Thai central bank to delay retail digital currency testing
Thailand's central bank is delaying pilot testing its retail central bank digital currency (CBDC) until late 2022. It was previously planned for the second quarter of 2022.
USDC Now Backed Only By Cash and Treasury Bills
The fine print in Circle's end-November attestation report for USDC stablecoins says that it no longer owns non-government cash equivalents (i.e., commercial paper). Only cash and Treasury Bills are being used to back USDC.
SETL to take part in asset tokenization pilot with SWIFT and other market participants
London-based SETL will be working with SWIFT, Clearstream, Northern Trust and other market participants to explore the issuance, delivery versus payment (DVP), and redemption processes to support a frictionless and seamless tokenized asset market. The experiments will use both established forms of payment and central bank digital currency (CBDC). SETL had previously been part of a Banque de France experiment in which shares of a money market fund were subscribed and then redeemed on the IZNES Platform using wholesale CBDC tokens created by the Banque.
DvP using CBDC: a "settlement choice model" for securities settlement
A paper from R3 proposes a new securities settlement model that offers the ability to settle both gross and netted trades instantly using central bank digital currency (CBDC) and digital assets on a blockchain infrastructure. Existing delivery versus payment models exist on a continuum from intraday gross settlement–which minimizes settlement risk while requiring a great deal of liquidity–to delayed batch settlement–which offers netting efficiencies but delays final settlement. Market participants acknowledge the benefits of real time gross settlement but continue to rely on the operational and liquidity advantages of delayed batch settlement. The R3 model purports to be a "best of both worlds" model.
Terra's UST Flips DAI to Become Fourth-Largest Stablecoin
Terra’s U.S. dollar-pegged stablecoin UST is now the #4 stablecoin on the market (about $9 billion) but it's very different from the three that sit above it. Tether's USDT ($77 billion), USD Coin's USDC ($42 billion) and Binance's BUSD ($15 billion) are run and managed by centralized entities, and the assets that back them (reportedly 1:1) are also centralized. However, UST is a decentralized stablecoin backed by other cryptocurrencies. Terra itself is a layer 1 smart contract-enabled network built using the Cosmos software developer kit, and UST is minted by users by “burning” (destroying) LUNA, Terra’s native token responsible for paying transaction fees and participating in governance. DAI, the #5 stablecoin (just under $9 billion), is also cryptocurrency backed.
Crunchfish announces Digital Cash Wallets’ architecture
"Crunchfish Digital Cash AB (“Crunchfish”) is announcing a patent-pending architecture of Digital Cash Wallets. In addition to Crunchfish’s original Digital Cash Wallet offline, that is integrated in a mobile app, an architecture spanning from Core Banking Systems to Digital Cash Wallets either online or offline, in mobile apps or on non-mobile devices is presented. This provides the foundation of Crunchfish’s ambition to take a global leadership position within digital payments. The Digital Cash Wallets online and in mobile apps are already ready for shipment."
RBI Board meet: Digital currency pilot soon
On December 17, 2021 the Central Board of the Reserve Bank of India (RBI) discussed various aspects related to central bank digital currency (CBDC) and cryptocurrencies. RBI officials reportedly informed the Board that they are working on both wholesale and retail CBDC, and a pilot project will be launched soon. They said that, while a lot of work is already done on wholesale accounts, the retail issue is slightly complicated and the central bank is taking some time on it.
Blueprint for CBDC in Post-Trade Settlement
The International Securities Services Association (ISSA) published a paper on the potential application of central bank digital currency (CBDC), and to a lesser extent stablecoins, in the existing and future capital markets post-trade landscape, with a specific focus on the value chain in securities settlement arrangements. It provides a broad overview of key use cases, opportunities, and considerations for market infrastructures, custodians, intermediaries and service providers to consider. In addition, it provides an outline of the roles (including the possible changes of current roles), challenges, opportunities and potential changes that the impact of CBDC and stablecoins could have on the banking, fintech, and securities industry.
