DFC

An unrolled Twitter thread on CBDC since 2012

"This paper was a joint a response from Martin Walker (Center for Evidence Based Management) and Izabella Kaminska (Financial Times) was a response to the inquiries request for information and analysis on the topic. The paper discusses the definitions of the term “Digital Currrencies”, the role of cryptocurrencies in the UK and explains the potential and the risks of more widespread adoption. It also provides an overview of Distributed ledger technology, its history, technical characteristics and potential applications in modern banking."

The Bank of England conducted surveys in 2021 to gain further insights into the store of value role of banknotes. They confirm that over the past decade, the fall in transactional cash use in the UK has been accompanied by a rise in the value of notes in circulation. Covid intensified this trend. As Covid restrictions have lifted, there has been a partial recovery in cash use, and more recently, a stabilization in cash use trends. The value of notes in circulation remains elevated, as people are holding more cash as a store of value.  And there remains a sizable share of the population who value cash and for whom cash remains their preferred means of payment. The Bank reiterated its commitment to  to ensure that cash remains available and accessible for those who want to use it.

The IMF published a paper by Adrian Armas and Manmohan Singh that examines the impact of digital money on central bank balance sheets and monetary policy. They show that the impact will depend on the type of substitution into digital money. For example, interest rate and credit monetary policy channels may become weakened by nonbank stablecoins backed by government securities, or if there is substitution out of bank deposits into central bank digital currency (CBDC). The common factor in these cases is a reduction of banking credit. However, when substitution is out of cash into private digital money backed by bank deposits, banking credit could expand.

"Judge Scott Skavdahl of the U.S. District Court for the District of Wyoming said he likely would not dismiss the lawsuit Custodia Bank filed against the [Fed] earlier this year. Following oral arguments from all parties, Skavdahl declined to issue a ruling from the bench on the Fed's motion to dismiss the lawsuit. He noted that the scope of the suit might be adjusted but the matter would likely survive "in some form." Custodia, a Wyoming-chartered special-purpose depository, sued the Fed in June, hoping to compel it to make a decision on the company's roughly two-year-old application for a master account with the Kansas City Fed."

In 2021 the European Central Bank (ECB) launched its first survey on the usage of cash among companies to understand their strategic view on the current and future use and acceptance of cash. It found that almost all businesses surveyed accept cash (even in cash-lite countries, like the Netherlands, 90% accept cash), most businesses prefer customers to pay with card but a quarter prefer cash, security and reliability are the top criteria when deciding on payment type, and very few that accept cash intend to stop accepting it in the future. The ECB concluded that the results provide further support for the Eurosystem’s cash strategy to continue to ensure that cash remains widely available and accepted as a means of payment and store of value.

Heng Wang has written one of the most comprehensive summaries of China's CBDC approach I've seen recently. He argues that the role of the state, the potential cross-border use of e-CNY, and China’s proactiveness in international governance are the core features of China’s CBDC. These features contribute to China’s CBDC approach, a possible selective reshaping of international financial order. He adopts a multifactor analytical framework which explores major economic, political economy, legal and regulatory factors affecting the sustainability of China’s CBDC approach to promote a holistic understanding of e-CNY’s evolution.

US Fed Vice Chair for Supervision Michael Barr shot across the bow of any bank plans to issue dollar-denominated stablecoins on open permissionless distributed ledger technology (DLT) networks. "It remains an open question whether banks can engage in such arrangements in a manner consistent with safe and sound banking and in compliance with relevant law... [Banks] may not be able to track who is holding their tokenized liabilities, or whether they are being used in risky or illegal activity.

The Société Universitaire Européenne de Recherches Financières (SUERF) published a briefing paper that highlights some of the under-researched trade-offs in central bank digital currency (CBDC) design.

Some have asked me for a summary of my central bank digital currency (CBDC) position, but I'm not inclined to be so absolute and dogmatic about the topic, since it's all so jurisdiction specific, but the Digital Euro Association (DEA) CBDC Manifesto comes pretty close to expressing my views on retail CBDC.

"There are more direct and impactful ways that we can address financial inclusion concerns rather than use cryptocurrencies. To address the needs of low-income households, for instance, the U.S. government could offer and encourage the use of a robust, real-time payments solution, as other countries have done.[76] (In fact, the Federal Reserve plans to launch the FedNow Service, an instant payment system, in mid-2023.) The U.S. government should also ensure that outreach efforts related to this instant payment system are focused on engaging underserved communities.[77]  "

"This document describes the proof-of-concept (PoC) developed by the Inter-American Development Bank (IADB), the IDB Lab, LACChain, Citi Innovation Labs, and ioBuilders to demonstrate cross-border payments between entities in different countries that involve currency exchange, using digital money represented by tokens -tokenized money- in the LACChain Besu Blockchain Network. For this PoC, Citi played the role of the bank holding the funds; the IDBs headquarters in the U.S. played the role of the sender of tokenized dollars; an individual in Dominican Republic played the role of recipient of tokenized Dominican pesos; LACChain provided the blockchain infrastructure and developed the back end, the smart contracts and the integrations; and ioBuilders provided technical advice and developed the front end."

"The National Bank of Kazakhstan in cooperation with Payment and Financial Technologies Development Center of the National Bank of Kazakhstan launched #retail #CBDC tests last week."

""Equipped with the lessons from the pilot and earlier phases of the project, Project mBridge will continue its work," the report said. "This includes the technology-build and testing – including improving on existing functionalities and adding new functionalities to the platform – in an effort to move from the current pilot phase towards MVP and eventually a production-ready system.""

