Ultimate Resource For Central Bank Digital Currencies (#GotBitcoin) Page#2
Central Banks Provide Guidance On Banks’ Crypto Exposure: Bank For International Settlements. Ultimate Resource For Central Bank Digital Currencies (#GotBitcoin) Page#2
“Cryptoassets and stablecoins will be subject to a conservative prudential treatment. The standard will provide a robust and prudent global regulatory framework for internationally active banks’ exposures to crypto-assets that promotes responsible innovation while preserving financial stability.” Pablo Hernández de Cos, chair of the Basel Committee and Governor of the Bank of Spain
The report, dubbed “Prudential treatment of cryptoasset exposures,” introduces the final standard structure for banks regarding exposure to digital assets, including tokenized traditional assets, stablecoins and unbacked cryptocurrencies, as well as feedback from stakeholders collected in a consultation launched in June. The Basel Committee on Banking Supervision noted the report will soon be incorporated as a new chapter into the consolidated Basel Framework.
Pablo Hernández de Cos, chair of the Basel Committee and Governor of the Bank of Spain, noted about the standard:
“The Committee’s standard on cryptoasset is a further example of our commitment, willingness and ability to act in a globally coordinated way to mitigate emerging financial stability risks. The Committee’s work programme for 2023–24 endorsed by GHOS today seeks to further strengthen the regulation, supervision and practices of banks worldwide. In particular, it focuses on emerging risks, digitalisation, climate-related financial risks and monitoring and implementing Basel III.”
The BIS disclosed in September the results of its multi-jurisdictional central bank digital currency (CBDC) pilot, following a month-long testing phase that enabled cross-border transactions worth $22 million. The pilot program involved the central banks of Hong Kong, Thailand, China and the United Arab Emirates, as well as 20 commercial banks from those regions. According to a report by the BIS published in June, around 90% of central banks are considering the adoption of CBDCs.
The new standard limits crypto reserves among banks to 2% by 2025, and goes into effect on January 1, 2025.
India To Introduce 30% Crypto Tax, Digital Rupee CBDC By 2022–23
Finance minister Nirmala Sitharaman believes the introduction of a CBDC will provide a “big boost” to India’s digital economy.
In a speech discussing the budget for 2022, Indian finance minister Nirmala Sitharaman announced the launch of a central bank digital currency (CBDC) by 2022–23 as a means to boost the country’s economic growth.
Sitharaman highlighted the need for digital inclusion across numerous business verticals while announcing the fund allocation set in the Union Budget.
Speaking about the launch of a digital rupee, she added that the introduction of a CBDC will provide a “big boost” to the digital economy. She also highlighted the possibility of a more efficient and cheaper currency management system made possible by digital currencies.
“It is therefore proposed to introduce digital rupee using blockchain and other technologies to be issued by the Reserve Bank of India, starting 2022-23.”
Complementing the launch of a digital version of the Indian rupee, Sitharaman also proposed the introduction of a 30% crypto tax that targets all transfers of virtual digital assets. She suggested:
“Any income from transfer of any virtual digital asset shall be taxed at the rate of 30%. No deductions in respect of any expenditure or allowance shall be allowed while computing such income, except the cost of acquisition.”
— All India Radio News (@airnewsalerts) February 1, 2022
The finance minister also highlighted that any losses that occurred while transacting digital assets cannot be used as compensation against any other income source. In other words, investors will not be able to show losses or hacks of cryptocurrencies to offset taxation on profits.
To keep track of crypto investments in the country, Sitharaman further proposed to implement a tax deduction at source (TDS) of 1% above a yet-to-be-determined threshold.
Local Indian media publication Lok Sabha highlighted that a parliamentary research group has organized a crypto-focused training for Wednesday, Feb. 2.
As Cointelegraph pointed out, the legislative business calendar for the lower house of parliament no longer includes a bill that could potentially ban crypto in the country.
Previously, published texts of the bill propose banning “private cryptocurrencies” in India while retaining use of “the underlying technology of cryptocurrency.”
India’s Central Bank To Start Wholesale CBDC Pilot Nov. 1
A pilot for a retail version will start within a month.
India’s central bank will introduce a pilot wholesale central bank digital currency (CBDC) Nov. 1, and a retail version will start within a month. In a statement, the Reserve Bank of India (RBI) said the use case for the wholesale digital rupee is the “settlement of secondary market transactions in government securities” because it would reduce transaction costs.
Nine prominent banks have been identified for participation in the pilot. These are State Bank of India (SBIN), Bank of Baroda (BANKBARODA), Union Bank of India (UNIONBANK), HDFC Bank (HDFCBANK), ICICI Bank (ICICIBANK), Kotak Mahindra Bank (KOTAKBANK), Yes Bank (YESBANK), IDFC First Bank (IDFCFIRSTB) and HSBC (HSBA).
The RBI said a pilot of the retail version is planned for launch within a month in select locations in closed user groups comprising customers and merchants. The bank published a 50-page concept note for the introduction of a central bank digital currency earlier this month.
Since early 2021 it’s been known that 80% of central banks around the world are exploring CBDCs. Recently, Australia’s Central Bank started a CBDC research project and announced plans to complete the pilot by mid-2023. The central banks of Israel, Norway and Sweden have teamed up to explore retail CBDC.
The Bank of International Settlements has also conducted a project with the central banks of Hong Kong, China, the United Arab Emirates and Thailand to study CBDCs and their possible role in cross-border payments and multi-CBDC transactions. The six-week pilot project successfully had 20 different commercial banks conduct over 160 payments worth around a total of $22 million.
India will have a prominent role in framing global crypto regulation when it takes over the G-20 group presidency for one year, starting from Dec. 1, 2022, until Nov. 30, 2023. The nation’s finance minister, Nirmala Sitharaman, has said crypto will be part of the agenda.
Sitharaman has said that she seeks to arrive at a framework or a standard operating procedure after discussions with G-20 members and institutions based on their studies and research around the topic.
“We would definitely want to collate all this and do a bit of study and then bring it on to the table of the G-20 so that members can discuss it and hopefully arrive at a framework or SOP (standard operating procedure) so that globally, countries can have a technology-driven regulatory framework,” she said.
In January 2022, Indian Prime Minister Narendra Modi sought global cooperation to tackle the challenges posed by cryptocurrencies. Later in July, the Finance Minister said no legislation is possible without significant international collaboration while re-stating the RBI’s known stance to parliament – ban cryptocurrencies to avoid a destabilising effect on monetary and fiscal stability.
Monetary Authority of Singapore Completes Phase 1 of CBDC Project, With More Trials To Come
The first part of the project found there was no urgent need for a retail CDBC, although the bank said it wanted to be prepared in case that changes.
The Monetary Authority of Singapore (MAS) has completed the first phase of its central bank digital currency (CBDC) project, according to a report on Monday.
This stage of Project Orchid explored the potential use cases for a digital Singapore dollar as well as the infrastructure required to implement one. It looked at the concept of purpose-bound digital Singapore dollars, which allows senders to specify how and where the money will be used.
They found there is currently no urgent need for a retail CBDC but said they want to be prepared in case that changes.
“MAS’ vision is to build an innovative and responsible digital asset ecosystem in Singapore,” the report said. The country has been collaborating with the crypto industry and issuing licenses to big players such as Coinbase and Blockchain.com, and has continued to explore a retail CBDC despite feeling like there is no need for one. Project Orchid was announced in November last year and even then-Managing Director Ravi Menon said that the benefits of a retail CBDC were “not compelling.”
Countries around the world have been looking into retail CBDC’s. A BIS survey in May revealed that 90% of the 81 responding central banks have started work on a CBDC. The U.S., U.K. and European Union are reviewing whether or not they should issue a CBDC while China is further along than most countries in its CBDC trials.
“Although MAS does not see an urgent case for retail CBDC, it is envisioned that the study of potential use cases for a programmable digital SGD (Singapore dollar) and the infrastructure required, would enable MAS and the financial services ecosystem in Singapore to develop capabilities to support a retail CBDC should the need arise,” the report said.
MAS believes that a CBDC would be a small part of the money supply in the same way that physical cash is. Banknotes and coins issued by MAS only account for around 8% of the entire money supply, while privately issued money makes up 92%, the report said.
“Second, the retail CBDC system will form part of Singapore’s national foundational digital infrastructure, which brings together payments, digital identity and data exchange and authorization and consent mechanisms to protect the privacy and welfare of individuals more holistically,” the report said. It will be fully interoperable with other payment systems.
Some of the use cases of a CBDC will be tested through trials with the public and private sector in 2022 and 2023. The trials will include looking at government and commercial vouchers that can be used to purchase goods at the upcoming Singapore FinTech Festival.
Government payouts will also be tested that do not require participants to have a bank account plus the CBDC will be used to automatically release grants.
The next phase of Project Orchid will look at what the best ledger technology is for the CBDC and how this can be integrated with the existing infrastructure.
Privacy Protection A Top Issue For Digital Yuan: China’s Central Bank Governor
“We must strike a delicate balance between protecting privacy and combating illicit activities,” said Yi Gang.
Privacy protection is one of the top issues among the many still remaining when it comes to the use of China’s central bank digital currency (CBDC), the digital yuan, according to China’s Central Bank Governor Yi Gang.
“It is also important to keep in mind that anonymity and full disclosure are not as simple as black and white. There are many subtleties in between,” Gang said during a virtual speech at Hong Kong FinTech Week. “Therefore, we must strike a delicate balance between protecting privacy and combating illicit activities.”
The central banks and governments of several major economies around the world have signaled their intent to explore the development of a CBDC with an eye on China’s lead on CBDCs.
The stress on privacy comes in a month when China’s digital yuan, also known as the e-CNY, reached the milestone of 100 billion yuan (US$13.9 billion) in transaction volume.
But that figure was a meager 14% increase from the end of last year, compared with its growth of 154% in the last six months of 2021. The e-CNY is being rolled out on a trial basis across the country in 23 cities.
While Gang emphasized the e-CNY is “mainly positioned as cash to meet the needs of domestic retail payment” to enhance inclusive finance and improve payment system efficiency, he stressed that the e-CNY has been designed to “ensure privacy protection and financial security through by-and-large anonymity and managed anonymity.”
He explained that is accomplished via the fact that “transaction-related data is encrypted for storage,” “entities and individuals are prohibited from arbitrary inquiry or information usage without rigorous legal authorization” and that China’s central bank keeps “small-amount soft wallets and hard wallets to meet the need for small-value anonymous transactions, both online and offline.”
However, the credibility of China’s privacy promises comes under the shadow of its infamous propaganda efforts and governmental heavy-handedness, particularly during the 2021 crypto crackdown when it declared all cryptocurrency transactions and mining illegal.
Singapore’s MAS Says No Urgent Case For Retail CBDC, But Launches 4 Fast Trials Of It
The Monetary Authority of Singapore will trial a retail central bank digital currency in various contexts at a fintech event, despite the electronic payment options already available.
The Monetary Authority of Singapore (MAS) has wrapped up the first stage of its Project Orchid examination of a retail central bank digital currency (CBDC). According to the white paper released on Oct. 31, there is no “urgent case” for a retail CBDC in Singapore, but the study envisioned the infrastructure required in case a need arose.
It also conceptualized a new model for digital currency — purpose-bound money — and pulled large Singaporean banks and government agencies into the research with a series of trials.
Singaporean consumers do not need a retail digital dollar at present because of the high quality of services already available, the authors wrote. They indicated, however, that the most foreseeable use case may be for the benefit of the MAS rather than users:
“Electronic payments in Singapore are pervasive, and households and firms in Singapore are already able to transact digitally in a fast, secure and seamless manner today. […] The case for a retail CBDC in Singapore could strengthen over time, especially if innovative uses emerge or there are signs that digital currencies not denominated in SGD are gaining traction as a medium of exchange locally.”
The MAS uses the concepts of programmable payment (“the automatic execution of payments once a pre-defined set of conditions are met”) and programmable money (“embedding rules within the medium of exchange itself that defines or constraints its usage”) to devise its purpose-bound money (PBM), which “specifies the conditions upon which an underlying digital currency can be used.”
This highly constrained, nonintermediated form of CBDC would serve well for vouchers, the authors of the white paper said. Four trials will be conducted at the Singapore FinTech Festival from Nov. 2 to 4.
The Monetary Authority of Singapore (@MAS_sg) has marked the successful completion of Phase 1 of Project Orchid w/ a report detailing potential uses of a purpose-bound digital Singapore dollar and the supporting infrastructure required #CBDC #digitalmoney https://t.co/3QwH5cPFoz
— Central Bank Payments News (@cbpaymentsnews) October 31, 2022
DBS Bank said it would issue digital Singapore dollars with smart contract capabilities enabled by the Open Government Products office in a pilot program that would make instant settlement possible, saving merchants one or two days of processing time.
One thousand consumers and six merchants are participating in that trial. The bank, which is Singapore’s largest, said that PBM would be applicable in the Community Development Council scheme that provides households with vouchers to counteract inflation and the high cost of living.
Other financial institutions will issue commercial vouchers that can be used at the festival, disburse government funds to people without bank accounts and disburse grant money to financial training providers.
Singapore has been researching a wholesale CBDC since 2016, but this white paper was the first step in the MAS’ expansion into a retail CBDC, which began last year.
Reserve Bank of India To Reportedly Launch Digital Rupee Pilot In November
Now debuting a wholesale CBDC, the RBI plans to launch the digital rupee for the retail segment within a month in select locations.
The Reserve Bank of India (RBI) is on track to debut a central bank digital currency (CBDC) after announcing its digital rupee project in February.
The central bank of India will launch the digital rupee pilot for the wholesale segment on Nov. 1, the RBI announced on Oct. 31.
The pilot will involve nine locally operating banks, including the biggest Indian bank, the State Bank of India. According to a report by Reuters, other banks in the pilot will also include Bank of Baroda, Union Bank of India, HDFC Bank, ICICI Bank, Kotak Mahindra Bank, Yes Bank, IDFC First Bank and HSBC.
The main use case of India’s CBDC pilot will be to settle secondary market transactions in government securities. The digital rupee is expected to add more efficiency to the interbank market by reducing transaction costs of settlements, the RBI said.
Wholesale CBDCs are a type of CBDC primarily used by financial institutions like banks, involving interbank transactions such as securities settlement and cross-currency payments.
Unlike wholesale CBDCs, retail CBDCs are utilized by households and businesses, allowing them to make payments directly and store value via the digital version of a specific fiat currency, like the Indian rupee. According to the new report, the RBI plans to launch the digital rupee for the retail segment within a month in select locations.
India has been somewhat quick in launching a CBDC. Indian Finance Minister Nirmala Sitharaman announced the initial plans in February 2022, declaring that a digital rupee would be a “big boost” for India’s economy. The RBI then proposed a three-step graded approach for its rollout, aiming for little or no disruption to the traditional financial system.
While rushing the CBDC’s development, the Indian government has been taking measures to make crypto less attractive for local investors, including adopting a 30% tax on digital asset holdings and transfers in April.
As previously reported by Cointelegraph, the new crypto taxes had a negative impact on the country’s crypto ecosystem, forcing industry entrepreneurs to move to friendlier jurisdictions.
Skeptical Nigerians Aren’t Sold On Africa’s First Digital Currency
A look at adoption and acceptance of the eNaira one year after it was introduced.
About a year ago, Nigeria introduced a digital version of its official currency, the Naira.
The introduction of the so-called eNaira was partly a response to concerns that the rising popularity of crypto in the country was threatening the banking system.
There are a few countries experimenting with their own versions of digital money, including the Central African Republic, China, Jamaica, The Bahamas, and various islands in the Eastern Caribbean. Other countries, including the United States, are in the “studying” and “thinking deep thoughts about feasibility” phase of things.
So how’s it going for Nigeria and the eNaira? Bloomberg reporter Ruth Olurounbi and Bloomberg Nigeria Bureau Chief Anthony Osae-Brown weigh in.
Chinese Central Bank Exec Says Digital Yuan Will Offer ‘Controllable Anonymity’
China’s digital yuan is one of the earliest CBDCs whose pilot phase has expanded to include millions of users and billions in transaction volume.
Chinese central bank governor Yi Gang, in a recent speech at Hong Kong Fintech Week, talked about the progress of their national digital currency called the digital yuan. He outlined the progress and the adoption of the national digital currency.
During his speech, Yi noted that the digital yuan is being positioned as an alternative to cash in China, a country with a robust digital payment infrastructure. He added that “privacy protection is one of the top of the issue on our agenda.”
He went on to describe the two-layer payment system that would offer controllable anonymity to the users. At tier one, the central bank supplies digital yuan to the authorized operators and processes inter-institutional transaction information only.
At tier two, the authorized operators only collect the personal information necessary for their exchange and circulation services to the public.
Yi promised that data will be encrypted and stored and, personal sensitive information would be anonymized and not shared with third parties. Users can also make anonymous transactions up to a certain amount, and there will be specialized e-wallets to facilitate those transactions.
The central bank governor noted that anonymity is a two-faced sword and thus must be dealt with carefully, especially in the financial ream and explained:
“We recognize that anonymity and transparency are not black and white, and there are many nuances that need to be carefully weighed. In particular, we need to strike a precise balance between protecting individual privacy and combating illegal activities.”
Yi’s comments are in line with the central bank digital currency (CBDC) program head Mu Changchun, who in July reiterated a similar stance saying CBDC doesn’t have to be as anonymous as cash. Mu had said that a completely anonymous CBDC would interfere with the prevention of crimes like money laundering, terrorism financing, tax evasion and others.
China started its CBDC program as early as 2014 and, after years of development, launched the pilot in 2019. Since then, the program has expanded to millions of retail customers across the country. In 2022, the CBDC testing has expanded to some of the most populous provinces.
The extent of the CBDC trail can be estimated from the fact that the total digital yuan transaction volume crossed $14 billion by the third quarter of 2022.
Bank For International Settlements Will Test DeFi Implementation In Forex CBDC Markets
The centralized financial institution says the automated market making technology in DeFi can serve as a “basis for a new generation of financial infrastructure.”
According to a new announcement on Nov. 2, the Bank for International Settlements, or BIS — along with the central banks of France, Singapore and Switzerland — will embark on a new initiative dubbed “Project Mariana” in its exploration of blockchain technology. Project Mariana intends to use decentralized finance, or DeFi, protocols to automate foreign exchange markets and settlement.
Project Mariana explores using automated market makers for the cross-border exchange of hypothetical CHF, EUR and S$ wholesale CBDCs. It’s a #BISInnovationHub joint venture with the French, Swiss & Singapore #CentralBanks@banquedefrance @MAS_sg @SNB_BNS https://t.co/GsNLpXZlsD pic.twitter.com/2tMitZcNF2
— Bank for International Settlements (@BIS_org) November 2, 2022
This includes using DeFi protocols to stimulate the hypothetical exchange of cross-border transactions between the Swiss franc, euro and Singapore dollar wholesale central bank digital currencies, or CBDCs. The technologies involved in building Project Mariana include smart contracts and automated market maker protocols, or AMMs.
Researchers seek to combine pooled liquidity in AMMs with innovative algorithms to determine the prices of tokenized assets, potentially developing into a basis of exchanges for CBDCs.
As an organization created by central banks to regulate the international financial framework, BIS wrote that “AMM protocols could form the basis for a new generation of financial infrastructures facilitating the cross-border exchange of CBDCs.” Cecilia Skingsley, head of the innovation hub at BIS, added:
“This pioneering project pushes our CBDC research into innovative frontiers, incorporating some of the promising ideas of the DeFi ecosystem. Mariana also marks the first collaboration across Innovation Hub Centres; expect to see more in the future.”
BIS and the collaborating central banks have set a tentative date of mid-2023 for delivering a proof-of-concept. The financial institution was previously skeptical of digital assets due to their inherent price variance and lack of a unified regulatory framework.
Nevertheless, BIS has praised elements of distributed ledger networks, such as their technological prowess relative to fiat money. According to a recent report authored by BIS, 90% of central banks worldwide are currently researching the utility of CBDCs.
CBDCs Could Reduce FX Transaction Speeds To 10 Seconds, NY Fed Says
The New York Fed simulated foreign exchange transactions using a distributed ledger to test for improvements over the current system.
Foreign exchange transactions could drop from a two-day process to less than 10 seconds if central bank digital currencies (CBDC) were involved, according to an experiment conducted by the Federal Reserve Bank of New York.
Project Cedar, a research effort launched by the N.Y. Fed’s New York Innovation Center (NYIC), tested the speed of FX transactions using distributed ledgers, finding that in a simulated example, they could lower the speeds of transactions with multiple participants and observers. The project intended to research the benefits of wholesale CBDCs, according to a brief report published Friday.
Each participant operated its own version of the ledger, rather than having the participants act as nodes in a single distributed ledger, the report said. Nevertheless, the participants were able to settle both sides of transactions simultaneously, finding a massive speed boost compared to the current system.
While the report detailed some of the technical aspects of the test – it used an undisclosed permissioned blockchain network and was written in the Rust programming language – it did not provide many details about how the simulation was conducted or how they confirmed transaction settlements.
This first phase saw each participant run “homogenous” ledgers, but future tests will see participants running different networks to test for cross-chain compatibility.
The Federal Reserve has been grappling with the question of whether it can or should issue a CBDC for years. While the Biden administration has indicated that the Fed should do so if it’s in the “national interest,” and various Fed branches – including Boston’s – have been conducting research, Fed officials have indicated they’ll wait for Congress to authorize a digital dollar before moving forward. This week’s report said it’s not meant to push for a particular outcome.
In a speech discussing the latest research, Michelle Neal, the head of the markets group at the N.Y. Fed, said the central bank branch wanted to test the technology from its own perspective to see if it could address concerns about risk and scalability.
“This indicates that a modular ecosystem of ledgers has the potential for continued scalability, and that distributed ledger technology could enable settlement times well below the current industry standard of two days, with the added guarantee of atomic settlement,” she said.
Buying Bitcoin ‘Will Quickly Vanish’ When CBDCs Launch — Arthur Hayes
Looking to buy BTC to avoid the CBDC “horror story?” The best time was “yesterday,” the former BitMEX CEO said.
Bitcoin holders looking to avoid Central Bank Digital Currencies (CBDCs) may have gained a surprise ally — banks.
In his latest blog post titled “Pure Evil,” Arthur Hayes, ex-CEO of crypto derivatives platform BitMEX, argued that banks may limit the impact of the CBDC “horror story.”
Hayes: Bitcoiners and banks stand against CBDC ’dystopia’
CBDCs are currently in various stages of development worldwide.
Fans of financial sovereignty naturally fear and even despise them, as they imply total government control over everyone’s money and purchasing power — “a full-frontal assault on our ability to have sovereignty over honest transactions between ourselves,” said Hayes.
Among opponents of CBDCs are not only Bitcoiners, however. Sharing the cause will likely be the commercial banks they have sought to oust from power with BTC.
“I believe that the apathy of the majority will allow governments to easily take away our physical cash and replace it with CBDCs, ushering in a utopia (or dystopia) of financial surveillance,” the blog post explained. Hayes continued:
“But, we have an unlikely ally that I believe will impede the government’s ability to implement the most effective CBDC architecture for controlling the general populace — and that ally is the domestic commercial banks.”
In implementing a CBDC, a government could either make the central bank the only “node” in the digital network, or use commercial banks as nodes in a less radical overhaul of the financial system. These systems Hayes calls the “Direct Model” and “Wholesale Model,” respectively.
“Given that every country that has at least reached the ‘choosing a CBDC model’ stage has opted for the Wholesale Model, it’s clear that no central bank wants to bankrupt their domestic commercial banks,” he reasoned.
As such, to “placate” banks to a certain extent but still achieve benefits such as eradicating cash, governments may ultimately be kept in check by the kind of entities known for limiting crypto exchange transactions and banning hodlers’ accounts.
“For politicians who care more for power than profits, this is their chance to completely destroy the influence of Too Big to Fail banks — and yet, they seem to remain politically unable to do so,” Hayes added.
‘Capital Controls Are Coming’
The topic of CBDCs received extensive attention even beyond the crypto industry, as they represent a major shift in both money and politics.
In an interview with Cointelegraph last week, Richard Werner — development economist and professor at De Montfort University — described them as a “declaration of war.”
“In other words, the bank regulator is suddenly saying we’re going to compete against the banks now because the banks have no chance. You can’t compete against the regulator,” he said.
Hayes, meanwhile, flagged Bitcoin as a safe haven still available for those already opposed to any form of zero-cash economy — but not for long.
Buying BTC will become increasingly difficult, or perhaps outright impossible, once CBDCs are implemented.
“This window won’t last forever. Capital controls are coming, and when all money is digital and certain transactions are not allowed, the ability to purchase Bitcoin will quickly vanish,” he warned, adding:
“If any of this doom porn resonates with you and you don’t own at least a very small % of your liquid net worth in Bitcoin, the best day to have bought Bitcoin was yesterday.”
Bank of Korea Tested NFT Trading, Remittances With CBDC: Report
The central bank recently completed a 10-month-long experiment of a digital South Korean won.
The Bank of Korea (BoK) has developed and tested a program that facilitates cross-border remittances by linking different central bank digital currencies (CBDC) from other countries, local media outlet Yonhap News reported on Monday.
The central bank had recently completed a 10-month experiment into a digital South Korean won, Governor Chang Yong Rhee revealed in a September speech.
During the project, the bank also tested the use of its CBDC to purchase non-fungible tokens (NFT), according to the report.
Major economies such as the U.S., U.K. and European Union have been exploring the issuance of CBDCs, while China has already carried out several trials. South Korea began its CBDC trial last year and completed the first of two phases by January.
In his speech, Rhee said that some decisions about a digital won required “trade-offs.”
“We have realized that there is no such thing as perfect technology or CBDC designs that can satisfy all the various goals and expectations at the same time,” Rhee said.
For instance, the bank made a decision to “improve compliance at the sacrifice of privacy,” Rhee said.
BoK established a virtual money laundering and terrorism financing monitoring system and will facilitate data submission, Yonhap News reported.
The experiment found that a CBDC could process up to 2,000 transactions per second, Yonhap News reported. However, it also found that distributed ledger technology, which underlies crypto, does not yet have the scalability needed for a retail CBDC, Rhee said in his speech. So it may be better to use the standard centralized ledger database, he added.
In July, BoK announced it was working on “real world” tests of a CBDC with ten commercial banks.
CBDCs May Need Global Regulation, EU Commissioner Says
Paolo Gentiloni says a series of international agreements may be needed to stop state-backed digital currencies from infringing on countries’ sovereignty.
Central bank digital currencies (CBDCs) may require a network of international deals to stop state-backed money from infringing on other countries’ sovereignty, European Union Commissioner Paolo Gentiloni said on Monday.
The bloc of 27 nations is considering a digital version of the euro, but needs to resolve issues such as how a digital euro will work for cross-border payments.
“How do you avoid the risk of infringing the sovereignty of other jurisdictions through a digital currency … while developing a digital currency with global ambition, as the digital euro will be?” said Gentiloni, who is responsible for economic policy at the European Commission, the EU’s executive arm. Gentiloni was speaking at a conference on the digital euro organized by the Commission and the European Central Bank.
“This, of course, brings the possibility of specific agreements with other jurisdictions regulating this kind of dimension,” he added.
In October 2021, the Group of Seven major industrialized nations warned that countries that are developing digital versions of their fiat currency need to be wary about treading on other jurisdictions.
EU policymakers have also raised the risk that easy access to a digital euro from overseas could undermine the currency, much like the dollarization of states that adopt U.S. currency without the Federal Reserve’s permission.
The International Monetary Fund has also raised the possibility of an international CBDC platform that could ease cross-border payments but that is now beset by delays and costs.
Gentiloni’s remarks at a conference in Brussels drew an immediate response – including from the Bahamas, one of the few countries that has already rolled out its own CBDC, the sand dollar.
“It is critical that any cross-border initiative, taken in regards to the work on CBDCs, reflects an inclusive approach to the needs that will be expressed by the Bahamas and small countries in this arena,” John Rolle, governor of the Bahamas’ central bank, told the conference.
Some Central Banks Have Dropped Out Of The Digital Currency Race
There are at least four countries that have either scrapped or halted CBDC plans so far, and each central bank has its own reasoning for not launching one.
As countries around the world race to launch a central bank digital currency (CBDC), some jurisdictions have slowed down or dropped out of the race altogether.
While many observers were pushing a narrative of urgency around CBDCs, some countries have decided that launching a CBDC isn’t currently necessary, while others have tested CBDCs only to dismiss them.
Each country had its own reasons, with global central banks providing very different insights on why their CBDC-related project didn’t go well or didn’t need to launch in the first place.
Cointelegraph has picked up four countries that have either stopped or paused their CBDC or CBDC-like initiatives based on publicly available data.
Denmark is one of the top European countries in terms of digital payments, as its population relies on cash far less than other European nations.
The Nordic country was also one of the earliest countries to explore the possibility of issuing a CBDC, with the Danish central bank expressing interest in issuing a digital currency in 2016. The Danmarks Nationalbank then started working on digitizing the local fiat currency and the possible introduction of a Danish digital krone.
After only a year of research, the Danish central bank dismissed the idea of launching a CBDC, ruling that it would do little to improve the country’s financial infrastructure. The regulator argued that Denmark already had a “secure and effective” payments infrastructure in place, which provided instant payment options.
“It is not clear how retail CBDCs will create significant added value relative to the existing solutions in Denmark,” the Danmarks Nationalbank stated in a CBDC-related report in June 2022.
The central bank referred to associated costs and possible risks, also pointing out potential difficulties for the private sector. The bank still continues to monitor global CBDC development has not completely ruled out a CBDC in the future.
Japan is the third wealthiest economy after the United States and China, and also is the third largest pension market in the world.
The Japanese central bank — the Bank of Japan (BOJ) — released its initial report on CBDC development in October 2020 and subsequently started testing its digital currency proof-of-concept in early 2021, planning to finish the first pilot phase by March 2022.
However, in January, former BOJ official Hiromi Yamaoka advised against using the digital yen as part of the country’s monetary policy, citing risks to financial stability.
In July 2022, the bank issued a report in which it claimed it had no plan to issue a CBDC, the “strong preference for cash and high ratio of bank account holding in Japan.”
The regulator also emphasized that a CBDC, as a public good, “must complement and coexist” with private payment services in order for Japan to achieve secure and efficient payment and settlement systems.
“Nevertheless, the fact that CBDC is being seriously considered as a realistic future option in many countries must be taken seriously,” the report noted.
Ecuador’s central bank, Banco Central del Ecuador (BCE), officially announced its own electronic currency known as dinero electrónico (DE) back in 2014. Key drivers of the DE program were increasing financial inclusion and reducing the need for the central bank to hold and distribute large amounts of fiat currency.
As of February 2015, Ecuador managed to adopt DE as a functional means of payment, allowing qualified users to transfer money via a mobile app. The application specifically allowed citizens to open an account using a national identity number and then deposit or withdraw money via designated transaction centers.
While Ecuador’s DE is widely referred to as a CBDC, some industry observers have questioned whether it was really a CBDC because it was based on the United States dollar instead of a sovereign national fiat currency.
The Ecuadorian government cited the support of its dollar-based monetary system as one of the goals behind its DE platform after it started to accept U.S. dollars as legal tender in September 2000.
According to online reports, Ecuador’s DE operated from 2014 to 2018, amassing a total of 500,000 users at its peak out of a population of roughly 17 million people.
The project was eventually deactivated in March 2018, with the BCE reportedly citing legislation abolishing the central bank’s electronic money system. Passed in December 2021, the law stated that e-payment systems should be outsourced to private banks.
Years after dropping its central bank digital money initiative, Ecuador has apparently remained skeptical about the whole CBDC phenomenon. In August 2022, Andrés Arauz, the former general director at Ecuador’s central bank, warned eurozone policymakers that a digital euro could potentially disrupt not only privacy but also democracy.
For those who think that the Bahamas and China were the first countries in the world to roll out a CBDC, the Bank of Finland has some news.
In 2020, the central bank of Finland issued a report titled “Lessons learned from the world’s first CBDC,” providing a description of its Avant smart card system, which it created back in the 1990s. The Bank of Finland argued that Avant is not only the project that “can be considered the world’s first CBDC” but also was the “only one” that went into production at the time.
Following years of research, the Bank of Finland launched its Avant project in 1993. The project involved smart cards similar to that used in debit and credit cards today. According to various sources, Avant cards preceded the attempts to create current CBDCs.
“A key difference between Avant and the CBDC systems being designed today is that for modern CBDC systems cards would probably be an additional feature. In Avant, cards were the main component,” the Bank of Finland noted in the report.
The bank also suggested that the project essentially represented a “token-based retail CBDC,” based on the current CBDC terminology.
Avant became obsolete and was eventually discontinued in 2006 because it became more expensive than simple debit cards, according to the Bank of Finland. The Avant card was initially cost-free for consumers, but fees were later added, which naturally affected the demand for the card in a negative way, the bank noted.
In the meantime, debit cards were progressing, adding smart card technology and becoming less expensive for consumers.
Despite higher fees, the Avant card had some non-obvious benefits compared to debit cards. According to the Bank of Finland, Avant allowed consumers to pay anonymously as it offered a possibility to avoid creating or using a bank account at all.
After dropping its own CBDC-related project years ago, Finland appears to support a pan-European digital currency. In August 2022, Bank of Finland governor Olli Rehn promoted the adoption of a digital euro functioning in tandem with private fintech solutions to conduct cross-border payments in Europe.
The whole world is now keeping an eye on CBDCs and no country is ignoring the new financial phenomena — even those who have already set aside their own CBDC plans.
While it’s still to be seen how various CBDCs will actually play out, it’s also important to draw lessons from past experiences, with many central banks stressing the importance of coexistence between CBDCs and the private financial sector.
David Chaum Rolls Out Privacy-Protecting CBDC Technology
The “godfather of cryptocurrency” suggested a CBDC design for a pilot with the Swiss National Bank.
Will central bank digital currencies (CBDC) replace cash and bank transfers in the future? And will they be an ultimate tool for financial surveillance and control? Or is another, more benign, future possible?
David Chaum, creator of the Bitcoin predecessor eCash and, more recently, the elixxir cryptocurrency, believes the democratic world can have a version of CBDCs that protects privacy. He is working with the Swiss National Bank (SNB) on Project Tourbillon, designed for privacy-focused central bank money.
The project will be developed under the auspices of the Bank of International Settlements’ (BIS) Innovation Hub, the organization announced on Thursday. The project will add to the range of CBDC pilots already in the works by the BIS Innovation Hub, like the projects Helvetia and Mariana – both involving the SNB, too.
The technology underlying the Project Tourbillon will combine privacy preserving functions and quantum-resistant cryptography developed by Chaum, the BIS announcement says. The system will also be scalable as it will be “using an architecture that is compatible with, but not based on, distributed ledger technology,” the press release reads.
The concept, based on Chaum’s blind signature technique, has been outlined in a joint research paper by Chaum and Thomas Moser, alternate member of the SNB governing board.
According to Morten Bech, head of the BIS Innovation Hub Swiss Centre, the project allows to avoid trade-offs between cyber resilience, scalability and user privacy.
“Project Tourbillon will build and test a prototype that reconciles these trade-offs and pushes central banks’ technological frontier,” Bech said in the BIS announcement.
The prototype is slated to be completed by mid-2023.
Not Like China
According to Chaum, the SNB first approached him last year about his eCash technology and he took it as a chance to prove that a CBDC can be designed in a privacy-protecting fashion. Speaking with CoinDesk in an exclusive interview, he pointed out China as an example of omnipresent digital surveillance by the government.
China’s central bank has one of the world’s most advanced CBDC projects, with 100 billion yuan (US$13.9 billion) in transactions already completed.
The U.S. and Europe can do better, Chaum believes. He acknowledges that “CBDCs are a big deal” in the world at the moment and is well aware of the fact that many believe CBDCs will be “the end of privacy in money.”
“It’s incredibly ironic for me that something I’ve been working on 40 years ago has become the actual pivotal distinction between the East and West – privacy in payments,” Chaum said.
“It really becomes a choice: Are we going to have a kind of protection we are entitled to and that distinguishes us as a human rights-based democracy, or we basically are going to have the same thing as in China,” he added.
