FSB Chair outlines work priorities for 2022
The Financial Stability Board (FSB) published its 2022 policy plans to promote global financial resilience, including on safely harnessing the benefits of digitalization:
G+D Filia® Digital Cash for Everyone, Anywhere, Anytime
Assessment of Risks to Financial Stability from Crypto-assets
The Financial Stability Board (FSB) published an examination of developments and associated vulnerabilities relating to unbacked crypto-assets, stablecoins; and decentralised finance (DeFi) and other platforms on which crypto-assets trade. The report notes that although the extent and nature of use of crypto-assets varies across jurisdictions, financial stability risks could rapidly escalate, underscoring the need for timely and pre-emptive evaluation of possible policy responses.
House Hearing Addresses Stablecoins and Regulation, Consensus May Emerge on Legislation
"Earlier this week, the House Committee on Financial Services held a hearing on stablecoins or digital assets tied to fiat currency. The Hearing was driven by the recent report by the President’s Working Group (PWG) on Financial Markets. While stablecoins are not (yet) systemically worrisome, the market has grown to $174 billion in market capitalization. Stablecoins currently represent more than 75% of trading on all digital asset trading platforms."
Project Hamilton: On The Report Published By The Boston Fed And MIT
"This article was very challenging to write, as technical details had to be presented in a condensed way without losing too many of the nuances. The main thrust is what this project means for the story of money in the United States and globally, especially to interested generalists. Sometimes technical material has overwhelmed the telling of the story. However, comments on the presentation especially in social media are welcome, so that the text can be altered to make it more accessible to the general public."
Project Hamilton (Part 1)
"Following up on the Hamilton Project CBDC reporting, here is a summary of how a transaction is executed. The different components are in CAPS."
Stablecoins and the Future of Money
"The writing is on the wall: Cryptocurrencies are likely going to play a significant role in the future financial system. The U.S. Federal Reserve has called for a comprehensive regulatory framework for stablecoins and is exploring a central bank digital currency. While a complete overhaul of the system of money is an extremely complex endeavor, there are three measured approaches — different, but not incompatible — that have serious potential: 1) true stablecoins, which are non-interest bearing coins designed to have stable value against a reference currency; 2) demand coins, which are demand deposit claims against insured commercial banks, on blockchain rails; and 3) central bank digital currencies, which are cash on digital rails and could represent the public sector’s response to decreasing demand for physical cash.c"
Digital euro bill due early 2023
The European Commission is reportedly planning to propose a bill for a digital euro early next year. The bill will serve as the legal foundation for the European Central Bank’s ongoing technical work on the virtual version of a euro banknote or coin.
Central Bank of Kenya seeks public input on potential CBDC
The Central Bank of Kenya published a discussion paper seeking public input on the potential benefits, risks and regulatory issues of introducing a central bank digital currency (CBDC) in Kenya. The paper seems skeptical regarding domestic use cases, given that the country already has a vibrant digital payments ecosystem. However, the paper highlights that using a CBDC might improve cross-border payments by making them more efficient and less expensive. https://www.centralbank.go.ke/2022/02/10/discussion-paper-on-central-bank-digital-currency/
Fintechs and Banks Pilot Cross-Chain Debt Transaction
Three UK Fintechs and two major European banks have successfully conducted a proof of concept showcasing the benefits of distributed ledger technology (DLT) in offering near-instant settlement in capital markets and payments. It was the first cross-chain pilot debt transaction on the public Ethereum and the Fnality Payment System (FnPS). Fnality expects to launch the FnPS, which is to be based on a wholesale synthetic CBDC (sCBDC), sometime in 2022. (However, I'll believe that when I see it, because issuing that sCBDC will require some hard-to-get central bank cooperation.)
China’s e-CNY pilot to boost Hong Kong as offshore yuan trading center
Hong Kong will reportedly launch a pilot program for the retail cross-border use of China's e-CNY central bank digital currency (CBDC) soon after the Spring Festival, which ends on February 15, 2022. It will link with the city’s Faster Payment System (FPS), a payment infrastructure the HKMA introduced in 2018. The FPS allows instant cross-bank payments in the Hong Kong dollar and the Chinese yuan by simply entering the mobile phone number or email address of the recipient.
A “Narrow” Path to Efficient Digital Currency
"The narrow stablecoin alternative is a middle course: instead of having the Fed enter the retail CBDC business, it would have it offer its wholesale accounts and services to a broad set of retail digital currency or stablecoin providers—and not just to insured banks and thrifts."