CBDC and Banking: Macroeconomic Benefits of a Cash-Like Design
Another Bank of Canada paper shows that an interest-bearing cash-like CBDC is more effective than a deposit-like CBDC in promoting consumption and welfare. It can also increase bank intermediation, even in the absence of bank market power. The cash-like CBDC's interest rate makes payments more efficient, which increases demand and generates positive spillovers on other types of transactions. As a result, deposit taking and lending, and thus intermediation, increase. The theoretical model used to draw these conclusions introduces new general equilibrium linkages across different types of retail transactions (including cash, deposits and credit) as well as feedback effects from transactions to deposit creation.
Revisiting the Monetary Sovereignty Rationale for CBDCs
The Bank of Canada published a paper on the potential role of central bank digital currency (CBDC) in protecting a country's monetary sovereignty. According to the monetary sovereignty argument, private and foreign digital currencies could displace domestic currencies ("currency substitution"), threatening the central bank’s ability to conduct monetary policy and act as a lender of last resort. The paper concludes that CBDC may be a useful defense mechanism for countries with strong monetary systems where currency substitution is driven more by the attractiveness of new digital currencies than by fundamental economic weaknesses in the country. However, for countries that have deeper macroeconomic and financial issues, CBDC issuance is unlikely to prevent currency substitution.
Cash Is An Offline Thing
"This use of tamper-resistant hardware means that when the mobile network has crashed because of a botched software upgrade, cloud services are down because of a DNS misconfiguration and the electricity is out because of high winds blowing trees down on power lines, you should still be able to send cash from your phone to a neighbour’s phone via Bluetooth or UWB whatever and you should till be able to tap your CBDC contactless smart card on a shopkeeper’s mobile phone to buy some food."
The Banque de France completed the first tranche of its CBDC experimentation
The Banque de France successfully completed the last experiment of its program for interbank settlements in wholesale central bank digital currency (CBDC), launched in March 2020. This final experiment involved the issuance of a digital bond on a blockchain and subscription with settlement in It successfully tested an end-to-end digital asset transactional lifecycle, through issuance, subscription by several actors, and coupon payment involving a conversion into another currency. All those transactions occurred across different blockchain environments operated by HSBC for the custody of the assets, and by the Banque de France for the securities settlement and the CBDC. The next phase of the Banque's CBDC experiments will be mainly dedicated to cross-border transactions.
CBDCs - The Folly of Digital Fiat
While most CBDC discussions stress the importance of inclusion of the ‘unbanked’ to the financial system, they regularly fail to address the true reasons why citizens do not maintain bank accounts. The largest group of unbanked is comprised of individuals unable or unwilling to pass stringent anti-money laundering procedures often charitably labelled as ‘know-you-customer’ requirements. Tellingly, that term even appears in quotations within the secretly extended legal requirements for - what must otherwise be considered - an invasion of financial privacy. CBDCs discussions offer little hope for the two billion unbanked citizens, most of which do not even possess government credentials.
Designing a Viable Central Bank Digital Currency
CBDC design must consider the creation process of all money across a number of categories which in step one could greatly improve the overall transparency, and manageability of the movement of money, and related values – i.e., seigniorage and demurrage. Our current thoughts on these categories include mortgages, certificates of deposits, corporate debt, student loans, auto loans, credit card debt, checking accounts, and HELOC. CBDC design papers largely omit discussions around the instantiation of fiat currency. It is necessary to examine the current birth process of fiat currencies which are largely brought into existence by the process of the collateralized lending activities by commercial banks (e.g., mortgages), a business model not readily available to competing private currencies.