Chaum says the eCash 2.0 technology he created and described in the paper with SNB’s Moser, is a “superior payment system” with both privacy and anti-counterfeiting protection built into it.
He believes it’s important to show that a CBDC can actually preserve privacy so that no government can say it’s impossible and use it as an excuse to build something similar to the Chinese model.
In another scenario, a government might be willing to maintain privacy in developing its CBDC, but at some point that government can discover that criminals are using those privacy features to conceal illegal activities. That in turn can become a reason to abandon the idea of privacy altogether.
Chaum believes the technology he invented can prevent both scenarios: preventing anyone from tracing how people use their money and, at the same time, allowing the law enforcement to track criminal funds.
How this works in practice is not easy to unpack.
The eCash 2.0 model has two tiers when it comes to issuing central bank digital money: a central bank does it via commercial banks, which onboard users.
To get some CBDC on their digital wallets, users need to request it from banks with which they already have accounts. Banks perform know your customer diligence and send a specific authentication code to the central bank so that money can be issued.
Cryptographic mechanics of eCash 2.0 allow central banks to issue those coins to a user without knowing which user exactly owns specific coins, says Mario Yaksetig, the project’s cryptographer. Neither knows the commercial bank that onboarded the user, although both the central and commercial banks know how much money in CBDC a known user received from the system.
A central bank holds a blockchain-based ledger of all the valid coin identifiers, Yaksetig said, so no one can forge new coins, but transactions between wallets are not recorded on a blockchain. “There is no record of transactions whatsoever,” Yaksetig told CoinDesk.
However, users can voluntarily give up the privacy of their coins if they want law enforcement to trace stolen funds. For this, a user would need to reveal his unique cryptographic key to, say, the police, and then the police can see when these stolen coins are being spent at a restaurant, a store or other kind of merchant, because merchants, unlike individual users, would be known to the system.
So the police would be able to find where that merchant is, go there and arrest the thieves, Chaum said.
Alternatively, instead of going to the police, a robbed or scammed user might request reissuance of his money using his unique key, Chaum said, so he can spend those coins before the criminals do.
Asked if a government building a CBDC can use what he created to make a system that can be surveilled and censored, making crypto’s worst fears about CBDCs come true, Chaum believes his technology is ill-suited for that.
“There is no way to use it for evil because all it does is protect privacy,” he said. You can opt to use decentralized cryptocurrencies if you wish, but “if you choose to use government-issued money, the government should not be able to see how you spend it,” he added.
The Clearing House Stands Up For Bank Rights, Opposes CBDC In Comments For US Treasury
The payments operator responded to a Treasury inquiry related to the presidential executive order with an appeal to keep bank interests in sight when designing digital assets.
United States payment systems operator The Clearing House has released its response to a Treasury Department request for comment on “digital-asset-related illicit finance and national security risks as well as the publicly released action plan to mitigate the risks.”
The Clearing House found significant security serious risks associated with digital assets but was concerned that banks should have the same opportunities to participate in the market as nonbanks.
The Treasury Department issued its request for comments on Sept. 20 as part of its ongoing response to President Joe Biden’s Executive Order 14067 from March 9, 2022, “Ensuring Responsible Development of Digital Assets.”
In its 22-page response letter, The Clearing House addresses some of the questions posed by the Treasury, and it highlights five main points that it sees as ways to mitigate national security and illicit finance risks posed by privately issued non-bank digital assets (many cryptocurrencies and stablecoins) and U.S. government tokens (central bank digital currencies, or CBDCs). The letter, dated Nov. 3, was made public on Nov. 10.
— The Clearing House (@TCHtweets) October 28, 2022
The Clearing House called for a federal prudential framework with standards for digital assets service providers that are equivalent to those for depository financial institutions engaged in functionally similar activities. Furthermore, banks “should be no less able to engage in digital-asset-related activities than nonbanks.”
The Company Minces No Words On CBDC, Stating:
“The risks associated with the possible issuance of a CBDC in the U.S. outweigh its potential benefits and, therefore, it should be determined that a CBDC is not in the national interest.”
In the event the United States decides to adopt a CBDC, “the foundational requirements in place to prevent criminal and illicit use of commercial bank money must be applied to a U.S. CBDC in such a way that criminal actors are not incentivized to use CBDC,” the company writes.
The Clearing House Sees Limited Appeal For A U.S. CBDC, In Any Case:
“Intermediaries must have a clear business case for assuming the customer identification/identity verification, AML/CFT screening, and sanctions compliance obligations, particularly as the risks associated with such assumption may, without fees, be unsupported by the low margins typically associated with the provision of custodial services.”
The Clearing House is owned by 23 banks and payment companies. It was founded in 1853.
New York Fed Collaborates With Singapore MAS To Explore CBDCs
A joint effort is aimed at assessing the possible use of wholesale central bank digital currencies in cross-border transactions.
The New York Innovation Center (NYIC) of the Federal Reserve Bank of New York and the Monetary Authority of Singapore (MAS) will launch a joint experiment with wholesale central bank digital currencies (wCBDCs). Regulators are keen to test the wCBDCs potential for cross-border wholesale payments.
On Nov. 11, the MAS announced the launch of Project Cedar Phase II x Ubin+. In its framework, NYIC and MAS will leverage wCBDCs as a settlement asset in cross-border cross-currency transactions. The aim is to assess the possible ability of wCBDC to reduce settlement risk.
Leong Sing Chiong, deputy managing director at MAS, highlighted the concept of “interoperability,” which lies at the core of the experiment:
“The project takes a practical approach and designs for any future wholesale CBDC to be interoperable across networks, while maintaining each network’s autonomy.”
As the statement goes, Project Cedar Phase II x Ubin+ will not advance any specific policy outcome, nor does it signals any imminent decisions on issuing a central bank digital currency (CBDC) by the Federal Reserve. A report with the project’s findings should be released in 2023.
On Nov. 4, NYIC released a report on the first phase of Project Cedar. During the first phase, spot transactions were carried out between different currencies on different ledgers through a permissioned blockchain network with an unspent transaction data output model.
Project Cedar complements the Boston Fed’s work on a retail CBDC in Project Hamilton, being conducted in conjunction with the Massachusetts Institute of Technology’s Digital Currency Initiative. Ubin+ is MAS’ international initiative to improve efficiency and reduce the risks of cross-border foreign exchange settlement by advancing cross-border connectivity and interoperability of wholesale digital currencies.
The Fed still has no plans to issue a CBDC, NY Fed Executive Vice President and Head of Markets Michelle Neal said at a presentation in Singapore, but it has investigated foreign exchange spot settlement “from the perspective of the Federal Reserve.”
Big Banks, NY Fed Start To Test Digital Tokens For ‘Wholesale’ Transactions
Citigroup, HSBC, BNY Mellon, Wells Fargo and Mastercard, are among the financial giants taking part.
A group of major banks and the Federal Reserve Bank of New York have started to test the use of digital tokens representing digital dollars to improve how central bank money is settled between institutions.
Citigroup (C), HSBC (HSBC), BNY Mellon (BK) and Wells Fargo (WFC) are among the banks taking part, along with payments giant Mastercard (MA), the New York Fed announced Tuesday.
The 12-week proof-of-concept pilot program will explore the use of a platform known as the regulated liability network, or RLN, whereby banks issue tokens that represent customers’ deposits that are settled on a central bank reserve on a shared distributed ledger.
The project will be conducted in a test environment using only simulated data.
While many central banks are developing or considering developing retail central bank digital currencies, which are forms of digital money for use by the public, many are also testing wholesale CBDCs, which are fiat money in token form for exchange among financial institutions to improve existing clearing and settlement processes.
NY Fed Launches 12-Week CBDC Pilot Program With Major Banks
Banking giants including BNY Mellon, Citi, U.S. Bank and Wells Fargo will be issuing tokens and settling transactions through simulated central bank reserves as part of the pilot.
The Federal Reserve Bank of New York’s Innovation Center, or NYIC, announced that it would be launching a 12-week proof-of-concept pilot for a central bank digital currency, or CBDC.
In a Nov. 15 announcement, the New York Fed said the program would explore the feasibility of an “interoperable network of central bank wholesale digital money and commercial bank digital money operating on a shared multi-entity distributed ledger” on a regulated liability network.
Banking giants including BNY Mellon, Citi, HSBC, Mastercard, PNC Bank, TD Bank, Truist, U.S. Bank and Wells Fargo will be participating in the pilot by issuing tokens and settling transactions through simulated central bank reserves.
“The NYIC looks forward to collaborating with members of the banking community to advance research on asset tokenization and the future of financial market infrastructures in the U.S. as money and banking evolve,” said NYIC Director Per von Zelowitz.
The proof-of-concept project will test the “technical feasibility, legal viability, and business applicability” of distributed ledger technology, as well as simulate tokens and explore regulatory frameworks. The NY Fed said the project could “potentially be extended to multi-currency operations and regulated stablecoins.”
The launch of the NYIC pilot project followed the center releasing research on its wholesale central bank digital currency program on Nov. 4. The first phase of the CBDC trial, dubbed Project Cedar, tested foreign exchange spot trades to determine whether a blockchain solution could improve “speed, cost, and access to cross-border wholesale payments.”
Federal regulators in the United States have not reached any consensus on whether to launch a digital dollar in the country, but agencies and those in the private sector have been exploring the possibility.
Following U.S. President Joe Biden issuing an executive order aimed at establishing a framework on digital assets, some lawmakers questioned what Congress’ role might be in passing legislation in support of a CBDC and how a digital dollar might curtail similar innovations from the private sector.
Fed Paper Looks At Theoretical Role Of Remuneration, Convenience In CBDC Design
The discussion paper reviews the literature on the impact of CBDCs in large, developed economies and draws some conclusions and specific design elements.
The importance of remuneration in the design of a central bank digital currency (CBDC) was emphasized in a paper released by the United States Federal Reserve Board on Nov. 17. The paper, part of the Fed’s Finance and Economics Discussion Series, reviews the theoretical literature on CBDCs in large, developed economies, with a particular view to the United States.
It looks at the risks and benefits to the banking system of introducing a CBDC, with a particular focus on the role of CBDC design in the implementation of monetary policy and remuneration — that is, payment of interest — as a critical design feature.
A CBDC could help control bank disintermediation resulting from its introduction, the authors find, and it can help in the management of the Fed’s balance sheet by making the holding of CBDCs more or less attractive relative to bonds.
The authors conclude that “Remuneration is arguably the key design feature that any central bank would want to contemplate.” They go on to say:
“A CBDC that pays no interest is consigned to the role of a medium of exchange; its value would be determined almost entirely by the convenience it would render. […] A remunerated CBDC, on the other hand, would be more attractive as a store of value, and its rate of remuneration could serve as an additional policy tool.”
Interest can be proportional, expressed as a percentage or tiered, with the rate rising or falling nonlinearly as a policy tool, such as relative to the size of the holding.
The paper also considered convenience as a quality of a CBDC that can be manipulated for policy purposes:
“If a CBDC pays no interest, its use as a store of value is circumscribed. […] In such circumstances, CBDC is much like cash, and its usage would be determined by how much convenience it provides, relative to its money-like rivals.”
The Reserve Bank Of India To Launch A Retail CBDC Pilot In December
The digital rupee is intended as a supplement to the current payment system and not its replacement.
Having tested the wholesale usage of its central bank digital currency (CBDC), the Reserve Bank of India (RBI) is preparing to conduct the retail pilot of the “digital rupee.” The pilot should launch within a month.
According to the Economic Times of India, the RBI is in the final stage of preparing the rollout of the retail digital rupee pilot. Among the participants are the State Bank of India, Bank of Baroda, ICICI Bank, Union Bank of India, HDFC Bank, Kotak Mahindra Bank, Yes Bank and IDFC First Bank. Reportedly, at some point, the pilot is going to include all the commercial banks in the country.
Each bank participating in the trial will test the CBDC among 10,000 to 50,000 users. To integrate the new payment option, the banks will collaborate with PayNearby and Bankit platforms. The CBDC infrastructure will be held by the National Payments Corporation of India (NPCI). As the anonymous source specified to Indian journalists:
“The e-rupee will be stored in a wallet, the denominations will be available as per the customer’s request, just like you request cash from an ATM. Banks are launching this only in select cities.”
Both customers and merchants will have to download the special wallets for the CBDC, although later the RBI plans to fully integrate it with existing digital banking services. Reportedly, the digital rupee is intended as a supplement to the current payment system and not its replacement.
The wholesale segment pilot for the digital rupee was launched by RBI on Nov. 1. Its main use case has been the settlement of secondary market transactions in government securities. However, no information on the successful ending of the wholesale pilot is available at the time of writing.
Bank Of Japan To Trial Digital Yen With Three Megabanks
The Japanese central bank plans to make a decision on whether to issue a digital currency by 2026.
Despite Japan’s uncertainty on whether to issue a central bank digital currency (CBDC), the Bank of Japan (BoJ) continues experimenting with a potential digital yen.
The Japanese central bank has started a collaboration with three megabanks and regional banks to conduct a CBDC issuance pilot, the local news agency Nikkei reported on Nov. 23.
The pilot aims to provide demo experiments for the issuance of Japan’s national digital currency, the digital yen, starting in spring 2023.
As part of the trial, the BoJ is expected to cooperate with major private banks and other organizations to detect and solve any issues related to customer deposits and withdrawals on bank accounts.
According to the report, the pilot will involve testing the offline functionality of Japan’s possible CBDC, targeting payments without the internet.
Japan’s central bank plans to proceed with its CBDC experiment for about two years and make a decision on whether to issue a digital currency by 2026, the report notes.
The news comes amid countries around the globe increasingly launching CBDC research and development initiatives, with countries like China leading the global CBDC race.
As Cointelegraph reported on Nov. 22, the Reserve Bank of India is preparing to start a retail pilot of the digital rupee in collaboration with major local banks including the State Bank of India in December.
In mid-November, the Federal Reserve Bank of New York’s Innovation Center announced the launch of a 12-week proof-of-concept CBDC pilot in partnership with banking giants like BNY Mellon, Citi, HSBC and others.
While the majority of the world has been rushing to launch a CBDC, some countries like Denmark have dropped out of the digital currency race.
Among reasons for dropping their CBDC or CBDC-related projects, the central banks listed potential difficulties for the private sector, questionable value and benefits and other issues. Still, no central bank has ruled out the possibility of launching a CBDC completely.
BIS Report Finds Uneven Progress, Differing Motivations In African CBDC Adoption
A survey of the continent’s central banks shows optimism about greater efficiency and inclusion, but several drawbacks remain; Nigeria already has an operational retail CBDC.
Mobile money has been a strong competitor to central bank digital currency (CBDC) in Africa, but many of the continent’s central bankers have greater faith in CBDC, according to a Bank for International Settlements (BIS) report published Nov. 24.
African central bankers also saw greater utility in CBDC for implementing monetary policy than bankers in other parts of the world, according to the BIS.
Nineteen African central banks responded to the survey that served as a basis for the report, and all of them stated that they were actively interested in CBDC.
Only Nigeria has issued a retail CBDC, the eNaira, meant for public use, while Ghana has a retail CBDC project in the pilot stage, and South Africa is currently running a project for a wholesale CBDC, meant for institutional use.
A new survey with 19 African central banks shows that the main concern regarding #CBDCs is cybersecurity, even more than elsewhere. High operational burden for the central bank is also a bigger concern than in other regions https://t.co/FzkCq5POOD pic.twitter.com/XqYHjRwyRv
— Bank for International Settlements (@BIS_org) November 24, 2022
The provision of cash was listed by African central bankers as a major motivation for the introduction of a CBDC for 48% of respondents. A CBDC would save money on the printing, transportation and storage of banknotes and coins, they said.
Financial inclusion was mentioned by all respondents. Less than half the adult African population was banked in 2021.
Sub-Saharan Africa accounts for two-thirds of the world’s money transfers by volume and more than half of all users. The entry of CBDC into this field could improve competition and lower costs, the report notes.
A CBDC would “support new digital technologies and their integration with the broader economy.”
Issuing And Operating A CBDC Is A Daunting Task:
“Here African central banks highlight aspects very similar to other EMEs [emerging market economies …]: network resilience, the cost, availability and combinability of technologies, and their scalability and functionalities. The operational cost of such a complex system is high.”
That was combined with cybersecurity concerns and the risk of low adoption in the minds of several of the central bankers.
Bank disintermediation also ranked among the concerns, although bankers expected CBDCs to help implement monetary policy. The cost of remittances was a big concern for design.
France, Luxembourg Test CBDC For 100M Euro Bond Issue
The Venus Initiative is the latest attempt to use digital representations of money for financial-market settlements.
France and Luxembourg have used an experimental central bank digital currency (CBDC) to settle a bond worth 100 million euros (US$104 million), the latest in a series of trials in tokenized financial markets.
The Venus Initiative “shows how digital assets can be issued, distributed and settled within the eurozone, in a single day” and “confirms that a well-designed CBDC can play a critical role in the development of a safe tokenised financial asset space in Europe,” Nathalie Aufauvre, general director of financial stability and operations at Banc de France, the French central bank, said in a statement.
The initiative also involved Goldman Sachs, Santander and Societe Generale as well as the publicly funded European Investment Bank.
The trial is the latest in a series of CBDC tests by the French central bank to manage liquidity in decentralized finance and settle cross-border transactions. The European Union has recently legislated to test out blockchain-based securities trading.
National Bank of Ukraine Releases Draft Concept For Digital Hryvnia
One of the design options for the Ukrainian CBDC describes the e-hryvnia available for usage in crypto exchange operations.
The National Bank of Ukraine (NBU) has introduced a draft concept for its central bank digital currency (CBDC) candidate digital hryvnia, or e-hryvnia.
Ukraine’s central bank on Nov. 28 released a statement on the concept of e-hryvnia, which aims to perform all the functions of money by supplementing cash and non-cash forms of the hryvnia as its key purpose.
The NBU said it has presented the e-hryvnia concept and continues developing the CBDC project with participants of the virtual assets market, payment firms and state bodies.
According to the announcement, the central bank is currently considering and developing three possible CBDC options, depending on design and main characteristics.
The first option describes the e-hryvnia for retail non-cash payments with the possible functionality of “programmed” money through smart contracts. A retail e-hryvnia would enable the implementation of targeted social payments and the reduction of government expenditures on administration, the NBU said.
The second CBDC option envisions the e-hryvnia available for usage in operations related to cryptocurrency exchange, issuance and other virtual asset operations.
“The e-hryvnia can become one of the key elements of quality infrastructure development for the virtual assets market in Ukraine,” the announcement notes.
The third option includes the e-hryvnia to enable cross-border payments in order to provide faster, cheaper and more transparent global transactions.
“The development and implementation of the e-hryvnia can be the next step in the evolution of the payment infrastructure of Ukraine,” Oleksii Shaban, director of NBU payment systems and innovative development department, said in the statement.
He added that a Ukrainian CBDC could have a positive impact on ensuring economic security and strengthening the monetary sovereignty of the state, as well as e sustainable economic growth.
According to the announcement, the Ukrainian Intellectual Property Institute registered the trademark “e-hryvnia” for the NBU in October 2022.
As previously reported, the NBU has been actively studying the possibility of issuing a CBDC in recent years, hiring blockchain developers and cooperating with major industry projects like the Stellar Development Foundation.
According to the regulator, the NBU launched a pilot project to issue the e-hryvnia for blockchain-based retail payments back in 2018.
India To Test Retail Version of Digital Rupee In Thursday Launch
* e-Rupee Will Come In The Same Denomination As Notes And Coins
* Four Banks To Participate Initially; Four More To Join Later
India’s central bank will launch the retail version of its digital currency on a test basis starting Thursday, a month after allowing some banks to use it for settling secondary-market transactions in government securities.
Four banks will initially run the digital currency pilot, with another four joining at a later stage, the Reserve Bank of India said in a Tuesday statement.
A select group of customers and merchants will take part in the pilot and use the e-rupee as a replacement for hard cash. Digital currency would be issued “in the same denominations that paper currency and coins are currently issued,” the RBI said.
India is joining countries including China in pushing forward with digital versions of their currencies, as it seeks to eliminate private cryptocurrencies that pose risks to financial stability.
The e-rupee would offer “features of physical cash like trust, safety and settlement finality,” the central bank said, adding that it will not earn any interest and can be converted to other forms of money, including deposits with banks.
Banks will distribute the e-rupee through digital wallets on mobile phones. Both person-to-person transactions and payments to merchants are possible. The latter will involve scanning a QR code, the central bank said.
Banks participating in the pilot are the State Bank of India, ICICI Bank, Yes Bank and IDFC First Bank in four cities. “The scope of pilot may be expanded gradually to include more banks, users and locations as needed,” the RBI said.
Digital Dollar Could Streamline Settlements, DTCC Says
The Depository Trust & Clearing Corp. is testing the use of a digital dollar in wholesale transactions, alongside major banks.
A digital dollar could streamline settlements to make financial markets more efficient, according to a report published Wednesday by the Depository Trust & Clearing Corp., the financial-infrastructure giant that has a hand in virtually every trade on the more than $40 trillion U.S. stock market.
DTCC said its report is the first-ever private-sector probe of what a central bank digital currency (CBDC) would mean for post-trade financial markets – the infrastructure that processes securities deals after a price has been agreed upon.
“This new initiative represents the essence of innovation … we should expect digital transformation to reshape markets and market structure in the coming years,” DTCC Managing Director Jennifer Peve said in a statement, referring to a program carried out with the nonprofit Digital Dollar Project and major banks such as Citigroup (C), Bank of America (BAC) and State Street (STT) to test the use of a digital dollar in financial markets.
“A U.S. CBDC should be carefully explored in consultation with key stakeholders across the public and private sectors,” Peve said.
A CBDC could help speed up settlement, in part by automating reports the DTCC must send to the Federal Reserve, the DTCC said. It cited evidence that distributed-ledger technology could save billions of dollars per year by simplifying how trades are confirmed and reconciled.
In August, DTCC announced it was processing as many as 160,000 trades per day on a blockchain via Project Ion. The Bank for International Settlements has said as many as nine in 10 of the world’s central banks are looking at a CBDC, although Federal Reserve Chairman Jerome Powell has suggested he is in no rush to issue a digital dollar.
Central Bank Plans To Make CBDC ‘Only Legal Digital Tender’ In Indonesia, Says Gov
“Collaboration and synergy on national and international level is critical to the development of Digital Rupiah,” said Perry Warjiyo.
Bank of Indonesia Governor Perry Warjiyo has announced developments in its plans to launch a central bank digital currency, or CBDC, for “various digital economic and financial transactions.”
In a Dec. 5 speech at the central bank’s annual meeting, Warjiyo said the bank planned to release details on the conceptual design of a digital rupiah — a currency the equivalent of the country’s fiat — and open the matter to public comment.
According to the governor, the Bank of Indonesia intended for the digital rupiah to be “integrated, interconnected, and interoperable” with other countries’ CBDCs following discussions with central bank officials.
The CBDC initiative, called Project Garuda, will start with the launch of a wholesale digital rupiah for “use cases of issuance, redemption, and interbank fund transfer” followed by “monetary operations and financial market development.” The project’s white paper states that the third phase will deal with end-to-end transactions between wholesale and retail digital rupiah users.
“Collaboration and synergy on national and international level is critical to the development of Digital Rupiah,” said Warjiyo.
Indonesia imposed a blanket ban on crypto payments starting in 2017, while trading in digital assets has largely remained legal in the country as regulated under the Commodity Futures Trading Regulatory Agency.
Warjiyo first announced plans for Indonesia to introduce a CBDC in May 2021 but did not provide a specific timeline for the digital currency’s release.
The Impact of CBDCs On Stablecoins With Bitget’s Gracy Chen
While CBDCs will cater to local demands, cooperation between countries could facilitate and support the widespread adoption of readily-available stablecoins.
For over 14 years, central banks worldwide have seen blockchain technology deliver highly secure, immutable, verifiable and transparent financial ecosystems, starting with the Bitcoin network.
Central bank digital currencies (CBDCs) stood out as one of the ways for fiat currency to harness a part of what cryptocurrencies achieve today.
To not only keep up with rising inflation and cut down on operational costs but also to counter money laundering and related concerns, 98 of 195 countries — representing over 95% of global GDP — have either launched or are researching and developing their own versions of CBDC.
With CBDCs joining the race to dominate the future of finance, the relevance of the stablecoin ecosystem — cryptocurrencies backed 1:1 with fiat, such as the United States dollar — comes into question.
As the managing director of crypto exchange Bitget, Gracy Chen got a front-row seat to the global disruption of cryptocurrencies. In an interview with Cointelegraph, Chen shared her thoughts on the future of stablecoins as CBDCs make their entry into the mainstream.
Cointelegraph: How relevant will stablecoins be (in retail and wholesale markets) once CBDCs are circulating?
Gracy Chen: According to the definition of the Bank for International Settlements (BIS), CBDCs can be divided into two categories according to users and purposes:
Wholesale CBDC: It is mainly issued to commercial banks and other large financial institutions for large-value payment settlement.
The wholesale CBDC with improved liquidation efficiency through blockchain technology is under a relatively mature regulatory system and can be supervised more easily with large amounts of funds. But, it also has disadvantages such as limited case uses (only suitable for participants like large companies).
Retail CBDC: It is mainly issued to individuals and companies and is widely used in small retail transactions as a cash supplement. This kind of CBDC helps enhance social welfare and improve payment convenience along with rich use cases. Nonetheless, supervision of it is difficult and intricate. Meanwhile, the high demand for transactions per second poses a challenge to the computing power of blockchain technology.
Overall, retail and wholesale CBDCs are complementary to each other. The central banks of various countries have different needs for CBDCs at different stages of their own development. Therefore, the strategies and means of developing CBDCs vary based on the local market situation. According to the data survey of BIS, among the 66 central banks that participated in the survey, 15% of them are working on the wholesale CBDC, 32% are studying retail CBDC and the remaining ones are embracing both.
Stablecoins and CBDCs may coexist in some way in the future, depending on how restricted the regulations would be on stablecoins and the adoption rate of CBDCs.
CT: What impact does the recent USDT price fluctuation have on the stablecoin ecosystem?
GC: Basically, Tether fluctuates once in a while, mainly due to the concern about the opacity of USDT’s collateral (not 100% backed by fiat USD) and FUD sentiment caused by scandals and collapses in the industry.
Thanks to the suspicion and risks of USDT’s opacity, USD Coin has exploded rapidly since 2021, and its market share has increased from 20% to 30.5%. However, due to factors such as the long-arm jurisdiction of the United States, users also have certain concerns about USDC.
Native overcollateralized stablecoins, such as Dai the upcoming Curve DAO Token USD (crvUSD) and Aave’s GHO (GHO) are all representatives with blockchain decentralization ethos and may also have the potential to become mainstream stablecoins in the future.
CT: How much control should entrepreneurs have over their crypto ecosystems?
GC: To some extent, it is good that influential and insightful entrepreneurs have more control over their crypto ecosystems in the early stages, as excellent leadership will help the development of the company and its ecosystem. But in the aspect of the users’ assets that are stored on the platform, it is necessary to establish strict rules for internal risk control, asset classification and custody isolation, and private key wallet multi-signature management policies to ensure the user’s asset security and transparency.
CT: Amid geopolitical tensions, some governments have chosen to use their own currencies for cross-border payments. Is this a trend that will continue? Will this sentiment translate to the general public? How will it impact the stablecoin ecosystem, if at all?
GC: Most of CBDCs are operated in a centralized manner, along with the characteristics of controllable anonymity and privacy protection. The stablecoins under this kind of system still rely on the supervision system from where the CBDC is located, and there is no fundamental change or effect to the reserve proof of the encryption system.
Some CBDCs with higher decentralization and interoperability will have higher compatibility for different encryption ecology, and stablecoins under this type of system will be more open and transparent. An example is Project mBridge, a cross-border payments project that was carried out by Bank for International Settlements and four central banks this year through a distributed ledger technology platform. The pilot involved the BIS Innovation Hub Hong Kong Centre, the Hong Kong Monetary Authority, the Bank of Thailand, the Digital Currency Institute of the People’s Bank of China and the Central Bank of the United Arab Emirates.
CT: What are your thoughts on CBDC-backed stablecoins? Will it aid proof-of-reserve initiatives for crypto ecosystems?
GC: CBDCs may weaken the power of traditional banks, same effects from the stablecoins and the crypto ecosystem as well. In my opinion, cooperation with more countries and more mainstream national regulatory policies will facilitate and support the widespread adoption of stablecoins.
CT: What are some of the main characteristics you’d like to see in CBDCs?
GC: I want to see more CBDCs with a certain number of nodes, which means their information transmission does not completely depend on a certain institution (such as the central bank). I also want to see some CBDCs that have good interoperability in technology. All these things are good characteristics that would make CBDC more compatible with the blockchain ecosystem.
While CBDCs are not considered direct competition to cryptocurrencies, they inherit numerous qualities from crypto that help eradicate problems within the existing fiat ecosystem. Moreover, the backing of central banks provides investors with a sense of security when compared to trusting entrepreneurs, given the track record most recently set by FTX CEO Sam Bankman-Fried.
Spain’s Central Bank Opens Call For Proposals For Wholesale CBDC Project
The proposal period will be open until Jan. 31 for financial institutions and tech providers.
The Bank of Spain plans to start a wholesale central bank digital currency (CBDC) project, and on Monday, it asked financial institutions and tech providers to submit proposals for the initiative by Jan. 31.
The program seeks to simulate the use of a CBDC in wholesale transactions, the bank said in an official statement. Wholesale transactions are those that involve the transfer of funds between banks and financial institutions.
The bank added that the program for a wholesale CBDC isn’t related to research the European Union is doing on a retail digital euro. Separately, in September, France’s central bank announced two projects to assess a possible wholesale CBDC.
Report Outlines Reasons Why Stakeholders Are Against CBDC
The American Banking Banking Association highlighted that a CBDC issued by the U.S. Federal Reserve lacks “compelling use cases.”
While some countries like Nigeria are aggressively pushing the use of central bank digital currencies (CBDCs), a new report summarized why a number of private stakeholders are against the idea of a CBDC.
The report dubbed “The State of CBDCs in 2022,” published by blockchain insights firm Blockdata, dove into the most significant CBDC developments within the past year. It also pinpointed some of the key reasons why some private companies are against CBDCs.
Citing stablecoin issuer Circle’s stance on CBDCs, the report highlighted that digital currency issuance may be better if left to the private sector and were left to innovate with regulatory approvals.
Furthermore, the American Banking Association’s (ABA) stance on CBDCs was also cited in the report. According to the ABA, a CBDC issued by the United States Federal Reserve lacks “compelling use cases” and would rewire the banking system.
In addition, the ABA highlighted that there will be a significant fundamental change in the responsibilities of the Fed if it issued a CBDC and urged that the issuance of digital currencies be left with the private sector.
Apart from these, the report also outlined other concerns by private stakeholders. According to the report, stakeholders are also concerned about anonymity and privacy, interoperability, scalability, technological structure and balance between design and central bank policies.
Meanwhile, the Indonesian government recently said that its central bank plans to make its CBDC the only legal tender in the country. During a speech at the central bank’s annual meeting, Bank of Indonesia Governor Perry Warjiyo highlighted new developments in its digital rupiah project and said that it will be integrated with other countries’ CBDCs.
On Dec. 5, Pakistan launched new laws to speed up the release of its CBDC. The State Bank of Pakistan signed laws for Electronic Money Institutions with the help of the World Bank. The country aims to launch its own CBDC by 2025.
Nigeria Bans ATM Cash Withdrawals Over $225 A Week To Force Use Of CBDC
The limits set by the Central Bank of Nigeria are part of a broader push to encourage digital financial transactions.
Nigeria has drastically reduced the amount of cash individuals and businesses can withdraw as it attempts to push its “cash-less Nigeria” policy and increase the use of the eNaira — Nigeria’s central bank digital currency (CBDC).
The Central Bank of Nigeria issued the directive to financial businesses in a Dec. 6 circular, noting that individuals and businesses would now be limited to withdrawing $45 (20,000 Nigerian nairas) per day and $225 (100,000 nairas) per week from ATMs.
Individuals and businesses will also be limited to withdrawing $225 (100,000 nairas) and $1,125 (500,000 nairas), respectively, at banks per week, with individuals hit with a 5% fee and businesses with a 10% fee for amounts above those limits.
The maximum cash withdrawal via point-of-sale terminals is also capped at $45 (20,000 nairas) per day. Announcing the changes, the director of banking supervision Haruna Mustafa noted:
“Customers should be encouraged to use alternative channels (Internet banking, mobile banking apps, USSD, cards/POS, eNaira, etc.) to conduct their banking transactions.”
The limits are cumulative limits for each withdrawal, so an individual withdrawing $45 from an ATM who then tries to withdraw cash from a bank on the same day would be hit with the 5% service fee.
The previous limits on daily cash withdrawals prior to the announcement were $338 (150,000 nairas) for individuals and $1,128 (500,000 nairas) for businesses.
Adoption rates for eNaira have been low since its launch on Oct. 25, 2021. As reported by Cointelegraph on Oct. 26, the Central Bank of Nigeria has struggled to convince its citizens to use the CBDC, with less than 0.5% of the population reported having used the eNaira as of Oct. 25, a year from its launch.
Nigeria established its “cash-less” policy in 2012, suggesting a shift away from physical cash would make its payment system more efficient, reduce the cost of banking services and improve the effectiveness of its monetary policy.
On Oct. 26, the Governor of Nigeria’s central bank, Godwin Emefiele, noted that 85% of all Naira in circulation was held outside of banks and, as a result, it would be reissuing new banknotes in an effort to drive the shift toward digital payments.
According to a CBDC tracker from the American think tank Atlantic Council Nigeria is one of 11 countries to have fully deployed a CBDC, 15 other countries have launched pilot programs with India set to join the ranks later this month.
Some Central Banks Reportedly Looking To Issue A CBDC Within 10 Years
Generally, 35% of central banks were more inclined to issue a CBDC despite recent events in crypto, the Official Monetary and Financial Institutions Forum said in a report surveying 18 entities.
Crypto is in the depths of a winter recently spurred by bankruptcy filings from some of the most prominent companies, including exchange FTX and crypto lender Celsius Network but these market conditions have only convinced countries to develop central bank digital currencies (CBDC), and no later than within 10 years, according to a Thursday report by the Official Monetary and Financial Institutions Forum (OMFIF).
A CBDC is a digital currency issued by a central bank. Two-thirds of the central banks OMFIF surveyed said they would issue a CBDC within 10 years and none said they would issue one later than that, according to OMFIF’s annual report, “Future of Payments”.
OMFIF is an independent think tank that focuses on global policy and investment issues involving central banking, economic policy and public investment, according to its website.
According to the report, generally 35% of central banks were more inclined to issue a CBDC despite recent events in crypto, while none were less inclined to issue one, the survey of 18 central banks found.
Central banks have been ramping up their efforts to look into CBDCs. The Atlantic Council said that 105 countries are exploring a CBDC, representing 95% of the global gross domestic product, up from 35 countries in May 2020.
The Bahamas, Nigeria, Eastern Caribbean and Jamaica have already issued a CBDC, the report said, while China is further along than most other nations in its CBDC trials.
“Overall, if central banks decide to issue a CBDC, they expect deployment to come sooner rather than later,” the report said.
The main reasons that central banks gave in the report for wanting to issue a CBDC were that they wanted to preserve the central banks role and boost financial inclusion.
However, many central banks have suggested that the crash of FTX only showed the need for a CBDC as a safe alternative solution.
Bank of England Deputy Governor Jon Cunliffe echoed those very words recently and suggested the U.K. may need to issue a CBDC.
Also, Fabio Panetta, a member of the executive board of the European Central Bank, said on Monday that a digital euro could be a more “risk free and dependable” digital settlement asset than crypto.
However, CBDCs are not without their risks and challenges. They could expose economies to “greater systematic financial risk brought on by volatility and sudden foreign exchange fluctuations,” the report said. Plus, central banks will have to workout how they can use a CBDC to ensure inclusion if not everyone has access to digital technology, the report said.
