DFC

The IMF ran a peer learning event at its Singapore Regional Training Institute on July 6/7 at which Changchun Mu, Director General, Digital Currency Institute at the People’s Bank of China gave a presentation on the e-CNY.

The Central Bank of Chile has opened an online survey on its CBDC project. The poll is aimed at several audiences, including the financial sector and academics; specialists in payments and technological services; and the general public. [Read more] This initiative is expected to deepen the evaluation process started in May with the publication of a first report on CBDC issuance. A second report will be published at the end of this year or beginning of 2023.

The Central Bank of Chile has opened an online survey about its planned CBDC project. The poll is aimed at several audiences, including the financial sector and academics; specialists in payments and technological services; and the general public.

The Richmond Fed published an article that discusses the question of whether a regulatory framework for stablecoins — where regulated banks can issue stablecoins backed 100% by deposits at the central bank — could serve as an alternative to issuing central bank digital currencies (CBDCs). It concludes that appropriate regulation may offer a path whereby stablecoins become effectively equivalent to CBDCs — when they are issued by regulated institutions and backed by reserves.

Circle Internet Financial released a detailed – though unaudited – breakdown of its reserve assets for the firm’s USD coin (USDC) that showed $42.1 billion in short-term U.S. government bonds and $13.6 billion in cash. The breakdown also listed the bonds’ individual CUSIP number identifiers. The cash was comprised of deposits at Bank of New York Mellon, Citizens Trust Bank, Customers Bank, New York Community Bank, Signature Bank, Silicon Valley Bank, Silvergate Bank and US Bancorp.

In April the South African Reserve Bank (SARB) announced the results of the second phase of its Project Khoka 2 (PK2) wholesale central bank digital currency (CBDC) trial, Project Khokha 2, which commenced in February 2021. PK2 explored the impact of distributed ledger technology (DLT) on trading, clearing and settlement by issuing a SARB debenture on a DLT network and enabling two DLT-based payment options in the form of a wholesale CBDC (wCBDC) token and a wholesale digital settlement token (wToken). There was one network where the wCBDC was issued and a second one – the Khokha Hub, where the wToken and tokenized bond were issued and traded. A bridge was used to port the wCBDC to the second network to settle the primary bond issuance transaction.

The World Bank has published a paper that explores the environmental implications of central bank digital currency (CBDC) and highlights ecological footprint differences between CBDC and other payment methods. As the legitimacy of CBDC is backed by the trust of central banks, it does not need to prove its legitimacy through energy-intensive consensus or mining mechanisms, so its energy consumption is low. CBDC can also be designed to use various systems, such as real time gross settlement systems, distributed ledger technology, or a mixture of both.

Bank Indonesia continues to research central bank digital currency (CBDC) and plans to issue a white paper at the end of this year concerning the development of a Digital Rupiah. The central bank's CBDC exploration has six salient objectives: (i) providing a risk-free means of digital payment using central bank money, (ii) mitigating the risk of non-sovereign digital currency, (iii) expanding payment system coverage and efficiency, including cross-border transactions, (iv) expanding and accelerating financial inclusion, (v) providing new monetary policy instruments, and (vi) facilitating the distribution of fiscal subsidies.

The Committee on Payments and Market Infrastructures (CPMI) and International Organization of Securities Commissions (IOSCO) published their final “same risk, same regulation” guidance on regulating stablecoin arrangements (SAs). The guidance highlights that the transfer function of an SA is comparable to the transfer function performed by other types of financial market infrastructure (FMI). As a result, an SA that performs this transfer function is considered an FMI for the purpose of applying the Principles for Financial Market Infrastructures (PFMI) and, if determined by relevant authorities to be systemically important, the SA as a whole would be expected to observe all relevant principles in the PFMI.

The U.S. Office of Financial published a paper that studies how introducing a central bank digital currency (CBDC) would affect the stability of the banking system. It presents a model that captures concerns that the option to hold CBDC can increase the incentive for depositors to run on weak banks. It highlights two countervailing effects. First, banks do less maturity transformation when depositors have access to CBDC, which leaves them less exposed to runs. Second, monitoring the flow of funds into CBDC allows policymakers to identify and resolve weak banks sooner, which also decreases depositors’ incentive to run. The paper's results suggest that a well-designed CBDC may decrease rather than increase financial fragility.

