"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."
Stablecoins could offer central banks a shortcut, says New York Fed advisor
"Stablecoins could offer central banks a shortcut to having their own digital currencies, according to the NY Fed's Antoine Martin. “Instead of issuing a retail [central bank digital currency], central banks could support stablecoins by allowing them to be backed one-for-one with balances in a central bank account... Adapting our regulatory and legislative environment to support stablecoins is already a formidable task, but it is probably easier than managing a CBDC for retail use, especially as the private sector currently provides all retail digital means of payments on legacy technology."
Central banks consider backing stablecoins instead of launching CBDCs
According to the New York Fed's Antoine Martin, “instead of issuing a retail central bank digital currency (#CBDC), central banks could support stablecoins by allowing them to be backed one-for-one with balances in a central bank account. They could also facilitate a bankruptcy remote legal structure to ensure that end-users are paid in full even if the issuer becomes bankrupt. Such stablecoins could be a close substitute for central bank digital money, while balances in a central bank account are risk free and could earn interest. Though stablecoin issuers should be subject to some oversight in exchange for access to a central bank account.”
President of Bank of Brazil Shows 'Open Finance' Digital Real Concept Featuring Stablecoin Integration and Payments Functionality
The president of Banco Central do Brasil (BCB), Roberto Campos Neto reportedly introduced some novel ideas that the central bank has for a possible CBDC, including the integration of the digital real with traditional and decentralized financial structures and institutions. He also showed off a “super app” that will allow customers to hold stablecoins and the CBDC, and showcased the connection the system will have with the already available PIX payments network.
The Official Monetary and Financial Institutions Forum (OMFIF) published the 2022 edition of its Future of Payments report. It focuses particularly on the challenges of cross-border payments for emerging market countries, delving into the validity of cryptocurrencies and stablecoins as a means of escaping domestic inflation and sending cheap remittances. It also examines the value proposition of CBDC for emerging markets, as well as looking at some of the progress made by CBDC cross-border integration projects. Notably, while central banks think that interlinking CBDCs might be a promising avenue for enhancing cross-border payments, they are not pursuing CBDC in order to provide a solution to the cross-border payments problem. The consensus is that CBDCs must justify their existence with other merits , such as improving financial inclusion.
"This chapter is organised as follows. To set the stage, it first describes today's monetary system and the high-level objectives it needs to achieve, and to what extent changes in technology and the economic environment have opened up room for improvement. The next section discusses the promise and pitfalls of crypto and DeFi innovations. The chapter then discusses a vision for the future monetary system, built on central bank public goods. The final section concludes."
Palau continues to work with Ripple to explore the creation of national stablecoin
President Surangel Whipps Jr. reportedly confirmed that the Republic of Palau continues to work with Ripple on the creation of a government-issued US dollar-backed stablecoin (the US dollar is Palau's national currency). Last year Ripple announced a partnership with Palau to explore a national digital currency and its use cases based on XRP Ledger, initially focusing on cross-border payments.
Banks concerned USDC stablecoin will become 'backdoor CBDC' with BlackRock help
The US-based Bank Policy Institute (BPI) is raising concerns that a sizeable proportion of Circle's USDC stablecoin reserves could be parked at the Federal Reserve, despite Circle not having a central bank account. Since November, BlackRock has been managing about two-thirds of the reserve assets in a bespoke money market fund, the Circle Reserve Fund (CRF) , which invests mostly in U.S. short-dated Treasuries. The BPI claims that Blackrock has applied for the fund to access the Fed's overnight reverse repo (ON RRP) facility, which provides money funds and government-sponsored enterprises a standing option to invest overnight with the Fed at a fixed rate, currently 4.3%. This involves the fund buying Treasuries from the Fed, which are resold to the Fed at a future date at a slightly higher price. The net effect of the cash flows, with the transfer of money to the Fed, is not dissimilar to depositing the USDC reserve cash at the Federal Reserve. The use of the ON RRP by the CRF could effectively transform USDC into a "backdoor" synthetic central bank digital currency (CBDC) if all of the assets are parked there. https://bpi.com/will-usdcs-blackrock-money-fund-create-a-back-door-cbdc-give-usdc-an-account-at-the-fed-or-both/
Iran and Russia are developing a stablecoin backed by gold
Iran and Russia are reportedly looking to launch a new gold-backed stablecoin to be used for cross-border transactions in the place of the US dollar, the Iranian rial and the Russian ruble in the Persian Gulf region. The cryptocurrency would also specifically intended as a payment method in the Astrakhan area – an economic zone whose design helped Russia begin to receive cargo shipments from Iran.
Universal digital payments network for stablecoins, CBDCs launches at Davos
"Multiple global banks will participate in use case proof of concepts (POCs) this month, to show how the UDPN will integrate digital currencies into daily businesses, banking and payment. The first two POCs will involve two banks testing UDPN’s digital currency cross-border transfer and swap capabilities, and how financial institutions can execute anonymous stablecoin transfers through the “travel rule” function." https://www.udpn.io/home
Traditional Banks Set to Dominate Crypto Stablecoin Market as Regulatory Certainty Grows
My SODA colleague Chris Ostrowski and Chris Hayes, in another CoinDesk article, make three predictions on the landscape for CBDCs and stablecoins in Europe and in the U.S. based on the trends they’ve seen through engagement with central bankers and policymakers.