DMI Finds CBDCs Not Targeting Cross-Border Payments, Huge Potential In Metaverse
The Digital Money Institute’s third annual payments report looks at central bank digital currencies for the first time, as well as other payment methods, through the lens of cross-border payment utility.
Central bank digital currency (CBDC) development aims squarely at inclusion, both for the central bank in the national economy and for the people it serves.
Meanwhile, the technology for cross-border payments is being developed elsewhere for the most part, according to a new report on the payments industry.
The Digital Money Institute (DMI), part of the Official Monetary and Financial Institutions Forum think tank, released its third annual Future of Payments report on Dec. 8.
The report was sponsored by several payments companies and the crypto exchange Binance, and those companies penned sections that supplemented DMI’s findings. This was the first time it included a survey of central banks.
The DMI staff found in its survey that CBDC development was “gaining momentum,” with two-thirds of central banks expecting to have CBDCs within a decade. Another 12% of central bank respondents said they did not expect to issue a CBDC at all.
When asked about their objectives, more than a quarter of central banks mentioned preserving their roles in money provision and more than 10% mentioned financial inclusion. “Other” was indicated more often.
None of the banks chose “aid cross-border payments” as one of their objectives. Nonetheless, almost 35% of the banks saw interlinking CBDCs as the most promising way to improve those payments.
When asked about stablecoins, nearly 90% of banks identified them as “an opportunity to make cross-border payments more efficient.”
Fiat-based cross-border payment systems are developing rapidly. However, there are significant hurdles to achieving global reach, especially data exchange, as only around 70 countries have adopted the financial messaging standard known as ISO20022.
The DMI report assures that “regionally integrated payment networks offer an exciting prospect.” Still, 80% of African cross-border transactions are processed off the continent.
In general, payments are “unlikely to be a ‘winner-takes-all’ kind of fight,” the report said. “The variety of payments systems will grow, creating competition and diversity in the marketplace.”
#Live: Sonja Davidovic, @BIS_org: It’s truly very difficult to determine what the impact of a #CBDC on #financial stability might be. It’s not an easy task to design these #technologies properly to avoid adverse impacts. https://t.co/V0bbfnZZ3a
— OMFIF (@OMFIF) December 8, 2022
Cryptocurrency and stablecoins are making their greatest strides in emerging economies, as they offer the advantages of disintermediation (which enables faster settlement across time zones), cost savings and accessibility, but have the potential downsides of volatility and unreliability. In the authors’ opinion:
“Vulnerable nations should invest in bringing down the cost of remittances and broadening access to financial services to reduce the exposure of vulnerable economic groups to volatile and unsafe cryptocurrency products.”
Finally, the report looks at the metaverse from a payments perspective, calling it “first and foremost, a model for a digital economy.” In the metaverse, cross-platform interoperability is key and will likely require “major changes to business models.” In turn:
“Developing the infrastructure to make metaverse payments stable, secure, interoperable and free from financial crime will have a huge impact on the broader payments landscape.”
The report cites a Citi estimate that the metaverse addressable market could reach $13 trillion.
Bank of England Opens Applications For ‘Proof Of Concept’ CBDC Wallet
The central bank is budgeting nearly $255,000 to develop a central bank digital currency sample wallet that could execute basic features such as transactions and payment requests.
The Bank of England (BOE) is seeking a “proof of concept” for a wallet that will be able to hold a central bank digital currency (CBDC).
On Dec. 9, the BOE posted a request for applications on the United Kingdom government’s Digital Marketplace, a service where government organizations can solicit work for digital projects.
Simple guidelines for what the proof-of-concept wallet would have to achieve were outlined, with the wallet seemingly only needing to offer basic functionality such as a signup process, a way to update details, and to display balances, transactions and notifications.
Of course, the wallet also has to demonstrate it can be loaded and unloaded with a CBDC, along with being able to request peer-to-peer payments through an account ID or QR code. It also must be able to be used to pay businesses online.
Key deliverables for the project are creating a mobile app for iOS and Android, a website for the wallet, an example merchant website and the back-end infrastructure to serve the wallet website and apps while also storing user data and transaction history.
“No work has been done” on a CBDC sample wallet, the bank said, and it “will not develop a user wallet itself.”
The stated aims of the project are to “explore the end-to-end user journey” as the BOE seeks to “sharpen functional requirements for both the Bank and private sector” along with making the CBDC product “more tangible for internal and external stakeholders.”
A budget of $244,500, or 200,000 British pounds, for an expected five-month project was set for the proof-of-concept, with the BOE slated to evaluate five suppliers. There were no applications at the time of writing.
The BOE has previously stated it is seeking to potentially launch a CBDC by 2030.
The sample wallet is supportive of the BOE’s work as part of Project Rosalind, a joint experiment it’s carrying out with the Bank of International Settlements Innovation Hub aimed at creating prototypes of an application programming interface (API) for a CBDC. The proof-of-concept wallet will also be test implemented with the Rosalind API.
On Dec. 9, the chancellor of the Exchequer, Jeremy Hunt, shared a number of reforms to Britain’s financial services sector, including consulting on proposals for the establishment of a CBDC.
Brazil Central Bank Plans To Launch A CBDC In 2024
The central bank sees a digital currency as a way of increasing participation in the financial system.
The Central Bank of Brazil plans to introduce a central bank digital currency (CBDC) by 2024, bank President Roberto Campos Neto said at a conference hosted by Brazilian news site Poder360 on Tuesday.
The bank will conduct a pilot program working with some financial institutions before starting wider use of the CBDC, a digital currency issued by a central bank, Campos Neto said.
“I think that this digitized, paid-in, integrated system, with inclusion, will help a lot in the development and inclusion of people in the financial world,” Campos Neto said.
In March the country selected nine partners to help it develop a digital currency. When the CBDC is issued, Brazil will join the Bahamas, Nigeria, Eastern Caribbean and Jamaica as nations that have already issued their own CBDCs.
Dozens of countries are exploring the technology, and some have become only more determined to start using one as a risk free alternative to crypto after the collapse of crypto exchange FTX roiled the industry.
“Greater inclusion, lower cost, intermediation, competition with reduced barriers to entry, efficiency in risk control, monetization of data, complete tokenization of financial assets and contracts,” Campos Neto said. “This is what we see in this digital economy in Brazil.”
Why Hong Kong Is Pushing For Its Own Central Bank Digital Currency
As a global financial hub, Hong Kong has a vested interest in shaping the development of CBDCs and especially the systems in which they will transact across borders. But the U.S. should be concerned by its lack of full independence from mainland China.
With Hong Kong likely to issue its electronic Hong Kong Dollar (e-HKD), this month, U.S. policymakers need to anticipate what a successful issuance of Hong Kong’s digital fiat means for the existing global financial order.
An examination of why Hong Kong may want its own central bank digital currency (CBDC), its fintech development strategy and its diminishing political openness leaves plenty of room for U.S. national security concerns.
The e-HKD is Hong Kong’s bid amid a Cambrian explosion of central bank digital currency projects around the globe. Hong Kong started exploring a CBDC in 2017. U.S. policymakers may applaud the HKMA’s care in designing its CBDC.
The e-HKD’s Bank for International Settlements (BIS) paper discussing different CBDC issuance models is thoughtful, covering the design trade-offs between operational division of labor and data security.
If the “safety, privacy and flexibility” principles of the pilot actually manifest in the e-HKD, it would be wonderful news to U.S. policymakers. However, it is important to consider why Hong Kong wants to issue the e-HKD in the first place.
Typical drivers for issuing digital central bank money, such as enhanced financial inclusion and reduced credit risk, seem good on paper, but are not convincing when considered in Hong Kong’s financial context.
Since the under-banked population is negligible in Hong Kong, financial inclusion alone is not a compelling rationale to promote the e-HKD (and even the HKMA policy paper agrees).
The second motivation of mitigating credit risk during financial instability has more mileage. Introducing CBDC like the e-HKD to the public means they can hold central bank money in electronic form.
Because the e-HKD is the liability of the central bank it is not tied to the failure of commercial entities, which then reduces credit risk. Granted, Hong Kong’s status as an international financial center is on shaky ground given mainland China’s firm grasp on Hong Kong’s political liberty and democratic governance.
Nevertheless, there does not seem to be a systemic credit event on the horizon that would warrant issuing a CBDC as a preemptive response.
I believe Hong Kong’s real motivation for issuing its own CBDC is it wants to determine how tomorrow’s alternative financial pipelines are built. There are potential network effects as more central banks adopt CBDCs. Academics have argued that a multi-CBDC future would likely be decentralized.
In contrast to the current global financial network, which is centralized around the U.S. dollar and U.S. financial leadership, the future CBDC network might have many central banks, or “nodes,” connecting to each other via CBDC-to-CBDC platforms.
In a CBDC future, many central banks could ostensibly tip the financial power imbalance away from the U.S. and other developed economies by adopting CBDCs early and influencing CBDC standards. It is to no one’s surprise that a financial hub like Hong Kong would not want to miss out on this CBDC “Sputnik moment.”
In October Eddie Yue, the chief executive of the HKMA, remarked that “more is more” when it comes to adopting new platforms for payments and cultivating network effects.
HKMA is one of the first monetary authorities to test out CBDC-to-CBDC interoperability. The mBridge project, the most extensive cross-central bank effort to date to test out a blockchain-based CBDC-to-CBDC platform, bloomed out of a collaborative project between the HKMA and the Bank of Thailand in 2019.
The project then morphed into Project mBridge in 2021, with the addition of the People’s Bank of China (PBOC), the Central Bank of the United Arab Emirates and the BIS Innovation Hub in Hong Kong.
A multi-CBDC platform would naturally entail CBDCs from other jurisdictions to participate. The mBridge allows banks to move wholesale CBDCs across borders, as long as flows are verified by each of the participating central banks’ mBridge ledger (mBL).
While the HKMA and other central banks are preoccupied in testing potential future financial pipes, central banks from the developed economies such as the United States and Europe are notably absent from this effort.
This brings us to the geopolitical elephant in the room.
As a financial hub that previously thrived under democratic processes, Hong Kong today looms in the shadow of mainland China. The HKMA released a Fintech 2025 vision document, outlining five ambitious goals spanning financial technology innovation, labor force supply, regulatory environment, data infrastructure and developing cross-border capabilities.
There is no smoking gun evidence that the PBOC had any direct influence over the HKMA’s fintech development trajectories.
Nevertheless, the HKMA’s goals strive to digitize and leverage the productivity of Hong Kong’s economy, which resonate with the two fintech development plans out of the mainland in the last few years.
The Fintech 2025 plan’s goal of “creating next-gen data infrastructure” mirrors similar sections in the PRC’s 2022-2025 Fintech Development Plan.
Though the HKMA claims these data infrastructures will be distributed ledger technology-based, it is unclear whether and exactly how the central authority would build in sufficient data security and privacy safeguards.
Though Hong Kong is rolling out its broader e-HKD pilot imminently, it is unclear when the e-HKD will be fully implemented. But lack of an official delivery date should not justify inaction.
The instructive takeaway from Hong Kong and other financial hubs’ move to explore CBDCs (such as Singapore’s Project Orchid) should be that the U.S. government needs to monitor collaborative CBDC efforts. In addition to monitoring, the U.S. Federal Reserve should be present at these significant efforts in building alternative pipelines.
This does not necessarily mean the United States must develop its own CBDC, but it certainly puts a premium on U.S. participation in standard setting activities.
On top of proactive engagement from the U.S. government, government agencies such as the Department of Commerce should set up information-sharing processes with private sector participants in Hong Kong, which may include financial institutions and private-sector firms that may be required to transact in e-HKD.
For example, financial institutions that operate under correspondent banking models are likely paying close attention to the developments out of Hong Kong. The U.S. government would be well-advised to get on-the-ground intelligence from them.
Looking more broadly beyond the e-HKD, mBridge may over time shape the contours of alternative financial plumbing. Yes, proliferating CBDCs across borders could just be a pipedream of many central banks.
But should the U.S. leadership really sit around to find out, or should it preemptively engage other central banks in an emerging alternative financial ecosystem? BIS has extended the invitation for other central banks to join the effort, so the Federal Reserve should be there influencing the ground rules.
The mBridge consortium of central banks have already agreed on the principles of “do no harm, compliance, and interoperability.” However, depending on how CBDC-to-CBDC projects such as mBridge pan out, the principles may change.
To safeguard U.S. leadership in the global financial order, the U.S. government should be monitoring CBDC developments, and proactively shape the agenda of the meetings taking place in the nine international organizations under the Bank for International Settlements, along with discussions happening at other standard-shaping institutions, including the Financial Stability Board, the Organization for Economic Co-Operation and Development, the International Organization for Standardization, the Group of Seven, Group of 20 and other bodies.
How Nigerian Crackdown On Vast Cash Economy Backfired
Nigeria’s government triggered economic chaos with a botched plan to bring the country’s vast informal economy under control. The idea was to get cash that was circulating under the radar into the regular banking system by compelling people to exchange their old money for newly designed naira bills. But banks couldn’t issue enough of the new notes to replace the ones being handed in, creating a cash shortage that frustrated citizens and disrupted businesses. The nation’s top court then ordered a halt to the currency swap, saying it was unconstitutional.
1. What Was Supposed To Happen?
The central bank changed the colors of the 200, 500 and 1,000 naira notes and the new bills went into circulation from Dec. 15. The hope was that when people dropped their old money at the bank, many would choose that moment to switch to making electronic payments for their day-to-day finances. Banks hired 1.4 million agents to fan out to markets and rural areas to encourage people to open accounts, aiming to avoid a last-minute rush. The central bank suspended charges on cash deposits at banks and directed lenders to open their branches on Saturdays to encourage customers to turn in their old notes.
2. What Was The Purpose Of The Exercise?
It’s been difficult for the central bank to do its job when an estimated 85% of local currency circulates outside the banking system and well over 70% of informal transactions were made using cash. The value of bank notes in circulation had more than doubled since 2015 to 3.23 trillion naira ($7 billion). Announcing the currency reform in October, bank Governor Godwin Emefiele said it would help to rein in runaway inflation. It was also supposed to reduce corruption, organized crime and the vote-buying that has dogged elections in the West African country. Nigeria has a thriving kidnapping industry that sees thousands of people abducted by bandits each year, with relatives often paying cash for their release.
3. What Went Wrong?
Recalling 2.7 trillion naira using the country’s under-developed banking network was always going to be a challenge when it wasn’t clear how much old cash citizens were likely to turn in, and where. Nigeria has just 4.5 bank branches for every 100,000 people, one of the lowest ratios in the world. Just 35% of women and 47% of men have a bank account, according to the country’s statistics agency. Banks were overwhelmed and unable to meet demand for the new notes, disrupting day-to-day business and leaving many people unable to deposit their savings. The digital payments system was pushed to breaking point as customers opted for online transfers, with transactions taking hours or days to complete, or failing outright.
4. What Was The Fallout?
The crisis backfired on President Muhammadu Buhari, who shrugged off the mounting criticism from within his own party and maintained that the policy was necessary to tackle corruption. As the cash scarcity intensified, he blamed the “selfishness and greed” of the country’s commercial lenders and called for more time to resolve the crisis. Finance Minister Zainab Ahmed insisted the initiative was a success as it brought trillions of naira of cash into the banking system, saying “the only sore point is the pain it has caused to citizens.” Then three state governors from the ruling All Progressives Congress party said their regions were “on the verge of anarchy” and went to court to try to force the federal government to suspend the cash swap. More than 10 other governors joined the legal challenge. The Supreme Court ruled on March 3 that the government’s plans were unconstitutional because there had been inadequate consultation and told Nigerians they could continue using the old notes until at least the end of 2023.
5. Didn’t Anyone See This Coming?
Yes. There were warnings that Nigeria could suffer the same problems that India encountered when it pushed through a similar policy. That move led to cash shortages, long lines at banks and post offices and a slowdown in economic activity as farmers trekked for miles to exchange their old banknotes. It largely failed to reduce the amount of cash circulating outside the banking system or discourage corruption.
6. Will The Currency Swap Eventually Go Ahead?
That’s looking increasingly unlikely. Bola Tinubu, who was declared the winner of a February presidential election and will succeed Buhari in May after a three-month transition period, lambasted the currency reforms in the run-up to the vote. His campaign accused Emefiele of duping Buhari and sabotaging his party’s electoral prospects. Before the court delivered its judgment, some of Tinubu’s closest allies even urged citizens to continue using their old bills without fear, saying he would switch course. Buhari and Emefiele haven’t commented on the court order and it’s unclear how the central bank will react to the ruling, which would require it to return the old bills into circulation.
The Federal Reserve Should Drop FedNow And Any Plans To Launch A CBDC
Just before Thanksgiving, the Fed announced it still plans to launch its new real-time payments system in the middle of 2023. More surprisingly, it also plans to waive the fees to participate in the new system.
One report notes that the Fed plans to launch the new system, known as FedNow, after “years of work on the project.” But it doesn’t mention that for most of those years the Fed claimed it had no interest in launching its own instant payments network. Or that the private sector did most of the work.
Yet, in 2019, after the private sector created one, the Fed announced that it would launch its own real-time settlement system.
Given the long-running love-hate relationship between the federal government and the banking sector, it’s difficult to feel sympathy for the banks. Small banks, unsurprisingly, are supporting FedNow.
Regardless, the Fed clearly shafted the big banks, and things might not work out as well for the smaller banks as they’re hoping.
Some might be tempted to view the Fed’s latest move as good old-fashioned competition, but nobody can compete with the Fed. It’s the government agency responsible for supplying U.S. dollars.
(My colleague George Selgin has multiple Twitter threads on the Fed’s statutory requirements for pricing its services and recovering its costs, and how historically difficult it has been to hold the Fed accountable to those requirements.)
This whole thing is an avoidable mess.
Set aside the below-cost/predatory pricing issue and whether the Fed disingenuously pushed the private sector into creating an instant-payments network.
Also ignore whether the Fed truly recovers its costs, and whether the Fed itself is to blame for a host of a payments system problems throughout history. The basic question remains: Should the government be running payments systems?
In general, the government should not provide a good or service unless there is some sort of market failure. And there is clearly no market failure in the payments industry.
Payments services are not public goods, and the private sector has regularly provided such services. The Fed does not have to take over the payment system–or even part of it–to implement monetary policy or to regulate financial firms.
It has no mandate to provide the technology for people to make commercial transactions, and it could easily change its policies to speed up settlement times on existing systems.
All these reasons have informed Congress’s efforts to limit the Fed’s ability to compete with the private sector, and rightfully so. There is little room for the private sector when a government entity, least of all the Federal Reserve, competes directly for
customers. FedNow will surely keep private firms out of the industry.
Moreover, the same negative implications–and some that are worse–apply with central bank digital currencies, or CBDCs. I received some flak for being a scare monger when I said it, but I stand behind my original argument:
For anyone who thinks this position is extreme, here’s a passage from a Roosevelt Institute paper (Central Banking for All: A Public Option for Bank Accounts) by Morgan Ricks, John Crawford, and Lev Menand:
They want the government to pay customers a higher interest rate than private banks and charge little to no fees, resulting in “transformational change to the monetary-financial system.” Yet, somehow, CBDCs are supposed to complement private banks?
For starters, the supposed benefits of a CBDC depend on widespread adoption. Worse, though, is the basic fact that only about 5 percent of U.S. households don’t have a bank account. And nearly half of those folks say that they don’t have an account because they do not have enough money to meet minimum balance requirements.
(For other explanations, see here.) Not having enough money is a broader economic problem, one that creating a “free” public option for banking does almost nothing to solve.
Furthermore, people can still participate in the American economy without a bank account. Check cashing services, prepaid cards, and payment apps such as Venmo are available to anyone who wants them.
Of course, CBDC supporters don’t like those check cashing services, so they refer to anyone with a bank account who uses them as “underbanked,” thus fluffing up the “financial inclusion” problem.
There is also absolutely no doubt where the political pressure will push even a severely limited public option CBDC. The CBDC’s availability will inevitably expand to more people and businesses, thus crowding out more and more private firms.
Just look at the above passage from the Roosevelt Institute and listen to what most of the CBDC supporters already promote.
Finally, there is the issue of how CBDCs fit into the existing anti-money laundering (AML) framework.
Anyone who thinks CBDC users will get a privacy pass compared to bank customers is in for a rude awakening, and there is clearly further potential for abuse of power with CBDCs relative to existing means of payment.
(For more on CBDC issues, check out this working paper coauthored with my Cato colleague, Nick Anthony.)
Just like FedNow, CBDCs should be left on the drawing board. Both usurp the private sector. Supporters of both ignore the many harms that the government has already done to financial markets and assume that the government will provide better solutions this time.
If Congress really wants to provide more access to financial markets and ensure more innovation in financial services, members should support more private innovation and competition.
At the very least, they should work to lessen government monopoly and regulation while ensuring that the Fed cannot issue a retail CBDC. Then they can start getting the government out of the payments system business.
New House Financial Services Committee Chair Wants To Delay Crypto Tax Changes
U.S. Republican Representative Patrick McHenry called for clarification on a “poorly” written digital asset tax provision in a letter to the Treasury.
The incoming United States House Financial Services Committee chair, Patrick McHenry, wants the Treasury to delay implementing a section of the Infrastructure Investment and Jobs Act that deals with digital assets and tax collection.
McHenry sent a letter on Dec. 14 to U.S. Treasury Secretary Janet Yellen with questions and concerns about the scope of Section 80603 of the act.
In the letter, he requested clarification over the “poorly drafted” and potentially privacy-compromising section that deals with the taxation of digital assets, scheduled to go into effect next year.
He said the section requires the government to treat digital assets as the equivalent of cash for tax purposes, which could “jeopardize” the privacy of Americans and hamp innovation.
The section, called “Information Reporting for Brokers and Digital Assets,” requires brokers to report certain information relating to dealing with digital assets to the Internal Revenue Service (IRS).
McHenry argues the section has been drafted badly and that the term “brokers” could be “wrongly interpreted” as applying to a wider range of people and companies than intended.
The Act contains a provision requiring individuals or entities engaging in a trade or business to report to the IRS any digital asset transactions that exceed $10,000.
The requirement was challenged earlier this year by Coin Center, a nonprofit advocacy group focused on blockchain technology, which filed a lawsuit against the Treasury arguing that the rule will impose a “mass surveillance” regime on U.S. citizens.
According to Fordham International Law Journal, the section is likely to impose reporting requirements on the major cryptocurrency exchanges that already have user information, including customers’ names, addresses and social security numbers.
McHenry acknowledged it was a positive step forward to see the Treasury Department state that “ancillary parties” should not be subject to the same reporting requirements as brokers.
In February, U.S. Senator Rob Portman tweeted a letter from U.S. Assistant Secretary for Legislative Affairs Jonathan Davies that clarified that parties such as crypto miners and stakers are not subject to the new legislation.
McHenry’s letter concluded by requesting the Treasury “immediately” publish the rules under the section and delay its effective date to give market participants time to comply with any new requirements.
It’s the second letter McHenry has sent to Yellen this year, having sent her a letter on Jan. 26 urging the Treasury secretary to clarify the definition of a broker.
Central Banks To Enforce Standard On Bank’s Exposure To Bitcoin In 2025
The standard will permit 2% Bitcoin reserve exposure among banks.
“A bank’s total exposure to Bitcoin must not exceed 2% of the bank’s Tier 1 capital and should “generally” be lower than 1%”, Group of Central Bank Governors and Head of Supervision (GHOS) of the Bank for International Settlements (BIS)👌🏿
Definition: Rather than a new currency, CBDC is a form of central bank electronic money that could be used by households and businesses to make payments.
A report by the Bank for International Settlements states that, although the term “central bank digital currency” is not well-defined, “it is envisioned by most to be a new form of central bank money […] that is different from balances in traditional reserve or settlement accounts.”.
The Group of Central Bank Governors and Head of Supervision (GHOS) of the Bank for International Settlements (BIS) has endorsed a global prudential standard for banks’ exposure to crypto assets.
In addition, the Group has decided on January 1, 2025, as the implementation date for the standard.
The standard was developed by the Basel Committee on Banking Supervision, the BIS’ primary global standard setter for the prudential regulation of banks, the BIS said in a statement released on Friday.
“Unbacked cryptoassets and stablecoins with ineffective stabilization mechanisms will be subject to conservative prudential treatment. The standard will provide a robust and prudent global regulatory framework for internationally active banks’ exposures to cryptoassets that promotes responsible innovation while preserving financial stability,” BIS explained in the statement.
Central Banks To Push For Low Exposure To Crypto?
According to the BIS, the direct exposure of the global banking system to crypto assets “remains relatively low.” However, the international financial institution believes that recent events have necessitated having “a strong global minimum prudential framework for internationally active banks to mitigate risks from cryptoassets.”
Therefore, BIS noted that the GHOS has tasked the Basel Committee with continuously assessing bank-related developments in cryptoasset markets, including the role of banks as stablecoin issuers, custodians of cryptoassets and as broader potential channels of interconnections.
“Today’s endorsement by the GHOS marks an important milestone in developing a global regulatory baseline for mitigating risks to banks from cryptoassets.
It is important to continue to monitor bank-related developments in cryptoasset markets. We remain ready to act further if necessary,” Tiff Macklem, the Chair of the GHOS and Governor of the Bank of Canada, mentioned.
Crypto In A New Era For Central Banks
According to the BIS, the standard will be incorporated as a new chapter of the consolidated Basel Framework (SCO60: Cryptoasset exposures). The standard accommodates feedback from BIS’ second consultation on the prudential treatment of banks’ exposure to cryptoassets carried out by the Basel Committee in June 2022.
Under the new standard, banks will be required to classify cryptoassets into Group 1 and Group 2, with Group 1 cryptoassets including digital assets such as tokenized traditional assets and stablecoins. However, Group 2 cryptoassets “pose additional and higher risks” compared to those in Group 1 and include assets such as unbacked cryptoassets.
“A bank’s total exposure to Group 2 cryptoassets must not exceed 2% of the bank’s Tier 1 capital and should generally be lower than 1%,” the standard says.
Furthermore, the standard prescribes a redemption risk test and supervision and regulation requirements for cryptoassets.
“This test and requirement must be met for stablecoins to be eligible for inclusion in Group 1. They seek to ensure that only stablecoins issued by supervised and regulated entities that have robust redemption rights and governance are eligible for inclusion,” the standard notes.
Basel Oversight Body Backs Standards For Banks’ Crypto Exposure
* Endorsement Billed As Step Toward Mitigating Bank-Sector Risks
* Crypto Volatility Writ Large In 2022 By Bankruptcies Like FTX
The body overseeing the Basel Committee on Banking Supervision endorsed global prudential standards for banks’ exposure to crypto assets, seeking to counter threats from virtual coins.
The backing from the Group of Central Bank Governors and Heads of Supervision is an important step toward “mitigating risks to banks” from digital tokens, Tiff Macklem, chair of the oversight body and governor of the Bank of Canada, said in a statement on Dec. 16.
The standards outline two groups of crypto assets — one for tokens that fully meet a set of conditions and another for coins that fail to meet any of them.
The first group is subject to capital requirements as set out in the existing Basel Framework. For group two crypto assets, a bank’s total exposure must not exceed 2% of Tier 1 capital and should generally be lower than 1%.
The chaotic bankruptcy of Sam Bankman-Fried’s FTX crypto empire, which may have left more than a million creditors, has injected urgency into regulatory efforts to curb risks from the digital-asset industry.
The Financial Stability Oversight Council in the US said last week that interconnections between crypto firms and traditional financial institutions remain limited while adding that entanglements could rapidly increase and put the broader system at risk.
Kazakhstan Central Bank Recommends A Phased CBDC Rollout Between 2023-25
Kazakhstan’s central bank recommended making the in-house CBDC available as early as 2023 with a phased expansion of functionality and introduction into commercial operation until the end of 2025.
Kazakhstan, the world’s third-largest Bitcoin mining hub after the United States and China, found feasibility in launching its in-house central bank digital currency (CBDC), a digital tenge.
The National Bank of Kazakhstan (NBK) revealed the finding following the completion of the second phase of testing.
In late October, Binance CEO Changpeng “CZ” Zhao announced that Kazakhstan’s CBDC would be integrated with BNB Chain, a blockchain built by the crypto exchange.
The country’s primary motivation for conducting studies on CBDC was to test its potential to improve financial inclusion, promote competition and innovation in the payments industry and increase the nation’s global competitiveness.
The pilot research focused on offline payments and programmability recommended the inclusion of market participants and infrastructure players for different scenarios and proposed clarifying language to be used by the country’s regulators. The latest research paper cemented Kazakhstan’s intent to roll out the digital tenge. A rough translation of the report reads:
“Taking into account the need for technological improvements, infrastructure preparation, development of an operating model and a regulatory framework, it is recommended to ensure a phased implementation over three years.”
Kazakhstan’s central bank recommended making the in-house CBDC available as early as 2023 with a phased expansion of functionality and introduction into commercial operation until the end of 2025.
As many Russians crossed the border into the neighboring borders amid war-related uncertainties, Kazakhstan announced to legalize a mechanism for converting cryptocurrencies to cash.
“We are ready to go further. If this financial instrument shows its further relevance and security, it will certainly receive full legal recognition,” said President Kassym-Jomart Tokayev while speaking at the international forum Digital Bridge 2022.
As Cointelegraph reported, the neighboring country of Georgia has also been moving to introduce new crypto regulations to become a global crypto hub.
What Will 2023 Bring For CBDCs?
Even as CBDC rollouts intensify, the future of these centrally backed currencies around the world is uncertain.
Since 2021, many governments have been ramping up their central bank digital currency (CBDC) efforts.
Moving from deliberation to the experimentation phase, central banks are actively building capacity to deliver next-generation payment systems backed by their governments. With growing competition from global digital assets, a CBDC is a central bank’s vehicle to re-establish its role in a country’s monetary system.
A Quick Overview Of CBDC Global Adoption Rates
According to the Atlantic Council think tank, over 100 countries are actively exploring CBDCs in the research and development phase. Eleven countries have launched their CBDC programs, including Jamaica, Nigeria and the Bahamas. Many countries are in the pilot phase, such as China, India and Thailand.
Notably, China has had the most success with its digital yuan, with transactions surpassing $14 billion, although overall volumes have slowed significantly from a record 154% growth in transaction volume in 2020 to just 14% since the end of 2021.
Finally, some countries, including Ecuador and Denmark have explored the possibility of launching CBDCs but have since paused their efforts.
The Newest Entrant To The CBDC Race: India
India’s pilot launch of its e-rupee has sparked global interest. As the largest democracy in the world with a massive crypto user base, India is the perfect testing ground to implement a large-scale CBDC campaign.
Its direct competitor, UPI – India’s current digital payments system – has onboarded over 376 banks and currently processes monthly transactions of over 119 lakh crore ($1.4 trillion), a solid foundation to build digital currency infrastructure.
Currently, the e-rupee pilot is restricted to bankers and select retail customers. Considering India’s G-20 presidency, its stance on CBDCs and the performance of e-rupee have the ability to influence the other 18 G-20 countries on their own potential CBDC rollouts.
Future of CBDCs: Predictions And Areas Of Improvement
CBDC Adoption Woes
Despite the widespread enthusiasm among governments and central banks, the adoption of existing digital currency projects has been lukewarm. There are several barriers to adoption working against CBDCs.
As the International Monetary Fund (IMF) states in its paper on instant payments, from a consumer point of view, there is little difference between instant payment systems and CBDCs since both are fast, backed by the central government and free of charge.
Thus, CBDCs need to provide tangible benefits for users to switch from an already working system. For instance, India’s e-rupee plans to target those who don’t have bank accounts, in contrast to UPI, which enables bank-to-bank transfers.
Further, UPI doesn’t permit cross-border transactions, but CBDCs can potentially tackle this issue once a global standard is established.
We will also see widescale incentivization and marketing campaigns to boost CBDC adoption. These could range from free money and tax benefits to foreign transaction fee waivers and public sector salaries paid with CBDCs.
However, in countries with more restrictive financial laws, incentivization might look very different, sometimes infringing on basic human rights. For instance, Nigeria plans to ban ATM cash withdrawals over $225 a week, with exceeding amounts attracting a 5% processing fee.
This is a clear attempt to boost Nigeria’s cashless policy and the lackluster adoption of its CBDC, eNaira – which has an adoption rate of just about 0.5% of the country’s population.
Countries that follow China’s example (where cryptocurrencies are banned) could potentially pose considerable restrictions on cryptocurrencies and stablecoins to boost CBDC adoptions.
A Continued Focus On CBDC Technology
Designing a financial system for an entire country is a massive undertaking. Unsurprisingly, there have been multiple technical roadblocks along the way as governments roll out their centralized digital currencies.
One banker told Reuters earlier this month that India’s e-rupee is, at the moment, “more inefficient” than traditional banking. Bulk trade settlement, paperwork reduction and other systems must be introduced to entice banks to keep using e-rupee.
Additionally, CBDC trade volumes need to exceed volumes on other payment methods, otherwise it leads to more paperwork for the bank.
Similarly, Nigerian users have found it hard to use eNaira, despite the fact that it is legal tender in the country.
“I’ve been able to create a wallet [on the eNaira app] and all, but I can’t fund it yet as it’s throwing an ‘account not found error.’ The entire experience has been quite frustrating, as the whole thing seems very half-baked,” Yusuf, a programmer and crypto enthusiast in Nigeria, told CoinDesk.
Based on the Google reviews for the eNaira app, this sentiment seems to be uniform across most Nigerian Android users. Nigeria’s plans to encourage a cashless policy when many users can’t even verify their accounts would likely result in a ton of backlash. For CBDCs to stand a fair chance against other payment systems, ironing out these technical details is crucial.
Co-existence of CBDCs, Stablecoins And Other Payment Methods
While some may believe CBDCs to be the future of money, the transition to CBDCs will be slow and, most likely, partial. And that’s if CBDCs are even successful.
For instance, according to a Bank for International Settlements (BIS) report, CBDCs could find a use case in facilitating cross-border payments, improving banks’ limited operating hours and long transaction chains. Merchants and wholesalers can directly benefit from faster settlement times and less paperwork.
CBDCs also show promise for settling bulk high-value transactions for wholesalers and entities. Sen. Cynthia Lummis (R–Wyo.), who has played a significant role in crypto regulation in the U.S., believes that CBDCs should be restricted to wholesale users, central banks and other government entities.
Last month, the U.S. began its 12-week pilot program of the digital dollar with a group of major banks and the Federal Reserve Bank of New York.
“I believe that the direct-to-consumer product will actually be stablecoins,” Lummis said in an interview with tech news site Protocol.
Other payment methods such as credit cards and cash will likely co-exist with CBDCs for the foreseeable future, with each catering to a different audience.
In advanced economies, where we already see a cash decline, CBDCs could accelerate the process and reduce the need for ATMs. User adoption will be the final judge.
Addressing Control Over Money Flow And Privacy Concerns
One of the primary arguments against CBDCs revolves around data privacy and government control over individual financial assets.
These concerns aren’t unfounded: Iran’s threat to freeze bank accounts of women who don’t wear hijabs and Nigeria’s cash withdrawal limits scratch the surface of what kind of control governments could potentially exert with mandated use of CBDCs, such as the removal of e-wallets as punishment.
What happens in the case of a war? Can trade restrictions and financial sanctions extend to government restriction of money between countries with the click of a button?
Democracies such as the U.S. want to distance themselves from the potentially privacy-breaching nature of CBDCs. “[In China], the digital yuan is direct-to-consumer. It’s also a means of surveillance. We don’t want a CBDC that is dollar-denominated that could be used as a means of surveillance,” said Lummis.
Privacy technologies used to combat CBDC’s privacy issues are expected to become popular among democratic countries that emphasize human rights. India has indicated that it will be looking into integrating its CBDC with privacy-based technologies.
How effective these technologies will be and the extent to which they will be implemented by the government remains to be seen.
Further, experts such as Bitget’s Gracy Chen have called for the possibility of CBDCs having multiple permissioned nodes so that a central bank is not the sole authority in a major payments system.
CBDCs Across Borders
Most countries experimenting with CBDCs are doing so independently. This drives a new problem: Different CBDCs use drastically varied design standards and technologies that are typically incompatible with one another.