Behind the Scenes of Central Bank Digital Currency
The IMF published a Fintech Note that shines a spotlight on six CBDC projects, discussing their key characteristics and lessons. Although the sample of countries remains small and country circumstances differ widely, the insights in this paper may inspire further investigation and allow countries to gain time by building on the experience of others. Unless a specific published source is cited, all information stems from interviews and workshops with members of CBDC project teams in each jurisdiction. (I was one of the authors.)
Zimbabwe Exploring Central bank Digital Currency
The Reserve Bank of Zimbabwe announced that it is actively exploring the feasibility of issuing CBDC, including specific design considerations, opportunities and risks to the monetary and financial system. In this context, the Bank is developing a roadmap for adopting CBDC, encompassing the feasibility and assessment stage currently taking place, policy design stage based on results of the feasibility study and implementation modalities.
Minutes of the CBDC Technology Forum - January 2022
The Bank of England published the minutes of the January 24 CBDC Technology Forum meeting. The Forum operates alongside the CBDC Taskforce which coordinates the exploration of a potential UK CBDC. It consists of senior stakeholders from industry, civil society and academia to gather strategic input on CBDC functional requirements. This meeting discussed different ledger data structures across a range of design areas to understand advantages and disadvantages of each, and the trade-offs and risks associated with introducing programmability.
Reserve Bank of New Zealand commencing CBDC proof-of-concept design work
The Reserve Bank of New Zealand (RBNZ) is commencing CBDC proof-of-concept design work, based on public feedback received during a recent consultation. The work will be a multi-stage and multi-year effort, and no specific design decisions have yet been made. The high-level design principles include providing a platform for economic and financial innovation, including competition in the payments and settlement sector, cross-border transfers, and financial inclusion and capability building tools. Also, the RBNZ believes that a CBDC can be designed so that privacy can exist alongside design features that make it hard to be used for nefarious or illegal purposes.
Zambia Explores Digital Currency
The Bank of Zambia reportedly expects to complete research on issuing central bank digital currency (CBDC) aimed at cutting transaction costs and boosting participation in the formal financial system by the fourth quarter. “The results of the research will form part of the input in the policy considerations on whether to introduce a central bank digital currency in Zambia,” Nkatya Kabwe, acting assistant director of communications at the regulator, said in response to Bloomberg's emailed questions.
Central Bank Digital Currencies: Policy Issues
The U.S. Congressional Research Service (CRS) published a report on central bank digital currency (CBDC) is and how it would alter the current U.S. financial landscape, what steps the rest of the world is taking to develop CBDCs, the range of potential design features for a CBDC, and what policy issues are raised by CBDCs. The CRS serves as nonpartisan shared staff to congressional committees and Members of Congress. It operates solely at the behest of and under the direction of Congress.
Japan's Biggest Bank to Issue Yen-Pegged Stablecoin for Settlement: Report
Mitsubishi UFJ Trust hopes to bring about instant settlement of securities transactions by using blockchain for trading and a Japanese yen-pegged stablecoin for payment. It will be similar to JPM Coin by JPMorgan, which is focused on speeding up wholesale payments such as bond transactions. Mitsubishi UFJ is looking to make settlements instantaneous, versus the couple of days it now takes.
George Selgin on FRB CBDC Report
"I really hate to do this, @CaitlinLong_ as I count myself a fan of yours as well as a fan and friend of Manhoman Singh, whose work you mention. But I'm afraid your thread commending some aspects of Liberty Street's stablecoin post strikes me as more self-serving than accurate."
Why stablecoins should not be regulated like Western Union
So how are stablecoins being regulated in the U.S? One of the many frameworks that has been adopted is existing state-based money transmitter law. The biggest stablecoin – USD Coin – is issued by Circle Internet, a company that is licensed by around 40 different states to transmit money. Oddly, this is the same regulatory framework that applies to old school remittance companies like Western Union. If you've never made a remittance before, here's how it works. A retail customers temporarily hand over a small amount of money, say $200, to a Western Union agent. The agent contacts a foreign Western Union office and tells them to provide cash to the customer's friend or relative. In the early 2000s this money transmitter framework was expanded to cover the likes of PayPal. Whereas Western Union keep customer funds for an hour or two, tops overnight, customers of PayPal keep balances in their wallet for months, even years. This storage function means that PayPal is doing something quite different than Western Union.
Hong Kong sets stage for e-CNY use, to launch pilot ‘soon after Spring Festival’
"Hong Kong will soon roll out a pilot scheme for the use of the digital yuan – or e-CNY – in the city for shopping and dining, making the special administrative region the first offshore city to use this digital currency outside mainland China."
