largely defensive. During the seminar, the main arguments for a digital euro brought forward were the decline in cash, respond to consumer demand for cheap and secure digital payments, safety of central bank money as the basis of trust, preservation of national sovereignty, protect the transmission mechanism of monetary policy, everyone else is doing one. Those may indeed just not ring persuasive enough. CBDC should be seen as a driver of change and to advance diversification in payments, respond to new payment needs and augment functionality and utility of central bank money."

The BIS published a paper that that explores the implications of central bank digital currency (CBDC) remuneration and convenience, focusing on the US monetary system with its large excess reserves, with the rate of interest on reserves (IOR) as the main monetary policy tool. The paper finds that at low IOR rates, large banks are non-responsive to IOR rate changes, leading to weak pass-through of IOR rate changes to deposit rates. Here an interest-bearing CBDC could provide competitive pressure to drive up deposit rates and improve monetary policy transmission. However, increasing remuneration past a point where it becomes a binding floor, increases deposit rates but leads to greater inequality of market shares in both deposit and lending markets, and reducing deposit rate responsiveness to IOR changes... The paper also finds that payment convenience is a crucial aspect of CBDC design that may be more desirable than remunerating CBDC. Payment convenience could be driven by a host of features that enhance the performance of CBDC as a medium of exchange. Examples include the quality of the user interface, processing speed, privacy and access to markets. A highly convenient CBDC produces sufficient competitive pressure in deposit markets to raise deposit rates for any given level of IOR and increases the responsiveness of deposit rates to IOR rate changes. Increasing payment convenience also has favorable effects on market composition by levelling the playing field

"Asked about Coinbase’s claim that traders are moving ‘offshore’ to exchanges like Binance that have rolled out zero-fee BTC transactions, chief operating officer Emilie Choi clarified that “companies that say zero fee are still generating a spread” and Coinbase was “not going to compete on price because of the premium nature of our offering.” Exchanges based in less, er, rigorous regulatory climates also get to offer products that Coinbase can’t legally provide. Armstrong said he repeatedly told policy makers that “by pushing so hard on local companies, you’re not actually protecting investors. You’re just encouraging them to move offshore to even less regulated options, right?”"

Two recent papers by Christian Pfister examine the state of play and short- to long-term prospects for payments, money and finance in the digital era. The second paper, which focuses on longer-term issues, recommends that if a CBDC were to be issued, it should be aimed to stimulate innovation and not lead, even inadvertently, to the marginalization of the private sector. It concludes with a set of recommendations, including that the central bank should continue to issue banknotes, but in order to discourage their illicit use, gradually withdraw the high-denominations. Also, if retail CBDC is issued, it should allow offline transactions. Also there should be a threshold of anonymity for very small-value transactions to facilitate its substitution for cash without facilitating illicit transactions. Above this threshold, allow transactions under pseudonyms, with the possibility for the judicial authorities to request the lifting of pseudonymity, and limit the collection of personal information to what is necessary for reporting entities to fulfil their regulatory obligations. Christian recommends not limiting individual CBDC holdings, except for a transitional period, and remunerating at an interest rate linked by a fixed spread under the monetary policy rate. In addition, he recommends the issuance of wholesale CBDC on a distributed ledger technology (DLT) platform, and allow, but not force, payment service providers, including regulated issuers of retail stablecoins, to back their issuance with them.

Two recent papers by Christian Pfister examine the state of play and short- to long-term prospects for payments, money and finance in the digital era. The first paper focuses on short- to medium term developments, and two forms of public sector, intervention; regulatory and production-based. He argues that the regulatory approach should be considered against the potential costs, like the creation of barriers to entry and protection of established players, which makes it ambiguous from the point of view of competition. Production-based intervention, such as the introduction of central bank digital currency (CBDC), aiming to provide an alternative to private supply is much stronger than regulation, and has its own ambiguities. Hence, before intervening, the public authority should ensure that private initiatives are unable to meet a clearly expressed need (i.e., there must be a “market failure”), and the benefits outweigh any disadvantages.

The IMF published a working paper that presents a vision for a multilateral platform that could improve cross-border payments, as well as related FX transactions, risk sharing, and more generally, financial contracting. It proposes a design that centralizes payments and settlement and that integrates functionality needed for cross-border transactions: streamlining compliance, reducing the cost of FX conversion, and better managing financial risks. The paper also shows how new technologies can be leveraged to better organize payments and associated financial markets. These new technologies are ledgers with unique states, programmability that allows for smart contracts, and encryption which ensures privacy, and can alleviate the underlying obstacles to trade. These technologies allow the design of a multilateral exchange system where participants can truthfully share information with smart contracts but can retain privacy relative to other parties.