Thus, there’s a very real possibility of ending up with the same fragmented, siloed financial ecosystem again, with CBDCs adding to the problem and not solving it.
We’ve already seen this happen with the current cryptocurrency ecosystem. Different blockchains such as Ethereum, Solana and Avalanche have their own ecosystems, which are largely incompatible with one another, except through common points such as bridges or centralized exchanges.
This issue could become even more complicated with CBDCs, which live on private ledgers controlled by governments who usually aren’t very eager to share information with each other.
Some form of standardization is needed to enable smooth, fast, cross-border transactions. SWIFT’s solution of globally interlinking CBDCs is a start, but more collaboration and testing across operational CBDCs is needed.
Banks And Fintech Providers Will Have A Role To Play
CBDCs might weaken the power of the existing financial system – especially banks. According to a BIS report, we risk systemic bank runs if many people rush to convert their money into CBDCs abruptly. However, that doesn’t mean banks and fintech providers don’t have a role to play in the adoption of CBDCs.
Many central banks across the globe are exploring a hybrid model for CBDCs, where the central bank distributes CBDCs to a regulated entity such as a bank or fintech institution.
While CBDCs would be regulated and managed by the central bank, intermediary entities would handle the basic checks for know-your-customer (KYC), anti-money laundering and overall transactions.
To achieve this, banks must significantly overhaul their structures and teams. They will need to assess how their existing structures can be upgraded, revamped and integrated with CBDC technology, and bank staff will need to be trained in the basics of distributed ledger technology.
If a bank is responsible for laying the groundwork for a CBDC, it will also need to hire more technical staff.
Further, CBDC onboarding will likely be contracted out to private players, particularly if the country’s banking infrastructure isn’t strong. For instance, Jamaica has partnered with technology provider eCurrency to onboard the country’s financial institutions.
To CBDC Or Not To CDBC
While still in the development phase, one thing is for certain: There is no one-size fits all approach to CBDCs. China’s success with CBDCs as an authoritarian country compared to Nigeria and the Caribbean’s extremely low adoption rates paint very different pictures.
To truly drive adoption, CBDCs need to evolve and customize strategies based on their customer’s needs and priorities – whether it be privacy, payment system efficiency or cross-border payments.
Most CBDC models are still new, with tepid success in terms of adoption and ease of use. Retail consumers, especially those happy with the existing payment solutions, will be the hardest sector to convince.
As eNaira user Owolabi Abdullah told CoinDesk, “Our CBDC doesn’t solve anything. It’s additional stress – I could just have a regular crypto wallet.”
Plus, giving governments more control over their financial assets just doesn’t sit well with most people, unless there’s something in it for them.
Kazakhstan To Press On With CBDC Development Until 2025
For the next two years the country will work on developing industrial operations and cooperate with other central banks on cross-border and currency-exchange applications.
Kazakhstan will continue looking into a central bank digital currency (CBDC) until 2025 at least, the central bank said in a report published Thursday.
In December 2021, the country said it was piloting a CBDC on R3’s Corda platform and would make a decision on whether to introduce one by the end of this year. In October, Binance CEO Changpeng Zhao said the National Bank of Kazakhstan will test use cases for the e-tenge on the company’s BNB Chain.
The bank said it has completed some phases of the trial, including refinement of the prototype and introduction for a limited number of participants.
For the next two years, the country “will develop solutions for launching into industrial operation,” and will cooperate with other central banks on cross-border and currency-exchange operations, the report said.
By December 2025 it will add more participants, aim to introduce offline capabilities and connect with non-bank mediators.
“The unique advantages of the national digital currency relates to conducting a chain of transactions offline,” the report said.
Countries around the world have been pressing ahead with CBDC exploration, with a few saying they are likely to issue one within 10 years.
As many as 105 countries are exploring a CBDC, representing 95% of the global gross domestic product, according to the Atlantic Council, a U.S.-based think tank that focuses on international issues.
Nigeria, the Bahamas, Jamaica and Eastern Caribbean have issued a CBDC, while China is further ahead than most countries in its CBDC trials.
Kazakhstan is also working with Binance on blockchain technology education. Binance, the largest crypto exchange by volume, will partner with the national bank’s Research Lab “Blockchain Center” on a program to introduce a blockchain program targeting 40,000 people, according to an emailed statement on Monday. The curriculum will be imbedded in university programs across the country.
Digital Dollar Is A Long Way From Reality, US Treasury Official Says
* Need For CBDC Currently Doesn’t Exist, Undersecretary Says
* Fed Won’t Issue CBDC Without Clear Congress, Executive Support
The Treasury Department’s top official for financial markets and stability expressed little urgency over the federal government’s need to prepare for the potential launch of a digital US dollar.
Regulators need to examine whether a central bank digital currency — or CBDC — would actually improve the speed or cost of real time interbank payments, which the Federal Reserve is aiming to introduce in 2023, said Nellie Liang, undersecretary for domestic finance at the Treasury.
Asked whether a digital dollar would help defend the primacy of the dollar in international commerce or as a reserve currency, she was even clearer.
“My view is our global leadership doesn’t come from our technology,” she said in an interview at Bloomberg News’s Washington office Monday. “It comes from our governance system, the rules that govern our financial markets, our rule of law and the safety and soundness of our institutions.”
No Current Need
If after five or more years many countries have introduced a CBDC, she added, that might become a factor in pushing the US to adopt one. But she emphasized the US government’s study of a potential CBDC was mainly to be prepared for a need that didn’t currently exist.
In a September report, the Treasury “set out a very deliberate, forward path for considering CBDC so that the Fed would be in a position to issue one if it decided it wanted to,” she said.
The Fed in January published a white paper on central bank digital currency, without committing to issuing one. Such a move, it said, would have to be made jointly with Congress and the executive branch.
“The Federal Reserve does not intend to proceed with issuance of a CBDC without clear support from the executive branch and from Congress, ideally in the form of a specific authorizing law,” the white paper said.
Views on the Fed’s Board of Governors vary. Governor Christopher Waller has emerged as a central bank digital currency skeptic, while Vice Chair Lael Brainard has cast the issue in light of a more efficient payment system that could benefit the under-banked and global economic strategy.
Fed Chair Jerome Powell has shown no urgency to decide the matter soon.
How Crypto Could Be Good For CBDC And Vice Versa: Industry Exec Explains
While some governments continue bashing crypto, some industry executives argue that crypto could be beneficial for CBDCs.
Cryptocurrencies like Bitcoin could potentially find some mutually beneficial interactions with central bank digital currencies (CBDCs), according to one industry executive.
While crypto is often associated with financial freedom, the concept of CBDC is frequently seen as the exact opposite. But this doesn’t mean that there cannot be a balance between the two, according to Itai Avneri, chief operating officer and deputy CEO of the crypto trading platform INX.
CBDCs and regulated cryptocurrencies could potentially complement each other in the future as the two types of digital currencies have their own benefits, Avneri said in an interview with Cointelegraph on Dec. 22.
Comparing CBDCs to regulated primary offerings, Avneri suggested that allowing or enabling crypto funds to participate in such offerings would be beneficial for both sides.
That would specifically expose such financial instruments to a wider audience while also giving crypto investors “comfort and confidence to trade in a regulated environment.”
“In my vision, the CBDC ecosystem will not be different, but we have a long journey ahead of us till we get there,” INX deputy CEO said, adding that balance between CBDCs and crypto would be a “master art.”
The exec noted that he is unfamiliar with any current initiative that would allow one to buy a cryptocurrency like Bitcoin with a CBDC or other potential interactions between CBDCs and crypto.
Avneri also pointed out the importance of combining regulation and decentralization because full decentralization misses out on regulations like Know Your Customer (KYC) controls, which “comes with a price that sometimes is not good for investors.”
“When thinking about working with governments and central banks, I believe customers must be identified as it will serve their interest and will build the needed trust in the ecosystem.”
Avneri emphasized that CBDC users still need to be able to interact in a private manner “similar to how they may use physical cash today.”
The news comes amid INX entering a partnership with authentication firm SICPA to help governments develop CBDC ecosystems. As previously reported, INX was the first company to conduct a tokenized initial public offering approved by the United States Securities and Exchange Commission in 2021.
INX deputy CEO is not alone in thinking that CBDCs and cryptocurrency technology could be beneficial to each other in the future. Thomas Moser, a governing board member at the Swiss National Bank, believes that centralized financial projects like CBDCs could enable more stability in the development of decentralized finance.
Mikkel Morch, executive director at the digital asset hedge fund ARK36, also believes that CBDCs do not pose any direct threat to cryptocurrencies like Bitcoin. Still, CBDC can bear some risks in relation to stablecoins like Tether (USDT), according to Morch.
Project Hamilton Has Concluded, Weeks After Legislators’ Enquiry, According To Boston Fed
The two-year project produced a white paper in February. Research results will continue to appear, with the Fed’s partner at MIT scheduled to make a research report in January.
Project Hamilton, the research project of the United States Federal Reserve Bank of Boston and Massachusetts Institute of Technology, announced its conclusion in the run-up to Christmas.
The two-year project looked at the technical aspects of a hypothetical United States digital dollar central bank digital currency, or CBDC.
“Project Hamilton took critical early steps toward a deeper understanding of how money might work better for all,” Boston Fed Executive Vice President Jim Cunha said in a statement announcing the conclusion of the project.
In February, the technologically “agnostic” project released a white paper and open-source research software called OpenCBDC in two versions, only one of which used distributed ledger technology. At the time, organizers promised that continuing research would look at “privacy, auditability, programmability, interoperability, and more.”
In Its Dec. 22 Announcement, The Boston Fed Stated:
“Researchers at the Boston Fed and MIT said they plan to release additional retrospectives on Project Hamilton’s findings in the coming months.”
MIT’s Digital Currency Initiative (DCI) — the organization that had partnered with the Boston Fed — is expected to hold a “research release” on Jan. 12, 2023.
— Digital Currency Initiative (@mitDCI) December 8, 2022
The Fed also hinted that work had continued on OpenCBDC, noting that it had reached a throughput rate of 1.84 million transactions per second.
That is presumably on the non-blockchain version, which had reached 1.7 million transactions per second as of February. The blockchain version processed 170,000 transactions per second as of that time.
Project Hamilton was the subject of a letter from nine U.S. legislators, headed by Representative Tom Emmer, addressed to Boston Fed President Susan Collins on Dec. 1. The Congressmembers wrote:
“There has been insufficient visibility into the interaction between Project Hamilton and the private sector.”
The letter’s authors asked about the involvement of private firms in the research and expressed concern about unfair advantages for research participants in future CBDC development. They also asked about the project’s approach to privacy. They requested written responses without suggesting a deadline.
The letter did not name specific private firms associated with the project. The white paper did not acknowledge any private involvement.
Emmer is an opponent of CBDCs and introduced legislation in January to prohibit the Fed from issuing a U.S. CBDC directly to consumers.
Since February, the DCI has picked up new partners. The Bank of England and Bank of Canada both entered into 12-month research projects with the DCI in March.
Nigeria Set To Pass Bill Recognizing Bitcoin And Cryptocurrencies
The slated law comes as Nigeria’s eNaira has only managed to obtain a 0.5% adoption rate, a little more than a year after its launch in October 2021.
The Nigerian government will reportedly soon pass a law that will recognize the usage of Bitcoin and other cryptocurrencies as a means to keep up to date with “global practices.”
The news was reported by Nigerian-based masthead Punch Newspapers on Dec. 18 following an interview with House of Representatives Committee on Capital Markets Chairman Babangida Ibrahim.
The report stated that if the Investments and Securities Act 2007 (Amendment) Bill is signed into law it would allow the local Securities and Exchange Commission to “recognize cryptocurrency and other digital funds as capital for investment.”
Ibrahim stressed the need for Nigeria to keep up to date with trends and developments in capital markets:
“Like I said earlier during the second reading, we need an efficient and vibrant capital market in Nigeria. For us to do that, we have to be up to date [with] global practices.”
The report comes almost 24 months after Nigeria banned crypto activity in February 2021, with the Central Bank of Nigeria (CBN) ordering Nigerian crypto exchanges and service providers to cease activity and mandating banks to shutter the accounts of any individuals or entities found to be engaging in trading activities.
But Ibrahim — who served as Nigeria’s president between 1985 and 1993 — insists that the passing of the law isn’t a 180-degree turn on the ban but rather a secondary review of what is within the scope of the CBN’s powers:
“It is not about [the] lifting of the ban, we are looking at the legality: what is legal and what is within the framework of our operations in Nigeria.”
“When cryptocurrency was initially banned in Nigeria, the CBN discovered that most of these investors don’t even use local accounts. So, they are not within the jurisdiction of the CBN. Because they are not using local accounts, there is no way the CBN can check them,” he explained.
If the law passes, amendments will be made to Nigeria’s Investments and Securities Act 2007.
In addition to the assignment of legal recognition to Bitcoin and other cryptocurrencies, the law will outline the regulatory roles of the Central Bank of Nigeria and Nigeria’s Securities Exchange Commission (SEC) on matters relating to digital currencies, the report said.
The law also comes as Nigerians have also shown little to no interest in Nigeria’s central bank digital currency, the eNaira, which had only obtained a 0.5% adoption rate in October, 12 months after its launch.
The Nigerian government’s efforts to crack down on crypto activity earlier on were arguably ineffective too, as adoption continued to increase following the ban in February 2021.
From January to August last year, Nigerians only trailed the United States in Bitcoin trading volume, and over the same period, Nigerians were more likely google“Bitcoin” than citizens of any other country.
Nigerian residents were also found to be the most crypto-curious nation, according to an April research study conducted by CoinGecko. The curiosity comes as no surprise, as Nigerians continue to look to fight off rampant inflation and economic malaise.
Nigeria also recently entered into early-stage discussions with cryptocurrency exchange Binance in September to develop a crypto-friendly economic zone that will aim to support crypto and blockchain-related businesses in the region.
⛓️ 🔗 Useful Links 🔗 ⛓️
~~~~~ – Timestamps –
0:46 About The Standards
3:13 Types Of Crypto, Risks, Limits
6:07 What ‘Stakeholders’ Want
9:56 What Will The BIS Watch?
13:28 The Fine Print
17:58 What Does It Mean For Bitcoin?
China’s CBDC Wallet Resorts To Ages-Old Tradition To Boost Adoption
A traditional Chinese way of gifting money that’s gone virtual with the rise of digital payments has been introduced into the digital yuan wallet app.
China’s wallet app for its digital yuan central bank digital currency (CBDC) introduced a feature for users to send money in an electronic version of traditional “red packets” to try to attract new users.
The new feature was released over the weekend, around one month ahead of the Chinese New Year on Jan. 22, as reported by the South China Morning Post on Dec. 26.
The “red packets,” called hongbao in China, are traditionally used for gifting money around the Chinese New Year and other celebrations as a gesture of good luck. The rising use of digital payments has seen virtual red envelopes offered by popular local services such as WeChat Pay and Alipay.
Reportedly, the e-CNY app allows a red packet to be sent to only one person, or a “lucky draw” can be set up for a group of people who will get a random amount from a pool of funds, both WeChat Pay and Alipay have a similar feature.
Users can choose a packet cover that displays well wishes for the new year or birthdays as well as wishes for a “prosperous China.”
Digital yuan transactions crossed the $14 billion (100 billion yuan) threshold on Oct. 10, seeing an increase of only 14% since the $12 billion (87.6 billion yuan) reported at the end of 2021 by the People’s Bank of China.
A Dec.18 report in the Chinese Workers’ Daily newspaper reported the e-CNY trails will expand to the cities of Jinan, Nanning, Fangchenggang and Kunming. The trials previously expanded in September to four of the country’s provinces, including its most populous, Guangdong.
Despite the government’s rapid expansion of the trials, the latest reported user base of the e-CNY wallets was in January 2022, with 261 million users have set up a digital wallet.
China’s government may seemingly have to leverage WeChat Pay and Alipay to boost the adoption of its digital yuan.
Both services accept e-CNY, with WeChat reportedly having 1.3 monthly active users in the September quarter, according to financial reports, while Alipay had over 1 billion annual active users in its fiscal year ending Aug. 17, 2020.
Former Chinese Central Banker Says Digital Yuan ‘Usage Has Been Low’
A former China central banker said cumulative e-CNY transactions only crossed $14 billion in two years, adding the results were “not ideal.”
A former official of the People’s Bank of China (PBOC), the country’s central bank, has expressed disappointment that China’s digital yuan is seeing little use.
Xie Ping, a former PBOC research director and current finance professor at Tsinghua University, made critical public comments about China’s central bank digital currency (CBDC) at a recent university conference, according to a Dec. 28 Caixin report.
Xie noted that cumulative digital yuan transactions had only crossed $14 billion (100 billion yuan) in October, two years after launch. “The results are not ideal,” he said, adding that “usage has been low, highly inactive.”
Despite the government’s rapid expansion of the trials and new wallet features to try to attract users, a January PBOC report stated that only 261 million users had set up an e-CNY wallet.
This compares to around 903.6 million people that utilize mobile payments in China, according to a 2021 China UnionPay report.
The former central banker said the use case of e-CNY “needs to be changed” from its current use as a cash substitute and opened to other uses such as the ability to pay for financial products or connected to more payment platforms to boost adoption.
He compared the digital yuan to other third-party payment systems in the country such as WeChat Pay, Alipay, and QQ Wallet, which allow for investments, lending or loans. He said they “have formed a payment market structure that has met needs for daily consumption.”
Some third-party financial apps are e-CNY compatible but see little use, as Xie said “people are used to” using the original service and change “is difficult.”
Such criticism of Chinese government initiatives is rare from former officials and signals the country may be seriously struggling to gain traction on its CBDC initiative.
The government has rapidly expanded e-CNY trails most recently in December to four new cities. It was previously expanded in September to Guangdong province, its most populous, and three others.
New features were added to the e-CNY wallet app in a bid to attract users in time for Chinese New Year that added functionality to send digital versions of traditional red packets or red envelopes (hongbao) containing money — a popular custom during festivities.
Turkey’s Central Bank Completes First CBDC Test With More To Come In 2023
After recently completing its first payment transactions using a central bank digital currency, the Turkish central bank is pushing ahead with more tests over 2023.
The Central Bank of the Republic of Turkey (CBRT) has completed the first trial of its central bank digital currency (CBDC), the Digital Turkish Lira, and has signaled plans to continue testing throughout 2023.
According to a statement released by the CBRT on Dec. 29, the central bank authority said it successfully executed its “first payment transactions” using the digital lira.
It said it will continue to run limited, closed circuit pilot tests with technology stakeholders in the first quarter of 2023, before expanding it to include selected banks and financial technology companies in the rest of the year.
Press Release on the Use of Digital Turkish Lira: https://t.co/48ulWfJqXw
— CentralBankofTürkiye (@CentralBank_TR) December 29, 2022
It said the results of these tests will be shared with the public through a “comprehensive evaluation report,” before unveiling more the next phases of the study which will further widen participation.
The Turkish central bank first announced it was looking into the benefits of introducing a digital Turkish Lira in September 2021 in a research project called “Central Bank Digital Turkish Lira Research and Development.”
At the time, the government made no commitment to the ultimate digitalization of the country’s currency, noting it had “made no final decision regarding the issuance of the digital Turkish lira.”
In its most recent statement, the CBRT said it will continue testing the use of distributed ledger technologies in payment systems and their “integration” with instant payment systems.
It will also prioritize studying the legal aspects around the digital Turkish Lira, such as the “economic” and “legal framework” around digital identification, along with its technological requirements.
Several countries, including the United Kingdom and Kazakhstan, have recently begun piloting central bank digital currencies.
The Bank of England has opened applications for a proof of concept for a CBDC wallet, while the Kazakhstan central bank has recommended the introduction of an in-house CBDC as early as 2023 with a phased implementation over three years.
The Reserve Bank of Australia (RBA) recently expressed hesitation about its own CBDC plans, with assistant governor Brad Jones warning in a speech on Dec. 8 that a CBDC could displace the Australian dollar and lead to people avoiding commercial banks entirely.
Digital Euro CBDC AKA #spycoin- Is THIS The Year?! Latest Update!
– Timestamps –
0:48 Digital Euro Explained
4:24 First Progress Report
7:32 Digital Euro Privacy
11:21 Second Progress Report
14:45 Digital Euro ‘Scheme’
16:50 What Does It Mean For CBDCs, Crypto?
The ‘Godfather Of Crypto’ Wants To Create A Privacy-Focused CBDC: Here’s How
David Chaum explained his game plan to create a CBDC that would also be appreciated by the crypto ecosystem in an exclusive interview.
When it comes to the “crypto” part of cryptocurrencies, David Chaum’s work predates the crypto ecosystem. His efforts as a renowned cryptographer date back to 1989, long before Bitcoin Chaum developed the protocols that act as the basis of DigiCash — the world’s first digital currency secured by cryptography.
As the CEO of privacy-focused network developer Elixxir, David Chaum is working with the Swiss central bank to develop a central bank digital currency (CBDC) that could also attract the crypto ecosystem due to its privacy features.
Named eCash 2.0, the new project aims to develop digital cash that would be “inalienably private” and quantum-resistant to counterfeiting. Since the technical details require a deep understanding of cryptography, Cointelegraph sat down with Chaum at Istanbul Blockchain Week to get a better understanding of the mechanics behind this crypto-friendly CBDC project.
A Censorship-resistant CBDC
It all started when Thomas Moser, a board member at Swiss National Bank, invited David Chaum to Zurich for a conference and told him “he wanted to make eCash great again,” asking for his help in a new project.
“[Moser] couldn’t understand why people weren’t using eCash for CBDC,” Chaum started explaining. Big banks have too much to consider in terms of reliability and future readiness. So, they are not eager to invest in something that isn’t quantum-resistant.
As part of the project, which is internally called “Project Tourbillon,” Chaum developed a cryptographic protocol that proves a CBDC can protect privacy, be censorship- and quantum-resistant, scalable and even compatible with decentralized finance (DeFi) blockchains. One of his goals was to make the total supply number of coins transparent.
At first, the project team tried to use the legacy eCash but quickly realized it wasn’t a good fit for what they had in their mind.
That’s why the BIS Innovation Hub, Swiss National Bank and xx Network based the joint project on eCash 2.0. Chaum noted that user-controlled privacy, “the best feature of the original eCash,” carried over to this new project.
According to the official announcement, Project Tourbillon aims to reconcile trade-offs between cyber resiliency, scalability and privacy by combining technologies like blind signatures and mix networks with the groundwork prepared by David Chaum and Thomas Moser.
Chaum pointed out that privacy is pivotal for banks, along with scalability and blockchain compatibility, as the public is very concerned about it. He noted the European central bank’s public call for comments about CBDC, highlighting that 40% of the comments were about privacy.
“You can withdraw $500 every day with your ATM card, but you can’t walk into a bank and withdraw $1,000,000 in cash — that’s privacy for the people,” Chaum explained. It should be similar in electronic payment systems, he noted. “Those systems should make it very difficult for someone to gather enough and use it for bad purposes, like hiring a hitman without being noticed.”
Inalienable keys: A New Approach To Privacy
To meet the privacy requirements of a digital currency, Chaum envisioned a privacy system in which it’s possible to prove a user knows their secret phrase without revealing it. It’s a relatively new approach that Chaum called “inalienable.”
The name, inalienable key, is derived from its key ability: This new private key type cannot be given or taken away by nature. The key itself is a phrase or a sentence that can be easily memorized by the owner but is impossible to guess by third parties.
Within the context of central bank digital currencies, when a user wants to join the CBDC system as a user, they can go to a bank office to prove that they know their inalienable key by confirming specific placements of random letters in the phrase.
When it’s done in a privacy-focused physical setting, as exemplified by Chaum in the image below, it helps users to prove that they know the key without actually revealing the private key.
Once users confirm their identity, they can establish a whole family of related pseudonyms that can’t be seen together, although they are all linked to the user’s passphrase.
In the inalienable system, the user doesn’t have to go through the physical confirmation step after the first time. They can send their confirmation electronically and also create pseudonyms for every other specific situation, Chaum explains.
He likened the pseudonyms to notebooks with specific signatures or “credentials.” He believes that the usability of inalienable keys extends beyond finance.
“They can represent that a user paid their taxes this year. Or they have graduated with high honors,” Chaum said, adding: “If they are asked for proof about any of those, they can use one of these pseudonyms and confirm it in a zero-knowledge way.”
Quantum Resistance Can’t Wait For Quantum Computers
Any conversation with the “godfather of crypto,” a moniker given to David Chaum for his decades-long contributions to cryptography, would not be complete without discussing quantum resistance.
While it’s not a direct threat to crypto — yet — quantum computers that can easily break Bitcoin’s SHA-256 cryptographic protocol are expected to arrive within the next decade.
Therefore, being ready against attacks from such devices is a must for any future-proof systems and services.
Chaum advised that quantum resistance should be on everyone’s agenda. “Because the data, even though it can’t be read now, is easily saved.” Once quantum computers arrive on the scene without any warning, today’s encrypted data will be much easier to crack.
His company, Elixxir, is focusing on the quantum-resistance aspect of cryptocurrencies with xx Network, which uses quantum-resistant backup keys to support its xx coins. Chaum claimed that xx Network was able to do 3,500 quantum-resistant transactions per second during the xx coin public test.
But, money is not everything; communication also matters. Chaum stressed that most of today’s chat services use end-to-end encryption as a promotional label.
He added that most modern messengers are misdirecting people to prevent them from noticing that there’s no metadata shredding, adding that anyone who taps one of these messengers can see all of “who talks to who” globally:
“We thought, we’ll put quantum-resistant encryption to protect the message content, then announce it and see what happens. And we did, and we have it, and none of the other messengers followed.”
Instant messaging services don’t care about their so-called strong end-to-end encryption, Chaum claimed, “because they don’t have it.”
UK MP Says Stablecoin Is A Gateway To CBDC, Only Crypto Can ‘Disrupt’ Settlements
MP Andrew Griffith and colleagues spoke before a hearing of the U.K. parliamentary Treasury Committee about payments technology and CBDC.
The United Kingdom remains committed to becoming a world crypto industry hub in spite of the recent negative events that have occurred on the market.
It is “the sector I have dedicated the most time to,” Member of Parliament and HM Treasury Economic Secretary Andrew Griffith told a meeting of the UK Parliament Treasury Committee on Jan. 10, underscoring that commitment.
The introduction of a wholesale stablecoin and the Financial Markets Infrastructure (FMI) sandbox will be next steps in the process.
Those elements are included in the Financial Services and Markets (FSM) bill, which will have its second reading in the House of Lords also on Jan. 10.
A stablecoin will likely serve as a “first use case of what is likely to be a wholesale settlement coin” in the “long runtime” leading up to the potential introduction of a central bank digital currency (CBDC), Griffith said.
Griffith defended the work being done on the wholesale stablecoin, saying stablecoins are “here now” and therefore in need of immediate attention. He noted that it is unclear whether a CBDC would displace private stablecoins on the market if a CBDC were introduced.
A retail British CBDC, if one were to be introduced, would be an anonymized and intermediated platform by design, Griffith said.
A consultative paper on CBDC will appear “in weeks, not months,” to be followed by a another on crypto regulation more broadly. The government will also hold at least six roundtables with the crypto sector this year.
It is “not the government’s position that this [crypto-based technology] is an inevitability,” Griffith said, but he added that current technology cannot solve issues in the financial sector such as settlement time “in a disruptive way,” as blockchain technology can.
The @CommonsTreasury Inquiry in to #Cryptoassets continues today with another oral evidence session. This time including Andrew Griffith MP, Economic Secretary.#crypto #cryptoregulation #cryptoinquiry
— CryptoUK (@CryptoUKAssoc) January 10, 2023
For retail users, Griffith drew a clear line between crypto as an investment and as a means of payment. Unbacked cryptocurrency may “find a role or not in the market,” Griffith held.
Crypto-based payment methods are an issue for digital and financial inclusion, but “there is a very strong commitment to the continued use of and access to cash,” in which banks continue to have a place. Griffith said:
“Removing that intermediary, certainly at the current evolution of the market, feels very premature.”
The FSM bill, which may “be done by Easter,” will also enable the licensing of some new payment apps in the FMI sandbox and their introduction onto the market. The use cases for crypto-based wholesale fintech may be in ledgers and registers “in the middle office” for now, Griffith said.
Full regulation of crypto asset markets will not be achieved in 2023, Griffith assured a committee member. Legislation will adhere to the principle of “same asset, same regulation.”
In the interim, oversight of crypto promotions is playing an important role in consumer protection. Consumers can look for the Financial Conduct Authority (FCA) logo on promotions to know they are dealing with a regulated organization. Treasury deputy director of payments and fintech Laura Mountford told the committee.
Be that as it may, only about 40% of consumers “understand or consider that they are buying crypto assets as a gamble,” Mountford said, citing FCA monitoring.
Tanzania ‘Cautious’ On CBDC Adoption After Initial Research
The Bank of Tanzania is waiting for the conclusion of its research into CBDCs before making a final decision on adoption.
Tanzania’s central bank says it is still considering the introduction of a central bank digital currency (CBDC) but will be a taking “phased, cautious and risk-based approach” after identifying several challenges that could impact its implementation.
According to a Jan. 14 public notice from The Bank of Tanzania, since its 2021 announcement about a possible CBDC rollout, the East African country formed a multidisciplinary technical team to explore the risks and benefits of CBDCs.
The bank revealed its team has conducted research looking into different types of CBDCs, models for issuance and management, and whether its CBDC should be token-based or account-based.
“The outcome of the research at this point revealed that more than 100 countries in the world are at different stages of the CBDC adoption journey with 88 at research, 20 proof of concept, 13 pilot and 3 at launch,” the bank said.
The central bank noted that at least four countries — Denmark, Japan, Ecuador and Finland — have publicly canceled CBDC adoption plans, while another six have moved away from digital currencies due to structural and technological challenges in the implementation phase.
Some of these challenges were high implementation costs, the dominance of cash, inefficient payment systems and the risk of disrupting the existing ecosystem, the bank said.
A key area being looked at by the team is also the risks and controls associated with the issuance, distribution, counterfeiting and usage of currencies.
“Analysis of these findings indicate that majority of central bankers across the world have taken a cautionary approach in the CBDC implementation roadmap, in order to avoid any potential risks that can disrupt financial stability of their economies,” it added.
At this stage, the bank has not given a clear timeline for when it will make a decision on CBDCs in Tanzania, but says it 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.”
Following neighboring countries’ efforts to introduce CBDCs, Bank of Tanzania Governor Florens Luoga made a Nov. 26, 2021, announcement that plans were underway in Tanzania to expand research into digital currencies and strengthen the capacity of central bank officials.
Cryptocurrencies are largely banned in Tanzania following a November 2019 directive from the Bank of Tanzania saying the digital assets were not recognized by local law.
CBDCs Not Worth The Costs And Risks, Says Former BoE Advisor
Tony Yates, the former senior adviser of the Bank of England, argues that CBDCs are not worth the headache.
Central banks worldwide are pushing forward with digital asset projects despite the various crypto industry implosions of the past 12 months. China has rolled out its central bank digital currency (CBDC) to several cities and made it available for use at the Winter Olympics.
Many other central banks, including the Bank of England, are considering how to roll out a CBDC, while Nigeria’s CBDC has had poor uptake so far. India has already launched a pilot scheme, while Mexico has confirmed the launch of a digital peso.
However, Tony Yates, former senior adviser to the Bank of England, advises against CBDCs in a recently published opinion piece for the Financial Times. According to Yates, “The huge undertaking of digital currencies is not worth the costs and risks.”
CBDCs are already in place in most countries as most countries already have digital versions of cash, coins and notes. Yates, therefore, questions the motivations behind global rollouts of CBDCs, calling them “suspect.”
CBDCs could be a way of quashing crypto, including decentralized currencies such as Bitcoin. However, “Cryptocurrencies are such bad candidates for money,” he explains, adding:
“They don’t have money supplies managed by humans to generate steady paths for inflation and are hugely expensive and time consuming to use in transactions.”
Yates’ take on Bitcoin is unsurprising. He has tweeted several times about Bitcoin, claiming that most of Bitcoin’s use is “illicit” and “speculative.”
I would guess that most of the use is 1) illicit, and not discouraged by central bank provision and 2) speculative; if CBDC were to cause a large price drop, this could wipe out and discourage a lot of users.
— Tony Yates (@t0nyyates) April 17, 2021
Since Bitcoin use a public ledger available for everyone, its use for illicit purposes has decreased steadily over the years to less than 1% of total transactions, reports show.
On top of that, the layer-2 Lightning Network allows instant remittance payments, while other cryptocurrencies and even stablecoins continue to grow in use cases and development.
For Yates, introducing CBDCs is akin to “making central bank reserves more widely available than just to counterparties.” But in a world where the reserve currency is the U.S. dollar, the competition for a new global CBDC is counterproductive.
The Financial Times opinion piece summarizes that the most compelling arguments for CBDCs are around payments and settlement efficiency, but the debate is “mysterious.” Yates explains that it would be a colossal undertaking for the central bank to employ the staff to build and manage the hardware and software of a new payment system.
Central-Bank Digital Currencies Are Coming—Whether Countries Are Ready or Not
The game-changing development could have a profound impact on the banking system. But few people still understand it.
“Central-bank digital currency” doesn’t exactly roll off the tongue. But you might want to get used to saying it. These so-called CBDCs, or digital versions of dollars, yuan, euros, yen or any other currency, are coming, say those who study them. And depending on how they are designed and rolled out, their impact on the banking system could be profound.
One hundred and fourteen countries are exploring digital currencies, and their collective economies represent more than 95% of the world’s GDP, according to the Atlantic Council’s Central Bank Digital Currency tracker. Some countries, including China, India, Nigeria and the Bahamas, have already rolled out digital currencies.
Others, like Sweden and Japan, are preparing for possible rollouts. The U.S. is studying the issue and has run trials of various technologies to enable a digital currency, although Fed chair Jerome Powell has indicated the U.S. central bank has no plans to create one, and won’t do so without direction from Congress.
Debates about the necessity, utility and potential pros and cons of digital currencies are often confusing, and confused, in part because every country rolling out a digital currency is doing it in its own way.
Generally, however, CBDCs can be roughly divided into two types: those designed for use by financial institutions and those designed for use by the general public.
Old vs. New
The first type is just a new way for central banks to transfer money to commercial banks.
More specifically, some central banks are testing whether money transfers between financial institutions—which in some cases can take days to settle—might be made safer and more efficient under a system in which central-bank money is represented by digital tokens and transactions are settled on a shared distributed ledger, concepts borrowed from cryptocurrency and blockchains.
One such system is being tested by the New York Fed and a range of big U.S. banks and financial institutions.
The second type of CBDC is a digital version of fiat money made available to the general public through accounts held by a central bank or a commercial bank.
From the perspective of a regular person or business, this kind of CBDC isn’t any different from the electronic money in their bank accounts today—it’s just a digital dollar.
What makes these kinds of CBDCs special is that they are created, and held, in accounts that a central bank has direct access to. If another pandemic happened, for example, the Fed could just deposit stimulus “checks” into every U.S. citizen’s digital-currency account.
This type of CBDC represents a departure from the way money is created and distributed today, in that everyday people would now have accounts, or “wallets” that contain money created by their country’s central bank itself, instead of by their commercial bank.
It represents a profound shift for central banks, from their traditional role as providers of money to a country’s banking and financial system, to connecting directly with everyday people.
China’s digital yuan is one such currency, and it can be used by everyday Chinese people through existing, and very popular, digital payment services like Alipay and WeChat Pay. India’s digital rupee is an equally bold experiment in allowing the country’s citizens to transact with a digital version of their currency in a way that could bypass traditional banks.
Question Of Control
At this point, the average person is probably wondering why, in a world in which billions of people have become accustomed to paying for things with electronic payment systems already, anyone needs a digital version of their currency.
The answer to that question depends on the motivations of the central banker, analyst or academic you ask. Many who study digital currencies argue that at the most basic level, a digital currency is all about control.
The rise of cryptocurrencies—which are another form of digital money, but one that isn’t controlled by a government or other central authority—and the potential of one nation’s digital currency to eat away at the dominance of others’ has driven interest in official digital currencies.
