Australian Reserve Bank to Explore Use Cases for CBDC
The Reserve Bank of Australia (RBA) has launched a research project to explore use cases for a CBDC in Australia. It is expected to take about a year to complete, and will involve the development of a limited-scale CBDC pilot that will operate in a ring-fenced environment for a period of time. Interested industry participants will be invited to develop specific use cases that demonstrate how a CBDC could be used to provide innovative and value-added payment and settlement services to households and businesses. The Bank and the DFCRC will then select a range of different use cases to participate in the pilot, based on their potential to provide insights into the possible benefits of a CBDC.
Nepal's central bank working to amend Act to issue digital currency
The Nepal Rastra Bank has reportedly initiated an exercise to revise the Nepal Rastra Bank Act in order to enable the central bank to issue digital versions of the Nepali currency. Revati Nepal, chief of the currency management department at the central bank. said that “a task force formed by the central bank has drafted an amendment bill to authorize the Nepal Rastra Bank to issue and manage a digital currency."
CBDC launch still on the table, BoJ says - Central Banking
A Bank of Japan (BoJ) official said the central bank has not scrapped its preparations for a potential CBDC launch, dismissing misleading reports by a number of media outlets. Tomohiro Sugo, head of the payment and settlement system division, told Central Banking that "the Bank of Japan continues preparing for the possible issuance of CBDC in the future and it has not quit its preparations." [Read more at Central Banking] As I mentioned a few days ago the misleading reports started with an Asia Times op-ed that rehashed inaccurately a July 5, 2022 report from the BoJ’s Liaison and Coordination Committee on Central Bank Digital Currency.
Cashlessness, Crime and Central Bank Digital Currency
David Birch argues that cash reduction via fintech means an increase in net welfare. People who are trapped in a cash economy, the poor in particular, are more likely to get robbed, to get bad deals, and to get shaken down. Although that argues for reducing cash usage, what do we do about the people people who say they would "struggle to cope" in a cashless society (one in five according to a U.K. survey) and those who say it would be "problematic" (half of those surveyed)?
"Innovative technology built specifically to enable CBDCs with full customisation. Inclusive, easy, convenient and affordable ledger-stored account CBDC access for banked, unbanked and underbanked - Seamless Consecutive Offline payments, Privacy, Interoperability and Innovation
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Central bank digital currencies could mean the end of democracy
"The transition to national digital currencies gives governments the ability to automate transactions and create conditions under which it can be spent. This raises crucial implications about democracy that must be identified and considered before central bank digital currencies become a reality."
Thailand's Central Bank Extends Retail CBDC Study to Pilot Phase
The Bank of Thailand is extending the scope of retail central bank digital currency (CBDC) development by starting a pilot study. It will adopt technology developed by Giesecke+Devrient and is expected to begin at the end of 2022 and last until mid-2023. However, the central bank emphasized that the purpose of the pilot is to assess the suitability of technology and CBDC design, and at present it does not have plans to issue retail CBDC until thorough consideration of benefits and associated risks for the financial system. https://www.bot.or.th/English/PressandSpeeches/Press/2022/Pages/n3965.aspx
An Illustrative Industry Architecture to Mitigate Potential Fragmentation across CBDC and Commercial Bank Money
A paper by a couple of Barclays staffers aims to provide a mitigation to the risk that the adoption of central bank digital currency (CBDC) fragments payments markets and retail deposits. It introduces the concept of ecosystems providing a common programmability layer that interfaces with the account systems at both commercial banks and the central bank. The paper focuses on a potential U.K. CBDC, including industry ecosystems interfacing with commercial banks using open banking application programming interfaces (APIs).
There are misleading stories circulating that the Bank of Japan has shut down its central bank digital currency (CBDC) project. They seem to be triggered by an Asia Times story that rehashed the July 5, 2022 report from the BoJ's Liaison and Coordination Committee on Central Bank Digital Currency, which reiterated its October 2020 position that “while the Bank of Japan currently has no plans to issue CBDC, from the viewpoint of ensuring the stability and efficiency of the overall payment and settlement systems, the Bank considers it important to prepare thoroughly to respond to changes in circumstances in an appropriate manner.” So the project lives on! https://www.boj.or.jp/en/announcements/release_2022/rel220705b.pdf
"Whether any of these ideas will go into full operation is an open question, but it does seem that in many regions offline access may be a make-or-break feature for central bank digital currencies."