Central bank digital currency, loan supply, and bank failure risk: a microeconomic approach
"We use a microeconomic banking model to investigate the effects of introducing an economy-wide, account-type CBDC on a bank’s loan supply and its failure risk. Given that a CBDC is expected to lower the cost of liquidity circulation and become a strong substitute for demand deposits, both the loan supply and the bank failure risk increase. These increases are countered by subsequent increases in the rates of return on term deposits and loans, which, in turn, reduce the loan supply and thus bank failure risk. These offsetting forces lead to no significant change in banking, as long as the rate of return on loans is below a certain threshold. However, once the rate is above the threshold, bank failure risk increases, thereby undermining banking stability. The problem is more pronounced when the degree of pass-through of funding costs to the loan rate is high and the profitability of a successful project is low. Our results imply that central banks wishing to introduce an economy-wide, account-type CBDC should first monitor yields on bank loans and consider policy measures that induce banks to maintain adequate liquidity reserve levels."
Stablecoins: How Do They Work, How Are They Used, and What Are Their Risks?
Alexis Goldstein, Director of Financial Policy, Open Markets Institute testified before the US Senate Committee on Banking, Housing, and Urban Affairs on how stablecoins work, how they are used, and their risks. "There are many investor, national security, and usability concerns with both algorithmic and asset-backed stablecoins. Congress should continue to examine if there are regulatory gaps that require new legislation to ensure consumer and investor protection as it relates to stablecoins, and regulators should continue to monitor stablecoins and ensure compliance with existing laws."
SEBA Bank Launches Regulated Gold Token to Enable Digital Ownership of Physical Gold
Swiss digital asset banking platform SEBA is offering a stablecoin backed by physical gold for any-time on-demand delivery of the physical metal. It was developed in conjunction with Argor-Heraeus, a leading service provider in the precious metal industry, and aXedras, a blockchain-based precious metal platform.
Interoperability between payment systems across borders
The Bank for International Settlements (BIS) published a paper on cross-border payment system interoperability. It illustrates the public and private sector options using four stylized models, ordered in increasing complexity and cost but also greater efficiency – a single access point, bilateral link, hub and spoke or a common platform (see below). The BIS Innovation Hub is putting theory into practice with several innovative projects to foster interoperability across the four stylized models.
The present and future of money in the digital age
ECB Executive Board member Fabio Panetta pushed back on the CBDC redundancy argument, pointing to the central role of public money in the economy, as the monetary anchor and by its fungibility with private money. Also, a digital euro would boost competition by making a free and easy to use digital means of payment available to everyone. In addition, the option to use CBDC would allow all European intermediaries, big and small, to offer products with a higher technological content at a competitive cost, making them better able to compete with global operators.
G+D report shows emerging market consumers ready to use CBDC
G+D and the Official Monetary Financial Institutions Forum (OMFIF) surveyed consumers’ attitudes towards central bank digital currency (CBDC) in Germany, Indonesia, Nigeria, and the United States. The survey revealed sharp differences between consumers in developed countries, where consumers already have many established digital payment options, and developing countries, where there are fewer such options. In Nigeria, 91% of respondents say they are likely to use CBDC, with 60% of consumers saying so in Indonesia. However, these figures fall to just 24% in the United States and 14% in Germany. CBDC awareness is also much higher in emerging markets. https://www.gi-de.com/corporate/Payment/Central_Bank_Digital_Currencies/G_D_2021_consumer_study.pdf
The Postal Banking Loophole
"Before addressing how the Postal Service might be justifying its authority to launch the pilot program, it’s helpful to consider what exactly is taking place. The pilot program only operates in four locations across four cities, and it offers a rather roundabout form of check cashing. Instead of receiving cash directly, customers can exchange a business or payroll check up to $500 for a single‐use gift card after paying a flat fee of $5.95. This design may appear odd, but it was chosen quite carefully. Instead of “cashing checks,” the Postal Service is “selling gift cards.”"
Kazakhstan to test national digital currency
The National Bank of Kazakhstan reportedly may soon launch a pilot of its digital tenge retail CBDC. The prototype platform has been completed and the final report on the results of the proof of concept work is set to be published on December 15, 2021. The final decision on whether to issue the digital tenge will be made in December 2022.