“There’s a worry that if we don’t launch a digital currency in the U.S. or Europe, China will set all the standards for them, and then we’ll be at a disadvantage,” says Megan Greene, global chief economist at the risk and financial advisory firm Kroll. “Also, digital currencies like crypto really scared the bejeezus out of central bankers.”
What central bankers and other interested parties—like the Biden White House, which in a September report outlined the possibilities of a digital U.S. dollar—fear is the potential of cryptocurrencies to wrest control of the creation and transfer of money from central banks, leaving them without the tools they currently have for preventing their respective economies from running too hot or too cold.
All of these threats remain entirely hypothetical for now, says Eswar Prasad, an economist at Cornell University. In his book “The Future of Money,” he outlines the other reasons that policy makers give for wanting to create digital currencies.
Perhaps the most noble of those reasons is financial inclusion. In the U.S., only about 5% of people don’t have a bank account.
But in other countries, such as the Bahamas, which was the first country in the world to implement a digital currency, the figure is much higher—around 18%, according to the country’s central bank.
If everyone had access to an account with their country’s central bank, and could use it to transact instantaneously with others using a digital currency, for a minimal or no fee, the idea is that it would bring many more people into the regional and even global financial system, with all the benefits that attend.
On the other hand, the potential downsides of a digital currency, even one initially intended for only the most benign purposes, could be profound, says Dr. Prasad.
First, there is the obvious issue of privacy. A digital currency could allow governments to track every transaction a person makes, no matter how minute.
This level of transparency would be a powerful disincentive to using these currencies for crime or fraud, but it could also open the door to new kinds of social control, especially in countries with already-scant protections for human rights.
For example, says Dr. Prasad, a government could make it impossible to spend the digital currency on things the ruling party deems problematic, like alcohol or pornography. The government also could make transacting with certain people difficult or impossible—China already has a social credit system that ranks citizens algorithmically, and punishes them in various ways.
“Throughout history, I think you see many examples where you see tech that seems very benign get perverted into much more malign uses,” says Dr. Prasad.
Even less-malign applications of digital currencies could lead to all sorts of unintended consequences. One, which the crypto industry has run afoul of many times in the recent past, is that the more complex and capable designers of a digital currency make their system, the greater the possibility that it could be manipulated in ways its designers didn’t anticipate.
Set aside FTX, which appears to be a straightforward case of the misuse of depositors’ funds. Set aside also the many hacks and thefts of cryptocurrency that have taken place of late.
Plenty of crypto projects have failed or lost huge amounts of money even when they were functioning exactly as they were designed.
For example, the crypto exchange Mango Markets saw $114 million in funds siphoned out by a trader who didn’t break any of the rules of the exchange, and simply exploited a feature of the behavior of the exchange that its designers didn’t anticipate.
Then there are the failures of various “algorithmic stablecoins”—that is, cryptocurrencies that are supposed to be pegged to the U.S. dollar—which collapsed as soon as the overall value of cryptocurrencies was no longer rising.
Ironically, one of the biggest dangers of central-bank digital currencies could be that they succeed. Buried in the code and systems that dictate how they function could be a liability that a country doesn’t discover until it’s too late.
It’s impossible to know what that liability might be, but the example of the many and varied experiments in new kinds of financial structures and products from the crypto industry should inspire designers of more-complicated digital currencies to tread carefully.
“I think it is inevitable there will be unintended consequences as a result of CBDCs,” says Ms. Greene. “The Fed and the Bank of England are moving pretty slowly on digital currencies, which has made them the subject of criticism—but I actually think it is smart they’re being methodical, because there are so many different decisions they have to make.”
WEF 2023: CBDCs Need To Find A ‘Real Problem’ To Solve, Says SARB Governor
The central bank governor highlighted that the South African Reserve Bank would rather follow than become a first mover in retail CBDCs.
South African Reserve Bank (SARB) governor Lesetja Kganyago highlighted issues surrounding the introduction of central bank digital currencies (CBDCs) at the World Economic Forum (WEF) 2023, held in Davos, Switzerland.
In a WEF 2023 panel discussion dubbed “In the Face of Fragility: Central Bank Digital Currencies” Kganyago voiced his opinions on CBDCs and questioned if there’s a real problem solved by this new technology. Kganyago said:
“Is this a solution looking for a problem or do we have some real problem that we are trying to solve?”
The central bank governor also highlighted that the countries that are researching and looking to introduce CBDCs highlighted several reasons for its implementation.
This includes the modernization of the central bank, making national payment systems more efficient, dealing with domestic market failure and strong financial inclusion.
However, the government official raised the question of demand. Kganyago pointed out there has to be a national conversation before introducing CBDCs. He argued that before introducing this to the public, central banks should make sure that the people actually want to use it.
Following these points, Kganyago mentioned that the SARB is taking a cautious approach when it comes to CBDCs. “We are going to be good students when it comes to retail CBDCs and would rather be a follower than to be a first mover,” he said.
Back in 2021, the SARB governor also voiced opposition to crypto being deemed as currencies. The government official said that crypto only meets two out of three requirements for currencies, arguing that it lacks general adoption.
In other parts of the WEF 2023 event at Davos, Cointelegraph reporter Gareth Jenkinson spoke with Ava Labs CEO Emin Gun Sirer and discussed decentralized finance and its role in complementing traditional finance.
Sirer noted that the two financial worlds are now merging despite their differing values in the beginning.
Going Cashless: Norway’s Digital Currency Project Raises Privacy Questions
At this point, the test network for the Norwegian CBDC uses not the public Ethereum ecosystem, but a private version of the enterprise blockchain Hyperledger Besu.
The small Nordic country of Norway may not be particularly notable on the global crypto map. With its 22 blockchain solution providers, the nation doesn’t stand out even at the regional level.
However, as the race to test and implement central bank digital currencies (CBDCs) accelerates every day, the Scandinavian nation is taking an active stance on its own national digital currency. In fact, it was among the first countries to begin the work on a CBDC back in 2016.
In recent years, amid a rise in cashless payment methods and concern over cash-enabled illicit transactions, some Norwegian banks have moved to remove cash options altogether.
In 2016, Trond Bentestuen, then an executive at major Norwegian bank DNB, proposed to stop using cash as a means of payment in the country:
“Today, there is approximately 50 billion kroner in circulation and [the country’s central bank] Norges Bank can only account for 40 percent of its use. That means that 60 percent of money usage is outside of any control.”
A year before that, another large Norwegian bank, Nordea, also refused to accept cash, leaving only one branch in Oslo Central Station to continue handling cash.
This sentiment came in parallel with Bitcoin enthusiasm, as DNB enabled its customers to buy BTC via its mobile app, local courts demanded that convicted drug dealers pay their fines in crypto, and local newspapers widely discussed investments in digital assets.
Last year Torbjørn Hægeland, executive director for financial stability at Norway’s central bank, Norges Bank, outlined to the project’s goal of replacing cash use in the country:
“With this background, the decline in cash use and other structural changes in the payment system are key drivers for the project.”
The experimental phase of the Norwegian CBDC will last until June 2023 and end with recommendations from the central bank on whether the implementation of a prototype is necessary.
Ethereum Is The Key
In September 2022, Norges Bank released the open-source code for the Ethereum-backed digital currency sandbox. Available on GitHub, the sandbox is designed to offer an interface for interacting with the test network, enabling functions like minting, burning and transferring ERC-20 tokens.
However, the second part of the source code, announced to go public by mid-September, has yet to be revealed. As specified in a blog post, the initial use of open-source code was not a “signal that the technology will be based on open-source code,” but a “good starting point for learning as much as possible in collaboration with developers and alliance partners.”
Earlier, the bank revealed its principal partner in building the infrastructure for the project — Nahmii, a Norway-based developer of a layer-2 scaling solution for Ethereum of the same name.
The company has been working on this scaling technology for Ethereum for several years and has its own network and tokens.
At this point, the test network for the Norwegian CBDC uses not the public Ethereum ecosystem, but a private version of the enterprise blockchain Hyperledger Besu.
In late 2022, Norway became part of Project Icebreaker, a joint exploration with the central banks of Israel, Norway and Sweden on how CBDCs can be used for cross-border payments.
Within its framework, the three central banks will connect their domestic proof-of-concept CBDC systems. The final report for the project is scheduled for the first quarter of 2023.
Local Specifics, Universal Problems
In terms of hopes and fears, what defines the Norwegian CBDC project among others is the national regulatory context. Like its geographical neighbors, Norway is known for its cautious approach to the digital assets market, with high taxes and the relatively small scale of its domestic crypto ecosystem — a recent study by EU Blockchain Observatory estimated its total equity funding at a modest $26.9 million.
Norwegian serial entrepreneur Sander Andersen, who has recently moved his fintech company to Switzerland, doubts that the upcoming project will co-exist peacefully with the crypto industry.
There are already more than enough problems for tech entrepreneurs in the country, he said in a chat with Cointelegraph:
“Despite the country’s strong infrastructure for entrepreneurs in other industries, such as low energy costs and free education, these benefits do not extend to the digital realm.
The tax burden faced by digital companies makes it nearly impossible to compete with businesses based in more business-friendly jurisdictions.”
As central bank digital currencies have the potential to compete with private cryptocurrencies, and the goal of any government is to control financial transactions as tightly as possible, Andersen doesn’t see Norway among the exceptions:
“The Norwegian central bank’s CBDC project can also pose a threat to the legal status of private stablecoins in the country. The introduction of a CBDC may prompt increased regulation and oversight of private stablecoins, making it harder for these companies to operate.”
Speaking to Cointelegraph, Michael Lewellen, head of solutions architecture at OpenZeppelin, a company contributing its contracts library to the Norges Bank project, doesn’t sound so pessimistic.
From a technical perspective, he emphasized, there is nothing stopping private stablecoins from trading and operating alongside CBDCs on both public and private Ethereum networks, especially if they use common, compatible token standards such as ERC-20.
However, from a policy perspective, there’s nothing that can stop central banks from performing financial gatekeeping and enforcing the Know Your Customer (KYC) standards, and this is where the CBDC looks like a natural development.
Banks will not sit idly by as the blockchain ecosystem grows, as there is a lot of shadow-banking activity happening on-chain, Lewellen specified, adding:
“CBDCs offer central banks the ability to better perform gatekeeping and enforce KYC rules on CBDC holders, whereas enforcing the same standards against entities using non-governmental stablecoins is far more challenging.”
Today, a mature solution doesn’t exist that would allow privacy in a compliant manner regarding the use of CBDCs.
Any national digital currency would almost certainly require every address to be linked to an identity, using KYC and other means we see in banks today.
In fact, if done on the private ledger, like the one that Norges Bank is testing right now, the CBDC will offer not only less privacy for a single customer, but at the same time less public transparency with regard to blockchains.
UK gov’t Is Hiring A Central Bank Digital Currency Lead For Treasury Team
The team lead will determine the “strategic direction” for Treasury’s efforts to develop a digital pound in line with the U.K. government’s agenda.
HM Treasury in the United Kingdom has begun calling for applicants to lead the central bank digital currency team behind efforts towards a digital pound.
In a job posted to LinkedIn on Jan. 24, the U.K. Treasury called for a team lead for its Payments and Fintech Team of roughly 20 people focused exploring on a “potential digital pound”.
According to the posting, the CBDC head would determine the “strategic direction” for Treasury’s efforts to develop a digital currency in line with the government’s agenda, as well as analyze potential policy issues for lawmakers.
“Treasury and the Bank of England are working together through the CBDC Taskforce to explore the case for a digital pound,” said the job posting. “Treasury and the Bank of England have committed to consult jointly on a potential digital pound, and the successful candidate will lead the Treasury team in the wake of the consultation’s issuance, including working with the Bank of England to consider consultation responses.”
Many U.K. lawmakers and industry leaders have all offered their two cents — or rather, pence — on the introduction of a CBDC as the digital asset space grows.
Tony Yates, a former senior adviser to the Bank of England, advised against CBDCs in a January interview, arguing it was “not worth the costs and risks.” The current governor of England’s central banks has likewise expressed skepticism about a digital pound.
The U.K. has experienced major shake ups in leadership, from the government going through three prime ministers within a matter of months to Queen Elizabeth II passing in September 2022. However, lawmakers continue to mull policies related to digital asset regulation and enforcement.
At the time of publication, 16 applicants had applied for the CBDC role at Treasury.
Saudi Central Bank Still Researching CBDC, But No Decision On Deployment
Saudi Arabia’s central bank stressed that no decision has been made to launch a CBDC, but it will continue to research use cases.
The Saudi Central Bank (SAMA) is ramping up its research into central bank digital currencies (CBDCs) but is yet to announce a deployment.
In a Jan. 23 bulletin, the bank stated it was working on a phase of a project that “focuses on domestic wholesale CBDC use cases in collaboration with local banks and fintechs.”
However, it confirmed there had been no final decision to launch such a digital currency in the Middle Eastern nation.
“SAMA stresses 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.”
SAMA is researching several aspects of a state-issued digital currency including economic impact, market readiness and the applications of a CBDC-based payment solution. It also intends to review policy, legal and regulatory considerations.
The move is part of Saudi Vision 2030, an initiative to reduce the kingdom’s dependence on oil, diversify its economy and develop public service sectors such as health, education, infrastructure, recreation and tourism.
According to SAMA governor H.E. Fahad Almubarak, local banks and payment companies will be heavily involved in the CBDC project and implementation.
SAMA successfully conducted a CBDC experiment called “Project Aber” in 2019. It worked in collaboration with the Central Bank of the United Arab Emirates to examine whether blockchain technology could contribute to cross-border payments.
The banks released a report on their findings in late 2020 concluding a dual-issued CBDC was technically viable for cross-border payments and presented “significant improvement over centralized payment systems in terms of architectural resilience.”
No details were provided on the technology behind the Saudi CBDC, but CBDC Tracker suggests it is based on the Linux Foundation’s Hyperledger Fabric.
According to the United States think tank Atlantic Council, there are currently 11 countries that have fully deployed a CBDC and 17 are running pilots. Most of those that have launched are in the Caribbean, with one in Nigeria.
Hong Kong Lawmaker Wants To Turn CBDC Into Stablecoin Featuring DeFi
A Hong Kong official believes that a government-backed stablecoin would serve as a better entry point to Web3 compared to private stablecoins.
Hong Kong authorities are looking for new designs for a central bank digital currency (CDBC), now proposing to issue a CBDC in the form of a stablecoin backed by the government.
Wu Jiezhuang, a member of the Legislative Council of the Hong Kong Special Administrative Region, believes that turning the Hong Kong digital dollar (e-HKD) into a stablecoin would provide benefits for the adoption of new technologies like Web3.
The option of developing e-HKD into a stablecoin has the potential to address the risks associated with virtual assets in Web3 effectively, Wu Jiezhuang said in an interview with China Blockchain News on Jan. 5.
According to the lawmaker, such a design of the Hong Kong digital dollar would help authorities gain investors’ trust in the Web3 industry and better protect users from issues like hacks.
“The stablecoins that are currently available in the market are all issued by some private companies and are not subject to government supervision,” Wu Jiezhuang said, referring to failures of several stablecoin projects in 2022, which caused a domino effect on the crypto market.
The lawmaker also pointed out that the stablecoin could be connected to decentralized finance (DeFi) for better access in Web3 ecosystems, stating:
“The Hong Kong government can consider whether the issuance of digital Hong Kong dollars can be connected with decentralized finance and become an important infrastructure component of the virtual asset trading platform.”
Apart from his role as a Hong Kong Legislative Council member, Wu Jiezhuang is also a founding member of G-Rocket, a startup accelerator that aims to attract 1,000 Web3 businesses to set up shop in the city-state over the next three years. He co-founded G-Rocket with Hong Kong legislative council member Jonny Ng Kit-Chong in 2016.
Wu Jiezhuang is the latest government official to highlight the potential benefits of the combination of CBDC and DeFi. Thomas Moser, a governing board member at the Swiss National Bank, said in September 2022 that a CBDC could provide more stability to DeFi and reduce the risks of its development.
Previously, Mikkel Morch, executive director at the digital asset hedge fund ARK36, suggested that a CBDC doesn’t have to be a competitor to a private or decentralized cryptocurrency. At the same time, a CBDC could potentially diminish the role of private stablecoins, he noted.
Bitcoin In Nigeria Is 60% More Expensive, But There’s A Catch
The price of one Bitcoin in Nigeria is the equivalent of $38,000 in the official rate for local currency, but there’s more to that.
The price of Bitcoin has skyrocketed to well above global market levels, but only if the official naira-to-U.S. dollar rate is used for calculation.
At the time of writing, the price of 1 BTC on the Nigerian crypto exchange NairaEX is 17.8 million nairas, equating to a whopping $38,792 in the official rate.
However, local media points out that the official foreign currency rate listed by the Central Bank of Nigeria (CBN) doesn’t reflect the actual USD price available to Nigerian citizens.
As per the official CBN exchange rate, $1 equals N460 as of Jan. 30. However, the exchange rate of USD in the parallel market, or the real price that Nigerian citizens can exchange Naira for U.S. dollars is close to N750.
This disparity between the official naira-to-USD rate and the real market rate of USD for Nigerian traders causes it to appear Bitcoin has a 60% “premium” over the current market price — which is around $23,700 at the time of writing.
Recently, CBN introduced new naira banknotes with the aim of curbing inflation and money laundering. The central bank imposed a deadline of Jan. 24 for Nigerians to exchange their old, higher denomination bank notes for the new currency.
However, there were long queues and complaints that there was insufficient time to meet the deadline. The central bank has now extended that deadline to Feb. 10, the BBC reported on Jan. 29.
Nigeria has become the leading country for Bitcoin web searches, according to Google Trends.
Additionally, on Jan. 26 Reuters reported that the Central Bank of Nigeria launched a domestic card scheme to rival foreign cards like Mastercard and Visa.
The “AfriGo” card scheme was designed to give Nigerians better access to bank card services and circumvent often expensive foreign card fees and exchange costs.
Indian Retail Chain Rolls Out Support For CBDC Payments In Stores: Report
Reliance Retail has implemented support for the digital rupee in its gourmet store line Freshpik.
One of India’s biggest retail chains, Reliance Retail, announced that they have started accepting the digital rupee at one of its store lines and plans to extend the rollout to all its businesses.
In a report by Tech Crunch, the company said central bank digital currency (CBDC) support is already rolled out at Freshpik, its gourmet store line.
In addition, the firm also noted that it would be expanding support for the digital rupee to all of its properties, a move that could push adoption forward for the country’s CBDC.
V Subramaniam, an executive at Reliance Retail, pointed out that accepting the central bank digital currency adheres to the firm’s vision of offering “the power of choice” to Indian consumers.
The executive also highlighted that the initiative allows the firm to provide an alternative payment option within its stores.
According to the report, Reliance Retail partnered with ICICI Bank, Kotak Mahindra Bank and fintech company, Innoviti Technologies to roll out support for the CBDC.
Consumers who opt to pay with the digital rupee will receive a QR code at the store to complete their payment.
Plans for the country’s CBDC were outlined by the Reserve Bank of India (RBI) on Oct. 7 in a 51-page note. The country’s central bank defined various factors, including the potential positive and negative effects. According to the RBI, one of the motivations behind a CBDC is reducing the operational costs of managing cash.
The RBI launched the wholesale pilot of the digital rupee in November 2022 for institutions and merchants. On Dec. 1, 2022, the central bank started the CBDC pilot for retail consumers within a closed user group composed of merchants and customers.
China Doles Out Millions In Digital Yuan In Bid To Boost Adoption: Report
Multiple Chinese city governments have given away millions worth of e-CNY to try to promote consumption around the holiday season.
Millions of dollars worth of China’s central bank digital currency (CBDC) has been handed out across the country over the Lunar New Year period in a bid to boost its takeup.
According to a Feb. 6 report in the Global Times, an English-language outlet of the state-ruPeople’s Daily newspaper, around 200 “activities” for the e-CNY were launched across the country during the holiday period.
These activities aimed to “promote consumption” — the first time the government has done so since recently relaxing COVID-19 restrictions.
Multiple cities reportedly gave away over 180 million yuan ($26.5 million) worth of the CBDC in programs such as subsidies and consumption coupons.
In one example cited by the outlet, the Shenzhen local government handed out over 100 million yuan ($14.7 million) worth of e-CNY to subsidize the city’s catering industry.
A Feb. 1 China Daily report said Hangzhou issued each resident an 80 yuan ($12) e-CNY voucher on Jan. 16. The total giveaway cost the city around 4 million yuan, or $590,000.
Some of these initiatives proved to be very popular among residents.
Citing data from the e-commerce platform Meituan, the Global Times report stated that e-CNY given away by the Hangzhou city government for the New Year celebrations was taken up by residents within nine seconds.
The last few months has seen the government enact other targets and features to boost the usage of the CBDC.
On Feb. 1, senior ruling party officials in the city of Suzhous set a tentative key performance indicator for the end of 2023 of having 2 trillion yuan ($300 billion) worth of e-CNY transactions in the city.
The target is ambitious considering cumulative e-CNY transactions only crossed 100 billion yuan ($14 billion) in October, two years after the CBDC’s launch.
In a bid to attract new users, in late December last year, the e-CNY wallet app introduced the ability to send “red packets” called hongbao in China, which is used for gifting money around the holidays.
The wallet app als received an update in early January allowing users to make contactless payments using Android phones — even if their device is without internet or power.
In December, a former Chinese central banker called the results of the e-CNY trials “not ideal,” and admitted, “usage has been low, highly inactive.”
Digital Pound Holdings Could Be Limited To 10K, Central Bank Says
The Bank of England has set out technical features of its central bank digital currency, which officials have said is likely to be needed.
U.K. citizens could be limited to holding 10,000 British pounds (US$11,900) each in a new digital pound, as the Bank of England seeks to avoid a new central bank digital currency undermining the banking system.
The central bank appeared to favor centralized databases over the blockchain as it seeks a technological basis for the digital currency, which officials said on Monday would be likely to be needed.
“The Bank would place some limits on holdings of digital pounds, at least during its introductory period,” to avoid citizens hoarding their assets in safe central bank money and skirting around the commercial banking system, a consultation published today by the central bank and U.K. Treasury said. “We judge that a limit of between 10,000 and 20,000 [pounds] per individual is likely to strike an appropriate balance between managing risks and supporting wide usability of the digital pound.”
The range of holdings would allow 75%-95% of U.K. earners to take their salary without breaching holding limits, the document said, but could vary by individual, it added, citing differences based on region, age and gender.
The central bank appears to take a cautious view on the ability to pre-program how funds can be used. While it could allow money held in trust to be released when smart contract conditions are met, or ensuring taxes get paid automatically, that functionality also changes the nature of money as a freely exchangeable good.
U.K. banks on Tuesday expressed concern that the central bank digital currency (CBDC) could effectively encourage a bank run as customers move to hold central bank money directly, perceived as the safest form of asset.
A separate technical paper published by the central bank said distributed ledger technologies that underlie crypto and blockchain-based solutions “might have advantages in guaranteeing consistency and resilience,” while presenting “privacy, scalability and security challenges.”
“Centrally governed, distributed database technologies might achieve the ledger requirements without such limitations. Therefore, these technologies might be appropriate for the core ledger design,” the technical paper said.
The central bank appears to take a cautious view on the ability to pre-program how funds can be used. While it could allow money held in trust to be released when smart contract conditions are met, or ensuring taxes get paid automatically, that functionality also changes the nature of money as a freely exchangeable good.
“The Bank will not implement central bank-initiated programmable functions,” the technical document said. “Instead, the Bank would provide the necessary infrastructure for the private sector to implement programmability features for users. Those features would require user consent.”
The central bank said it would allow private sector companies – such as those providing anti-money laundering checks on wallets or offering analytics services – to offer programmability on top of central bank infrastructure, but said any functions shouldn’t reduce simplicity or performance.
Regulated private intermediaries would have privileged access to the central bank’s core infrastructure, the consultation said – but personal holdings will appear on the central bank’s ledger, not on the balance sheet of the wallet provider.
“The digital pound would have at least the same level of privacy as a bank account and would also allow users to make choices about data use,” the consultation said.
It won’t be anonymous, but neither the government nor the central bank will have access to personal data, and the police will have access only on a “fair and lawful basis.” The central bank said it is still considering how to set limits if corporations, and even financial firms, should get access to the digital currency, too.
The consultation is open for comment until June 7.
Don’t Call It ‘Britcoin’: Digital Pound Nothing Like Crypto, Bank of England Official Says
The central bank has made no decision on whether a digital pound would use distributed ledger technology, Deputy Governor Jon Cunliffe said.
The Bank of England is not okay with the press calling a digital pound issued by the central bank the “Britcoin.”
“The digital pound can be confused in peoples’ minds with crypto assets such as bitcoin. I should take this opportunity to correct this misapprehension.
Indeed, nothing could be further from the truth,” Bank of England Deputy Governor Jon Cunliffe said during a Tuesday speech on the central bank’s new plans for a digital pound.
A majority of cryptocurrencies are “highly speculative” and have “no intrinsic value,” Cunliffe said, adding that although it is possible some technologies underlying crypto could help develop a digital version of the pound, the bank is considering a range of options.
While the central bank has made no decision on using distributed ledger technology (DLT) which is currently used for cryptos, Cunliffe said experimentation with decentralized record-keeping is “important to ensure it is appropriately considered.”
The Bank of England, along with the U.K.’s finance ministry, opened a consultation on Tuesday, inviting public opinions on plans for a central bank digital currency.
While U.K. banks responded to the news with concerns about bank runs, the consultation document laid out plans to cap individual holdings of the digital currency at between 10,000 (US $11,900) and 20,000 British pounds.
Cunliffe reiterated the need for caps for “keeping outflows from the banking system broadly within the assumptions set out in the Bank’s earlier modeling work” during his Tuesday speech.
In response to a question, he said U.K. citizens should be able to receive their salary and pension in digital pounds to make sure it’s useful.
The bank also envisions fiat-backed private crypto like stablecoins – which the U.K. is planning to regulate under its upcoming Financial Services and Markets Bill – operating alongside the digital pound for payments.
“The proposals set out today are designed to ensure that the U.K. is well placed to take advantage of the benefits that these changes can offer, while ensuring that we preserve the safety and uniformity of money in the U.K.,” Cunliffe said.
UK’s Digital Pound Would Modernize Payments But Won’t Replace Cash: Minister
Finance minister Jeremy Hunt says the digital pound, or “Britcoin,” would be issued and backed by the Bank of England, but it won’t negate the use of cash.
The Bank of England (BoE) and the United Kingdom’s Treasury are gearing up plans to create a digital currency that could “provide a new way to pay” without necessarily replacing cash.
On Feb. 7, a joint consultation paper on central bank digital currencies (CBDCs) is set to drop, with the BoE and Treasury seeking feedback on how — and if — they should proceed with building a CBDC.
In a Feb. 6 public statement, Finance Minister Jeremy Hunt indicated that the two entities would seek to develop a modernized digital payments system that doesn’t necessarily negate the use of cash.
“While cash is here to stay, a digital pound issued and backed by the Bank of England could be a new way to pay that’s trusted, accessible and easy to use,” he said, adding that “we want to investigate what is possible first, whilst always making sure we protect financial stability.”
Another key area of focus will be to provide a government-backed alternative to privately issued stablecoins, with officials from the BoE and Treasury expecting Big Tech companies to develop such in the coming years.
As part of the statement, BOE Governor Andrew Bailey emphasized that a “digital pound would provide a new way to pay, help businesses, maintain trust in money and better protect financial stability.”
“However, there are a number of implications which our technical work will need to carefully consider. This consultation and the further work the bank will now do will be the foundation for what would be a profound decision for the country on the way we use money.”
BoE Deputy Governor Jon Cunliffe is also set to give a speech on Feb. 7 to update the finance industry on the central bank and Treasurys’ CBDC work so far.
If they decide to move forward, it was suggested that the digital pound and its underlying blockchain-based system would not be built until at least 2025.
In April 2021, current prime minister and former finance minister Rishi Sunak directed the BoE and Treasury to collaborate and form the Central Bank Digital Currency Taskforce.
Essentially the duo is tasked with overseeing the study and potential implementation of the digital pound.
While it appears to have been a slow burn so far, given how cautious the BoE and Treasury’s stances are, the latter did post a job listing to LinkedIn on Jan. 24 calling for a team lead for its Payments and Fintech Team of roughly 20 people focused exploring on a “potential digital pound.”
Russia’s Gazprombank Recommends Slow CBDC Rollout Fearing Loss Of Income
Gazprombank, a subsidiary of a state-owned energy corporation, which participates in Russia’s CBDC initiative, fears losing a part of its income as the digital ruble replaces traditional fiat currency.
Gazprombank, a subsidiary of the leading Russian government-owned gas company, Gazprom, publicly proposed giving banks more time before implementing the digital ruble.
The country’s central bank digital currency (CBDC) project has been accelerating due to global financial sanctions amid geopolitical tensions.
As reported by local media on Feb. 7, Gazprombank, one of the 15 banks participating in the CBDC pilot, issued a public statement with a suggestion to proceed with caution regarding traditional banks’ interests:
“It is imperative that banks take measures to mitigate potential losses. Hence, it is crucial to recognize the potential risks associated with the transition to a digital ruble and approach its implementation with caution, allowing the financial system sufficient time to adjust.“
However, the statement admits that the CBDC will help raise transparency across the Russian financial system and economy.
The Russian branch of McKinsey estimated the potential losses of traditional banks from the CBDC implementation at around $3.5 billion (250 billion rubles) in five years. At the same time, the consultancy firm estimated the retailers’ profit at $1.1 billion yearly.
The work on a CBDC in Russia started back in 2020. The digital rouble is currently being tested for settling with the banks and is expected to be completed this year. According to the Bank of Russia’s latest monetary policy update, the authority will begin to connect all banks and credit institutions to the digital rouble platform in 2024.
The Central Bank of Russia has also begun developing a cross-border settlement system using a CBDC. The country faced mounting financial and trade sanctions since the escalation of the Russo-Ukrainian war when it launched a full-scale invasion of Ukraine in late February 2022.
India In ‘No Hurry’ For CBDC As Digital Rupee Pilot Onboards 50K Users
The central bank of India wants to proceed with CBDC testing in the smoothest way possible, deputy governor Rabi Sankar said.
The Indian government doesn’t want to rush its central bank digital currency (CBDC) pilot despite joining the CBDC race just a few months ago.
India’s recently launched CBDC pilot has amassed 50,000 users and 5,000 merchants since the Reserve Bank of India (RBI) launched the digital rupee pilot last year, local news agency The Economic Times reported on Feb. 8.
Announcing the first public milestones of India’s digital currency at a policy press conference, RBI deputy governor Rabi Sankar stressed that the government plans to proceed with CBDC testing in the smoothest way possible.
“We want the process to happen, but we want the process to happen gradually and slowly. We are in no hurry to make something happen so quickly.”
The latest announcement adds up to data from an official digital rupee application, which suggests that the pilot is taking no more users.
According to data from the digital rupee app by the ICICI Bank, India’s CBDC program is full at the time of writing, suggesting that more users would be able to join the trial at a later date.
Sankar noted that the digital rupee pilot project has recorded 770,000 transactions across eight banks since the trial launched on Dec. 1, 2022. The project is currently being carried out in five cities, with nine more cities potentially gradually joining the pilot soon. The official also said that five more banks are set to join the project in the near future.
As previously reported, the RBI officially debuted a wholesale CBDC in November 2022, launching a retail CBDC a month later.
The Indian government initially announced CBDC plans in early 2022, declaring that a digital rupee would be a “big boost” for India’s economy.
The RBI then proposed a three-step graded approach for its rollout, aiming for little or no disruption to the traditional financial system.
India’s CBDC developments came years after countries like China started aggressive digital currency rollout in April 2020.
Despite massive efforts to promote the use of CBDCs, some former central bank officials claimed that the digital yuan’s usage has been low.
BIS To Launch Stablecoin Monitoring Project And Up Focus On CBDC Experiments
The bank for central banks is expanding its CBDC research while developing a platform to monitor stablecoin balance sheets.
The Bank for International Settlements (BIS) will heighten focus on experimenting with central bank digital currencies (CBDCs) this year via its research and development arm and will also launch a new project to monitor stablecoins.
On Feb. 7, the Switzerland-based so-called “bank for central banks” announced its Innovation Hub will “increase its focus” on CBDCs in 2023 to improve payment systems.
The bank added that its work schedule for the year ahead also includes “Project Pyxtrial,” which it described as a new experiment being launched by the London branch of the BIS Innovation Hub to enable the “systemic monitoring of stablecoins.”
Pyxtrial will develop a platform to monitor the balance sheets of stablecoins. The bank noted that most central banks lack the tools to “systemically monitor stablecoins and avoid asset-liability mismatches,” before adding:
“The project will investigate various technological tools that may help supervisors and regulators to build policy frameworks based on integrated data.”
For its CBDC-related projects, the BIS will focus more on retail CBDCs such as the two-tiered system called Aurum that it piloted in Hong Kong in July.
It stated that CBDCs and payment systems improvements accounted for 15 of the 26 projects that have been active in the last couple of years. It cited increased awareness from central banks as the primary driver.
“This emphasis reflects the interests and priorities of central banks and the G20 countries’ programme to improve cross-border payments.”
It also plans to experiment with the distribution of a retail CBDC through an open API ecosystem in a joint experiment with the Bank of England dubbed Rosalind.
In 2023, the #BISInnovationHub will increase its focus on improving payments systems and experimenting with #CBDCs; on shaping the future of financial regulation and supervision; and on greening and securing the financial sector. Read more: https://t.co/565s9KK1gn pic.twitter.com/izlF1u0Q22
— Bank for International Settlements (@BIS_org) February 7, 2023
In September, the BIS concluded a pilot for a platform called mBridge, short for Multiple CBDC Bridge. The central banks of Hong Kong, Thailand, China and the United Arab Emirates took part in the pilot in addition to 20 commercial banks from the countries.
According to the Atlantic Council’s CBDC tracker, just 11 countries have fully launched a CBDC. All ar located in the Caribbean aside from Nigeria.
There are pilots underway in 17 nations, mostly in Asia, including China, Russia, Kazakhstan, India, South Korea, Thailand and Malaysia.
eNaira Is ‘Crippled‘: Nigeria In Talks With NY-Based Company For Revamp
After multiple attempts to create an efficient digital currency, the Central Bank of Nigeria is turning to a New York tech firm to revamp the underlying technology.
The Central Bank of Nigeria (CBN) continues to develop its central bank digital currency (CBDC), the eNaira, but this time it’s calling for backup.
According to a Feb. 21 Bloomberg report, the CBN is in talks with new “technology partners” to develop a new and improved system to manage the eNaira.
According to sources close to the matter, the Nigerian financial authority has discussed these plans with the New York-based technology firm R3.
New software for the eNaria will be created to allow the CBN to have complete control over the initiative; however, the unnamed source said the matter is confidential.
The effort to create the eNaira began in 2021 with the help of the financial software company, Bitt. According to the report, the new partner won’t immediately take Bitt’s role but will help phase in total control for the Nigerian central bank.
In a statement, Bitt said it is aware that the CBN works with various partners for its technological innovations. It confirmed that it still works closely with the CBN and is “currently developing additional features and enhancements.”
Although it is one of the first countries to have launched a CBDC, Nigeria’s eNaira got off to a sluggish start, with low adoption. According to some reports, the ambitious project is “crippled,“ with only 0.5% of Nigerians using the CBDC.
In January, a Nigerian innovator launched the country’s first active Bitcoin Lightning node. Shortly before that, the government announced its plan to create a legal framework for stablecoins and Initial coin offerings.
Nigeria is one of more than 90 countries exploring the use of CBDCs. Others include Russia and Japan, both of which have plans to roll out their currencies before the summer.
The city of San Francisco is also looking into the possibility of developing a CBDC system.
However, there is active pushback against CBDCs from activists who call them “surveillance” tools.
US Lawmaker Introduces Bill Aimed At Limiting Fed’s Authority On Digital Dollar
If passed, the legislation could prohibit the Fed from issuing a digital dollar “directly to anyone,” as well as bar the bank from implementing monetary policy based on a CBDC.