The future of stablecoins is commercial bank money
Issuers of stablecoins have thrived while nominal interest rates have been near zero. With high positive interest rates, the opportunity cost of holding zero-interest stablecoins increases and the issuers lose business. With significantly negative rates, the value of safe reserves declines but the tokens are still redeemable at par. Issuers face insolvency and must invest in riskier reserves for a chance to survive. If stablecoins are no longer fully backed by safe and liquid assets and are widely used, this creates financial stability risks. Suppose the issuers could pass on their interest earnings (or costs if rates are negative) on reserves to the token holders on a one-on-one basis. If interest rates are high, stablecoins are a competitive liquid store of value. If they are significantly negative, the issuers’ liabilities shrink along with their reserve; the issuer remains solvent. Stablecoins could be sustainable in all interest rate environments. There is a problem though, at least for the EU with the Regulation on Markets in Crypto-assets (MiCA) that is expected to come into force in 2024. This proscribes the paying of interest on money tokens. That would force issuers to adopt a business model that is only sustainable with near-zero interest rates.
China’s central bank to expand digital yuan pilot program
The People’s Bank of China (PBoC) has listed the “orderly expansion of the scope of the digital yuan pilot” as one of its key tasks in the second half of the year, according to the central bank’s work plan.
The European Central Bank (ECB) published a paper that describes current visions of how to eventually find the holy grail of immediate, cheap, universal cross-border payments settled in a secure settlement medium. It focuses on six potential solutions; (i) modernized correspondent banking; (ii) emerging cross-border FinTech solutions; (iii) Bitcoin; (iv) global stablecoins; (v) interlinked instant payment systems with FX conversion layer; (vi) interlinked CBDC with FX conversion layer. For each, settlement mechanics are explained, and an assessment is provided on its potential to be the holy grail of cross-border payments. Several solutions are suitable for improving cross-border payments significantly, and some could even be the holy grail.
Tradeoffs in Permissioned vs Permissionless Blockchains: Trust and Performance
"We develop a model of transaction safety in permissioned and permissionless blockchains to study this tradeoff and find that in several settings there may be no tradeoff at all. With a minimal level of trust in the blockchain operators and the supporting institutions, well-designed permissioned blockchains can offer both higher operational efficiency and higher transaction security. While this minimal trust in the ``system'' is essential to the functioning of permissioned blockchains, it is also inherent in most business relationships, making permissioned blockchains well suited for enterprise applications of the technology. We explore the implications of our analysis for the design of permissioned blockchains, such as the reputation or bonding implications for their validators."
Partner states bicker over who will host the East African central bank
In East Africa, the Protocol for the establishment of the East African Monetary Union (EAMU) was signed by the heads of state in Kampala on November 30, 2013, setting up a 10-year roadmap for attaining a single currency in 2024. But the EAC is way behind schedule in setting up relevant institutions to support a single currency, the most important being the EAMI, which was supposed to be up and running in 2015. Other institutions such as the East African Financial Services Commission, East African Statistics Bureau and the East African Surveillance, Compliance and Enforcement Commission were supposed to be operational by 2018. Member countries are also struggling to meet and comply with other macroeconomic indicators that are key to the implementation of a monetary union. These are debt-to-GDP ratio of 50 percent, fiscal deficit (including grants) of three percent of the GDP, overall inflation of eight per cent and forex reserves of 4.5 months of import cover.
Israel bans use of cash for purchases larger than NIS 6,000
The law to reduce the use of cash is intended to assist in the fight against black capital and criminal activity. The law sets restrictions on the use of cash and checks and applies to a dealer, private individual, tourist, accountant and attorney when providing "business service" to a customer. From August 1, the maximum amounts allowed for cash use will be updated: in transactions with dealers - NIS 6,000 and between private individuals - NIS 15,000. https://www.gov.il/en/departments/topics/cash-use-reducetion/govil-landing-page
Millicent Successfully Carries Out Test of a General Purpose Full-Reserve Stablecoin
Millicent, a fintech company co-funded by the Innovate UK, has successfully performed a test of a full-reserve stablecoin aimed at the retail market. The reserves are held in a ringfenced account safeguarded by a regulated third party, directly at the Bank of England. Millicent runs on a hybrid Layer-1 distributed ledger network (DLT). A sandboxed demonstration simulated fiat on-ramping via Faster Payments from one of the UK's largest consumer banks, as well as the on-chain conversion and minting of stablecoins pegged to the British Pound Sterling, and a variety of payment and settlement scenarios.
