UK has no plans for a wholesale CBDC, envisages banks enabling synthetic
The Bank of England dismissed the option of a domestic wholesale CBDC, because the private sector can achieve a similar result themselves. Governor Bailey, at a UK House of Lords Economic Committee meeting, highlighted that banks have existing access to central bank money through its real time gross settlement system. Also, the Bank has introduced an omnibus account that would enable the banks to use digital coins between themselves that settle with the Bank of England. It might also allow nonbanks, like Fnality, to create wholesale digital currency backed by central bank money
Visa's research and product teams are working on a universal payment channel (UPC) initiative, a blockchain interoperability hub that connects blockchain networks and allows for transfers of digital assets. The UPC hub would connect different blockchain networks by establishing dedicated payment channels between them — whether that means connecting central bank digital currency (CBDC) networks between countries or connecting CBDC networks with vetted private stablecoin networks. New, trusted blockchains could easily be added to the network of networks by creating new payment channels within the UPC hub.
Reflections on Stablecoins and Payments Innovations | FRB Governor Waller
"Earlier this year, I spoke about whether the Fed should offer a general-purpose central bank digital currency (CBDC) to the American public. My skepticism about the need for a CBDC, which I still hold, comes in part from the real and rapid innovation taking place in payments. My argument—simple as it sounds—is that payments innovation, and the competition it brings, is good for consumers. The market and the public are telling us there is room for improvement in the U.S. payment system. We should take that message to heart and provide a safe and sound way for those improvements to occur."
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.
Tokenizing Trust and Putting the ‘Stable’ in Stablecoins
While Gorton and Zhang, and the IMF, have the right idea of building a public/private partnership by backing privately issued stablecoins with a central bank liability (e.g. reserves), they picked the wrong liability — or at least the wrong version. A more practical and efficient method of backing a privately-issued stablecoin would be to replace (off-chain) central bank reserves with an (on-chain) central bank blockchain-based liability, or CBBL for short. Another way of thinking about a CBBL is it’s effectively a tokenized form of the trust we have in central banks, but it’s more efficient, transparent, and accessible than traditional central bank reserves.
"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"
Central bank digital currencies, community currencies, and the reinvention of money
This article makes a case for community (or complementary) currency backed by a central bank digital currency (CBDC) to democratize money creation. The authors show that community currencies can have higher multiplier effects on local expenditure, allow central banks to control circulation velocity, and help countries in currency crises. For example, communities can build smart contracts into their currencies, incentives to “nudge” users toward green services and other pro-social expenditures.
This paper, co-authored by the European Central Bank's Ulrich Bindseil, describes current potential "holy grail" ways to cheap cross-border payments that settle immediately in a secure settlement medium. It concludes that several solutions are suitable and some may even be the holy grail.
Testimony by Vice Chair Brainard on digital assets and the future of finance
In testimony before the U.S. House Financial Services Committee, Fed Vice Chair Lael Brainard said that no decision has been made about whether the Fed will issue central bank digital currency (CBDC). However, she said that it is important to undertake the necessary work to inform any such decision and to be ready to move forward should the need arise. For example, a digital dollar could help ensure financial system stability if crypto-assets and CBDCs issued by other countries become increasingly popular. https://financialservices.house.gov/events/eventsingle.aspx?EventID=409382
No, the UK Is Not Going to Make USDC and USDT Legal Tender
"Money doesn’t have to be legal tender to be used for mainstream payments. It just needs to be widely accepted. Making stablecoins legal tender may help to instill confidence in them, but far more important is regulating them so they are perceived as safe. The U.K. has a comprehensive system of regulation to ensure that electronic payments are safe. Bringing stablecoins into this system of regulation would encourage their widespread use."
Old dogs, new tricks: adapting central bank balance sheets to a world of digital currencies
The Bank of England's Andrew Hauser argues that a central bank digital currency (CBDC) could have a big impact on the the size, composition and risk profile of the central bank's balance sheets; for the monetary policy transmission mechanism, and for monetary control. He argues for the need to understand these impacts, and build them into the design of CBDCs and central bank operational toolkits.
"Small businesses have largely been ignored during the debate over digital currencies, even though they’re a hugely significant part of the U.S. economy and have much to gain from cheaper, more efficient payment systems. These businesses work with small margins, have less bargaining power than large companies, and suffer from cash flow problems as they wait to be paid for goods and services. Stablecoins and central bank digital currencies can help. These technologies can reduce payment processing costs, allowing small businesses to keep more of what they earn, and significantly accelerate how quickly they get paid. This could drastically improve small businesses’ liquidity and cash buffers, and help them survive negative economic shocks and thrive."