The Bank for International Settlements (BIS) and Bank Indonesia announced the 21 shortlisted finalists for the G20 TechSprint CBDC challenge. The shortlisted teams now have until the end of August to complete their prototypes, which will then be judged by an independent expert panel convened by Bank Indonesia. Winners for each of the three categories will be announced in October ahead of the G20 Summit. Among the shortlisted were BitMint, R3, Ripple, S.e.A. (Stellar, eCurrency and ANZ), Bitt-IDEMIA, Crunchfish, and Giesecke+Devrient (G+D) Filia.

The Banque de France (BdF) has kicked off the second phase of experimentation into a wholesale CBDC, with an eyer towards being ready to introduce central bank money as a settlement asset as early as 2023, with the implementation of the European pilot regime. Over the past year, the central bank has successfully completed the first phase of its experimentation program, comprising nine experiments with the private sector and with other public actors, with a focus on cross-borer payments and tokenized securities settlement. Now the BdF wants to get closer to a viable prototype, testing it in practice with more private actors and more foreign central banks in the second half of 2022 and in 2023.

The Bank of Korea (BOK) wants to commence real-world testing for its prototype central bank digital currency (CBDC) with 10 domestic commercial banks in the second half of the year. Until now, the BOK CBDC work has been limited to proof-of-concept experiments, starting with basic functions such as minting, issuance, distribution, and redemption from August to December last year, and payment, digital asset transactions, and cross-border remittances from January to June this year. Now the central bank wants to know whether the prototype is compatible with various banks’ IT platforms and wants to investigate possible interoperability-related issues

The Bank for International Settlements Innovation Hub, Committee on Payments and Market Infrastructures, International Monetary Fund and the World Bank assessed different options for cross-border access and interoperability of central bank digital currencies (CBDCs). They highlight that CBDCs currently have a key benefit in being able to consider cross-border functionality already during the initial development phase, but this "clean slate" advantage has an expiry date. International cooperation and coordination are needed in the early stages of CBDC design. In addition, any system must be built with the flexibility to adapt both to a changing world and the different CBDC designs likely to be chosen by central banks.

The Financial Stability Board (FSB) announced that it will submit to the October meeting of G20 finance ministers and central bank governors a public consultation report on its review of its high-level recommendations for the regulation, supervision and oversight of “global stablecoin” arrangements, including how existing frameworks may be extended to close gaps and implement the high-level recommendations. The FSB will also submit a public consultation report that proposes recommendations for promoting international consistency of regulatory and supervisory approaches to other crypto-assets and crypto-asset markets and strengthening international cooperation and coordination.

"The same question could be directed at other well-known money transmitters like PayPal, Square, and Western Union... and my guess is that their answers would be equally unclear."

Matt Taibbi asks some tough questions about the sanctity of the reserve assets that back Circles USDC stablecoin, and the issue of bankruptcy remoteness. Circle is unlike some competitors, whose user agreements specifically spell out that reserves are, say, “fully backed by US dollars held by Paxos Trust Company, LLC,” or “custodied pursuant to the Custody Agreement entered into by and between you and Gemini Trust Company, LLC.” Those describe trust agreements, which are truly bankruptcy remote. However, Circle is not a trust, so customers  are guarded only by protections afforded under state money transmission laws. However, Circle is only regulated  as a money transmitter in the states where Circle has licenses, and the firm has obtained licenses only in those states were licenses are required. There are other reasons to be concerned as a USDC hodler, and I recommend reading the whole post.

"Somewhat ahead of its time, Mondex was a peer-to-peer proposition, which we’ll come back to later on. This meant that the value was transferred directly from one chip to another with no intermediary and therefore no cost. In other words, people could pay each other without going through a third party and without paying a charge."

"A CBDC analogous to a digital form of paper money—a digital bearer instrument, would not require intermediaries for most transactions carried out by consumers today. Payments for everyday purchases could be done without revealing the identities of the parties involved in the same way that users may choose to pay in cash. This would help combat cybercrime while freeing up resources to identify truly illicit activities."

Paxos will now disclose on a monthly basis the specific financial instruments backing its USDP and BUSD stablecoins, in addition to its attestations. These reports will provide the CUSIP numbers of all instruments backing USDP and BUSD, showing that Paxos only backs its stablecoins with cash, overnight loans secured only by US Treasuries, and US Treasuries with a less than 90 day maturity. As a Trust Company chartered by the New York State Department of Financial Services (“NYDFS”), Paxos is legally required to hold all regulated stablecoin reserves in bankruptcy remote, fully-segregated accounts and in only cash and cash equivalents.

