DFC

The OECD published a paper that analyzes possible reasons for the absence of a market for tokenized assets and puts forward policy considerations for financial supervisors and policy makers, to which Josiah Hernandez and I contributed material on the wholesale central bank digital currency (CBDC) aspects. Possible impediments tokenization growth identified include "chicken and egg" problems (e.g., the lack of liquidity and absence of an ecosystem for tokenized assets, and the need for distributed ledger technology (DLT) payment rails (including wholesale CBDC) to exist for the payment leg of settlement), market functioning challenges of instant and "atomic" settlement, the lack of custodians to onboard investors and assets, and legal issues (e.g., the legal status of smart contracts, token ownership not necessarily according ownership to the underlying assets). It concludes that "with the proper foundations in place, new possibilities of potential efficiencies and productivity gains in tokenized assets markets can be brought about in a manner that need not negatively impact financial stability, law enforcement, local and global policy regimes".

The Bank of Canada published a paper that explores the use of privacy-enhancing technologies (PETs) in the design of central bank digital currency (CBDC) systems, potentially paving the way for solutions that better safeguard end-user privacy and meet rigorous data protection standards. PETs can offer robust protection for data throughout their lifecycle, whether stored, in transit or during processing, and ensure privacy is maintained even when data are extensively shared or analyzed. However, they can introduce performance overheads and add complexity to systems, and their effectiveness and applicability are currently limited due to their early stage of development. This paper provides a comprehensive overview of how PETs can transform privacy design in financial systems and the implications of their broader adoption.

Banca d'Italia published a paper that proposes a methodological framework for estimating the maximum amount of digital euro (D€) that is consistent with a smooth monetary policy implementation (MPI) in the euro area (EA). To this end, it considers that monetary policy is implemented smoothly following the introduction of the D€ when i) the remaining aggregate liquidity in the EA is sufficient to anchor short-term rates to the deposit facility rate and ii) EA national banking sectors can largely meet D€ demand with excess reserves and additional central bank credit. It estimates that, for a smooth MPI, the maximum amount of D€ should not exceed EUR 1.7 trillion under an approach that takes into account the heterogeneity across EA countries and banks and prevents any EA national banking sector from facing a too severe liquidity distress following the introduction of the D€. The analysis suggests the importance of refinancing operations with a broad collateral framework in the Eurosystem operational framework, due to their key role in allowing the central bank to elastically withstand additional reserve demand stemming from the introduction of the D€.

Considering that the US Bank Secrecy Act was passed in 1970 as a way to monitor foreign accounts and is now responsible for over 26 million reports on Americans a year, it should be no surprise that people are worried about the threat a CBDC could pose to financial privacy. There is little doubt that government officials will tout the risks of terrorists, drug cartels, and money launderers to justify the surveillance that a CBDC would bring. But surveilling “for bad actors” inevitably means surveilling innocent people as well. It’s time to reduce financial surveillance, not further entrench it. Introducing a CBDC would mark the end of what little financial privacy is left in the United States.

To date, at least three transactions have reportedly been made with the Banco do Brasil (BCB) Drex central bank digital currency (CBDC) as part of its proof-of-concept experimentation. One was carried out between two private banks (BTG Pactual and Itaú Bank) to test the compatibility and the efficiency of the payment network. The second was between the BCB and a public-sector bank (Caixa Econômica Federal). The third, in September 2024, was an interbank transaction between a public bank (Caixa) and a private digital bank (Inter). All were presumably conducted in the BCB's Drex sandbox.

The Banque de France carried out two transactions involving tokenised assets: a reverse repurchase agreement with Société Générale and an outright securities purchase with BNP Paribas. Société Générale pledged bonds issued in 2020 on the public blockchain Ethereum as collateral, in exchange for CBDC tokens issued by the Banque de France on the DL3S interoperability solution (distributed ledger). Both parties used the technological capabilities of the Société Générale Forge platform, which acted as registrar for the issuer. The Banque de France purchased a tokenised euro area sovereign bond in the secondary market, and successfully tested two corporate actions – coupon payment and redemption – both of which were settled on the Banque de France DL3S platform. BNPP's securities business acted as subscriber and registrar for the Banque de France, operating on the Neobonds blockchain.

A bill has reportedly been introduced to Russia’s State Duma that that would make the use of the digital ruble central bank digital currency (CBDC), mandatory for banks and merchants. The draft law proposes a phased rollout starting on July 1, 2025, with systemically important banks, and expanding to all banks by 2027. It would make accepting digital ruble payments mandatory for retailers with annual revenues over 30 million rubles by July 2025, with the threshold dropping to 20 million rubles by July 2026. The draft bill would also mandate the use of a universal QR code system for almost all digital ruble payments.

