Addressing the risks in crypto: laying out the options
A Bank of International Settlements (BIS) paper suggests that authorities can take three different approaches when it comes to crypto-assets; targeted regulation, containment ("let crypto burn"), or a complete ban. Central banks and public authorities could also work to make traditional finance (TradFi) more attractive. A key option is to encourage sound innovation with central bank digital currency (CBDC).
E-Yuan App Adds Payment Function for When Mobiles Are Offline, Out of Power
The People's Bank of China (PBOC) has added a new function to its e-CNY payment app so that select Android-based mobile phones can be still be used to make tap-to-pay payments without internet connection or power. Users need to activate the function in the e-yuan app, and can choose how many times it can be used and how much can be paid after their phone shuts down. A verification code needs to be entered on the device if a payment exceeds the code-free quota, and payment will continue only if it passes the system check. Users also can set payment limits in their phone settings. In addition, if users have lost their mobile phones they can log in to the e-yuan app on another mobile phone to suspend the payment-without-power function.
Market research on possible technical solutions for a digital euro
As announced in December 2022, the European Central Bank (ECB) is inviting market participants to take part in market research to get an overview of options for the technical design of possible digital euro components and services. Participation is voluntary and will not have any impact on eligibility for future procurement procedures related to a digital euro or any other topic. Nor will it imply any pre-selection for a potential subsequent tender. Submissions are due by February 17, 2023 in a fully anonymous manner, avoiding trade names.
"A CBDC poses substantial risks to financial privacy, financial freedom, free markets, and cybersecurity. Yet the purported benefits fail to stand up to scrutiny. There is no reason for the U.S. government to issue a CBDC when the costs are so high and the benefits so low."
Digital Currencies: Tanzania Central Bank Currency Launch
The Bank of Tanzania is working toward a “phased, cautious and risk-based” introduction of a central bank digital currency (CBDC). The central bank will "continue to monitor, research and collaborate with stakeholders, including other central banks, in the efforts to arrive at a suitable and appropriate use and technology for issuance of Tanzanian shillings in digital form". It is exploring both retail and wholesale CBDC. https://www.bot.go.tz/Adverts/PressRelease/en/2023011413181519.pdf
Why central banks should not push ahead with CBDCs
"CBDCs are a huge undertaking. Many of the motivations for doing it are very poor and there are a lot of risks. I would urge central banks not to do it."
The Council of the European Union (Eurogroup) reaffirmed its support for the continued efforts of all European and national institutions involved in the preparatory work for the potential issuance of a digital euro. It asserted that a digital euro should complement, and not replace cash, and should guarantee access to central bank money for euro area users in times of increased digitalization in payments.A risk-based approach could be followed to allow for more privacy in the case of less risky transactions, which could ensure a wider adoption of the digital euro among citizens with a stronger preference for privacy. The Council also supports the exploration of an offline functionality which would serve a wider range of use cases and also contribute to financial inclusion.
The Bangko Sentral ng Pilipinas (BSP) has reportedly confirmed that it will not be exploring retail CBDC, instead focusing on wholesale CBDC to improve settlement times between banks. In April 2022 the BSP announced the start of its Project CBDCPh wholesale CBDC pilot program, with several leading financial institutions playing a part. On the retail payments front, the BSP has been focusing on drumming up support for private-sector digital payment rails, like they did with its recent “BSP Piso Caravan” program aimed at encouraging the public to replace their unfit banknotes and coins with digital cash. https://www.bsp.gov.ph/SitePages/MediaAndResearch/MediaDisp.aspx?ItemId=6588
Central Bank Digital Currency? How money could be redesigned
"The stakes for redesigning access to money are high. As such, many exciting areas remain for future research, including socio-technical and user research; systems design, security and privacy; and research on the economics of CBDC compared to existing solutions. In exploring these topics, we must always ask ourselves whether new financial technologies increase the self-determination and agency of the poor and vulnerable. In order to achieve a public interest benefit from money technologies, we must achieve inclusion as well as other dimensions of the public good." (This is a summary of the recent MIT survey-based paper on CBDC and financial inclusion.)
Exploring multilateral platforms for cross-border payments
The Committee on Payments and Market Infrastructures (CPMI), the BIS Innovation Hub (BISIH), the International Monetary Fund (IMF) and the World Bank published a paper on challenges to addressing and approaching the establishment of a multilateral cross-border payments platform. Such a platform could reduce the need for intermediaries and allow payment service providers in different jurisdictions to transact directly with each other. Two paths are examined – the growth approach that involves expanding existing multilateral platforms to additional jurisdictions, currencies and participants, and the greenfield approach that involves building a new, potentially global, infrastructure for cross-border payments.