CBDCs for the People? Where the Current State of Digital Currency Research Leads
"We will likely see more central banks in emerging markets and developing economies than in advanced economies testing and launching CBDCs, with many of the emerging markets/developing economy CBDCs coming seemingly out of the blue from among the 44 central banks that we have labeled as being in the exploratory stage. That is because the benefits of introducing CBDCs are typically more obvious in an emerging market or developing economy, where the upside seemingly outweighs the risks. For example, increasing financial inclusion and decreasing cross-border payments costs are priorities in emerging markets and developing economies."
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WhatsApp launches cryptocurrency payments pilot in the US
Meta's WhatsApp has launched a pilot that lets a “limited number” of people in the US send and receive money instantly from within a chat using Pax Dollars (USDP) stablecoins. The feature is powered by Meta's Novi, digital wallet launched as a pilot six weeks ago. There are no fees for sending or receiving money, no limits on how often payments can be sent, and no fees to keep a balance in a Novi account or to withdraw it to a linked bank account.
China’s PBOC: Link e-CNY & Hong Kong Faster Payment System
The People’s Bank of China is reportedly working with the Hong Kong Monetary Authority on adding cross-border payment features to China's e-CNY retail CBDC. They've run preliminary technical tests with a limited number of Hong Kong residents who could create e-CNY wallets with basic features, such as top-up, transfer and payments to certain merchants. And now they're exploring approaches for interlinking the e-CNY and the Faster Payment System in Hong Kong.
Australia Set for Massive Shakeup to Crypto Regulations: Treasurer
The Australian government will announce major reform to payment systems, including broadening the definition of services and products that can be regulated. Crypto exchanges will be brought within the regulatory perimeter, and the treasury will be working on a CBDC with the Reserve Bank. The proposed regulation will also take aim at “buy now, pay later” services.
Reserve Bank and Industry Partners complete Wholesale CBDC Research Project
The Reserve Bank of Australia, Commonwealth Bank, National Australia Bank, Perpetual and ConsenSys, with input from King & Wood Mallesons, today jointly released a report to mark the successful conclusion of Project Atom. The project involved the development of a proof-of-concept (POC) for the issuance wholesale central bank digital currency (CBDC) to fund, settle and repay a tokenized syndicated loan on an Ethereum-based distributed ledger technology (DLT) platform. Integrating a wholesale CBDC on the same DLT platform enabled "atomic" delivery-versus-payment settlement of the drawdown, novation and repayment of the tokenized syndicated loan, demonstrating efficiency gains and operational risk reductions versus the normally highly manual and paper-based processes.
Press release: BIS, Bank of France and Swiss National Bank conclude successful cross-border wholesale CBDC experiment
The Bank for International Settlements, Bank of France and Swiss National Bank have shown that wholesale CBDC can be used to settle transactions between financial institutions across borders. The recently completed Project Jura explored settling FX transactions in euro and Swiss franc wholesale CBDC, and issuing, transferring and redeeming tokenized euro-denominated French commercial paper between French and Swiss financial institutions. Project Jura was conducted in collaboration with Accenture, Credit Suisse, Natixis, R3, SIX Digital Exchange and UBS.
Zimbabwe Central Bank Mulls Digital Currency, Spurns Crypto
Zimbabwe’s central bank is exploring the use of a digital currency rather than allowing cryptocurrencies as legal tender. Governor John Mangudya said that “we believe in central bank digital currency which is basically trying to say ‘how do we have an e-Zimbabwe dollar as opposed to cryptocurrency’.” The central bank plans to send a team to Nigeria to learn from their experiences in launching the first digital currency in Africa in October.
Central Bank Digital Currency: A Payments Perspective
The World Bank published a guidance note to assist central banks and public authorities as they investigate the use of central bank digital currency (CBDC) as an instrument to strengthen or modernize their national payment systems. It articulates the analysis and decision-making process through five fundamental "W" questions (why, what, when, where and who) that should holistically determine whether to issue CBDC.