The Cambridge Centre for Alternative Finance (CCAF) published a report that examines the key motivations, models, and policy considerations for wholesale central bank digital currency (CBDC). It discusses the need for wholesale CBDCs as risk-free settlement assets to support digital transaction infrastructure and mitigate potential instability arising from reliance on tokenized private assets. Central banks are considering wholesale CBDCs as an alternative to upgrading real-time gross settlement (RTGS) systems, aiming to keep pace with programmable, always-on infrastructures that facilitate real-time, cross-currency liquidity and tokenized asset transactions.

As central banks around the world have explored and researched the uses, viability, and needs for a central bank digital currency (CBDC), Hyperledger’s distributed ledger technologies (DLTs) have been at the forefront of these experimentations. This ebook provides the reader an overview of the Hyperledger Foundation, why open source development is appropriate for all central bank projects and real-life examples of CBDC projects around the world.

The Bank of Canada (BOC) published a paper that investigates the introduction of a retail central bank digital currency (CBDC) into the market for payments. Focusing on the point of sale (POS), it develops and estimates a structural model of consumer adoption, merchant acceptance and usage decisions. It counterfactually simulates the introduction of a CBDC, considering a version with debit-like characteristics and one encompassing the best of cash and debit, and characterize outcomes for a range of potential adoption frictions. It shows that, in the absence of adoption frictions, CBDC has the potential for material consumer adoption and merchant acceptance, along with moderate POS usage. However, modest adoption frictions substantially reduce outcomes along all three dimensions. Incumbent responses required to restore pre-CBDC market shares are moderate to small and further reduce the market penetration of CBDC. Overall, this implies that an introduction of retail CBDC into the market for payments is by no means guaranteed to be successful.

The Bank for International Settlements (BIS) published a paper by its Consultative Group on Innovation and the Digital Economy (CGIDE) that discusses four main processes in a retail central bank digital currency (CBDC) architecture. These are: i) enrolling new users, ii) creating CBDC (cash-in), iii) destroying CBDC (cash-out) and iv) intra-ledger transfers. These four processes could involve other flows and vary depending on the CBDC design, regulatory framework, technological infrastructure and policy objectives of each jurisdiction. The architecture lays out a hybrid model which allows for the division of labor between the central bank and private intermediaries.

On November 29, 2024 the Bank of Russia announced the extension of extend the fee-free period for digital ruble transactions to December 31, 2025. After that the fee for businesses accepting payments for goods and services in digital rubles will be 0.3% of the payment amount (but no more than ₽1,500). The fee for housing and utility companies will be 0.2% but no more than ₽10. The fee on business-to-business transfers will equal ₽15 per transaction. However, digital ruble transactions will always be fee-free for individuals.

The Digital Euro Association (DEA) published a paper that I contributed to on the opportunities and challenges of using open-source software (OSS) in central bank digital currency (CBDC) development. The use of OSS could be crucial in building trust and transparency within CBDC projects, especially for retail CBDCs in regions where consumers and advocacy groups have resisted their implementation. By making the source code publicly available, central banks can facilitate independent verification of the software’s functionality, which could help to address concerns around privacy and surveillance. By analyzing successful case studies and industry best practices, this report seeks to guide central banks in making informed decisions about OSS adoption.

The Bank of England (BOE) published a paper that proposes a simple mechanism through which an unremunerated central bank digital currency (CBDC) may improve welfare by lowering the market power financial intermediaries have in negotiating fees with digital firms that cannot use cash as an alternative means of payment. However, welfare benefits will be reduced to the extent that the CBDC reuses existing payment infrastructure without providing additional competition, efficiency and functionality. Final version:

Bank Indonesia (BI) completed its Project Garuda proof of concept (PoC) for a distributed ledger technology (DLT) based digital rupiah wholesale cash ledger. The testing confirmed that the solution can meet the business and technical needs requirements (transaction security, interoperability with existing payment systems and financial infrastructure). Two DLT-based platforms were tested; Corda (R3) and Hyperledger Besu (Kaleido). Both were able to meet all testing scenarios and address all key questions. Project Garuda will proceed with a broader exploration of securities ledger, including exploring liquidity management and privacy technology.

Societe Generale (SocGen) completed a collateralized market transaction fully executed on blockchain through its FORGE subsidiary. This is the first sale and repurchase agreement (repo) transaction in digital securities with a Eurosystem central bank. SocGen deposited as collateral with the Banque de France some bonds issued in 2020 on the public Ethereum blockchain in exchange for pilot central bank digital currency (CBDC) issued by the Banque de France on its DL3S blockchain.