This article from the Richmond Fed dives into potential answers to these questions about the failed Terra UST stablecoin. UST was backed by LUNA, but the price of LUNA was backed by its option value of converting to UST. When the confidence of this circular backing is shaken, the liquidity of algorithmic stablecoin becomes flighty. In this case, the algorithm does not fully function because Terra needs to (but can't always) defend both UST and LUNA. When market liquidity evaporated, UST and LUNA ultimately relied on the issuer's equity to support the prices, similar to the backing of a more traditional currency as seen in the Asian Financial Crisis. It is the part of economics cannot be replaced by technology.

FDIC insurance only protects customers in the event of the insolvency of the bank holding the deposits. That leaves open the question of where stablecoin holders rank in the event of the stablecoin issuer's insolvency. This was recently discussed in a Twitter thread launched by JP Koning to which George Selgin and Dan Awry contributed. According to my read of the thread, which focused specifically on the Circle-issued USDC stablecoin, the answer seems to be "maybe" but the question could be tied up in courts for a long time.

The Bank of Japan (BoJ) published an English version of its Liaison and Coordination Committee on Central Bank Digital Currency interim report. While the BOJ “currently has no plan to issue CBDC, the BOJ considers it important to prepare thoroughly to respond to changes in circumstances in an appropriate manner”.  The report noted the strong preference for cash and high ratio of bank account holding in Japan, as reasons for cautiousness. However, as privately-issued digital currencies proliferate, a CBDC might be called for to provide broadly secure and neutral payment instruments to avoid fragmentation and monopolization of payment services, and to enable private businesses to utilize these as a source for creating new services.

Deputy Governor Jon Cunliffe reportedly said that the Bank of England (BoE) is unlikely to offer a digital pound that works like banknotes, opting instead for an instrument managed through some sort of account, reflecting concerns that it could be used in crime and money laundering. The BoE plans to release a consultation paper at the end of the year about how a retail central bank digital currency (CBDC) might look. Cunliffe said it’s unlikely that any digital pounds will be issued within the next three years, that it’s more likely in five or more years.

The European Central Bank (ECB) is inviting technology experts to take part in online technical talks to explore options for the design of a central bank digital currency. The talks will focus on the large-scale application of privacy-enhancing technologies in settlement of retail payments. For example, how can the payment asset issuer exert control over settlement rules and maintain adequate, tamper-proof evidence of the amounts in circulation, while also minimizing the accessibility of sensitive information? The talks will be held at expert level as closed sessions with members of the ECB’s digital euro project team.

This dissertation by Jonas Gross studies issues related to digital currencies and monetary policy. In particular, it analyzes the determinants of the monetary policy of the European Central Bank (ECB) and examines design aspects of central bank digital currencies (CBDCs), e.g., related to financial stability, monetary policy, and privacy. For example, it finds that CBDCs crowd out bank deposits and negatively affect bank funding, but this crowding-out effect can be mitigated if the central bank chooses to provide additional central bank funds or to disincentivize large-scale CBDC accumulation via low or potentially even negative interest rates (if the CBDC is remunerated).

"A Forum Member presented a view on why offline functionality should be a key feature of CBDC. The presentation exposed why offline settlement finality was important in a world where physical cash usage is diminishing. The presenter noted that offline settlement finality offered benefits in terms of availability, throughput and operational infrastructure costs, where existing real time (online) settlement systems encountered the biggest challenges. The presentation also mentioned that, without offline finality, any CBDC system would be difficult to differentiate from any other real time payment system. The presenter also mentioned drawbacks of offline systems, including the higher risk of counterfeiting and double spending due to added technical complexity."

"National currency is a foundational element in society. A switch from material coins and banknotes, and their counting balance to a novel cyber entity comprised of a string of bits, is a big move with a lot of promise, alas facing a myriad of risks and unintended consequences. It is therefore advisable to develop a risk-mitigation strategy for this initiative."

"Stablecoins and central bank digital currencies are on the horizon in Asia, and in some cases have already arrived. This paper provides new analysis and a critique of the use case for both forms of digital currency. It provides time-varying estimates of devaluation risk for the leading stablecoin, Tether, using data from the futures market. It describes the formidable obstacles to widespread use of central bank digital currencies in cross-border transactions, the context in which their utility is arguably greatest. The bottom line is that significant uncertainties continue to dog the region's digital currency initiatives."