DFC

The European Central Bank (ECB) published a paper about the Eurosystem’s commitment to the principle that every individual in the euro area should be able to decide how to make day-to-day payments, regardless of their individual payment preference, geographical location or technological savviness. On the basis of the ECB’s most recent data, despite the gradual decline in cash transactions, cash is the most popular payment instrument among euro area citizens for day-to-day transactions at the point of sale or person-to-person payments. In addition, cash is used for savings and liquidity, especially in times of crisis or uncertainty.

The Central Bank of Nigeria Governor, Godwin Emefiele, has reportedly said that Nigerians will be able to transact on eNaira central bank digital currency (CBDC) wallets through the Unstructured Supplementary Service Data (USSD) code on mobile phones. Nigerians will only have to dial *997# from their phones to carry out transactions on their phones. The Governor also reported that the eNaira has been used to carry out transactions worth 4 billion naira ($9.3 million) since it was introduced last October, and there are now about 270,000 active wallets.

This column introduces the available stablecoins and discusses the possible impact of the forthcoming Markets in Crypto-assets regulation by the European Commission on e-money issuers. The authors argue that the regulation may spur regulatory arbitrage in Europe and lead commercial banks to offer tokenised deposits on the decentralised ledger of a public blockchain.

The Colombian government is reportedly planning to launch a digital currency to curb tax evasion and enhance the traceability of citizens’ transactions, according to Luis Carlos Reyes, head of Dirección de Impuestos y Aduanas Nacionales (DIAN), the country’s tax authority.

Saudi Central Bank (SAMA) issued a report on the results of an extensive study conducted to measure used payment methods in the Kingdom during 2021, which aimed to assess consumer payment habits (cash and non-cash), across all market sectors; individuals, business, and the government sector. The study indicated that - for the first time in the Kingdom - cash is no longer the most used method of payment by individuals, as electronic payments of individuals have grown significantly to reach 57% in 2021 of the total number of transactions executed, compared to just 36% in 2019.

Will an introduction of CBDC cause disintermediation? I provide empirical and theoretical evidence that CBDC will not necessarily crowd out bank deposits in economies with significant demand for currency. I estimate the model for the US using data on households' payment choices and find that non-interest-bearing CBDC will lead instead to an inflow of deposits caused by cash substitution. Banks then lower deposit rates and lend more. Similarly, banks will not contract lending if CBDC is intermediated even if they experience an outflow of deposits. Finally, I show that CBDC can lead to disintermediation when it is interest-bearing.

This paper identifies three main components of any stablecoin, the peg, token and backing or reserve, that can be interpreted as three dimensions of (exchange) value fulfilled by the three functions of money: a unit of account, means of exchange, and store of value. By doing so, the stablecoin concept is not be characterized as a separate and self-contained asset class, but rather as an overarching and general meta-category from which a multitude of other classes and types of crypto-assets can be derived. By noting that different types of money and financial assets emerge from the different ways in which the three functions of money interact, the paper identifies five main cases from the various ways in which peg, token, and reserve are recombined. Various types of traditional financial assets belonging to each of these five cases and discusses how the various types of crypto-assets (and stablecoins) are identified and mapped into each of them.

The Bank of Russia continues working towards the gradual introduction of central bank digital currency (CBDC) according to the latest monetary policy update. The prototype digital ruble platform is currently being tested, and in 2023 the central bank plans to start pilot testing, including beta tests of digital ruble-based smart contracts for trades by a limited number of participants. If all goes to plan, the connection of banks and credit institutions to the digital ruble platform in will happen in 2024.

"We use economic principles along with evidence from the data and the academic and policy literature to discuss frictions that might lead to inefficient financial exclusion in the United States, defined here as a suboptimal allocation of bank account services. Private market initiatives—such as financial education schemes or new online banks—or new technologies—such as prepaid cards—can help mitigate such frictions. But if the frictions persist, intervention by authorities may be justified."

"The unbanked rate has been decreasing in the United States, but it remains high compared to unbanked rates in other developed economies. Lower-income and racial and ethnic minority households are more likely to lack access to a bank account than white households with higher incomes. Fees and minimum balance requirements are important factors in the decision to be unbanked. However, several studies show that when fees are constrained, banks find low-balance accounts unprofitable, so access to bank accounts can actually decline."

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.

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."

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.

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)?

"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."

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).

"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."

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.

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.

"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."

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.

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.