Moneyness: How profitable is the world's largest stablecoin?
In a recent blog post, the world’s largest stablecoin issuer Tether mocked its smaller competitor, Circle (which issues USD Coin), for being unprofitable. In Circle’s first quarter of 2022, it was $113 million in the red, whereas according to JP Koning’s estimates based on an analysis of Tether’s six attestation reports, Tether earned $13 million over the twelve months ending March 31, 2022. Going forward, both Circle and Tether can be expected to earn much more interest income on their base of non-interest-paying customer deposits, but Tether may face losses on its possibly riskier investments, including $62.8 billion in the collapsed lender Celsius, which is probably worthless now.
Seven out of ten tell Fed they don't want digital dollar: Cato Institute
The Cato Institute analyzed responses to the Federal Reserve consultation on central bank digital currency (CBDC) and found that 66.52% of the 2,052 comments rejected a digital dollar. By excluding blank comments or those soliciting work on the project, the figure rises to 71.21%, with 11.74% in support of a CBDC, and 17.06% neutral. The most common concerns were over financial privacy, financial oppression, and the risk of disintermediating the banking system. https://www.cato.org/blog/update-two-thirds-commenters-concerned-about-cbdc
Why Hedge Funds are Losing Money Shorting USD₮ (Tether)
Many industry participants have commented on how the gap in marketcap between Tether and its largest competitors has narrowed. However, the difference between USD₮’s 24hr trading volume and its competitors tells a clearer and more important story. For example, rather than catering to the traditional banking industry, Tether is focused on being the most used currency for peer-to-peer exchanges, remittances, a tool of freedom and inflation hedge for developing countries. This is why, while Tether’s marketcap has decreased due to the billions of cash redemptions that it's effortlessly facilitated over the past several weeks, Tether’s 24hr trading volume remains roughly 10x that of its closest competitor. This points to the utility of Tether in daily trading and is the true measure of adoption. The sheer scale of the integration of USD₮ into the financial plumbing of the crypto industry is an order of magnitude greater than its nearest competitor.
"Not applying a digital bearer paradigm to currencies of the United States - or for that matter other nations, is no more reasonable than withholding electronic mail systems from citizens, or insisting on maintaining networks of human phone operators, with outsized and entirely unnecessary frictions and costs added to all functions of the economy." (Christian Kameir)
Government of Bermuda Pilots Stimulus Token in Response to COVID-19 Crisis
In September 2021, Denis Pitcher, chief fintech adviser to the Premier of Bermuda said “we’re not particularly interested in creating a unifying technical solution that’s going to solve all problems at digitizing money for a country, because it’s hard to see how that really can exist."
Facilitating increased adoption of payment versus payment (PvP)
"This consultative report – issued as part of the G20 cross-border payments programme – focuses on facilitating increased adoption of payment versus payment (PvP) to reduce foreign exchange settlement risk and improve cross-border payments. The report analyses the causes of non-PvP settlement, takes stock of existing and proposed new PvP solutions and suggests roles for the private and public sectors to facilitate PvP adoption."
Defining the Regulatory Perimeter for Stablecoins in Canada
"Currently, there is no overarching regulatory framework for stablecoins in Canada, and no authority has asserted jurisdiction over the operations of their issuers. This article is the first scholarly work to provide a detailed assessment of the jurisdictional perimeter, and risk-informed regulatory design principles, for fiat-backed stablecoins in Canada. It provides two unique and vital contributions to policy formation in stablecoin regulation. First, it analyzes whether stablecoins are securities, investment funds, or derivatives based on statutory definitions and interpretive jurisprudence. Second, it assesses whether a securities-based regulatory framework is sufficient to mitigate the risks that stablecoins pose, or if it leaves gaps that must be filled by banking, payments, and systemic risk regulators. While securities authorities have a reasonable case for legal jurisdiction over stablecoins based on how they are currently used, there are several “gaps” if stablecoins are exclusively regulated under securities law, and while many protections are provided, the full breadth of risks will not be mitigated. If Canadian securities regulators move forward with a stablecoin policy framework, they must do so with an eye to resulting gaps. Ultimately, a comprehensive framework will require inter-agency cooperation, across the financial regulatory landscape, to adequately address all stablecoin risks. It must apply “same risk, same regulation” principles, contextualized to support innovation, financial inclusion, and competition, using tiered parameters, and parallel and complementary inter-agency oversight. It must seek international regulatory cooperation, data-sharing, and contemplate contagion, interconnection, and the consequences of the potential failure of a global stablecoin issuer."