Representative Tom Emmer has introduced legislation in the United States House of Representatives that could limit the Federal Reserve from issuing a central bank digital currency, or CBDC.
In a Feb. 22 announcement, Emmer said he had introduced the “CBDC Anti-Surveillance State Act” in an apparent effort to protect Americans’ right to financial privacy.
According to the Minnesota lawmaker, the bill could prohibit the Fed from issuing a digital dollar “directly to anyone,” bar the central bank from implementing monetary policy based on a CBDC, and require transparency for projects related to a digital dollar.
“Any digital version of the dollar must uphold our American values of privacy, individual sovereignty, and free market competitiveness,” said Emmer. “Anything less opens the door to the development of a dangerous surveillance tool.”
Today, I introduced the CBDC Anti-Surveillance State Act to halt efforts of unelected bureaucrats in Washington, DC from stripping Americans of their right to financial privacy. pic.twitter.com/lONbHFZMk7
— Tom Emmer (@GOPMajorityWhip) February 22, 2023
If passed in both the House and Senate and signed into law by President Joe Biden, the bill would amend the Federal Reserve Act to limit the Fed’s authority with respect to CBDCs.
Emmer is the Majority Whip for the House, where Republicans currently hold a majority of seats. Cointelegraph reached out to Representative Emmer’s office but did not receive a response at the time of publication.
Many on social media lauded the bill as a step in the right direction. Bitcoiner Dan Held applauded Emmer’s actions, with others citing financial privacy as one of the reasons they supported the legislation.
Emmer introduced a similar bill in January 2022, during the last session of Congress when Republicans held a minority in the House.
At the time, the U.S. lawmaker cited “China’s digital authoritarianism” in limiting the Fed’s authority on a digital dollar — China had announced its digital yuan would be available to foreign athletes at the Beijing 2022 Winter Olympics and continues to move forward with the project.
During much of his recent time in office, Representative Emmer has been considered a crypto-friendly lawmaker calling for the government to scale back regulation in order to promote innovation in the industry.
In December, he requested Securities and Exchange Commission Chair Gary Gensler appear before Congress to “answer questions about the cost of his regulatory failures.”
Why Nigerians Aren’t Turning To The eNaira Despite Crippling Cash Shortages
A lack of infrastructure, merchants and interest may all be reasons why more people in the country aren’t using the digital currency.
Nigeria is struggling with severe cash shortages, with riots erupting across the country just days before a presidential election – but people are still not turning to the national digital currency, the eNaira, which promised to improve retail payments.
The digital iteration of the naira, which was issued by the Central Bank of Nigeria in October 2021, hasn’t had the most impressive start and adoption has been slow.
But even if people in Nigeria wanted to turn to the eNaira, transaction options with the central bank digital currency, or CBDC, are limited.
“They want to put it out there to get people to use it, but people don’t have enough places to use it,” said Nigerian native Adesoji Solanke, a director at Renaissance Capital, an emerging and frontier markets-focused investment bank that has a branch in Nigeria.
There may be a dearth of merchants willing to accept the eNaira, according to London-based Varun Paul, CBDC and market infrastructure director at institutional crypto custody platform Fireblocks.
Paul, who previously worked at the Bank of England as an economist and head of its fintech hub, is now leading Fireblocks’ efforts to build out infrastructure for CBDC integration.
“So you have this chicken and egg problem,” he said.
At the end of 2022, outgoing President Muhammadu Buhari’s government decided to change the currency design and swap out old bank notes for new ones. The slow changeover caused ATMs to dry out quickly, and the government placed limits on withdrawals.
The country’s $220 billion informal economy stalled, and as the crisis worsened, the already weak naira fell even further against the U.S. dollar on the local forex black market.
Nigeria’s informal economy thrives on cash, and so cash shortages have left everyone from street vendors to bus drivers frustrated, Solanke added.
While protests in Nigerian cities turned violent, citizens also took to Twitter to complain about not being able to access basic necessities like fuel or food without cash.
A year after the launch of the eNaira, less than 0.5% of Nigerians were using it, Bloomberg reported. By last August, the eNaira was used to carry out transactions worth 4 billion naira ($9.3 million). Comparatively, in 2020, Nigerians conducted $26 billion worth of ATM transactions.
Since then, the central bank has tried to push adoption. The Central Bank of Nigeria announced in December that it would limit cash withdrawals for individuals and corporate organizations to 100,000 naira ($217.19) and 500,000 naira ($1,085.97) respectively by January, and encouraged banks to turn customers to cash alternatives like the eNaira.
Despite the central bank’s efforts, people haven’t turned to the eNaira as a solution during the current cash shortage because the necessary infrastructure wasn’t in place to foster adoption, both Solanke and Paul said.
“I think there’s a couple of things they may have wished they did better,” Paul said, referring to Nigeria’s leaders. “One is they went out faster than anyone else, whereas other central banks around the world are researching a lot longer.”
People might have needed to be educated more on the benefits of a digital naira, according to Paul. In June 2021, Nigeria announced it may be kicking off a CBDC pilot program before the end of that year, and a Central Bank of Nigeria official said the institution had been researching a digital currency for two years. Just four months later, the eNaira went live.
Meanwhile, the European Union set up a two-year research and experimentation project for a digital euro ahead of deciding whether to issue one. If it does decide to go ahead, officials have said it could take several more years to launch.
The U.K. is seeking public feedback on its recently published multiyear plan for a digital pound.
In addition to issues of infrastructure, not everyone can readily access the eNaira, Solanke said.
“The challenge is that the wallet requires you to have a smartphone and use the internet, but think of the people you’re trying to send money to, they’re relatively poor, right?” Solanke said.
“So the cost of the smartphone, the cost of the internet, these are just some of the hindrances to get some of these things up and running.“
Estimates show the number of Nigerians with a smartphone may be anywhere between 25 and 40 million. Africa’s most populous nation, Nigeria is home to more than 219 million, with nearly half over the age of 18 and old enough to have a phone.
There have been some attempts at expanding infrastructure digital payments with the eNaira. In September 2022, popular African payments platform Flutterwave added the currency as a payment option for merchants.
Earlier this week, Bloomberg reported that the central bank was on the lookout for new tech partners to build out a new system to support the eNaira.
But Solanke said that “there’s a lot of work that needs to happen both at the customer end and also at the merchant end to really get it up and running,” something Nigeria’s next president will have to grapple with.
Nigerians are set to vote for a new president on Saturday in what could be one of the most competitive elections the West African country has seen in recent years.
BIS Head Claims Fiat Won Battle With Crypto, Bitcoin Community Disagrees
BIS general manager Agustín Carstens reckons the war between fiat and crypto has been won by fiat. The community disagrees.
The Bank for International Settlements (BIS) has long taken a cautious approach to Bitcoin and cryptocurrencies. However, there is no need for caution anymore as the “battle has been won” between fiat and crypto, according to BIS.
BIS general manager Agustín Carstens, who made the claim, highlighted that “technology doesn’t make for trusted money,” among further criticisms of crypto in an interview with Bloomberg.
Crypto has lost the argument that it’s an alternative to fiat currency, the head of the Bank for International Settlements says https://t.co/xZKFHEj3b2
— Bloomberg Crypto (@crypto) February 22, 2023
As the central bank for central banks, the BIS has emphasized the need for regulation and risk management in the crypto space, but claiming the crypto vs. fiat battle has been won sparked outrage, satire and corrections among the Bitcoin and crypto community.
Ray Youssef, CEO of Paxful and vocal Bitcoin maximalist, told Cointelegraph that it’s “easy to get sucked into these battles but is all a distraction with no ROI.“ He continued, “We must focus on the battles in the global south and fight for every inch and every eyeball. What is happening in Nigeria now is vital for us all.“
“Want to p*ss the clowns off? Ignore their FUD bait and focus all in on the global south and what is happening on the streets of nigeria.“
Saifedean Ammous, the author of The Bitcoin Standard, brought Carsten’s statement to his followers’ attention, provoking condemnation and concern in the comments.
Florida-based Bitcoin advocate SVN (not his real name), whose frozen bank account prompted a switch to go all in on Bitcoin, told Cointelegraph, “these people are clowns.”
Meanwhile, Lady Anarki, a Bitcoin advocate who recently closed a Bitcoin Security Education company, explained that “fiat and crypto are essentially the same exact scam.”
“For fiat, it is nefarious elite oligarchs creating a rigged game system to enrich themselves while making everyone else poorer. Bitcoin is a technology designed with incentives and sound economic principles that enriches anyone who brings value to the world.”
Bitcoin losing the “war” for money, as Carstens explained, is another reference to the fact that Bitcoin has been declared dead, dead and dead again. The 2022 and 2023 bear market is no different, and Bitcoin advocates on Twitter seized the opportunity to mock financial experts dancing on the imaginary grave of the decentralized currency.
Nonetheless, Bitcoin is up over 40% from its 2022 lows, and Lightning Network adoption flourishes while the community appears increasingly vocal.
What Bitcoin Did, the popular podcast hosted by Peter McCormack, tweeted some handy statistics to correct another inflammatory statement published by the BIS this week. Notably, from August 2015 to December 2022, the BIS explained that “nearly all economies made losses on their Bitcoin holdings.”
BIS analysis: Aug ‘15-Dec ‘22 “majority…in nearly all economies made losses on their #Bitcoin holdings”
-Majority of global fiat lost value to USD since 2015
-USD has lost over 26% of its own value due to inflation#Bitcoin has gone up nearly 8000%
Facts be sticky pic.twitter.com/mMyBzuVhWz
— What Bitcoin Did (@WhatBitcoinDid) February 21, 2023
As shown, the Bitcoin price continues to trend higher despite the BIS’ best efforts to the contrary.
The BIS has been a vocal critic of cryptocurrencies, citing concerns about their volatility, scalability and energy consumption.
However, the BIS has researched stablecoins and spearheads the development of central bank digital currencies in partnership with several countries, juxtaposing Carsten’s comment in the Bloomberg interview that tech “doesn’t make for trusted money.”
Willem Middelkoop, author and Bitcoin advocate, highlighted that the war between fiat and crypto is far from over. A cursory scroll through the comments on the original tweet from Bloomberg Crypto would suggest that the war is just heating up.
Bank Of England Has No Tech Skills To Issue CBDC Yet: Deputy Governor
BoE deputy governor Jon Cunliffe compared a potential digital pound with Apple’s iPhone app store as it could “open a new frontier for people to improve payments.”
According to a deputy governor, the United Kingdom is not ready to issue a central bank digital currency (CBDC) just yet, as the Bank of England (BoE) doesn’t have enough expertise.
There is more than a 50% chance that the central bank of the United Kingdom would issue a CBDC, but the regulator doesn’t have the technical skills to issue a digital currency yet, BoE deputy governor Jon Cunliffe declared at the treasury select committee hearing on Feb. 28.
Cunliffe said that the BoE expects to get the necessary expertise to move forward with the CBDC development in the next phase, with the central bank planning to test a potential digital pound with private sector partners.
“But to move to the next stage, which would be to build a working prototype, to test in a simulated environment and then you’d be into testing in a live environment, then implementation. This next phase is designed to put us in a position to do that,” the deputy governor stated.
Cunliffe stressed that the design and structure of a potential digital pound would vary greatly, depending on the motivation of the CBDC. BoE’s basic motivation here would likely be providing digital cash, or the digital equivalent of BoE notes, for “general payment purposes,” he said, adding:
“We didn’t want a system in which there were two forms of Bank of England money circulating, remunerated and unremunerated. And also, we didn’t want a system where we would be producing something which would have the characteristics of a savings product.”
The deputy governor also highlighted some potential CBDC functions and benefits currently not present in the existing financial system.
Comparing a potential digital pound with Apple’s iPhone app store, Cunliffe said that a CBDC is about “opening a new frontier for people to improve payments and the way in which money is used.”
He mentioned micropayments as a major potential use case for a digital pound, stating:
“This will be much, much easier for you to make very, very small payments. So if you wanted to read an article in a newspaper, you wouldn’t have to subscribe to the newspaper. You could pay tiny fractions to do that.”
The news comes amid the U.K. government growing increasingly involved in the CBDC development, with the Treasury opening a position to lead the development of a digital pound in January 2023.
Previously, BoE governor Andrew Bailey reportedly expressed doubts about the necessity of a CBDC in the short term, while European finance ministers once again showed support for a retail version of the digital euro.
US Lagging On CBDCs Could Spell ‘Trouble’ — Crypto Council Policy Head
A former CIA analyst doesn’t believe the Chinese-led CBDC movement on the global stage will replace the U.S. dollar but may cause geopolitical headaches.
Yaya Fanusie, a cryptocurrency researcher and former CIA analyst, believes the United States government’s relatively slow start on central bank digital currency (CBDC) development may result in it losing its grip on the global financial system.
Fanusie, the policy head at crypto advocacy group, the Crypto Council for Innovation, explained in a Feb. 28 Bloomberg interview, that sanctioned states are looking to transact on financial infrastructure that isn’t controlled or heavily influenced by the U.S. to move funds more freely cross-borders.
Fanusie explained that state-issued CBDCs could be a part of the financial infrastructure that will be globally adopted. If the U.S. has little influence over these new standards, it “impacts U.S economic statecraft.”
If the U.S. continues to sit on the “sidelines” and lag on CBDC adoption, Fanusie believes this may spell “trouble” and cause unforeseen “geopolitical implications” over time:
“The potency of our sanctions power comes from the centrality of the U.S. to the financial global infrastructure. So if that shifts a little bit, it doesn’t mean that China is going to take over or that the yuan is going to displace the dollar but if there’s a viable new rail where sanctioned actors can now transact, that’s trouble.”
The U.S. Federal Reserve has, however, recently made progress on its CBDC — the digital dollar project — releasing the latest version of its white paper on Jan. 18:
Today we are proud to release DDP’s 2023 white paper update where we revisit our “champion model” proposed in 2020, provide recommendations to the US government and private sector and look ahead to the next stage in #CBDC developments @giancarloMKTS https://t.co/bX5u4zfqMc pic.twitter.com/si2joxbkq9
— The Digital Dollar Project (@Digital_Dollar_) January 18, 2023
However, the Federal Reserve has not received approval from the U.S. government to proceed with the CBDC project.
Fanusie highlighted that China has benefited from a near-first mover advantage, having explored CBDCs since 2014 and launching the pilot version of its digital yuan on Jan. 4, 2022, which Fanusie says has processed “millions of transactions” across “millions of wallets,” so far.
Fanusie added that there is an “array of pilots” testing out smart contracts to add programmability to the CBDC, and that China is helping other countries to adopt similar standards.
He added that an unspoken “race” is possibly going on in the CBDC frontier as nations look to gain a geopolitical edge.
“That’s happening whether we want to like it or not.”
However, previous commentators on the CBDC race between China and the U.S. have said that China’s CBDC ambition is purely about domestic dominance rather than trying to beat the U.S. dollar.
CBDCs run on state-controlled ledgers are reportedly more efficient and easier to use in some cases than decentralized public networks, such as Bitcoin and Ethereum.
However, some opponents of CBDCs believe states are adopting blockchain-powered CBDCs to maintain a degree of financial control over their citizens.
Part of the pushback in the U.S. recently came from pro-crypto U.S. Congressman Tom Emmer, who recently introduced the CBDC Anti-Surveillance State Act to protect the financial privacy of U.S. citizens from actions by the Federal Reserve:
Today, I introduced the CBDC Anti-Surveillance State Act to halt efforts of unelected bureaucrats in Washington, DC from stripping Americans of their right to financial privacy. pic.twitter.com/lONbHFZMk7
— Tom Emmer (@GOPMajorityWhip) February 22, 2023
Hong Kong Citizens Not Interested In Digital Yuan: Reports
Despite the 20% discount, the e-CNY hard wallets don’t attract much attention from Hong Kong residents.
The Chinese government’s central bank digital currency (CBDC) project has not sparked much enthusiasm among the citizens of Hong Kong. In the first four days since the “digital yuan” (also known as “e-CNY”) hard wallets became accessible to residents, only 625 Hongkongers had obtained them.
As reported by a local newspaper on Feb. 28, Shenzhen installed the machines, dispensing the hard wallets for digital yuan, the first of a kind in the country. Due to the city’s unique location as a gateway from Hong Kong to mainland China, the machines were programmed to serve the citizens of Hong Kong exclusively.
The goal of the initiative, launched by the Bank of China and smart card provider Octopus Card, was to issue 50,000 hard wallets by March 31. However, in the first four days after the machines’ installation, only 625 wallets were demanded by the customers.
Even the 20% discount on purchases from 1,400 local vendors — subsidized for the CBDC owners by the government — hasn’t been a decisive factor for adoption.
However, as the Shenzhen Securities Times highlights, the local authorities will continue to promote the digital yuan for Hong Kong citizens, including the SIM card hard wallet, which would combine financial and communicational functions.
The reason lies in a greater political mission to integrate the recently independent island city in the Guangdong–Hong Kong–Macao Greater Bay Area.
The adoption of e-CNY in the country is still slow, despite the Bank of China’s efforts. In October 2022, two years after the CBDC’s introduction to the market, cumulative e-CNY transactions only crossed 100 billion yuan ($14 billion).
In February 2023, during the Lunar New Year period, multiple cities reportedly gave away over 180 million yuan ($26.5 million) worth of the CBDC in programs such as subsidies and consumption coupons to boost the adoption.
BIS Wraps Exploration Project On Retail CBDC Payment System
The bank concluded that a “hub-and-spoke” model between CBDC domestic systems could “reduce settlement and counterparty risk” and complete cross-border transactions in seconds.
The Bank for International Settlements, or BIS, has reported it has concluded a project exploring international retail and remittance payments use cases for central bank digital currencies, or CBDCs, with the central banks of Israel, Norway and Sweden.
In a March 6 report, the BIS said it had finished Project Icebreaker, an initiative involving the bank’s Innovation Hub Nordic Centre that tested key functions and the technological feasibility of interlinking domestic CBDC systems through the Central Bank of Norway, the Bank of Israel, and Sveriges Riksbank.
According to the report, the BIS concluded that a “hub-and-spoke” model between domestic systems could “reduce settlement and counterparty risk by using coordinated payments in central bank money and complete cross-border transactions within seconds.”
“Without a hub-and-spoke approach, each [retail CBDC, or rCBDC] system would need to make individual specific network and infrastructure configurations to communicate with other rCBDC systems,” said the report.
“Communication between these rCBDC systems may not be standardised via a common interface and would instead be a bespoke integration between each pair of rCBDC systems. This would be not only complex to support and maintain but could also introduce cyber security risks.”
The #BISInnovationHub Nordic Centre and the central banks of Israel, Norway and Sweden have concluded Project Icebreaker, which studied the potential benefits and challenges of using retail #CBDC in international payments @riksbanken @NorgesBank https://t.co/2OfFYaPbr6 pic.twitter.com/jPFjrCXDlT
— Bank for International Settlements (@BIS_org) March 6, 2023
The report could provide the groundwork for a cross-border payment system should the central banks of Israel, Norway and Sweden move forward with issuing a digital shekel, digital krone, and digital krona, respectively.
In October, the bank reported that a CBDC pilot involving the central banks of Hong Kong, Thailand, China and the United Arab Emirates was “successful” after a month-long test facilitating $22 million worth of cross-border transactions.
In 2020, the Central Bank of the Bahamas became the first in the world to make a central bank-issued CBDC — the Sand Dollar — available to all residents of the island nation.
Other countries have been moving forward on large-scale trials of digital currencies, including China, with the nation’s central bank reportedly distributing millions of digital yuan over the Lunar New Year holidays.
Naira Redesign No More: President’s Directive Canned By Nigerian Supreme Court
The Supreme Court of Nigeria says no to redesigning the naira, ruling that the old banknotes will remain in circulation.
The Supreme Court of Nigeria has ruled that the old 200, 500 and 1,000 naira notes remain in circulation until Dec. 31, 2023, effectively nullifying the naira redesign previously announced by Nigerian President Muhammadu Buhari.
The introduction of redesign sought to phase out the use of the old naira notes.
A seven-member panel of the court, led by John Okoro, said in a unanimous judgment that President Buhari issued the directive without consultation.
The court said the federal government should have consulted with the state government through relevant bodies, including the National Council of States and the National Economic Council, before embarking on such a project.
The Supreme Court went on to declare Buhari’s directive withdrawing the old notes from circulation as illegal and an affront to the 1999 Constitution. The court also issued another order nullifying it and extended the legal tender status of the currency notes until Dec. 31.
The pronouncement is among nine declarations and orders issued by the Supreme Court in a judgment on the suit filed by some state governors challenging the president’s directive.
In late 2022, Buhari ordered the withdrawal of the 200, 500 and 1,000 naira notes by Jan. 31, 2021 after introducing the newly designed versions of the banknotes, which were in short supply.
The directive, described as a “demonetization policy” by some state governors opposed to it, has created a scarcity of banknotes, creating disruption in the financial system and hardship for millions of citizens.
The inability to access cash due to the scarcity of banknotes also affected many businesses.
With an already existing pegged maximum ATM withdrawal amount of 20,000 naira ($43), this has also affected crypto users in Nigeria who want to change tokens to fiat for local business transactions and day-to-day expenditures.
However, this new ruling by the apex court has shed hope on the availability of cash for transactions.
BIS Says ‘Hub-and-Spoke’ Cross-Border Transfers Offer Benefits To Retail CBDC
The system is designed to offer users the best foreign-exchange rates and faster transactions while allowing central banks to keep almost total control of their currencies.
The Bank for International Settlements, an organization of the world’s leading central banks, said the cross-border payment model for the central bank digital currency, or CBDC, it explored in Project Icebreaker offers benefits to both the banks and retail customers, according to a report on Monday.
The project, which was conducted with the help of the central banks of Israel, Norway and Sweden, used a so-called “hub-and-spoke” method to connect between the countries’ different national CBDC systems. A retail CBDC is a digital currency issued by a central bank that can be used for payments by consumers.
In the hub-and-spoke process, a cross-border transaction is broken down into two domestic payments facilitated by a foreign-exchange provider active in both countries.
That gives central banks almost complete control over their CBDCs, while allowing competitive quotes for the exchange rate to be submitted to the hub so that end users can benefit from the best rate.
“This competitive setup mitigates the risk of insufficient liquidity in the desired currency pair, which can drive fees up and even delay the transaction,” the BIS said. “The project also demonstrated that the hub-and-spoke model can reduce settlement and counterparty risk by using coordinated payments in central bank money; and complete cross-border transactions within seconds.”
Many central banks are looking to issue a CBDC within 10 years. Nigeria, Bahamas, Eastern Caribbean and Jamaica have already issued one, and China is further ahead than most countries with its CBDC trials.
The Group of 20 industrialized nations has made exploring cross-border payment systems a priority, and Project Icebreaker was a response to G-20’s call to action, the report said. The BIS has conducted other successful CBDC cross-border experiments, such as Project Dunbar, which focused on wholesale use, or money transfers between banks. .
For the hub-and-spoke model to work, every CBDC system involved needs to operate 24/7 and have a hash time-locked contract, which is a form of smart contract, a program that automatically execute transactions when triggered.
“Implementing the Icebreaker model in the real world would require a range of technology, policy and legal considerations to be addressed,” the report said. “Policy considerations could include the governance arrangement, the viability of the business model, liquidity provision, privacy, AML/CFT ( anti-money laundering/ combating the financing of terrorism) compliance and monitoring, and payment initiation-related standards.”
Tassat Blockchain To Join FedNow Service With B2B On-Ramp As Pilot Prepares For Launch
The New York-based fintech firm said it would provide an API to allow clients to access the new Federal Reserve real-time payment service when it premiers.
Blockchain operator Tassat announced on March 14 that it would provide access to the United States Federal Reserve’s FedNow payment system. FedNow, which will launch as a pilot project later this year, will provide real-time, round-the-clock payment service.
Tassat will serve as a business-to-business on-ramp for FedNow through a client-facing application programming interface, CEO Kevin Greene told Cointelegraph. Both the company’s interbank and intrabank services will provide FedNow access.
The FedNow pilot is expected to begin in June or July with a small number of banks. The system will offer real-time gross settlement by funneling commercial bank money from a sender through a Fed credit account to its recipient. It is often seen as a non-blockchain alternative to central bank digital currency and stablecoins.
FedNow will initially be available only for domestic transfer, which suited Greene. “We have a lot of work to do here in America,” he said. He referred to the U.S. financial infrastructure as “antiquated.”
— MetaMan X ™️ (@MetaMan_X) March 8, 2023
Tassat has a pipeline of six banks, which include the recently shuttered Signature Bank. Greene said of the recent bank closures:
“Recent events have illuminated the existential crisis that small, mid-sized and regional banks face, particularly being squeezed out by the mega banks.”
Blockchain adoption is progressing rapidly in the banking system, according to Greene. “Sixteen months ago, most bank CEOs didn’t know much about blockchain at all,” he said, “and today, the feeling is […] they have to have some kind of blockchain strategy.” Greene added that Tassat had doubled its employees to 90 in the past 12 months.
Greene began as an investor and board member at the company when it was founded in 2017, then moved into the CEO and chairman positions.
Federal Reserve Confirms July Launch For FedNow Instant Payment Service
The FedNow service aims to reduce the gap in payment time between United States financial institutions.
The United States Federal Reserve has confirmed a July launch date for its long-awaited instant payments system, seen by some as an alternative to central bank digital currencies and stablecoins.
The instant payment network will settle payments in seconds and can support transactions between consumers, merchants and banks. It does not rely on blockchain technology.
It’s a significant step for the government, as it is controlled by the Federal Reserve. Clearing House’s RTP network, which also offers real-time payments, is operated by a consortium of large banks.
— Federal Reserve (@federalreserve) March 15, 2023
According to a March 15 announcement, the U.S. Fed said the debut of FedNow is set for July, with the U.S. Treasury and a “diverse mix of financial institutions of all sizes” ready to use the network from launch.
The Fed said it will “begin the formal certification of participants” during the first week of April in preparation for the launch.
“Early adopters will complete a customer testing and certification program, informed by feedback from the FedNow Pilot Program, to prepare for sending live transactions through the system,” the announcement reads.
FedNow was announced in 2019 and will provide round-the-clock, real-time gross settlement by funneling commercial bank money from a sender through a Fed credit account to its recipient. It also has built in features such as fraud risk management.
if you like bank runs in the age of social media you’re going to love bank runs in the age of fednow
— nic carter (@nic__carter) March 12, 2023
Following the official launch, the Federal Reserve outlined that it will push to onboard as many as financial institutions as possible in order to increase the availability of instant payments.
“The launch reflects an important milestone in the journey to help financial institutions serve customer needs for instant payments to better support nearly every aspect of our economy,” Tom Barkin, president of the Federal Reserve Bank of Richmond and FedNow Program executive sponsor, said in the announcement.
Some see the FedNow service as tackling a problem that both stablecoins and CBDCs also seek to solve.
The FedNow program, however, doesn’t use blockchain tech, while the Federal Reserve is known to have a cautious and skeptical view on stablecoins.
One of the major banking payment rails servicing U.S. crypto companies in the Silvergate Exchange Network (SEN) was shut down earlier this month following Silvergate’s collapse.
As it stands, SEN competitor SigNet from Signature Bank is still operational despite the bank’s forced closure on March 13.
However, its fate is up in the air, while a number of companies have reportedly fled from the network following Signature’s troubles.
Silverbank had Silvergate Exchange Network.
Signature had Signet.
Both were private networks for companies to transfer value between each other using digital assets. Where are both now?
These companies enabled alternative currencies that threaten a CBDC and FedNow.
— Damon Nam (@damonnam) March 15, 2023
FedNow could also stand in place of a central-bank-issued digital currency.
Federal Reserve Vice Chair Lael Brainard emphasized during a House of Representatives Committee on Financial Services hearing in May that a CBDC would take far longer to get off the ground than FedNow due to regulatory hurdles.
“[If] Congress were to decide… to issue a central bank digital currency, it could take five years to put in place the requisite security features, the design features,” she said.
She added that FedNow will serve many of the same functions as a CBDC anyhow.
Fed chair Jerome Powell also spoke before the House Financial Services Committee on March 9 and suggested that a potential U.S. CBDC is still quite some time away.
“We’re not at the stage of making any real decisions,” he said, adding that “what we’re doing is experimenting in kind of early stage experimentation. How would this work? Does it work? What’s the best technology? What’s the most efficient?”
Commenting on FedNow, however, he stated that “we’ll have real-time payments in this country very, very soon.”
Through communications and conversations, we want to keep financial institutions and the broader payment industry informed on the design of the FedNow Service and how to prepare for it. Here are some of the most common questions we’ve received.
- When will the FedNow Service launch and what features will be available?
- What features will be included in future releases?
- What fraud prevention tools will be in place with the FedNow Service and will financial institutions need to implement additional controls to mitigate fraud?
- What use cases will be supported by the FedNow Service?
- How will the FedNow Service compare to other faster payment services already in the market?
- Which vendors will support the FedNow Service?
- Will the FedNow Service be interoperable with private sector options?
- How can financial institutions get ready for the FedNow Service?
- How can organizations get involved in the development of the FedNow Service?
For more information on the FedNow Service, including a description of the payment flow and additional resources, visit the About FedNow Service page.
US Senator Ted Cruz Tries Again With New Bill To Block CBDC
Ted Cruz said it is “more important than ever” to ensure the financial privacy of American citizens is preserved.
Republican Senator Ted Cruz has introduced a bill to block the United States Federal Reserve from launching a “direct-to-consumer” central bank digital currency.
In a March 21 statement, Cruz said he introduced the bill to prevent the Fed from developing a retail CBDC, “which could be used as a financial surveillance tool by the federal government.”
Cruz stated it’s “more important than ever” to ensure U.S. policy on digital currencies protects “financial privacy, maintains the dollar’s dominance and cultivates innovation,” adding:
“CBDCs that fail to adhere to these three basic principles could enable an entity like the Federal Reserve to mobilize itself into a retail bank, collect personally identifiable information on users, and track their transactions indefinitely.”
Cruz claimed the federal government has “no authority to unilaterally establish” a CBDC.
“We should be empowering entrepreneurs, enabling innovation, and increasing individual freedom — not stifling it,” he stressed.
The federal government has no authority to unilaterally establish a central bank currency.
— Senator Ted Cruz (@SenTedCruz) March 21, 2023
Cruz’s anti-CBDC bill has the backing of Republican Senators Mike Braun of Indiana and Chuck Grassley of Iowa.
In statements, both expressed the belief that a CBDC would be used as a surveillance tool.
If the bill is passed into law, it would ensure that the state isn’t “snooping” on the finances of hardworking Americans, Grassley stated:
“The American people ought to be able to spend their money how they choose without the possibility that every transaction could be tracked by the government.”
The anti-CBDC bill is a second attempt by Cruz, Braun and Grassley, who introduced a similar bill on March 30, 2022, to prohibit the Fed from issuing a CBDC directly to individuals.
However, nearly 12 months later, the bill still hasn’t moved past the introduction phase.
Meanwhile, considerable progress has been made on a U.S. dollar CBDC since President Joe Biden signed an executive order titled “Ensuring Responsible Development of Digital Assets” in March 2022.
In November, the Federal Reserve Bank of New York and several large financial firms, including BNY Mellon, Citi, HSBC, and Wells Fargo, participated in a 12-week digital dollar pilot program with Mastercard and SWIFT.
Cruz, Braun and Grassley aren’t the only U.S. politicians fighting to stamp out CBDCs.
On March 20, Florida Governor Ron DeSantis called on state lawmakers to introduce legislation banning the digital dollar in Florida.
DeSantis compared the digital dollar to China’s digital yuan and claimed the e-CNY has been used to extensively “monitor citizen behavior,” saying:
“Any way they can get into society to exercise their agenda, they will do it. So, what the central bank digital currency is all about is surveilling Americans and controlling behavior of Americans.”
No CBDC in Florida https://t.co/p9pwSTmrlN
— Ron DeSantis (@GovRonDeSantis) March 20, 2023
U.S. Congressman Tom Emmer recently introduced an anti-CBDC bill of his own, on Feb 22.
Emmer also spoke of the privacy concerns surrounding CBDCs, saying a programmable dollar could be “easily weaponized” as a spying tool to “choke out politically unpopular activity.”
The World Could Be Facing A Dark Future Thanks To CBDCs
From forcing people to spend their money to making them save it, central banks around the world could soon use CBDCs to create a dystopian nightmare.
During the financial crisis of 2007–2008, many people lost trust in traditional financial institutions and turned to alternative forms of currency, such as cryptocurrencies. It was a way for people to maintain their financial freedom and privacy in a system that had let them down.
However, the rise of central bank digital currencies (CBDCs) raises serious concerns about privacy and freedom.
One of the most significant concerns with CBDCs is the death of anonymity. Currently, cash transactions offer the secrecy and anonymity needed for financial freedom.
People can use cash to make transactions without leaving a paper trail, which is a fundamental right in a democratic society. However, the introduction of CBDCs could change this.
CBDCs would be fully traceable, meaning that every transaction would be recorded and monitored by the central bank. This would allow central banks to surveil and control financial transactions in ways that were previously impossible. While this may sound like a positive development, it raises serious concerns about privacy and civil liberties.
CBDCs’ potential negative consequences can also be understood by examining the government’s response to the global financial crisis. For instance, in the aftermath of the crisis, governments all over the world established policies to stop the financing of terrorism and combat money laundering.
Unfortunately, these regulations frequently came at the expense of people’s freedom and privacy.
For example, the Russian government has shrewdly used the Anti-Money Laundering framework to further goals unrelated to the fight against terrorism and organized crime.
However, the research has revealed that the AML regime has been used by the Russian government to expand its strategic influence over domestic politics and business, as well as to try to restructure the banking system.
The regime’s overall legitimacy is weakened by the inefficiency of AML rules and their use for covert purposes.
The 2001 Patriot Act led to abuses of power and violations of civil liberties in the United States. The Federal Bureau of Investigation’s Office of General Counsel found 13 cases of alleged FBI misconduct during intelligence operations between 2002 and 2004 alone, according to the Electronic Privacy Information Center.
Central bank digital currency (CBDC): Government control your money.
Bitcoin: You control your money. pic.twitter.com/KnUBuR7CE8
— Pan ₿ (@satstackerMY) December 30, 2022
Additionally, some policies implemented in response to the crisis led to restrictions on individual financial activities. For instance, some countries imposed capital controls in an attempt to limit the flow of money across borders and stabilize their financial systems.
For example, as a November 2022 report by the Bank for International Settlements notes, “individual and merchant wallets of the eNaira” — Nigeria’s CBDC — “have different caps on daily transaction limits and the amount of eNaira that can be held in them, depending on their customer due diligence tier.”
The ability to impose limits on people’s daily financial holdings and expenditures could serve to significantly erode privacy and freedom and have a chilling effect on free speech and political dissent.
Moreover, central banks could use CBDCs to implement negative interest rates, which would incentivize people to spend their money rather than save it. This could lead to a surge in consumption and inflation, which could destabilize the economy.
This would also lead to a number of technical challenges. For instance, a cap on individual CBDC holdings could restrict the number or quantity of payments because it would be necessary to know the recipients’ CBDC holdings to complete the payment.
In addition to these concerns, CBDCs could also exacerbate existing inequalities. For instance, those without access to the internet or digital gadgets would be shut out of the financial system.
This could apply to underrepresented groups like the elderly, the poor and residents of rural areas.
CBDCs may potentially lead to new types of financial exclusion since central banks may decline to do business with those regarded as high-risk.
For instance, the Bahamas implemented the Sand Dollar to address the fundamental problem of financial exclusion. However, Sand Dollar balances increased by less than $300,000 between January 2021 and June 2022, whereas the value of notes increased by $42 million — indicating that the Sand Dollar hardly qualifies as a means of payment.
Central banks should carefully consider the implications of CBDCs for privacy, freedom and financial stability. To make sure that CBDCs are created in a way that respects individual rights and freedom, they must also consider frequent consultations with stakeholders like corporations, civil society organizations and individuals.
Ultimately, the rise of CBDCs could be a double-edged sword. Government-backed digital currencies may result in speedier, less expensive, more secure transactions, but they also bring up important issues related to freedom, privacy and financial stability.