"The ongoing digital revolution may lead to a radical departure from the traditional model of monetary exchange. We may see an unbundling of the separate roles of money, creating fiercer competition among specialized currencies. On the other hand, digital currencies associated with large platform ecosystems may lead to a re-bundling of money in which payment services are packaged with an array of data services, encouraging differentiation but discouraging interoperability between platforms. Digital currencies may also cause an upheaval of the international monetary system: countries that are socially or digitally integrated with their neighbors may face digital dollarization, and the prevalence of systemically important platforms could lead to the emergence of digital currency areas that transcend national borders. Central bank digital currency (CBDC) ensures that public money remains a relevant unit of account."
Stablecoins and Central Bank Digital Currencies: Policy and Regulatory Challenges
"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."
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.
Fit-for-Purpose Payment System Interoperability: A Framework
"This paper offers a discussion on the challenges analysts, technicians, and interested members of the public face when discussing how interoperation in a payment system can support goals of efficiency, security, and accessibility. We deconstructed elements of the payment system and defined these elements to support a deeper analysis of where and how the term interoperation can be appropriately applied. The fit-for-purpose framework offers a simple, four-step approach to increasing the depth and clarity of discussions about payment system interoperability and how it may be used as a tool to support various goals. The approach focuses on defining the boundaries of a system within the context of the discussion, adopting common terminology, describing the degree of interoperation required, based on agreed-upon descriptions, and mapping the current state of existing structures (where applicable). Finally, we sketched preliminary results of a hypothetical discussion where participants used our framework to discuss the topic of interoperation with respect to how a potential CBDC and stablecoins could technically co-exist in payment systems."
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.
Central Bank Digital Currency Competition and the Impossible Trinity
"In the two-country model in Benigno, Schilling & Uhlig (2022), the usage of a privately-issued crypto-asset as a global means of payment leads to the enforced synchronization of nominal interest rates, and hence to a loss of monetary policy autonomy. This paper shows that the same result obtains in a world in which central banks issue digital currencies (CBDC) to be used abroad. In that case, shock transmission is symmetric, whereas it is asymmetric if only one country issues international CBDC or crypto-assets are tied to one currency (stablecoin)."
Russia's Finance Ministry is working on stablecoin platforms to avoid cross-border dollar settlement
Russia's finance ministry is reportedly looking to stablecoins to avoid international payment rails denominated in the U.S. dollar and euro. "The stablecoins can be tied to some generally accepted instrument like, for example, gold, whose value is understood and appreciable for all parties... It will require additional regulation, and the ministry is only considering approaches to it, there are no ready-made solutions."
"The IMF will soon publish two papers on these topics with coauthors Tobias Adrian, Tommaso Mancini- Griffloli, Dong He and Federico Grinberg of the IMF; Rod Garratt of the University of California, Santa Barbara; and Robert Townsend and Nicolas Xuan-Yi Zhang of the Massachusetts Institute of Technology. The papers will lay out an initial blueprint for such platforms in the hope of stimulating further discussion on these important topics, which are likely to shape the future of cross-border payments. Much remains to be explored, debated, and eventually done. The effort is certainly worth it, if anything to avoid embarrassing questions about what happens today behind the cloak of bilateral handshakes."
Project Dynamo: financing small and medium enterprises in the digital age
The BIS Innovation Hub's Hong Kong Centre and the Hong Kong Monetary Authority have launched Project Dynamo, which aims to deliver a prototype for the compliant use of decentralised finance (DeFi) tools, such as blockchain and smart contracts, to improve access to finance for unfunded and underfunded small and medium enterprises (SMEs). The research will extend into related topics such as decentralised identifiers and the interoperability of digital payment methods such as stablecoins and central bank digital currencies.
Framework for Responsible Development of Digital Assets
The U.S. Treasury published a report on the Future of Money and Payments that reviews the current U.S. system of money and payments, including developments in instant payments and stablecoins. It describes design choices for a potential U.S. central bank digital currency (CBDC) and recommends that the Fed advance work on it, in case one is determined to be in the national interest. Among other things, the report also encourages use of instant payment systems to support a more competitive, efficient, and inclusive U.S. payment landscape, the establishment of a federal framework for payments regulation to protect users and the financial system, while supporting responsible innovations in payments, and prioritizing efforts to improve cross-border payments, both to enhance payment system efficiency and protect national security.