IMF to collaborate with the Philippines on wholesale CBDC project
The IMF will be collaborating with Bangko Sentral ng Pilipinas (BSP) to create a wholesale central bank digital currency (CBDC) aimed at addressing (i) frictions on cross border foreign currency transfers; (ii) settlement risk exposure arising from the use of commercial bank money in the equities market; and (iii) challenges in operating the automated intraday liquidity facility. The BSP has decided that retail CBDC would have limited benefits for the Philippines economy due to widespread digitalization of retail payments and financial inclusion reforms. https://www.imf.org/en/Publications/CR/Issues/2022/12/15/Philippines-2022-Article-IV-Consultation-Press-Release-and-Staff-Report-526983
The European Central Bank (ECB) published a digital euro "way forward" slide deck that provides a nice summary of the current status of their CBDC project, including the timeline
The Digital Dollar Project (DDP) published an updated version of its white paper “Exploring a U.S. CBDC,” offering a global perspective on the rapidly accelerating developments in central bank digital currencies (CBDCs).
A Digital Euro Association working group of global experts delved into the topic of CBDC Privacy, examining the importance of privacy in CBDCs and how it impacts the successful adoption, usage, and implementation of digital currencies. Their paper examines privacy-preserving technologies and provides recommendations for ensuring privacy and security in a CBDC system.
Project Rosalind Phase 2 TechSprint - Invitation for Expressions of Interest (EOI)
The BIS Innovation Hub London Centre has launched the Project Rosalind TechSprint, inviting expressions of interest to come up with retail central bank digital currency (CBDC) use cases. Participants will be required to develop feasible prototypes by using the set of application programming interfaces (APIs) developed in phase one of Project Rosalind. It aims to develop prototypes of an API platform for the distribution of retail CBDC. The purely experimental setup is based on a two-tier distribution model, comprising a central bank at the foundation of the retail CBDC system and with customer-facing activities carried out by the private sector payment interface providers (PIPs).
The digital euro: our money wherever, whenever we need it
"Our priority for the digital euro project has always been clear: to preserve the role of central bank money in retail payments by offering an additional option for paying with public money, including where this is not possible today, for example in e-commerce. The digital euro would not replace other electronic payment methods, or indeed cash. Rather, it would complement them. And by doing so, it would safeguard our monetary sovereignty while strengthening Europe’s strategic autonomy."
Saudi Central Bank Continues CBDC Experimentations
The Saudi Central Bank (SAMA) is working on a phase of a project that focuses on domestic wholesale central bank digital currency (CBDC) use cases in collaboration with local banks and fintechs. SAMA stressed that although no decision has been made regarding the introduction of CBDC in the Kingdom, it continues to focus on exploring the benefits and potential risks of implementing CBDC.
Who comes after us? The correct mindset for CBDC design
"We argue that an account-based design cannot meet the ECB’s stated design goals and that the ECB needs to fundamentally change its mindset when thinking about its role in the context of the Digital Euro if it wants the project to succeed. Along the same lines, the French National Council for Digitalization published a report on "Notes and Tokens, The New Competition of Currencies" [DGTV21]. Here, the authors make related incorrect claims about inevitable properties of Central Bank Digital Currencies (CBDCs), going as far as stating that a CBDC is not possible without an eID system. Our paper sets the record straight."
UK Treasury is Looking for CBDC Head as it Explores Digital Pound
The U.K. Treasury is seeking a "Head of Central Bank Digital Currency" to lead its work on a potential digital pound. The CBDC chief will lead the Treasury team as it works with the Bank of England on the government's soon to be issued consultation on the digital pound, the listing continues. This role will fit into the existing Payments and Fintech Team and is a separate from the current head of crypto-assets and digital currencies.
The Digital Euro Association (DEA) published actionable recommendations for enhancing privacy in CBDC systems, but the DEA provided a punchier version on Twitter.
Agility in the design and development of CBDCs: From discovery through launch
Amazon Web Services (AWS) published their views on best CBDC design practices through an agile development lifecycle. This framework aligns the design of a CBDC to the goals of a particular central bank and its stakeholders. Each stage throughout this process encourages reflection on a central bank’s policy vision and only recommends proceeding with a CBDC if alignment remains with all relevant policy goals.