The Future of Payments Is Not Stablecoins
A NY Fed blog post argues that stablecoins are unlikely to be the future of payments, but if distributed ledger technology platforms are the transfer mechanism of the future, then tokenized bank deposits might be a fruitful avenue to pursue. One of the reasons given is that, because they are fractionally backed by reserves, tokenized deposits wouldn't lock up liquidity like stablecoins do, plus deposits support bank lending to the real economy and the transmission of monetary policy.
Nepal initiates study on digital currency
The Nepal Rastra Bank (NRB) set up a task force to study the feasibility of introducing of issuing central bank digital currency (CBDC). Revati Prasad Nepal, executive director at the central bank's currency management department reportedly said that the task force is expected to deliver its concept note within the next two weeks, and that he expects it would take at least two-to-three years before a CBDC might be issued. The NRB has also formed a steering committee headed by deputy governor Bam Bahadur Mishra to make recommendations regarding the CBDC after discussing the concept note. https://www.nrb.org.np/contents/uploads/2021/10/Monetary-Policy-2021-22.pdf
BSP unlikely to issue digital currency
Bangko Sentral ng Pilipinas (BSP) reportedly has "no plans to introduce a central bank digital currency (CBDC) in the near term primarily because the population remains heavily cash reliant given the country’s efficient and effective payment and settlement systems.” Governor Benjamin E. Diokno said the BSP’s technical working group has done consultations with other central banks, technological service providers, other institutions and even small businesses in relation to the use cases of a possible CBDC. For now, he said they are strengthening the domestic retail payment system.
The Polish central bank remains ambivalent about a digital zloty
The National Bank of Poland (NBP) has reportedly admitted that it has been researching central bank digital currency (CBDC) since 2017, but so far is not seeing a clear case for moving ahead with issuance. In May 2021 the NBP published a special CBDC report which concluded that there are no sufficient reasons for the rapid introduction of the digital zloty. It found that there were no consumer or merchant payment media requirements that can't be satisfied by existing payment services. The central bank's restraint was also related to a lack of legal grounds to issue CBDC. https://www.nbp.pl/systemplatniczy/cbdc/raport-cbdc.pdf
CBDC must preserve defining features of physical money
"As sovereign issuers around the world contemplate the introduction of retail central bank digital currencies, a digital complement to physical cash, stakeholders face a once-in-a-lifetime opportunity to steward this evolution. Digital cash should not only embody the fundamental attributes of its physical counterpart but also offer additional enhancements that can serve the emerging needs of society. The dematerialisation of cash promises to unlock efficiencies and spur financial innovation. One such feature is the automated behaviour of money and transactions – programmability."
Falling Use of Cash and Demand for Retail Central Bank Digital Currency
The authors of a recent IMF working paper, based on a study of the declining use of cash for payments relative to payment cards and e-money in 24 of 25 countries studied, concluded that the main impact of the introduction of a retail central bank digital currency (CBDC) will be on the usage of cash substitutes. They assume that central banks will likely design their CBDCs to largely match user and merchant benefits associated cards use in terms of convenience, speed of payment, fraud control, and other desirable payment attributes, and then run through the additional incentives that may be required for their adoption and use.
These might include zero fees to both users and merchants, and making payments immediately final and available in receivers' bank deposit accounts. However, card schemes may fight back by reducing interchange fees and providing merchants immediate access to card sale revenues and make up the revenue loss elsewhere. Also, card firms that own and supply fast payment services may choose to rely on these newer payment services going forward, providing zero-cost person-to-person mobile payments, as well as person-to-business point of sale transactions and business-to-business invoice payments, with fees paid for by the receiver.
Myanmar Plans Its Own Crytpocurrency This Year to Lift Economy
Myanmar’s military government reportedly plans to establish a digital currency to support domestic payments and boost the economy within the year and is assessing how to move forward. The director-general of Central Bank of Myanmar’s currency-management department, Win Myint, said “at this point, we are still learning about digital currencies and having discussions.”
Pilot CBDC outage due to expired certificate, ECCB says
The Eastern Caribbean Central Bank (ECCB) has revealed that an expired certificate caused its pilot central bank digital currency (CBDC), DCash, to go offline from January 14. Karina Johnson, the ECCB project manager for the DCash pilot, said that “the version of Hyperledger Fabric (HLF)”, the network that hosts DCash’s distributed ledger, “had a certificate expire”. To install an up-to-date certificate, the currency’s operators are undertaking “a version change of HLF and associated systems.