The goal of financial stability could come at a significant cost in terms of personal freedom and privacy, as we saw in the global financial crisis. The defense of individual liberties and rights should be a top priority for central banks as they consider their approach to CBDCs.
Bank Profits At Risk From Potential CBDC Transformation Of Global Economy: Moody’s
CBDCs are here to stay, it seems, and Moody’s is looking at their implications for the global economy and international banking.
Emerging central bank digital currency cross-border transaction technology could transform the global economy by providing faster, cheaper and safer services for many of its players. But banks may not fare as well in that new economy, Moody’s Investor Service said in a report dated March 21.
Many proposals for the domestic use of CBDCs foresee a crucial intermediating role for banks in their operations, but cross-border CBDC transactions would depend on entirely new infrastructure that reduced the role of banks more severely, Moody’s pointed out.
Banks would see benefits from the new technology, too. Settlement risk could be reduced or eliminated:
“Banks would be able to make, clear, and settle cross-border payments at low cost and in seconds without needing to sign up to multiple payment systems or rely on correspondent banks in other countries.”
The same innovations would also “reduce banks’ profits from payments, correspondent services and likely also from foreign-exchange transactions.” The role of correspondent banks could be eliminated entirely. Not only that:
“In a CBDC-driven economy, banks may well need to redesign their operations. They may be obliged to join new networks and create the infrastructure necessary to support CBDC interoperability at scale, which will impose a burden on resources in the short term.”
Interoperability for both retail and wholesale CBDC is being worked out in experimental projects, often with the participation of the Bank for International Settlements.
“Central banks may need to compromise on some of the decision-making to make their CBDCs interoperable,” Moody’s said. Otherwise, “digital islands” could be created among small groups of countries that can transact with each other but no other countries.
Issues such as Anti-Money Laundering, sanctions and privacy would require a legal and regulatory framework, and support for CBDCs is not universal. “Financial incumbents who benefit from existing architecture will likely not help facilitate adoption,” the report said.
A United States CBDC faces opposition from some lawmakers because of privacy concerns. Direct exchange of currencies could also reduce the role of the U.S. dollar in the world economy, which does not add to its appeal in Congress.
5. Moody’s Downgrades the Entire Banking Sector
Moody’s Investors Service cut its outlook for the entire U.S. banking sector and placed six banks on review for potential credit downgrades in the wake of the collapse of SVB and Signature Bank. https://t.co/IcY2jjQF7W pic.twitter.com/EvkwSaC58Z
— Investopedia (@Investopedia) March 15, 2023
Moody’s downgraded the U.S. banking sector to “negative” on March 14. It has examined the potentially disruptive effects of CBDC on commercial banking before.
The present report came out nearly simultaneously with the U.S. Treasury report detailing potential effects a CBDC could have on the domestic banking system.
Is It Time For Public Checking Accounts At The Fed?
Does the SVB disaster suggest it’s time for a public option?
When Silicon Valley Bank failed, the government stepped in and guaranteed that all accounts — even those well above the FDIC threshold for deposit insurance — would be made whole. So now people are wondering whether all accounts at every bank are implicitly guaranteed, regardless of their size.
But if they are, then what is the point of private, for-profit retail banking? On this episode of the podcast, we speak with Saule Omarova, a professor at Cornell Law School.
She had been nominated by President Biden to head the Office of the Comptroller of the Currency, but was forced to withdraw due to fierce opposition from the banking lobby.
That opposition was based, in part, on her endorsement of public checking accounts at the Federal Reserve. But what was a seemingly “out there” view a year ago, is now firmly within the Overton Window of political possibilities. On this episode, we discuss the SVB disaster, what it means for banking, and the case for a public option.
UAE Unveils CBDC Strategy, First Phase To Be Completed By Mid-2024
The first phase of the Digital Dirham is expected to be completed over the next 12 to 15 months.
The United Arab Emirates expects to complete the first phase of its central bank digital currency strategy around mid-2024, its central bank announced on Thursday. This includes proof-of-concept work for a wholesale and retail CBDC.
The Central Bank of UAE (CBUAE) also revealed an engagement with G42 Cloud, a cloud platform from the region, and New York-based blockchain firm R3 as the infrastructure and technology providers respectively.
The first phase of the CBUAE’s CBDC (The Digital Dirham) is expected to be completed over the next 12 to 15 months and will include three major pillars, the announcement said.
The first pillar is the soft launch of the ongoing project mBridge, a collaboration between the Bank for International Settlements (BIS) and the central banks of Hong Kong, the Chinese mainland, the United Arab Emirates and Thailand to study cross-border payments and multi-CBDC transactions.
The second pillar is proof-of-concept work for a bilateral CBDC bridge with India and the third is proof-of-concept work for a domestic wholesale and retail CBDC, the plans for which were first announced last month.
The UAE had announced its digital dirham as one of nine key initiatives of its new Financial Infrastructure Transformation Program at a time when central banks all over the world have been working towards exploring CBDCs.
Ted Cruz And Ron Desantis Take On The ‘Digital Dollar’
Two lawmakers in one week weighed in against the possibility of a United States central bank digital currency.
Two lawmakers in one week weighed in against the possibility of a United States central bank digital currency (CBDC). Florida Governor Ron DeSantis — expected by many to throw his hat into the ring for the 2024 U.S. presidential race — has called for a ban on a digital dollar in the state.
DeSantis spoke out against the Federal Reserve issuing and controlling a CBDC, claiming the initiative would grant “more power” to the government.
Texas Senator Ted Cruz went even further, introducing a bill to block the Fed from launching a “direct-to-consumer” central bank digital currency.
Cruz stated it’s “more important than ever” to ensure U.S. policy on digital currencies protects “financial privacy, maintains the dollar’s dominance and cultivates innovation.”
The anti-CBDC bill is a second attempt by Senators Cruz, Braun and Grassley, who introduced a similar bill on March 30, 2022, to prohibit the Fed from issuing a CBDC directly to individuals.
Representative Tom Emmer introduced another anti-CBDC bill in February. The bill could prohibit the Fed from issuing a digital dollar directly to anyone, bar the central bank from implementing monetary policy based on a CBDC, and require transparency for projects related to a digital dollar.
It’s also presented as an apparent effort to protect Americans’ right to financial privacy.
European Banking Federation Shares Its Vision Of Digital Euro, wCBDC, Bank Tokens
The EBF calls itself the voice of the European banking sector; it expressed its support for European digital money, with suggestions of its own.
The European Banking Federation (EBF) has released a paper detailing its vision for the digital money ecosystem of the future, and the retail digital euro in particular.
The carefully worded paper expressed values and concerns about the digital euro from the perspective of commercial banks.
The paper, released on March 28, emphasized the bank’s values, such as stability and privacy. It called for closer public-private partnership in the introduction of the digital euro.
“There is currently no dialogue in place to address the fundamental changes and risks to the monetary and financial system,” the paper said. At the same time, it stated that there needs to be a framework for permanent high-level engagement.
The EBF ecosystem vision emphasized the role of the private sector in all aspects, beginning with infrastructure, where Europe needs to lessen dependence on outside “actors.”
That ecosystem would contain three elements: the digital euro, a wholesale central bank digital currency (CBDC) and bank-issued money tokens.
In the EBF vision, the digital euro should have three levels, with a European Central Bank role and two industry levels — the first to interact with the Single Euro Payments Area and an “Industry Level B” that “would be subsequently developed and operated by the private sector, in compliance with the principles set out in the previous layers.” Those principles have yet to be developed fully. The paper continued:
“The European market needs the authorities to clarify the interaction of different and converging policy objectives, especially when it comes to the development of pan-European payment solutions at the Point of Sale / Point of Interaction.”
The paper was careful to refer to blockchain technology only in reference to certain parts of its envisioned ecosystem. A wholesale CBDC, where interoperability is key to enabling cross-border transactions with central bank money, was assumed to operate on distributed ledger technology (DLT).
Why financial skills alone do not result in a more resilient future? @DeWitteK, Professor @FEBkuleuven & Director @LeuvenEconomics, discusses the potential of behavioural-based financial education. pic.twitter.com/jqsLUNyTBV
— European Banking Federation (@EBFeu) March 21, 2023
In addition, bank-issued money tokens had a crucial role in the EBF vision for “business needs such as automated industrial processes that run on DLT and use smart contracts.”
These tokens apparently correspond to Industry Level B of the digital euro scheme. More standardization would be needed for these solutions as well, the paper noted.
The EBF represents 33 national banking associations and 3,500 individual banks.
Russia Delays Digital Ruble Launch Testing Due To Lawmaking Process
The participating banks expressed their readiness to proceed with the CBDC pilot.
The rollout of The Bank of Russia’s central bank digital currency (CBDC) pilot is being delayed indefinitely. However, participating banks have stated their readiness to begin the testing.
As reported by the state-owned TASS on March 28, the CBDC pilot won’t start on April 1, as previously announced, because specific legislation has only passed through the first reading in the State Duma — the Federal Assembly’s lower house. According to TASS, the legislation may be enacted by early May.
The number of private banks participating in the pilot has also changed from 15 to 13. Some of the banks’ employees would become the test participants for CBDC retail payments, as well as one of the largest insurance companies in the country, Ingosstrakh.
Bank executives expressed enthusiasm for the project. The director of innovations at Sinara Bank, Vitaly Kopysov, told journalists:
“The use of smart contracts should reduce the operational load of banks and make the deals transparent, which not only will reduce the chances of the misuse of government and banks’ funds, but ultimately simplify the control over the existing contracts.”
The upcoming pilot will involve real operations and consumers, although it will be limited in scale. The general public will be unable to participate in the first stage, as the banks will enter the pilot with chosen customers.
Following the first stage, the Bank of Russia intends to determine how to scale the digital ruble further.
Initially scheduled for 2024, the consumer CBDC pilot was moved to an earlier date as the Russian central bank sought an alternative to the SWIFT payments system amid Western economic sanctions against Russia.
Japan Plans To Form Expert Panel To Explore Digital Yen: Report
The ministry’s panel will reportedly focus on developing a framework for a central bank digital currency based on a technical study carried out by the Bank of Japan over the past two years.
Japan’s Finance Ministry is planning to establish an expert panel in April to explore the feasibility of introducing a digital yen, Japanese news outlet NHK reported.
According to the report, the ministry’s panel will focus on the creation of a framework for a central bank digital currency (CBDC) and will refer to a technical study conducted by the Bank of Japan (BOJ) over the past two years.
The ministry intends to use the findings from the expert panel to prepare for the possible issuance of a digital yen.
CBDCs are digital versions of traditional currencies, such as the U.S. dollar, yen and euro, issued and backed by central banks.
Unlike cryptocurrencies, which purport to be decentralized and not backed by any government or central authority, CBDCs are issued by a central bank and operate within a centralized system.
Although CBDCs are still in the early stages of development, opponents of central bank issued digital currencies have expressed concern that this technology would give monetary authorities unprecedented control over financial transactions.
Additionally, some people argue that CBDCs are unnecessary and that traditional forms of payment are sufficient.
Central bank digital currency (CBDC): Government control your money.
Bitcoin: You control your money. pic.twitter.com/KnUBuR7CE8
— Pan ₿ (@satstackerMY) December 30, 2022
Despite these concerns, many central banks worldwide are exploring the possibilities of issuing CBDCs, and the debate surrounding their use is ongoing.
The United States, China, India and several European nations are already examining the viability of state-run digital currencies.
As previously reported by Cointelegraph, the Central Bank of the United Arab Emirates (CBUAE) is making progress toward the full launch of its CBDC, called the digital dirham, for domestic and cross-border payments.
On March 23, the CBUAE announced it had signed an agreement with G42 Cloud and R3 to provide infrastructure and technology for the CBDC implementation.
In addition to addressing payment challenges, the digital dirham is expected to promote financial inclusion as the country aims to become a cashless society.
Citi Analyst: CBDCs Will Be A ‘Trojan Horse’ For Blockchain Adoption
Ronit Ghose says increasing use blockchain technology will be driven by digital financial instruments.
Central bank digital currencies (CBDC) will be the driving force behind getting more people to use blockchain, Ronit Ghose, future of finance global head at Citi, told CoinDesk TV.
In Citi’s latest “Money, Tokens, and Games” report, the banking giant said the crypto industry is reaching an inflection point where blockchain’s potential will be seen and measured in “billions of users” coupled with “trillions of dollars in value.”
That, however, could hinge on whether the use of CBDCs globally becomes a reality. By 2030, according to the Citi report, up to $5 trillion worth of CBDCs could be circulating in major economies across the world, half of which would be tied to distributed ledger technology.
“CBDCs will be a Trojan horse,” Ghose told CoinDesk TV’s “First Mover” on Wednesday, referring to how using the digital currency will get more people comfortable using blockchain.
The original, wooden Trojan horse was used by the Greeks to breach the defenses of the city of Troy during the Trojan War.
Ghose said CBDCs will push “the adoption in financial services of tokenized assets [and] tokenized money.”
The use of CBDCs is likely to vary by region and use cases, said Ghose. China, for instance, is a country likely to take a more centralized approach in its use of a CBDC.
Still, Ghose said, blockchain technology “has a real value when you’re looking at fragmented systems” and some countries, such as India, could benefit from cross-border CBDCs.
From The Retail User’s Perspective
Ghose predicts the three drivers for blockchain technology will be CBDCs, securities and tokenized assets in gaming.
“That’s what’s going to drive the growth of blockchain adoption in the next three to five years,” he said.
Adoption of blockchain will be helped greatly by what users already know – digital wallets, such as Apple Pay, according to Ghose.
CBDCs ‘Threaten Americans’ Core Freedoms’ — Cato Institute
The D.C.-based think tank views a central bank digital currency as a danger to citizens’ privacy.
A report from the Cato Institute argues that a United States government-issued central bank digital currency, or CBDC, would usurp the private sector and threaten citizens’ privacy and core freedoms.
The U.S. government is investigating the creation of a CBDC, essentially a digital dollar that would be backed by the Federal Reserve. According to analysis from the Cato Institute — a Washington, D.C.-based policy research think tank — this represents a clear and present danger to citizen privacy and the free market.
The institute minced no words in the phrasing of the report’s ultimate takeaway, stating that CBDCs “should have no place in the American economy” and that “Congress should explicitly prohibit the Federal Reserve and the Department of the Treasury from issuing a CBDC in any form.”
— Cato Daily Podcast (@CatoPodcast) April 4, 2023
The primary arguments against the development of a government-issued CBDC, according to the Cato Institute, include fears over tracking and control, destabilization of the free market and cybersecurity.
“The private sector is not immune either, but it does have the distinct advantage of being more decentralized than the federal government,” writes the authors of the report, which continues, “Whereas an IRS breach puts all 333 million Americans at risk, a breach at a private financial institution would affect only a fraction of citizens.”
These privacy concerns could extend beyond the United States, as some 60% of global financial liabilities and claims are denominated in U.S. dollars, according to the Federal Reserve.
It’s unclear at this time if and when the U.S. intends to issue a CBDC — although the Federal Reserve’s FedNow service, a state-operated instant transaction banking portal, is scheduled to go online in July.
Per a previous report from Cointelegraph’s Brayden Lindrea, the ongoing discussions on Capitol Hill remain a hot-button issue for some, with Congressman and Republican Party majority whip Tom Emmer calling CBDCs potentially “dangerous” for both individual users and the government’s political opponents.
ANZ Bank Completes Australian CBDC Use Case For Carbon Credit Trading
The first Australian dollar-backed stablecoin was used with Australian CBDC support to trade carbon credits with Grollo Carbon Ventures.
Australia and New Zealand Banking Group (ANZ) has completed its use case in the pilot project run by the Reserve Bank of Australia (RBA) and Digital Finance Cooperative Research Centre using central bank digital currency (CBDC). ANZ partnered with Grollo Carbon Ventures (GCV) to trade carbon credits.
ANZ tokenized Australian Carbon Credit Units (ACCUs) and GCV used its A$DC stablecoin to trade carbon credits on a public, permissionless blockchain.
Settlement occurred “in near real-time via ANZ smart contracts,” the bank said. Australian CBDC was used to back A$DC. ANZ banking services lead Nigel Dobson said:
“When applied to carbon markets, tokenisation has the potential to improve efficiency and transparency, reduce risk and preserve the unique characteristics of underlying projects to incentivise investment in climate solutions.”
This was the first of three Australian CBDC pilot use cases in which ANZ will participate. It will also be involved in use cases for offline payments and pension fund payments, which are among the 14 use case projects the RBA announced in March.
Besides the three projects, ANZ will also be involved in distributing the CBDC.
A$DC premiered in March 2022 as the first Australian dollar-based stablecoin issued. It was used in June in an ACCU trade between the Victor Smorgon Group and Zerocap.
ANZ Bank Goes FULL STEAM AHEAD with their ‘Central Bank Digital Currency’ Program, Prepare For a Social Credit System. pic.twitter.com/q3MwCs9rpa
— Australians vs. The Agenda (@ausvstheagenda) March 31, 2023
The second Australian bank-issued stablecoin was the AUDN, issued by National Australia Bank with carbon credit trading specifically in mind. That coin was used in the first-ever cross-border stablecoin transaction in March.
Pro-crypto Australian Senator Andrew Bragg introduced legislation to regulate stablecoin and cryptocurrency services as a private bill (one not introduced by a government minister) in March.
He had released a draft of the bill in September. The RBA published a white paper on stablecoins and their regulation in December.
Peru Considering CBDC To Improve Payment System: Former IMF Adviser
The Central Reserve Bank of Peru has released a report on the development of a central bank digital currency and promises more reports as its research continues.
The Central Reserve Bank of Peru (CRBP) has published a paper that it said will be the first in a series to examine the need, design and timing of a Peruvian central bank digital currency, reported John Kiff, research director at the Sovereign Official Digital Association (SODA). His report concentrates on issues relating to a retail CBDC.
The status quo of competing payments systems in Peru is untenable, the CBRP wrote, but the introduction of a CBDC, combined with new policies to improve the access and interoperability of existing systems, would help the central bank overcome barriers to financial inclusion and lower costs for transactions. According to the report:
“The objective of a CBDC within the framework of the payment system in Peru is to give the unbanked population access to digital payments, so it is important to know their characteristics to prepare an implementation strategy.”
Peru has serious obstacles to overcome. About half the country’s population is unbanked. Three-quarters of the unbanked live in “non-poor” households, but almost 79% of them have no savings.
They live mainly in urban areas and almost all of them work informally. Almost all the unbanked have mobile phones.
Nonetheless, the use of digital payments in Peru has increased fivefold since 2015, the report said.
En el Perú, han ocurrido tres eventos que dan luces de hacia donde va el sistema financiero peruano de la mano de blockchain.⛓️
1⃣ El Banco Central de Reserva del Perú publicó el primer documento “CBDC : Impulsando los pagos digitales en el Perú”
— Blid (, ) | .lens (@blid_one) April 3, 2023
The current report marked the end of the first step out of five steps in the potential production of a CBDC, the report said. No timeline for CBDC development was mentioned. The CBRP also released a 25-question survey of potential users, due April 30.
Peru received technical assistance in the creation of the report from the International Monetary Fund under an agreement reached in May 2021. CBRP President Julio Velarde announced in November 2021 that the country would cooperate with India, Singapore and Hong Kong to develop a CBDC.
SODA is a technology-agnostic firm that provides advisory services on central banking, digital finance and the Web3 industry. Kiff is a former IMF section expert.
India Targeting One Million CBDC Users In Three Months, Prioritizing Offline Transfers: Sources
Around 100,000 users have participated in the country’s central bank digital currency pilot since it kicked off in December.
India’s retail central bank digital currency (CBDC-R) architects are aiming to scale the user base of the digital rupee to one million users, and have prioritized solving the challenge of creating an offline version, two people familiar with the matter told CoinDesk.
Although RBI officials publicly stated in March they were aiming for 500,000 users by July, they are privately looking to double that amount.
“Given India’s population as the world’s largest, we expect to reach the milestone of one million users easily,” one person said, adding that the tentative timeline for reaching one million users is three months.
The Reserve Bank of India (RBI) is running both retail and wholesale CBDC pilots. The retail CBDC pilot is active in at least 15 cities with more than 13 banks participating.
India’s retail CBDC pilot began on Dec. 1, 2022, and has seen more than 100,000 customers participate in the four months since.
India’s digital rupee was the subject of great interest at a recent meeting of the Group of 20 (G-20) hosted by India in Bengaluru, said RBI Governor Shaktikanta Das in a media conference on Thursday.
“In fact, an eminent person from the international financial sector went to the extent of complementing the design of our CBDC, adding that the only thing he missed in the CBDC was the smell of new currency.”
The RBI had initiated a Hackathon in 2023 to find solutions to some of the challenges around a retail CBDC including improving scalability, increasing transactions per second and solutions for enabling offline transactions.
“This is nearly an impossible trinity. As on date, you can achieve two objectives but not the third,” said another person. “Hopefully, some technological innovation will address this soon.”
A digital currency system that can facilitate offline transactions is seen as a way to improve financial inclusion in emerging economies such as India.
The RBI is hoping to conduct offline transactions by testing the use of wearables, cards including debit and credit, Bluetooth technology and a smartphone. Another key concern the RBI is looking to address is the risk of double-spending.
More than 50 proposals were submitted to the RBI on the closing date of March 24 to solve the problem of offline transactions, one person said.
The RBI has also been interacting with private companies to consider solutions to improving scalability, even though no partnership has been initiated with any prominent blockchain-related entities.
The RBI has not announced a timeline for rolling out a full-scale retail CBDC but has previously indicated it was aiming for the end of the year.
Bank of England Targets 30-Strong Team For Digital Currency: Report
Among the positions available are digital pound security architect and digital pound solutions architect.
The Bank of England is looking to hire a staff of as many as 30 people to develop a central bank digital currency, the Sunday Times reported, without saying where it got the figure.
In February, the U.K.’s central bank and finance ministry said they were starting further research and development on a digital version of the pound sterling, and invited the public to weigh in on the plans.
While the project has been dubbed “Britcoin” in the press, the bank is less keen on the moniker, saying no decision has been made on whether a digital pound would use distributed ledger technology.
The bank’s website careers page lists positions for a digital pound security architect and digital pound solutions architect, both added toward the end of last month.
Both pay as much as 80,000 British pounds ($99,000) in salary. The Treasury advertised for a head of central bank digital currency in January.
“A team of 30 seems like quite a significant resource to focus on the digital pound,” said Ian Taylor, a board adviser for trade association CryptoUK, according to the newspaper. “It shows the impact it would have, and that the bank are serious about it.”
The Digital Currency Monetary Authority (DCMA) Launches An International Central Bank Digital Currency (CBDC) #Shitcoin #Spycoin
Today, at the International Monetary Fund (IMF) Spring Meetings 2023, the Digital Currency Monetary Authority (DCMA) announced their official launch of an international central bank digital currency (CBDC) that strengthens the monetary sovereignty of participating central banks and complies with the recent crypto Universal Monetary Unit (UMU), symbolized as ANSI Character, Ü, is legally a money commodity, can transact in any legal tender settlement currency, and functions like a CBDC to enforce banking regulations and to protect the financial integrity of the international banking system.
Banks can attach SWIFT Codes and bank accounts to a UMU digital currency wallet and transaction SWIFT-like cross-border payments over digital currency rails completely bypassing the correspondent banking system at best-priced wholesale FX rates and with instantaneous real-time settlement.
In an IMF interview with Tobias Adrian, Financial Counsellor at the International Monetary Fund, he states “Cross-border payments can be slow, expensive, and risky. In today’s world of payments, counterparties in different jurisdictions rely on costly trusted relationships to offset the lack of a common settlement asset together with common rules and governance.
But imagine if a multilateral platform existed that could improve cross-border payments—at the same time transforming foreign exchange transactions, risk sharing, and more generally, financial contracting.”
According to Darrell Hubbard, the Executive Director of the DCMA, and the chief architect of UMU, “This vision expressed by the IMF is the exact solution the DCMA is delivering to central banks worldwide.”
Adopting a global localization public monetary system architecture, UMU can be configured to operate according to the central banking regulations of each participating jurisdiction.
George Walker, a Partner at Practus, LLP, specializing in international law, facilitated meetings between the DMCA and the IMF, states “Although the IMF has not officially endorsed Universal Monetary Unit, 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.”
According to Darrell, “UMU is not attempting to disrupt the international monetary system. If fact, it strengthens it by helping the IMF achieve its stated mandate to provide economic and financial stability to its member states. UMU is a game-changer in how cross-border payments are transacted and mitigates against seasonal and systemic local currency depreciation.”
Universal Monetary Unit Model Law legislation has been drafted in collaboration with several sovereign states. In this proposed legislation, UMU should not be enacted as legal tender for negotiating domestic prices or international trade agreements.
Instead, the legislation proposes UMU to be enacted as a complementary money commodity for the store of value, mitigating against potential seasonal and systemic local currency depreciation, and tendered as a payment currency at the time of settlement.
Merchants and trading partners could accept UMU for the equivalent market value for their good and services priced in any national legal tender.
UMU has premium exchange rates built into its wallet and can convert any settlement currency amount to the equivalent UMU amount.
Universal Monetary Unit is cryptocurrency reimagined from the ground up to support central banking and regulated financial institutions.
It features a trusted consensus protocol, Staked Proof of Trust (SPOT) Protocol, and a multi-dimensional DLT (mDLT) capable of supporting any asset or liability ledger enabling full-service digital banking and international trade payments.
The DCMA introduces Universal Monetary Unit as Crypto 2.0 because it innovates a new wave of cryptographic technologies for realizing a digital currency public monetary system with a widespread adoption framework encompassing use cases for all constituencies in a global economy.
Central bank digital currencies (CBDC) have been a hot topic this year. The European Central Bank is due to finish its investigation into a digital euro in October.
This week, the Bank of England announced it is looking to grow its CBDC team for a potential ‘Britcoin.’ Also, this week, Sweden has just published the third round of its pilot report for its own e-krona.
While many countries are in the investigation phase, far fewer have launched one—or committed to doing so. The Bahamas’ Sand Dollar was issued by its central bank all the way back in October 2020, becoming the first nationwide CBDC in the world.
Nigeria, Africa’s most populous country, launched its eNaira last year. However, it has been plagued with a lack of adoption and merchants willing and able to accept the currency.
So the news this week that the Digital Currency Monetary Authority (DCMA) has announced the launch of a new digital currency is surprising.
The currency—called the Universal Monetary Unit (UMU) or Unicoin— was announced during the International Monetary Fund (IMF) Spring Meetings in Washington, D.C. (UMU is distinct from another project called Unicoin. The two are not related. BeInCrypto will use UMU going forward.)
The fledgling currency already has its own symbol, the ANSI Character, Ü.
Who Is the Digital Currency Monetary Authority?
The DCMA is a private organization that advocates for the advancement of digital currencies in central banks and money systems. According to a press release, its executive team has been working with governments and central banks on blockchain and digital currency cryptography since 2013.
The DCMA is also a monetary authority. “UMU is our monetary asset, and we back it,” said Darrell Hubbard, the Executive Director of the DCMA, and the chief architect of UMU, in an interview with BeInCrypto. “Meaning, you can always redeem the value from us for the value paid to us. That’s the role of a monetary authority.”
The group aims to promote global trade by integrating international payments and settlements with digital currency. It has “between 50 to 75 Human Resources at any given time,” continued Hubbard. “Our Board is from central banks and financial institutions.”
Its thesis, if you want to call it that, is that most cryptocurrency does not fulfill the needs of the financial sector. Indeed, Bitcoin’s whitepaper stated that it was not designed to operate within regulated financial institutions.
However, with central banks exploring cryptocurrency and digital assets, the DCMA believes there needs to be cryptographic cash that can meet the requirements of banks.
Currently, global banking recognizes two legal forms of cash: regulated e-cash and physical cash. Bitcoin’s electronic cash hasn’t been widely adopted in banking because it doesn’t cryptographically represent either of these.
However, the DMCA’s UMU/Unicoin currency is explicitly designed to work with financial and monetary institutions.
What Is The UMU/Unicoin CBDC?
It is important to note that UMU (or Unicoin) will not be a central bank digital currency in the traditional sense. At least not in the foreseeable future. It is intended to function “like a CBDC.” However, it is legally a money commodity.
“UMU functionally operates as a CBDC,” said Hubbard. “But it’s intentionally working across all national jurisdictions. Not just for a local economy.”
Its Whitepaper Has A Passage That Sums Up Their Thinking:
* The IMF assumes that all crypto assets pose a risk to the international monetary system. The IMF does not consider, there could be a class of digital currency innovations designed to enhance the safety and stability of the international monetary system
According to the DCMA, UMU/Unicoin is designed to be suitable for central banks to create retail (for use by the public) and wholesale CBDCs (for use by financial institutions.) It also claims to fix a problem: the slow, inefficient, and complicated process of international bank transfers.
According to the release, banks will be able to link UMU digital currency wallets with SWIFT codes and bank accounts to process cross-border payments similar to SWIFT but over digital currency networks.
This will be done at wholesale foreign exchange rates and with settlements happening in real time. This contrasts with the traditional model, where international bank transfers can take days.
However, UMU will not be a legal tender for negotiating domestic prices or international trade agreements. Instead, it will function as a store of value, mitigate currency devaluation, and be used as a method of payment.
UMU has premium exchange rates built into its wallet and can convert any settlement currency amount to the equivalent UMU amount. Its creators hope that one day merchants could accept UMU for the equivalent market value for their goods and services priced in any national legal tender.
There’s Some Way To Go
For the UMU to take off, it will need buy-in from the financial system and central banks. Something that it doesn’t have yet. On the retail side, UMU will have to compete with the likes of Bitcoin which allows international transactions to happen at a fraction of the speed of many bank transfers using the Lightning Network.
The DCMA has also drafted a law for their CBDC. Their proposed Universal Monetary Unit Model Law was developed in collaboration with central banks from Advanced Economies and Emerging Markets.
The legislation includes UMU/Unicoin as a complementary money commodity that serves as a store of value, designed to help mitigate the potential depreciation of the local currency.
Additionally, UMU/Unicoin would function as a payment currency during settlement transactions.
There are currently no confirmed partners, and the DCMA was not able to confirm which economies it has been working with.
“The DCMA is under NDA with these economies,” said Hubbard. “However, our access is either central bank governors or finance ministers. I can disclose our largest commitments are with the African Union, who are introducing us to all governors on the continent.”
“Because of politics, we’ve been asked to keep participation economies under NDA. In the near, we will be able to disclose our partners.”
According to a press release announcing the new currency, UMU, also known as Unicoin, is a legal money commodity that can transact in any legal tender settlement currency and functions like a CBDC to enforce banking regulations and “protect the financial integrity of the international banking system.”
UMU “adopts a central banking monetary policy framework to ensure it has continuous purchasing demand, minimal price volatility, and annual asset pricing targets,” the announcement said.
Banks will be able to utilize the new currency by attaching SWIFT Codes and bank accounts to a UMU digital currency wallet.
This enables them to conduct SWIFT-like cross-border payments entirely over digital currency rails, accessing the best-priced wholesale FX rates and achieving instantaneous, real-time settlement while bypassing the correspondent banking system.
“Cross-border payments can be slow, expensive, and risky,” said Tobias Adrian, Financial Counsellor at the International Monetary Fund. “In today’s world of payments, counterparties in different jurisdictions rely on costly trusted relationships to offset the lack of a common settlement asset together with common rules and governance.
But imagine if a multilateral platform existed that could improve cross-border payments—at the same time transforming foreign exchange transactions, risk sharing, and more generally, financial contracting.”
Through the adoption of a global localization public monetary system architecture, UMU can be configured to operate according to the central banking regulations of each participating jurisdiction, the release said.
“UMU is not attempting to disrupt the international monetary system,” said Darrell Hubbard, the Executive Director of the DCMA. “If fact, it strengthens it by helping the IMF achieve its stated mandate to provide economic and financial stability to its member states.
UMU is a game-changer in how cross-border payments are transacted and mitigates against seasonal and systemic local currency depreciation.”
In the proposed UMU Model Law legislation, Unicoin would be enacted as a complementary money commodity and function as a store of value, helping to mitigate against potential seasonable and systemic local currency depreciation and function as a payment currency at the time of settlement.
Merchants and trading partners will be able to accept UMU as a form of payment for their goods and services priced in any national legal tender. “UMU has premium exchange rates built into its wallet and can convert any settlement currency amount to the equivalent UMU amount,” the press release said.
UMU is specifically designed to support central banking and regulated financial institutions. It utilizes a staked proof of trust (SPOT) consensus protocol, along with a “multi-dimensional DLT (mDLT) capable of supporting any asset or liability ledger enabling full-service digital banking and international trade payments.”
The DCMA hopes that UMU serves as “Crypto 2.0” through the introduction of “a new wave of cryptographic technologies for realizing a digital currency public monetary system with a widespread adoption framework encompassing use cases for all constituencies in a global economy.”
According to George Walker, a Partner at Practus, LLP, who facilitated weekly meetings between the DMCA and the IMF where the whitepaper for the project was discussed, while the IMF has not made any official endorsements of UMU, the organization “has yet to state any objections to UMU’s FX premier rates and its monetary sovereignty approach.”
About the Digital Currency Monetary Authority (DCMA) –
The DCMA is a world leader in the advocacy of digital currency and monetary policy innovations for governments and central banks. Membership within the DCMA consists of sovereign states, central banks, commercial and retail banks, and other financial institutions.
About Universal Monetary Unit (UMU):
Universal Monetary Unit (UMU), also known as Unicoin, is an innovation in store of value cryptography powered by artificial intelligence (AI). It adopts a central banking monetary policy framework to ensure it has continuous purchasing demand, minimal price volatility, and annual asset pricing targets.
A copy of the UMU Whitepaper is available on its website.
Can CBDCs, Tokenized Deposits, Stablecoins and DeFi Coexist?
Central banks may continue to dictate monetary policies but private regulated entities, such as banks and protocols, may play an increasingly large role in distributing money to the public, Moody’s senior director Yiannis Giokas writes.
Decentralized finance (DeFi) is booming, and the FTX exchange collapse has thrown a spotlight on the urgent need for safer, more efficient systems in the crypto market. So how can governments, financial institutions and DeFi-native groups meet this challenge?
The answer lies in exploring viable alternatives including central bank digital currencies (CBDC), tokenized deposits and fiat-backed stablecoins. Each instrument comes with its pros and cons, but can they coexist within the evolving DeFi space? Trust and ease of redemption for payment transactions will be the key.
CBDCs are digital versions of a country’s legal tender, issued and regulated by the central bank. They offer efficiency of payment and direct translation of monetary policy, but also raise privacy concerns, technological challenges and could disrupt traditional banks.
Tokenized deposits are digital representations of deposits held at a financial institution, converted into easily transferable and accessible blockchain tokens. They promise improved liquidity, efficient cross-border transactions and fractional ownership.
However, tokenized deposits also carry risks associated with the issuing institution, are subject to regulatory scrutiny and may not be accessible to all.
Fiat-backed stablecoins are digital assets collateralized by a mix of cash and securities in a specific currency – most commonly the U.S. dollar, offering stability and minimal price fluctuations.
They can play a crucial role in crypto trading and DeFi applications but contain risks related to centralization, transparency and regulatory uncertainty leading to mixed appetites for the assets globally.
All three instruments can harness blockchain technology, paving the way for faster and more efficient transactions. They share the potential to increase accessibility and financial inclusion, particularly for underbanked or unbanked populations.
Each instrument is designed to provide stability, whether backed by a central bank (CBDC), deposit protections (tokenized deposits) or underlying fiat currency reserves (stablecoins).
The key risks and caveats revolve around issuance and regulation, accessibility and restrictions, and specific risk factors. CBDCs and tokenized deposits are subject to government regulations and deposit protection rules, respectively, while fiat-backed stablecoins rely on the transparency and management of the underlying collateral.
Moreover, CBDCs and tokenized deposits may face limitations, whereas stablecoins are generally more accessible.
So, can CBDCs, tokenized deposits and stablecoins coexist within the DeFi landscape? Governments, financial institutions and stablecoin issuers are each focused on developing their own instruments and must adapt their strategies to successfully coexist.