Bank for International Settlements (BIS) General Manager Agustín Carstens called for the development of a “unified ledger” that would allow different parts of the digital financial ecosystem to work together seamlessly. More specifically, such a ledger could bundled together central bank digital currencies (CBDCs) and tokenized deposits, linked with smart contracts, to create a "money Lego" ecosystem. And Mr. Carstens claimed that all of a unified ledger's potential benefits could be achieved on permissioned platforms with various degrees of centralization.
Financial interoperability requires a stable price as means of value exchange. The first implementation of wrapcbdc is Convexity eNaira(CNGN) which is currently available on the Bantu Network as well as Binance Smart Chain. CNGN creates possibilities in payments, lending, investing, trading and trade finance.
Whether Private Or Public, The U.S. Needs A Digital Dollar
David Birch: "The travails of Silicon Valley Bank (SVBVB), which went from having an A credit rating to being taken over by the Feds in three days, reminded me of a the words of Morgan Ricks, a professor at the Vanderbilt Law School and a former Treasury official, who said "there's nothing inherently dodgy about stablecoins. But there is something inherently dodgy about banking, which is why countries build elaborate regulatory regimes to protect deposits”. Indeed. We should be encouraging truly stable stablecoins. Most of all, we should be encouraging a digital dollar."
"Digital currencies provide a potential form of liquidity competing with bank deposits. We introduce digital currency into a macro model with a financial sector in which financial frictions generate endogenous systemic risk and instability. In the model, digital currency is fully integrated into the financial system and depresses bank deposit spreads, particularly during crises, which limits banks’ ability to recapitalize following losses. The probability of the banking sector being in crisis states can grow significantly with the introduction of digital currency. While banking-sector stability suffers, household welfare can improve significantly. Financial frictions may limit the potential benefits of digital currencies."
Russia touts common digital currency between Russia, China, India
The Deputy Chairman of the State Duma, Alexander Babakov, suggested that Russia, China and India should trade using a common digital currency, which could be a digital ruble, rupee or yuan. "India, Russia, and China are the countries that now create a multipolar world that is backed by the majority of countries. Its creation should be based on establishing new financial ties based on a system that does not safeguard today's dollar and euro, but rather creates a new currency capable of serving our goals," he said. https://tass.com/economy/1596017
Texas Bill Would Create State-Issued Gold-Backed Digital Currency
Bills introduced in the Texas House and Senate would require the state comptroller to establish a digital currency that is fully backed by gold and fully redeemable in cash or gold. The comptroller would be required to create a mechanism to use this digital currency in everyday transactions. In practice, individuals would be able to purchase digital currency from the state. The state would then use the money to purchase gold that would be held in the Texas Bullion Depository or another secure vault. The bills must next be assigned to committees, after which they must get a hearing and pass by a majority vote before moving forward in the legislative process.
The Digital Currency Monetary Authority (DCMA) Launches an International (CBDC)
The Digital Currency Monetary Authority (DCMA) announced their official launch of an international central bank digital currency (CBDC) at the 2023 International Monetary Fund (IMF) Spring Meetings. The press release implies that their Universal Monetary Unit (UMU) algorithmic stablecoin has the IMF's blessing, including quoting IMF Financial Counselor Tobias Adrian from a November 2022 speech that implies nothing about DCMA engagement. Also, the following quote from the DCMA's legal counsel appears designed to mislead: "although the IMF has not officially endorsed UMU, in reviewing the DCMA's whitepaper and in weekly team discussions, the IMF has yet to state any objections to UMU's FX premium rates and its monetary sovereignty approach."
Central Bank of Montenegro to Develop a Digital Currency Strategy and Pilot
The Central Bank of Montenegro (CBCG) is working with Ripple to develop a strategy and pilot program to launch a national stablecoin, in a follow-up to Prime Minister Dritan Abazovic's related Tweet in January. The CBCG will work with Montenegro's government and academia to create a practical digital currency or secure currency solution to test blockchain functionality and potential. Montenegro uses the EUR, despite not being a member of the Eurozone, although it is a candidate country for European Union (EU) membership.
U.S. House Committee Publishes Draft Stablecoin Bill
The U.S. House Financial Services Committee (FSC) published a draft version of a stablecoin bill, with proposals including a two-year moratorium on stablecoins backed by other cryptocurrencies and a request to study a central bank digital currency (CBDC). The draft puts the Federal Reserve in charge of non-bank stablecoin issuers, whereas insured depository institution issuers would fall under the appropriate federal banking agency supervision. Among the factors for approval is the ability of the applicant to maintain reserves backing the stablecoins with U.S. dollars or Federal Reserve notes, Treasury bills with a maturity of 90 days or less, repurchase agreements with a maturity of seven days or less backed by Treasury bills with a maturity of 90 days or less, and central bank reserve deposits. A subcommittee will hold a hearing on stablecoins on Wednesday, featuring Dante Disparte from USDC issuer Circle; the Blockchain Association's Jake Chervinsky; Columbia Professor Austin Campbell and New York Department of Financial Services Superintendent Adrienne Harris. https://financialservices.house.gov/calendar/eventsingle.aspx?EventID=408691