Framework for Responsible Development of Digital Assets (Fact Sheet)
"Following the US President’s Executive Order, New Reports Outline Recommendations to Protect Consumers, Investors, Businesses, Financial Stability, National Security, and the Environment."
Nomura invests in Fnality institutional blockchain payments platform
Nomura is investing in Fnality, the interbank payment and settlement platform that uses "synthetic" wholesale central bank digital currency (CBDC) to settle transactions on distributed ledger technology (DLT) based financial market infrastructures (FMIs). (A "synthetic CBDC" is essentially a stablecoin backed by central bank deposits.) Fnality is expected to launch its first such synthetic CBDC in October 2022, pegged to the British Pound and backed by deposits at the Bank of England.
A new experiment by the Bank for International Settlements (BIS) Innovation Hub and Hong Kong Monetary Authority (HKMA) shows central bank digital currency (CBDC) can work with private stablecoins, even if intermediary operators go bust. Project Aurum created a technology stack comprised of a wholesale interbank system and a retail e-wallet system, setting up two different types of tokens: intermediated CBDC and stablecoins backed by CBDC in the interbank system. While intermediated CBDC is a direct liability of the central bank, CBDC-backed stablecoins are liabilities of the issuing bank, with its backing assets held by the central bank.
The IMF published a paper by Adrian Armas and Manmohan Singh that examines the impact of digital money on central bank balance sheets and monetary policy. They show that the impact will depend on the type of substitution into digital money. For example, interest rate and credit monetary policy channels may become weakened by nonbank stablecoins backed by government securities, or if there is substitution out of bank deposits into central bank digital currency (CBDC). The common factor in these cases is a reduction of banking credit. However, when substitution is out of cash into private digital money backed by bank deposits, banking credit could expand.
The Bank of England conducted surveys in 2021 to gain further insights into the store of value role of banknotes. They confirm that over the past decade, the fall in transactional cash use in the UK has been accompanied by a rise in the value of notes in circulation. Covid intensified this trend. As Covid restrictions have lifted, there has been a partial recovery in cash use, and more recently, a stabilization in cash use trends. The value of notes in circulation remains elevated, as people are holding more cash as a store of value. And there remains a sizable share of the population who value cash and for whom cash remains their preferred means of payment. The Bank reiterated its commitment to to ensure that cash remains available and accessible for those who want to use it.
Payments, money and finance in the digital era (Parts 1)
Two recent papers by Christian Pfister examine the state of play and short- to long-term prospects for payments, money and finance in the digital era. The first paper focuses on short- to medium term developments, and two forms of public sector, intervention; regulatory and production-based. He argues that the regulatory approach should be considered against the potential costs, like the creation of barriers to entry and protection of established players, which makes it ambiguous from the point of view of competition. Production-based intervention, such as the introduction of central bank digital currency (CBDC), aiming to provide an alternative to private supply is much stronger than regulation, and has its own ambiguities. Hence, before intervening, the public authority should ensure that private initiatives are unable to meet a clearly expressed need (i.e., there must be a “market failure”), and the benefits outweigh any disadvantages.
Payments, money and finance in the digital era (Part 2)
Two recent papers by Christian Pfister examine the state of play and short- to long-term prospects for payments, money and finance in the digital era. The second paper, which focuses on longer-term issues, recommends that if a CBDC were to be issued, it should be aimed to stimulate innovation and not lead, even inadvertently, to the marginalization of the private sector. It concludes with a set of recommendations, including that the central bank should continue to issue banknotes, but in order to discourage their illicit use, gradually withdraw the high-denominations. Also, if retail CBDC is issued, it should allow offline transactions. Also there should be a threshold of anonymity for very small-value transactions to facilitate its substitution for cash without facilitating illicit transactions. Above this threshold, allow transactions under pseudonyms, with the possibility for the judicial authorities to request the lifting of pseudonymity, and limit the collection of personal information to what is necessary for reporting entities to fulfil their regulatory obligations. Christian recommends not limiting individual CBDC holdings, except for a transitional period, and remunerating at an interest rate linked by a fixed spread under the monetary policy rate. In addition, he recommends the issuance of wholesale CBDC on a distributed ledger technology (DLT) platform, and allow, but not force, payment service providers, including regulated issuers of retail stablecoins, to back their issuance with them.
"Engineers introducing the designation identity to describe objectives or operational aspects of technology, must establish a functional definition of the term identity before committing the concept to source code. As such the objective of this taxonomy project is to provide a peer-reviewed library to serve as a reference for engineers in general, and software engineers aiming to facilitate legally relevant (commercial) activities in particular."