Governments won’t easily give up monetary control but a CBDC won’t be a reality in the U.S. anytime soon and there is still a long way to go in launching one in Europe despite the political will to do so.
Similarly, financial institutions will strive to maintain customer relationships by promoting tokenized deposits over stablecoin alternatives but have not yet started to roll these out commercially.
Stablecoins need experienced custodians to manage reserves effectively and must resolve transparency issues and navigate an evolving regulatory landscape.
At the same time, many consumers may push back against increased government oversight of their financial activities to favor stablecoins over institutional alternatives.
In summary, the market environment continues to be fluid, and there is no clear winner on either side. Ultimately, the coexistence of CBDCs, tokenized deposits and stablecoins hinges on striking the right balance to meet customers’ needs and ensuring trust in their redemption as payment transactions.
This coexistence should be driven by application, with central banks continuing to dictate monetary policies and issue money while relying on private regulated entities, such as banks, for distribution to the public.
As financial institutions and nonfinancial institutions have historically driven innovation in B2B and B2C [business-to-business and business-to-consumer] payments, they are well-positioned to prevail in the digital world, creating a harmonious ecosystem where CBDCs, tokenized deposits and stablecoins can all thrive.
The evolving DeFi landscape offers an opportunity for increased efficiency and safety. Understanding the nuances of these instruments will be crucial in determining their future roles in the global economy.
Trust in their redemption as a form of payment transaction will be the cornerstone of their coexistence and success within the DeFi ecosystem.
How The Fed Will Make Bank Transfers Truly Instant
While many countries now offer bank payments in the blink of an eye, moving funds between accounts in the US can still take days. Electronic platforms such as PayPal Holdings Inc.’s Venmo and Block Inc.’s Cash App offer various workarounds to speed up the process, but they are essentially intermediaries that interface with the slow banking system. Now the Federal Reserve has created a high-speed transportation lane that allows for bank transfers within seconds. Here’s what you need to know about the new service, FedNow, which launches in July.
1. Why Are US Bank Payments So Slow?
Transfers using the Automated Clearing House — the legacy system invented in the 1970s — can take days to complete, partly because it lumps transactions together and processes them at specific intervals. Newer instant-payment tools like Venmo are fine when you’re doing something like buying a hot dog or sending cash to a friend who uses the same app. But when you want to pull money back off those platforms, the funds grind their way through the legacy banking system before they show up in your account. The same thing happens when you receive a paycheck or pay a utility bill. A survey by American Banker in 2021 found that 21% of consumers had abandoned a financial transaction or account opening because it took too long. The current slow transfers often lead to late fees for missed bill payments or penalties for overdrafts. So for the millions of Americans who live paycheck to paycheck, the delays can be costly.
2. Why Can’t Banks Solve The Problem Themselves?
All the income from those overdraft and other fees meant banks had little incentive to come up with a faster solution on their own. A bank can also temporarily sweep transfer funds held overnight into short-term securities to earn a yield. US banks have the right to hold your money for as long as 10 days for the purpose of making sure it is not the proceeds of a crime. A group of big US banks did come up with a rapid-settlement platform of their own, known as real-time payments, or RTP, but have marketed it mainly to business customers because they already offer a peer-to-peer system called Zelle for consumers. While this is sold to consumers as a real-time transfer service, in some instances the transfers are settled over the legacy batch system and the banks in effect extend short-term credit until those payments settle.
3. How Will FedNow Work?
FedNow will offer instantaneous payments from one bank account to another 24/7, all year round. Because payment occurs instantly, customers will know right away if the transfer has completed or failed. The person receiving the funds will be able to use them almost instantly. The flip side is that, unlike a check, you can’t put a hold on a FedNow payment or cancel it. Once you’ve made that payment, the money is gone for good. And unlike a credit card, there are no rewards, points or fraud protection.
4. What Are The Fees For Using FedNow?
Payments will cost a few cents, but it’s not clear who will pick up the tab — the bank or the customer. With ACH, it’s often the bank that pays the fees unless the customer is making a large number of payments.
5. How Can I Sign Up For FedNow?
You can’t, as there won’t be a FedNow consumer app. First your bank will need to sign up to use the system and plug it into the back end of its own banking website or app.
6. Will This Kill Providers Like Venmo or Cash App?
That’s certainly not the goal: The Fed has always said consumers are best served by a competitive payments landscape with multiple players. FedNow will both complement and compete with existing electronic payment systems. Almost 10,000 US banks and credit unions will be able to join and use FedNow, giving the country’s patchwork of regional lenders and credit unions a better chance of vying for payments business against giant banks and financial technology firms.
7. Is The US Leading The Way Here?
Europe’s Single Euro Payments Area already allows instant payments across 36 countries, while the UK introduced instant payments in 2008. One limitation of FedNow is that it doesn’t allow for “pull” transactions in which utilities, phone companies or other service providers can trigger a payment from a customer account on an agreed date, a capability that makes it easier for those businesses to manage their cash flow.
8. How Soon Will My Bank Offer FedNow?
Fed officials expect the adoption to be slow and gradual, and it could be many months before FedNow shows up on a bank’s website or app. While there were just over 100 banks in a FedNow pilot program, there’s no obligation to use the service and it’s not known how many will choose to do so.
9. Will FedNow Invade My Privacy?
Since this will be a bank-operated system, the same privacy infrastructure that exists around other payment systems will apply. Like it or not, your basic information is all over your non-cash payments, from your credit cards to your bank checks, which have a lot of information about you written right on them. If you want more privacy, stick with dollar bills.
10. Is FedNow A Step Toward A Digital Currency?
Various commentators on social media have suggested FedNow is a scheme to phase out physical cash or part of a plan to introduce an official, government-backed digital currency to replace the dollar. (Some politicians, including long-shot Democratic presidential candidate Robert F. Kennedy Jr., have seized on some of those talking points, while Florida Governor Ron DeSantis has railed against the idea of a central bank digital currency in the US.) The Fed denies this, saying the new payments service will simply be a faster way to move deposits and that it will continue to provide notes and coins for those who still want to use cash. The people most responsible for the declining use of hard currency are consumers themselves. Commercial payments in cash dropped to about 20% in the pandemic year of 2020 from 30% in 2017.
CBDC ’Human Rights’ Tracker Revealed At Oslo Freedom Forum
A pro-Bitcoin nonprofit says it will flag potential civil liberty concerns as more countries are expected to develop CBDC technology.
The nonprofit Human Rights Foundation (HRF) has launched a central bank digital currency (CBDC) tracker, the organization announced at the same Oslo Freedom Forum event it hosts. The online tracker has published educational materials and a tip line. It is expected to become fully functional by year-end.
The tracker came out of an eight-month fellowship at the HRF that was announced in January. The fellowship was awarded to Cato Institute policy analyst Nick Anthony, researcher Janine Romer and podcaster Matthew Mezinskis. The Cato Institute is an ardent opponent of CBDCs.
HRF chief strategy officer Alex Gladstein said in a promotional video about the tracker:
“It’s going to be an online resource that describes the progress of central bank digital currencies around the world, especially in authoritarian countries, and the civil liberties red flags and risks that come along with this.”
Because a CBDC is a central bank liability, it “creates a direct link between citizens and the central bank,” which “opens the door to so many human rights concerns when it comes to the adoption of CBDCs,” according to the CBDC tracker on the HRF website.
The first phase of the @HRF CBDC Tracker is now live!
Just announced at the Oslo Freedom Forum, the full resource will be unveiled at the end of the year.
— Nick Anthony (@EconWithNick) June 13, 2023
The HRF is an active supporter of Bitcoin. Gladstein has told Cointelegraph in the past that Bitcoin “fixes democracy” and could disincentivize wars.
According to the unrelated, open-source CBDC Tracker website, the vast majority of the world’s central banks are at some stage of CBDC research, but only three CBDCs have been launched so far.
Those are the Bahamas’ Sand Dollar, the Jamaican Jam-Dex and the eNaira in Nigeria. The website also lists 14 pilot projects, including China’s digital yuan. According to HRF, the digital yuan already has 300 million users.
IMF Official Presents Blueprint For Cross-Border CBDCs
The organization wants to help cut the cost of cross-border transactions without abandoning compliance checks or capital controls, Tobias Adrian, director of IMF’s monetary and capital markets department said.
New platforms for cross-border central bank digital currencies (CBDCs) could be more efficient and safe, while still ensuring countries can impose compliance checks and capital controls, an official from the International Monetary Fund said on Monday.
Tobias Adrian, director of the IMF’s monetary and capital markets department reckons one global CBDC platform that will allow for capital controls could cut payment costs – but such a vision is a far cry from crypto enthusiasts’ dream for decentralized financial systems.
“Our blueprint for a new class of platforms would enhance and ensure greater interoperability, efficiency, and safety in cross-border payments, as well as in domestic financial markets,” Adrian said in a speech given in Rabat, Morocco.
“The cost, sluggishness, and opacity of cross-border payments comes from limited infrastructure.”
Earlier Monday, Managing Director Kristalina Georgieva said the IMF was “working hard” on a global infrastructure to enable different CBDCs to work with each other, according to Bloomberg.
The new system, also outlined in an IMF Fintech Note published Monday, could program payments without payees giving precious private information to intermediaries, and saving liquidity by letting contracts be pledged as collateral – without changing the fully fungible nature of money, Adrian said. Adrian first proposed the idea of a CBDC platform in September.
“The ledger would be controlled by the platform operator,” Adrian added, apparently rejecting more innovative ideas such as blockchain-based validation. “The single ledger would ensure there is a unique description of who owns what, so no double spending can occur.”
A document published alongside Adrian’s speech said blockchain had “important limitations” in terms of validator costs, security, efficiency and privacy.
Bitcoin-style proof-of-work technology consumes a lot of energy while Ethereum’s proof-of-stake is costly and untested, it said.
Governments would keep the right to limit their citizens’ transactions in foreign currency and impose anti-money laundering checks, Adrian said – with the IMF keen not to undermine the kinds of capital measures often imposed on countries facing a financial crisis.
Crypto proponents often cite easier cross-border payments as a major benefit – but there’s plenty of competition against free-floating blockchain solutions being used for that purpose, not least as standard-setters don’t want to undermine government controls.
The Bank for International Settlements and private players such as SWIFT are both looking at options involving state-backed CBDCs.
The Committee on Payments and Market Infrastructures, a standard-setter linked to the Bank for International Settlements, is looking at the impact of stablecoins – tokens tied to the value of a fiat currency – while a report from the European Central Bank last year poured cold water on the idea crypto can cut international payment costs.
Unified Ledger For CBDCs, Tokenized Assets Could Enhance Global Financial System: BIS
“This would be a game-changer in how we think about money and how transactions take place,” said the central bank group’s Head of Research Hyun Song Shin.
A new type of market infrastructure in the form of a unified electronic ledger could enhance the global financial system, argues a Tuesday report by the Bank for International Settlements (BIS).
This ledger, proposed by the umbrella group for central banks as part of its annual economic report, could combine central bank digital currencies (CBDCs) along with tokenized money and assets on one platform, with the help of automated smart contracts that power transactions on blockchains including Ethereum.
“Bringing together central bank money, commercial money, and different assets on the same platform, all tokenized and interacting, opens up a whole new range of possibilities,” said BIS Economic Adviser and Head of Research Hyun Song Shin in a press release.
The current monetary system is not seamless because databases must be connected by third party messaging systems such as SWIFT that send messages back and forth with participants having incomplete views of actions, the report said.
A new unified ledger would eliminate “delays and uncertainty,” the report added.
This envisioned finance system would, according to the BIS, provide new methods for securities settlement combining all individual steps into one transaction and enable tokenized deposits with built-in regulatory checks for wholesale CBDCs.
Such a system could also reduce the cost of trade finance for smaller companies, the report said.
The unified ledger proposed by the BIS may exceed in scope a similar combined platform envisioned by the International Monetary Fund (IMF) for CBDCs. Tobias Adrian, director of the IMF’s monetary and capital markets department said in a speech on Monday that a global CBDC platform could be more efficient and safer than traditional platforms.
“We are at the cusp of another major leap in the monetary and financial system, which will have far-reaching consequences for the economy and society at large,“ said Shin. “This would be a game-changer in how we think about money and how transactions take place.”
A unified ledger for cross-border payments would also require significant policy harmonization across jurisdictions, the BIS report said.
Although central bankers and economists at the BIS are not set on the technological and design aspects of such a unified ledger, Shin said the institution is not thinking of using a permissionless blockchain though the mechanism used for effecting the transaction can be decentralized.
“I think the actual choice of technology will really have to be decided for that particular use case,” Shin said at a Monday press briefing on the report. “It could be decentralized, like in a permissioned blockchain, but it doesn’t have to be.
It could be a centralized system as well where there is a rigorous set of controls on data confidentiality, cyber resilience, and so on.”
The next step would be for a group of central banks to come together to take the project forward under a public policy mandate with the help of the private sector, which would handle most of the customer-facing activities, according to Shin.
“I think it’s going to be a very important coming together of both the official sector as well as the private sector and rest assured this is going to be something that we will be discussing going forward,” Shin said.
IMF’s CBDC Push Gets Feedback From The Crypto Community — ‘No One Wants This’
A community member described CBDCs as a “dystopian nightmare” and argued that they would give governments complete control over individuals.
As the International Monetary Fund (IMF) continues its effort to advance the technologies behind central bank digital currencies (CBDCs), some members of the crypto community have reacted strongly against the IMF’s efforts to further the initiative.
In a June 19 CBDC policy roundtable, the IMF’s director of the monetary and capital markets department, Tobias Adrian, presented a new platform concept for cross-border payments. This includes a blueprint for a payment system that uses one ledger to record CBDC transactions.
According to Adrian, the “XC platform” will have a single ledger where digital representations of central bank reserves in any currency can be exchanged.
While the IMF seemed eager to share new development, the same cannot be said for many members of the crypto community, which interpreted the move as a “power grab” and claimed that no one wants centrally-controlled money.
The IMF is creating a global CBDC platform. Where central banks globally would follow the same regulatory framework.
So, if you say the wrong thing in one country, you’ll have nowhere to flee as they can switch your money off anywhere in the world in any jurisdiction.
— Layah Heilpern (@LayahHeilpern) June 19, 2023
According to a Reddit user, the whole project is just a new attempt by the IMF to gain more control, arguing that the organization is now using issues that they’ve “ignored for decades,” like financial inclusion, as a “Trojan horse” to push CBDCs forward. The Redditor wrote:
“The IMF is once again back to their old game. With nations exploring CBDCs, they see this as their next opportunity to amass more power and control.”
On Twitter, one person criticized the IMF’s latest move by saying that the new platform sounds very similar to a “sh*tcoin.” The Twitter user argued that governments or the IMF should not be able to decide on what “the best money is.“
Responding to the new platform, another community member described CBDCs as a “dystopian nightmare.” The Redditor highlighted that this would give government agencies complete control over individuals, as they could see every transaction and allow the IMF to turn off access to their own money whenever they want.
One person expressed joy that they haven’t seen individuals advocating for CBDCs, stating that “no one wants this” centrally managed and controlled money.
Britcoin May Not Actually Be On Blockchain, BOE Exec Says
* All Options On The Table For Digital Pound, UK CBDC Chief Says
* The Central Bank Plans To Trial Various Types Of Ledgers
A digital pound developed by the Bank of England could end up running on software that is not a blockchain, the distributed database technology underpinning cryptocurrencies and other digital coins issued by central banks.
All options are on the table as the UK plugs ahead with research to figure out if a digital pound — which has been dubbed “Britcoin” — is worth building, according to Tom Mutton, who heads the Bank of England’s central bank digital currency (CBDC) project.
At a recent meeting of technologists hosted by the Bank to discuss how a digital pound might be designed, “none of them agreed with each other at any point,” Mutton said in a podcast interview with Bloomberg News.
The Bank plans to trial several different versions of ledgers, including public blockchains similar to those underpinning cryptocurrencies like Bitcoin, to see which option might work best for a UK CBDC.
Proponents of blockchain technology have touted its efficiency over existing payment rails, and more than a hundred central banks around the world are exploring whether a digital currency is worthwhile for their economies.
“We definitely want to be compatible with distributed-ledger business models in the private sector, but we were not convinced that distributed ledgers offered more efficiency over conventional ledgers,” Mutton said. “It’s very much open.”
The UK Treasury and the Bank established a joint taskforce to research a UK CBDC in April 2021. An initial proposal this year suggested placing a limit on how many digital pounds consumers could hold, in an effort to avoid disintermediating private sector banks from the financial system.
A call for responses to the Bank’s consultation on whether to build a CBDC is set to end on June 30, after which it will spend two to three years evaluating the technology and policy requirements before making a final decision. The earliest that an eventual CBDC could appear is in the second half of this decade.
A digital pound would be the first consumer-facing service launched by the Bank for some time. The product would likely not feature the Bank of England’s branding, Mutton said, as consumers would largely use digital pounds through wallets developed by companies in the private sector.
“I‘m not sure that we want people to see this as a Bank of England product,” Mutton said. “It might be best to see it as something which is a way of paying, which is offered by your private-sector wallet, and you just know it’s very, very safe.”
FedNow “Early Adopter” List Contains No Blockchains, But Some May Integrate Later
Two blockchain networks had previously announced integration with the Fed’s instant payment service, but they were not found on a new list of certified providers.
The Federal Reserve’s upcoming instant payment system, FedNow, released its list of certified “early adopters” on June 29. The organizations on the list have been certified as ready to connect with the platform when it launches in late July.
No blockchain networks are on the list, despite at least two having previously announced that they would connect to the instant payment system.
The FedNow service stated that some organizations not on the list may be integrated later, and Metal Blockchain said it still intends to connect with the platform once it gains “the appropriate bank sponsor.”
List Of Organizations Certified With The FedNow Service. Source: Federal Reserve Board Services
FedNow is an instant payment service in development by the United States Federal Reserve. The Federal Reserve claims that the service will allow for instant transfers between banks in the U.S., similar to the United Kingdom’s Faster Payments and Europe’s Single Euro Payments Area systems.
Currently, bank transfers within the U.S. can only be done through ACH or wire transfers, which are not settled instantly. FedNow is scheduled to launch in July.
At least two blockchain networks have announced that they will be “connecting” to FedNow when it launches. One is Metallicus’ Metal Blockchain. The Metallicus team stated in May that its network will allow instant conversion of cash to stablecoins through a connection with FedNow.
At the time, FedNow’s official website also listed Metallicus in its “service provider showcase,” providing further evidence that the integration was going to occur.
his listing was removed within a few days of the announcement being made. On May 15, Twitter user JeffXRP remarked on the strangeness of its sudden removal.
The list of “service providers” released on June 29 includes ACI Worldwide, ECS Fin, FPS Gold, Open Payment Network and 11 other payment providers, but neither Metallicus nor Metal Blockchain are on it.
In a conversation with Cointelegraph, Metallicus co-founder and CEO Marshall Hayner claimed that the company still intends to integrate Metal Blockchain with FedNow once it obtains the proper bank sponsorship, stating:
“Metallicus is currently in communication with the Federal Reserve and the FedNow program administrators while we seek the appropriate bank sponsor and stay focused on building our bank chain technology.”
The other blockchain network that had announced integration with FedNow was Tassat, creator of the TassatPay service and Digital Interbank Network. Tassat claims its network is a business-to-business private blockchain for commercial banks. In March, it announced that it will connect its digital B2B payment platform to the upcoming FedNow service.
Tassat was listed on the FedNow website’s “service provider showcase” as of June 30.
However, Tassat is not listed as a certified service provider in the June 30 list of “early adopters.” Cointelegraph reached out to the Tassat team through email but did not receive a response by the time of publication.
In the Federal Reserve’s announcement, it explained that some organizations not on the list may become service providers in the future:
“In addition to the initial adopters, the Federal Reserve continues to work with and onboard financial institutions and service providers planning to join later in 2023 and beyond, as the initial step to growing a robust network aimed at reaching all 10,000 U.S. financial institutions.”
FedNow has been criticized by some blockchain users for allegedly being a step toward a central bank digital currency (CBDC). U.S. presidential candidate Robert F. Kennedy Jr. has claimed that it will lead to “financial slavery.” In April, the Federal Reserve issued a statement denying that FedNow is related to a CBDC.
Big Banks, NY Fed’s Innovation Group See Merit In Digital Ledgers For Global Payments
NY Fed’s innovation center worked with Citi, HSBC and other banks on the concept of a network for wholesale payments on a shared ledger, finding the idea has potential benefits.
Citigroup Inc., HSBC, BNY Mellon and other global financial giants have been experimenting with what they call a “regulated liability network” for conducting round-the-clock, wholesale payments using shared ledgers, and a paper released Thursday suggests the system has potential.
Fitting somewhere in the middle of the debate between central bank digital currencies (CBDCs) and private stablecoins, the Federal Reserve Bank of New York’s New York Innovation Center (NYIC), which has collaborated on the project since last year, concluded that “the network has the potential to deliver improvements in the processing of wholesale payments due to its ability to synchronize U.S. dollar-denominated payments and facilitate settlement on a near-real time, 24 hours a day, 7 days a week basis.”
“From a central banking perspective, the proof of concept was conducive to exploring tokenized regulated deposits and understanding the potential functional benefits of central bank and commercial bank digital money operating together on a shared ledger,” said Per von Zelowitz, director of the NYIC, in a statement.
The center added that it’s not endorsing the approach, and its work doesn’t reflect any position of the Federal Reserve.
The theoretical payment network experimented with transactions in commercial bank deposit tokens, settling with hypothetical wholesale CBDCs on the same platform and using a shared ledger.
It also looked at wholesale movement of U.S. dollars across borders. The network cut some of the friction over “speed, cost, off-hours availability, and the settlement process” for payments, according to the group’s proof-of-concept released Thursday.
The participants – also including Mastercard, PNC Bank, Swift, TD Bank, Truist, U.S. Bank and Wells Fargo – haven’t committed to any next steps with the experiment, they said.
Raj Dhamodharan, an executive vice president at Mastercard, posted a Tweet that called the effort “an important exploration into how shared ledger technology and the regulated financial system can come together to deliver dynamic, safe and efficient payments solutions.”
The Federal Reserve is on the verge of starting its long-awaited FedNow real-time payments system in the U.S., which is meant to allow banking customers’ transactions to clear right away rather than over the course of a couple of days.
BIS Develops Framework Against CBDC Cyberattacks
The institution cited rising exploits against DeFi as a need for more secure CBDCs.
On July 7, the Bank for International Settlements (BIS), a financial institution owned by constituent central banks, published a framework for defending central bank digital currencies (CBDCs) against cybersecurity threats. The BIS wrote:
“Recent examples of smart contract hacks, which have led to the loss of a significant amount of value in DeFi, serve as an example of the potential security risks CBDC systems could face.”
In its report, the BIS said security frameworks should safeguard the confidentiality, integrity and availability of CBDC transactions.
By design, CBDCs must be able to dynamically scale to respond to a sudden surge in transaction volumes, have no single points of failure, operate 24/7 without outages and function even if their underlying financial institution experiences an outage. Moreover:
“To organise the control objectives that have been identified and adapted for CBDC systems, this framework […] has seven steps: Prepare, Identify, Protect, Detect, Respond, Recover and Adapt.”
Together, the seven procedures translate into 104 control objectives, such as “24/7 monitoring and alerting function,” doing due diligence “on the security of cryptographic keys,” and “using a DDoS protection service” to alleviate network traffic volume.
To execute the framework, BIS called for the establishment of a central bank senior leadership and board, a chief security officer and various information technology, security and stakeholder teams.
Although cautious about decentralized finance, BIS has been adamantly supporting the adoption of CBDCs. On June 20, the financial organization published a unified-ledger proposal for cross-border and tokenized asset transactions.
In April, BIS concluded a distributed ledger technology plot with the Bank of England.
The Real Use Case For CBDCs: Dethroning The Dollar
Central bank digital currencies will revolutionize how companies settle international trade and reduce the need for greenbacks in the world economy, says Michael Casey.
Much like the cruel joke Charles de Gaulle reportedly cracked about Brazil – that it’s “the country of the future and always will be” – predictions of an end to the dollar-based international monetary system seem to belong to a future that will never arrive.
Yet that future is coming, faster than all the prior failed forecasts of the end of dollar hegemony would have you think. In contributing to that shift, Brazil may have the last laugh.
The catalyst can be found in central bank digital currencies (CBDCs), a model for digital fiat money that was, ironically, spurred by governments’ reaction to the 2008 invention of the decidedly anti-fiat Bitcoin protocol.
Bitcoin fanatics tend to pooh-pooh CBDCs as centralized tools for government manipulation that local populations will recoil from.
In dismissing them, they overlook the massive cross-border shifts these new tools will foster at the macro level.
As key export economies such as Brazil embrace CBDC-based direct settlement with their trading partners, it will spur a trend of de-dollarization over the next decade.
The ramifications for U.S. capital markets, for the global economy, and for geopolitical power dynamics are profound.
Brazil’s central bank is among more than a hundred experimenting with CBDCs. Others that matter for this discussion include the United Arab Emirates, Russia, Singapore and China, which is streets ahead in rolling out its electronic currency, the e-CNY. China, of course, has made no secret of its desire to reduce its dependency on dollars.
Those five economies account for around 25% of global output, but it’s their outsized roles in world trade – as exporters of oil (UAE’s Abu Dhabi), foodstuffs (Brazil), natural gas (Russia) and consumer goods (China) and as a finance and shipping entrepot (Singapore) – that amplifies the international impact of their respective currency strategies.
Things will get really interesting once such countries’ central banks use digital currencies in direct settlement arrangements with each other rather than going through the dollar, which is currently used as an intermediating currency in 90% of all trade finance.
There are signs this is moving forward – from Singapore’s DBS Bank recent move allowing direct payments in e-CNY to multilateral institutions such as the Bank of International Settlements, the World Bank and the International Monetary Fund encouraging member countries to collaborate on cross-border CBDC design. So, buckle up.
Cross-border CBDCs Are What Matter, Not Retail
People tend to view CBDCs through a retail lens, seeing them as new digital payment units that citizens would use in daily purchases.
That somewhat overhyped idea has fueled concerns about state surveillance of people’s spending – to such an extent that opposition to CBDCs is now a campaign position of U.S. presidential candidates, including Republican hopeful Florida Governor Ron DeSantis and Democrat challenger to President Biden Robert F. Kennedy Jr.
While those privacy concerns are valid – see my critique of the European Commission’s CBDC plans last week – they’re a sideshow. The far bigger issue lies in wholesale, cross-border transactions.
I’ve been arguing for some time that protocol-based interoperability for countries to directly exchange digital fiat currencies would have a dramatic impact on the international monetary system.
By cryptographically locking an exchange rate forward-contracts into a decentralized, blockchain-based escrow structure could protect an exporter and an importer from currency volatility over the timeframe of their trade deal without either party having to trust the other, or anyone else, to hold the funds. Voilà, no need for the dollar to sit in the middle.
Under this system, a Brazilian farmer could agree to provide a Chinese hoggery with soymeal feed for its pigs at a real-to-renminbi exchange rate fixed at signing, knowing that a smart contract would automatically deliver those funds upon arrival of the shipment in Shanghai.
With the right oracles in place, all this would happen peer-to-peer without either side having to trust the other’s promise to deliver the funds or the goods.
As such, they could eschew the grossly inefficient current system in which a U.S.-regulated correspondent bank typically acts as the trusted third party in the deal, first exchanging the importer’s renminbi into dollars and then converting them into reals for the Brazilian exporter.
If such arrangements proliferated, I have argued, it would reduce global trade-related demand for dollars and, by extension, diminish investment in dollar reserve assets such as U.S. government bonds.
Now, after listening to influential economist Zoltan Pozsar on the Odd Lots podcast with Bloomberg’s Joe Weisenthal and Tracy Alloway, I see that it will likely be the collaborating efforts of central banks, rather than direct importer-exporter agreements, that will forge this path toward disintermediated digital settlement.
Pozsar sees CBDC-wielding central banks adopting new roles as clearing agents for their country’s exporting and importing firms and then using CBDCs to settle directly with their foreign counterparts.
In this way, they would displace the all-powerful dollar-based correspondent banks of Wall Street, such as J.P. Morgan and Citibank. The upshot is that countries won’t need as many dollars.
Pozsar sees the trend driven by mid-tier trade-heavy economies, those that play an outsize role in the demand and supply of dollars worldwide.
Net exporting countries that run trade surpluses will accumulate fewer dollars and so will supply less greenbacks to global foreign exchange markets. And importers that run trade deficits will have less demand for the dollars they previously needed to pay for things.
Depleted Dollar Demand
It’s all part of Pozsar’s “Bretton Woods III” vision, where the dollar ultimately loses its hegemonic status over the next decade. Importantly, he sees a different outcome from that of the British pound’s loss of reserve status in the early 20th century, when the U.S. dollar simply supplanted it.
Instead, he predicts a multi-currency world where no one currency is dominant, a result made possible because of CBDC clearing mechanisms, which negate the need for reserve currency intermediation.
Negotiating counterparts will need to agree on which of their two currencies to denominate their trade deal in, but they won’t have to default to the dollar, or some other universal standard, for actual settlement.
So China is not destined, as some have argued, to become the world’s reserve currency leader. Nonetheless, it will likely see its global influence grow as more of its trade contracts are listed in renminbi.
The trend is already underway, with Russia, Brazil, Argentia, the United Arab Emirates, Egypt and other countries all agreeing to denominate trade with China in its currency. Even U.S. Treasury Secretary Janet Yellen has said a gradual decline in worldwide dollar reserves is to be expected.
Depending on how fast the trend occurs, it will have major implications for the U.S. The debt racked up by U.S. consumers, companies and government entities is in part sustained by the ongoing demand for dollar assets by foreign entities.
The inflows prop up U.S. bonds, which in turn depresses their yields and, by extension, keeps broader U.S. interest rates low. Americans’ mortgages are affordable because of foreign demand for dollars. If that demand drops off, the cost of capital in the U.S. will rise – likely significantly.
Don’t Fight The Inevitable
How Should The U.S. Respond?
I see this is an “if you can’t fight them, join them” moment. There’s no getting around Wall Street banks’ gradual loss of intermediary status, which will mean Washington can no longer use those institutions as agents for surveilling the world’s transactions.
The U.S. should accept that reality and consider how to leverage the potentially fleeting advantage it still enjoys as the issuer of a currency desired the world over.
It should lean into the “soft power” aspects of the dollar’s dominance – the open, rule-of-law values that underpin its value – and give up on the “hard power” elements of gatekeeping and control.
The soft-power approach works because it reinforces the diminished but still widely held impression of the U.S. as an open, advanced economy and it gives the U.S. a chance to lead monetary innovation for the benefit of users around the world.
That path forward is the opposite of China’s “panopticon” centralized digital fiat currency. There’s no compelling reason for the U.S. to develop a retail CBDC.
Rather, official digital dollars should be reserved for inter-central bank cross-border settlement while domestic-use digital money should be opened up to private players using decentralized models with crypto technology. That’s where the real innovative edge will be found.
Sadly, as readers of CoinDesk will know, the U.S. government’s current agenda seems very far from that crypto-friendly approach.
There Could Be 24 CBDCs Live By 2030: BIS Survey
93% of central banks are already conducting research on central bank digital currencies.
According to a survey by the Bank for International Settlements (BIS), 93% of central banks are already researching central bank digital currencies (CBDCs), and there could be up to 15 retail and nine wholesale CBDCs in circulation by 2030.
Published on July 10, the survey of 86 central banks was conducted from October to December 2022. It asked central banks whether they were working on a retail, wholesale or both types of CBDC, how advanced the work was, and their motivations.
According to a survey, over half of the world’s central banks are conducting experiments or working on a CBDC pilot. Almost a quarter of all central banks are already piloting their retail CBDC projects, and the number of wholesale CBDCs in the works is much lower.
Geoeconomically, nations within emerging markets and developing economies are leading CBDC adoption. Their share in piloting the retail (29%) and wholesale (16%) CBDCs almost doubles that of advanced economies, which stands at 18% and 10%, respectively.
Both developing and advanced economies mostly share the motivation behind their CBDC projects — financial stability and cross-border payments efficiency. However, developing countries are more often driven by financial inclusion reasons.
The share of central banks likely to issue a retail CBDC within the next three years grew from 15% to 18% in 2022. At the same time, 68% of central banks still state their unreadiness to issue a retail CBDC “any time soon.”
To date, there are still only four CBDCs in circulation: in the Bahamas, the Eastern Caribbean, Jamaica and Nigeria. Yet, based on the central bankers’ answers, the survey predicts 15 retail and 9 wholesale CBDCs will be live by the end of this decade.
At the end of June, the Reserve Bank of India reported ongoing negotiations with at least 18 central banks worldwide regarding the possibility of cross-border payments via its CBDC, the “digital rupee.” In July, the Federal Reserve Bank of New York’s Innovation Center completed its proof-of-concept of a regulated liability network for a CBDC.
Clearing House Says No Ongoing Payment Bug After Error
The Clearing House said it’s not aware of any ongoing issues following a processing error that affected deposits and transfers at some of the nation’s biggest banks.
A spokesperson for The Clearing House said that the issue affected a single file and therefore a batch of payments, and that the matter pertained to a narrow processing issue caused by human error.
In a separate statement, the Federal Reserve said all of its financial services are operating normally. The central bank identified the processing issue at EPN, the automated clearing house owned by The Clearing House.
The Clearing House is owned by financial giants including JPMorgan Chase & Co., Citigroup Inc. and Wells Fargo & Co.
Bank of America Corp. told clients that some of their deposits may be temporarily delayed due to the issue impacting multiple financial institutions, according to a customer memo sent Friday.
“Your accounts remain secure, and your balance will be updated as soon as the deposit is received,” the bank said.
A spokesperson for JPMorgan Chase & Co. said in a statement that the system issue affected ACH debits and credits sent to the bank and other lenders.
“The originators of these deposits are working to resend the payment files and we will post them as soon as we can,” the spokesperson said.
Bug In Fed’s Payment System Prevents Americans From Getting Paid
Banks stressed customer accounts “remain secure,” and balances will be updated as soon as the issue is resolved.
Some of the largest United States banks cannot facilitate customer’s deposits after one of the Federal Reserve’s payment systems suffered an outage on Nov. 3.
The Federal Reserve said the bug was caused by a “processing issue” in the Automated Clearing House — a payment processing network widely used by banks and employers to deposit wages into employee bank accounts.
The ACH is operated by the Federal Reserve Banks and the Electronic Payment Network.
Banks stressed customer accounts “remain secure,” and the Federal Reserve claims all of its services resumed at 4:44 pm UTC time.
However, customers are still complaining about the ordeal. One X (formerly Twitter) user, Georgiaree Godrey, says she still hasn’t been paid and as a result, cannot pay rent.
Hello. Some deposits from 11/3 may be temporarily delayed due to an issue impacting multiple financial institutions. Your accounts remain secure, and your balance will be updated as soon as the deposit is received. ^adrian
— Bank of America Help (@BofA_Help) November 3, 2023
Another X user, Des Imoto, iterated that funds can’t be secure if they’re missing and suggested that Bitcoin serves as a fix to the problem at hand.
“It’s the opposite of secure since the funds are missing. #Bitcoin fixes this.”
X user LashishLizard also asked Wells Fargo whether they would pay for any late fees imposed against them.
“So are you going to pay everyone’s late fees, court fees and everything else associated with this BS? Because credit companies, bills, landlords don’t want to hear you don’t have it,” they said.
Hi, we appreciate you reaching out to us. We would like to see how we can help. Please send us your full name/ZIP/phone # and we would be happy to follow up with you. ^adrian
— Bank of America Help (@BofA_Help) November 3, 2023
A CNBC survey from September found that 61% of Americans are living paycheck to paycheck, up from 58% in March.
Outage reports from the U.S. banks started to rise at about 11:00 am UTC time on Nov. 3.
Reports from Bank of America peaked at 313 across a 15-minute interval at 4:00 pm UTC time, according to Downdetector. Chase and Wells Fargo reached similar peaks of 279 and 137 around the same timeframe.
The Federal Reserve launched FedNow in July, which allows banks and money transmitter services to make payments instantly without needing to rely on the ACH.