The Cambridge Centre for Alternative Finance (CCAF) published a report that reviews the case for a wholesale CBDC, the various approaches in how it can be delivered, and an assessment of the pilots and experiments undertaken by the industry and central banks. It finds that buy- and sell-side firms are progressing with tokenization initiatives, driving a need for digital money for the cash leg. which may increasingly be delivered through tokenized bank deposits or stablecoins. Meanwhile, central banks are raising concerns on the risks of using such private settlement assets for settlement, facilitating experiments demonstrating how central bank money can be used instead, but with no clear indication yet on how and when this may be delivered in practice.

The Constitutional Law, State Structure, Judicial and Legal Issues, and Parliamentary Regulations Committee of the Kyrgyz Parliament has reportedly approved the draft law on the status of the digital som – in its first reading. It is designed to launch a pilot project for a prototype digital som and to establish its legal framework and status. Testing of the prototype is scheduled to begin in early 2025, and a final decision on the launch of the digital som is planned for the end of 2026.

The Reserve Bank of Fiji (RBF) has reportedly ruled out issuing a central bank digital currency (CBDC) for Fiji, and is instead focusing on modernizing its existing national payment system. In the meantime, the RBF will continue to keep a tab on how other central banks progress on CBDC as well monitor international new developments that may influence Fiji’s payment system.

The Reserve Bank of New Zealand (RBNZ) published the results of a public consultation on New Zealanders’ views on a Kiwi central bank digital currency (CBDC). The vast majority of respondents expressed concern about the potential for government control, privacy, traceability, and autonomy. Many feared Digital Cash will be used to facilitate unacceptable intrusion into their privacy or social control, even if it is not originally designed to do so. In that regard, they want assurance that physical cash will still be issued by the RBNZ. In response, RBNZ said that it remains committed to a privacy-centric design for Digital Cash subject to financial integrity considerations.

The Bank of England (BoE) published a joint report with MIT Digital Currency Initiative (DCI) on how privacy enhancing technologies (PETs) could be used to enhance the privacy of a potential digital pound. The paper focused on pseudonymization, zero-knowledge proofs, and secure multiparty computing. It found that these technologies present opportunities for a central bank digital currency (CBDC) to be at least as private as current forms of digital money and potentially even more private as they mature. While PETs, on their own, do not guarantee privacy, the approaches explored in this paper seek to safeguard consumers’ private information, enable compliance with existing regulations, and strengthen trust and confidence in a digital pound, should one be launched in the future.

The Bank for International Settlements (BIS) and its central bank partners demonstrated that regulatory compliance can be embedded in cross-border transaction protocols. Project Mandala, which has reached proof-of-concept stage, aims to automate compliance procedures, enhance transparency of country-specific policies and provide real-time reporting and monitoring for regulators and supervisors. This architecture integrates a peer-to-peer messaging system, rules engine and proof engine. It ensures that all necessary compliance checks have been completed before the payment instruction is initiated, after which the system automatically generates a compliance proof, which accompanies any digital settlement asset or payment instructions across borders.

A paper co-written by a Deutsche Bundesbank staffer conducts a quantitative analysis to calculate a potential digital euro holding limit. It draws on a detailed dataset including individual bank level as well as aggregated banking group data for the entire euro area. It uses data and a simulation approach on the number of accounts in individual institutions and on account balance distribution. To assess the De impact on banks, the analysis is conducted for two different points in time reflecting different monetary policy environments with accommodative and restrictive stance. The effects of the CBDC are considered in three holding limit scenarios. The calculations reveal a lower bound holding limit of around 1,000 euro that almost all banks can handle. The results show a strong heterogeneity between the various euro area banks, as many could offer significantly higher limits. For the implementation of holding limits, the paper therefore proposes a model that has a low mandatory limit which every institution must offer, while providers can decide for themselves whether they like to offer a higher limit depending on their individual situation and customer base, subject to an approval process.

Bangko Sentral ng Pilipinas and participating financial institutions (FIs) have completed proof-of-concept work on Project Agila. Agila allow FIs to transfer funds to each other even during off-business hours, including evenings, weekends, and holidays, using wholesale central bank digital currency (CBDC). The evaluation with FIs covered functional, performance, security, exploratory, end-to-end and programmability testing.

Banco de España published a paper that explores the financial stability nexus within a monetary ecosystem that has been expanded to include a central bank digital currency (CBDC). It highlights the importance of partially adapting the two-tier system of money by implementing certain limits, as envisaged in CBDC plans. The endogenous mitigation of the risks through improved bank competition often attributed to CBDCs is uncertain and may be insufficient from a systemic risk perspective. The introduction of exogenous mitigants, like CBDC holding limits calibrated on the basis of a robust methodology, seems instrumental to ensure the consistency of a monetary ecosystem that includes a CBDC. Hence, the paper addresses some fundamental methodological issues related to these limits, such as the rationale for alternative targets for the limits, the influence of disintermediation speed, the time horizons involved in the limitation and adaptation process, and the role of regulatory and market frictions.