The Hong Kong Monetary Authority (HKMA) reportedly announced the six winners of its Global Fast Track CBDC competition, who will now work with the HKMA on central bank digital currency (CBDC) research projects: ARTA TechFin Corporation Limited (technology), Bank of China (Hong Kong) (use case), Giesecke+Devrient (G+D Filia) (technology), Hang Seng Bank (use case), HSBC (ecosystem) and Visa (ecosystem).

"In this article, I would demystify this concept of wholesale CBDC. I will first clarify what wholesale CBDC is and elaborate on design considerations for the same. And then I will outline the use case of CBDC for securities settlement ."

"European Union (EU) lawmakers [reportedly] won’t vote on the Markets in Crypto Assets regulation (MiCA) until February, likely meaning further delays in the landmark licensing regime for crypto companies within the bloc. A previous tentative plan for the parliament to vote at its December plenary session has been abandoned given the length and complexity of the text. EU procedures require legal acts such as MiCA, which was negotiated in English, to be available in all the bloc's 24 official languages."

The European Central Bank (ECB) is inviting experts from the payment industry to take part in technical talks, in order to explore options for the provision of programmable payment services in digital euro. The talks will center around the questions regarding retail payments use cases, standards, and back-end IT architecture core payment settlement capabilities. The talks are expected to take place in December 2022. They will be held at expert level as closed sessions with members of the ECB’s digital euro project team, and observers from euro area national central banks.

The Monetary Authority of Singapore (MAS) launched Ubin+, an expanded collaboration with international partners on cross-border foreign exchange (FX) settlement using wholesale central bank digital currency (CBDC).  Ubin+ will develop technical standards and infrastructure to support cross-border connectivity, interoperability and atomic settlement of digital currency transactions across platforms using distributed ledger technology (DLT), and non-DLT based financial market infrastructures. It will also evaluate the efficiency and risk implications of such platforms, and establish the related policy frameworks. (The BIS Innovation Hub led Project Mariana that is investigating the use of decentralized finance (DeFi) protocols and automated market makers (AMMs) to automate FX trading and settlement, is part of Ubin+.)

"Recent advancements in decentralized finance (DeFi) have resulted in a rapid increase in the use of Automated Market Makers (AMMs) for creating decentralized exchanges (DEXs). In this paper, we organize these developments by treating an AMM as a neoclassical black-box characterized by the conversion of inputs (tokens) to outputs (prices). The conversion is governed by the technology of the AMM summarized by an ‘exchange function’. Various types of AMMs are examined, including: Constant Product Market Makers; Constant Mean Market Makers; Constant Sum Market Makers; Hybrid Function Market Makers; and, Dynamic Automated Market Makers. The paper also looks at the impact of introducing concentrated liquidity in an AMM. Overall, the framework presented here provides an intuitive geometric representation of how an AMM operates, and a clear delineation of the similarities and differences across the various types of AMMs."

Reserve Bank of Zimbabwe (RBZ) Deputy Governor Innocent Matshe reportedly said the RBZ will proceed with plans to a central bank digital currency (CBDC), undeterred By the slow adoption of Nigeria's eNaira. In addition to sending a team to learn from the Central Bank of Nigeria’s experiences, the RBZ has also reportedly sent teams with a similar mission to countries like China and Ghana.

A global, independent company borne from industry collaboration, Partior was founded in 2021 by Temasek Holdings, J.P. Morgan and DBS. In a world where money is moving faster than ever, our solutions address the growing demand for transparency, cost efficiency and liquidity optimisation.

"Last week, Binance boss Changpeng Zhao (CZ) declared that after the exchange received a license in Kazakhstan, his team had persuaded Berik Sholpankulov, the First Deputy of the Governor of the National Bank of Kazakhstan, to test integrating the Digital Tenge with the BNB blockchain. While he stopped short of confirming integration, the tweets started a frenzy of rumors and digital currency media articles speculating that BNB Chain would be the home of Kazakh CBDC."

"India’s central bank digital currency (CBDC) made a steady and glitch-free start in the world of real-time trades Tuesday, with several banks using the virtual money backed by Mint Road to settle nearly 50 government bond transactions cumulatively worth about Rs 275 crore."