The Bank of Jamaica (BOJ) has reportedly officially launched Jamaica’s JAM-DEX central bank digital currency (CBDC) through the Lynk app on July 25. Lynk is currently the only transaction platform for Jamaicans to use their JAM-DEX. As part of the launch, the first 100,000 customers that signed up for JAM-DEX via the Lynk app were given an incentive bonus of $2,500 JAM-DEX in their wallets by the Government of Jamaica. https://twitter.com/lynkjamaica/status/1546630694977343494
What can CBDC designers learn from asking potential users? Results from a survey of Austrian residents
The Österreichische Nationalbank (ONB) published a paper that summarizes the results of a survey of 2006 Austrian residents about their central bank digital currency (CBDC) design preferences and their likelihood of using a digital euro. Respondents were satisfied with the existing payment options, and only about half expressed at least some interest in a digital euro. In terms of CBDC design, high importance was placed on security against fraud and theft, but less than a third considered privacy important
Seigniorage, electronic money and financial independence of central banks
"Recently, the subject of seigniorage - the revenues deriving from the monetary monopoly - has attracted the attention of academics and policy-makers. The authors discuss the reasons for this interest before undertaking a survey of the implications of a large-scale introduction of electronic money products on the seigniorage revenues and financial independence of central banks in the group of G10 countries. In countries with decreased seigniorage revenues and a high percentage of e-money the financial independence of central banks are negatively affected as a result of their inability to compensate for increasing operational expenses. Measures such as the limitation of e-money issuance and the imposition of requirements on e-money help in curtailing operational costs related to salaries, pensions, publications and banknote circulation, among others."
The Financial Services and Markets Bill 2022 has been introduced into the U.K. Parliament. Section 22 of the Bill contains a new power for the government to introduce bespoke rules on the regulation of payments, payment systems and service providers in relation to the payments that include “digital settlement assets”, which includes any digital representation of value or rights that “(a) can be used for the settlement of payment obligations; (b) can be transferred, stored or traded electronically, and (c) uses technology supporting the recording or storage of data (which may include distributed ledger technology).” The Chancellor of the Exchequer said that HM Treasury will be working to understand how distributed ledger technology could be applied to a U.K. sovereign debt instrument.
Fit-for-Purpose Payment System Interoperability: A Framework
"This paper offers a discussion on the challenges analysts, technicians, and interested members of the public face when discussing how interoperation in a payment system can support goals of efficiency, security, and accessibility. We deconstructed elements of the payment system and defined these elements to support a deeper analysis of where and how the term interoperation can be appropriately applied. The fit-for-purpose framework offers a simple, four-step approach to increasing the depth and clarity of discussions about payment system interoperability and how it may be used as a tool to support various goals. The approach focuses on defining the boundaries of a system within the context of the discussion, adopting common terminology, describing the degree of interoperation required, based on agreed-upon descriptions, and mapping the current state of existing structures (where applicable). Finally, we sketched preliminary results of a hypothetical discussion where participants used our framework to discuss the topic of interoperation with respect to how a potential CBDC and stablecoins could technically co-exist in payment systems."
What factors determine central bank interest in CBDC?
This paper by Bank of Indonesia staff attempts to explain the differences in central bank digital currency (CBDC) interest across emerging and advanced market countries. Based on a cross-country dataset, it shows that wholesale CBDC work is more advanced in countries with developed financial markets and greater cross-border transactions. Retail CBDC work is more advanced in countries with lower financial inclusion and a large informal economy. It further shows that different factors affect retail CBDC adoption across emerging and advanced countries