PEReDi: Privacy-Enhanced, Regulated and Distributed Central Bank Digital Currencies
"In this work, we put forth a new model for CBDCs and an efficient construction that, for the first time, fully addresses privacy and regulatory compliance simultaneously. Moreover, recognizing the importance of avoiding a single point of failure, our construction is distributed so that all its properties can withstand a suitably bounded minority of participating entities getting corrupted by an adversary. Achieving all the above properties efficiently is technically involved; among others, our construction uses suitable cryptographic tools to thwart manin-the-middle attacks, it showcases a novel traceability mechanism with significant performance gains compared to previously known techniques and, perhaps surprisingly, shows how to obviate Byzantine agreement or broadcast from the optimistic execution path of a payment, something that results in an essentially optimal communication pattern and communication overhead when the sender and receiver are honest. Going beyond "simple" payments, we also discuss how our scheme can facilitate one-off large transfers complying with Know Your Transaction (KYT) disclosure requirements. Our CBDC concept is expressed and realized in the Universal Composition (UC) framework providing in this way a modular and secure way to embed it within a larger financial ecosystem."
Crunchfish and Lipis Advisors pubished a guide to offline payments design, providing insights to how offline payments relate and can interoperate with online payment system. It provides a way of categorizing offline payment solutions by three design choices which provides the payment ecosystem with a better understanding of the nuances of offline payments:
-Online Payment Rail: (i) distributed ledger technology (DLT) based or (ii) centralized account-based. (The paper incorrectly labels DLT-based as token-based (see the 20xx New York Fed article on this misnomer).
-Offline Security Protocol: (i) native (layer-1) or (ii) non-native (layer-2) tokens security protocol, described in relation to the underlying online payment rail.
-Offline Trusted Environment: (i) hardware-based or (ii) software-based.
Balancing Privacy & Compliance to Ensure High Privacy for CBDC Payments
Are There Tech Solutions to the Privacy and Compliance Trade-Offs for CBDCs? Users will likely demand cash-like privacy protections for central bank digital currencies, which may be thwarted by regulations. However, new technology solutions may enable high degrees of privacy while complying with regulations.
I moderated a couple of sessions on offline central bank digital currency (CBDC) at the International Telecommunication Union (ITU) DC³ From Cryptocurrencies to CBDCs Conference on January 27, 2023. The first session was on the importance of offline payments for CBDCs and financial inclusion at which cases were presented by Lars Hupel (G+D), Razvan Dragomirescu (WhisperCash), Joachim Samuelsson (Crunchfish) and Jerome Ajdenbaum (IDEMIA). The second session was a deep dive into offline CBDC implementation and risk management presented by Lauren Del Giudice (IDEMIA) and Stuart Smith (VISA). [Both sessions were recorded and are available at the ITU]
Tailored CBDC technical assistance in emerging markets
Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ) published a stocktaking paper that I co-authored on the degrees of central bank digital currency (CBDC) technical assistance (TA) support for lower- and middle-income countries (LMICs). It highlights the different options for CBDC support for LMIC authorities in their general-purpose/retail and wholesale CBDC exploration journeys. It also shows how demand outstrips supply in fit-for- purpose assistance and the important role of development partners in closing this gap in order to ensure that CBDCs can meet the expectations in relation to achieving the sustainable development goals (SDGs). Also the paper highlights the remaining gaps in optimally equipping authorities in LMICs in their CBDC pursuit.
Montenegro starting work on a central bank- or government-issued stablecoin
Prime Minister Dritan Abazovic, announced that, in collaboration with Ripple and the central bank, the government is starting work on a digital currency or stablecoin for Montenegro. Montenegro uses the EUR, despite not being a member of the Eurozone, although it is a candidate country for European Union (EU) membership.
The Central Bank of Iran will reportedly make its CryptoRial central bank digital currency (CBDC) available to the public on February 7, 2023, following its pilot phase, of which little is known. Bank Melli, Bank Mellat and Bank Tejarat were involved in the experimental stages of the project, and Bank Melli and Bank Mellat conducted the pilot. If anyone out there knows more about the pilot, or upcoming launch, please let me know!
"The Riksbank is investigating whether it is possible to issue a digital complement to cash, a so-called e-krona. Just like cash, the e-krona would be issued by the Riksbank and be available to everybody. As yet no decision has been taken to issue an e-krona. "