The Bank for International Settlements (BIS) Innovation Hub, Banque de France, Monetary Authority of Singapore (MAS) and Swiss National Bank launched Project Mariana, to investigate the use of decentralized finance (DeFi) protocols to automate FX trading and settlement. The project will explore the use of automated market makers (AMMs) for the cross-border exchange of hypothetical CHF, EUR and S$ wholesale central bank digital currency (CBDC). AMM protocols combine smart contracts with pooled liquidity to price and transfer digital assets automatically.

"Effective AML: Thoughts, stories, and ideas about effectiveness and outcomes"

"This paper uses anti-money laundering as a case study to illustrate the benefits of cross-disciplinary engagement when major policymaking functions develop separately from public policy design principles. It finds that the anti-money laundering policy intervention has less than 0.1 percent impact on criminal finances, compliance costs exceed recovered criminal funds more than a hundred times over, and banks, taxpayers and ordinary citizens are penalized more than criminal enterprises. The data are poorly validated and methodological inconsistencies rife, so findings cannot be definitive, but there is a huge gap between policy intent and results. The scale of the problem not addressed by “solutions” repeatedly “fixing” the same perceived issues suggest that blaming banks for not “properly” implementing anti-money laundering laws is a convenient fiction. Fundamental problems may lie instead with the design of the core policy prescription itself. With an important policymaking function operating largely as an independent silo of specialist knowledge, this paper suggests that active engagement with critical, diverse perspectives, and deeper connections between the anti-money laundering movement and other disciplines (notably, policy effectiveness, outcomes and evaluation principles of public policy) should contribute to better results."

We build a stylized, nominal Diamond-and-Dybvig (1983) model, a consolidated central bank conducts maturity transformation, issuing on-demand, nominal liabilities in the form of an account-based central bank digital currency (CBDC) to citizens and investing the funds in a real asset. We show, the central bank's classic role as the guardian of price stability is in fundamental conflict with its role as a financial intermediator. Implementation of the socially optimal allocation requires a commitment to inflation. Commitment to price stability jeopardizes the real return on currency, and causes runs. Central bank runs manifest themselves as a `run on the price level'.

"This paper discusses a decentralized finance (DeFi) application called MakerDAO. The Maker Protocol, built on the Ethereum blockchain, enables users to create and hold currency. Current elements of the Maker Protocol are the Dai stable coin, Maker Vaults, and Voting. MakerDAO governs the Maker Protocol by deciding on key parameters (e.g., stability fees, collateral types and rates, etc.) through the voting power of Maker (MKR) holders. The Maker Protocol is one of the largest decentralized applications (DApps) on the Ethereum blockchain and is the first decentralized finance (DeFi) application to earn significant adoption. The objective of this paper is to analyze and discuss the significance, uses, and functions of this DeFi application."

The European Central Bank (ECB) published an article that provides an overview of the economics of central bank digital currency (CBDC). It first outlines the economic forces that shape the rise of digital money and motivate the current debate. It then looks at the implications for monetary policy and financial stability before discussing policy issues and challenges. Finally, it highlight several areas where the understanding of digital money could be improved by further research.

"Surely it would be possible for Scotland to embrace the next wave of change in the technology of money (digital currency) and generate yet more innovation. The regulatory environment has been changing to encourage competition in Europe, the Scots could build on this. The European Commission’s Directive on Electronic Money, the Payment Services Directives have already created the institutions — the Electronic Money Institutions (ELMI) and the Payment Institution (PI) to allow Scotland to drive innovation forward."

In a Hong Kong Fintech Week 2022 speech, Yi Gang, Governor of the People’s Bank of China (PBOC), described the “delicate balance between protecting privacy and combating illicit activities" in developing its  e-CNY central bank digital currency (CBDC).  "The e-CNY operates on a two-tiered system. At tier one, the PBOC supplies e-CNY to the authorized operators and processes inter-institutional transaction information only. At tier two, the authorized operators only collect the personal information necessary for their exchange and circulation services to the public. Transaction-related data is encrypted for storage. Sensitive consumer information is de-identified to non-transacting parties. Entities and individuals are prohibited from arbitrary inquiry or information usage without rigorous legal authorization. There are small-amount soft wallets and hard wallets to meet the need for small-value anonymous transactions, both online and offline."