According to Turkey’s Presidential Annual Program for 2023, the Central Bank of Turkey will start piloting a central bank digital currency (CBDC) in 2023. Many news services are reporting that a Digital Lira will be launched in 2023, but according to Google Translate the key passage in the Annual Program Budget Rationale ("kullanım testlerine başlanacaktır") translates to "usage tests will begin" which sounds like a pilot to me. But it does sound like several proofs of concept (PoC) have been done (the Annual Program calls them "pilots", but if they didn't include "usage tests" then they're PoCs by my definition.

The World Economic Forum’s (WEF's) Digital Currency Governance Consortium has published a summary of the earlier-published comprehensive analysis of the macroeconomic impact of cryptocurrency and stablecoins. The project had two objectives: (i) to project economic outcomes of crypto and stablecoins given various possible high-level regulatory paths and (ii) to arm policymakers and business leaders with the projections to inform decision-making. The rising concern around the potential spillover effects of crypto and stablecoins on the financial system was another impetus.

"A year after launching Africa’s first digital currency, Nigeria’s central bank is turning to the nation’s three-wheeler taxi operators to speed the adoption of the eNaira, as regulators across the world scrutinize its every move. It’s offering a 5% discount to drivers and passengers of the motorized rickshaws who use the eNaira. It’s the latest attempt to kickstart the central bank digital currency (CBDC), which has so far attracted just one in 200 Nigerians... The relatively low adoption up until this point, while not uncommon for countries in the early phases of launching a digital currency, may be caused by insufficient incentives for commercial banks or mis-targeted consumer messaging, according to John Kiff, managing director of the CBDC Think Tank."

"In wrapping up, I think this is up there with the best wallets I have used. It’s a shame about the micro USB charger, but I’m an Android boy and I like having one cable for everything. Overall, if you are looking to jump into cold storage, this is a strong option – the CoolWallet Pro is a great hardware wallet with market-leading features. "

This week, the Central Bank of Nigeria (CBN) commemorated the first anniversary of the launch of its eNaira retail CBDC, which was formally launched on October 25, 2021. The press release is notable, because until now, according to that official announcement in 2021, it was a pilot launch, so sometime in the last year it morphed into a full launch, which many of us (me included) suspected it was from the start, despite the use of the word "pilot".

"Waller took a more cautious view. “It is critical that we keep both the benefits and risks of digital assets in the policy conversation,” he said. Waller noted that, in January 2022, the Federal Reserve Board published a discussion paper on the topic and has not yet resolved to move forward. Personally, he said, “I am highly skeptical of whether there is compelling need for the Fed to create a digital currency.” In particular, he took issue with Singh’s view that the lack of a CBDC would threaten the dollar. “The underlying reasons for why the dollar is the dominant currency have little to do with technology, and the introduction of a CBDC would not affect those underlying reasons.”"

A new experiment by the Bank for International Settlements (BIS) Innovation Hub and Hong Kong Monetary Authority (HKMA) shows central bank digital currency (CBDC) can work with private stablecoins, even if intermediary operators go bust. Project Aurum created a technology stack comprised of a wholesale interbank system and a retail e-wallet system, setting up two different types of tokens: intermediated CBDC and stablecoins backed by CBDC in the interbank system. While intermediated CBDC is a direct liability of the central bank, CBDC-backed stablecoins are liabilities of the issuing bank, with its backing assets held by the central bank.

Coinbase says the adoption of USD Coin has been “more conservative” outside of the United States, which it believes is a result of international currency conversion fees. The U.S. exchange said there is currently three times more USDC bought with U.S. dollars as compared to other currencies. The exchange said it is aiming to “build more on-ramps for users to access USDC,” and will be waiving fees for all customers who buy or sell USDC using any fiat currency.

The Bank of England is looking for a specialist supplier to help them with their offline central bank digital currency (CBDC) research and proof of concept (PoC) work. The process of applying is a bit wonky because thy've delegated it to the UK government's digital supplier procurement system, and if you or your firm are not already on their supplier list, tough luck. And tough luck for the Bank too, because the "supply" of offline digital currency experts is rather thin, and most probably aren't already be on the list.

Silvergate Capital no longer plans to launch its own payments-focused, dollar-pegged stablecoin this year. Company executives said the delay is related to regulatory compliance, not technical issues, underscoring that the technology was ready when Silvergate acquired it from Diem.

The rise of cryptocurrencies has demonstrated just how difficult it is both to enforce existing financial regulations in the context of new currencies and to predict how those new currencies will be used, and by whom. That’s not a reason to forswear all new forms of currency but it is a reason to approach them cautiously and with an eye to the opportunities for abuse and illicit activity. It’s also a reason to be less confident about what types of benefits a CBDC will realistically be able to offer, especially since many of those could potentially be addressed through other, less radical changes to existing financial institutions and instruments.

“JP Morgan already enables tokenized U.S. dollar deposits with JPM Coin. Now it plans to enable blockchain-based Euro deposits ‘soon’… Most blockchain financial applications sit under JP Morgan’s Onyx division. This includes Onyx Digital Assets with an intraday DLT repo application, Liink for messaging around conventional payments and JPM Coin. It’s also experimenting with using JPM Coin on a public blockchain as part of Project Guardian, its Singapore DeFi experiments with the Monetary Authority of Singapore.”