Fintech Daily Digest

"While proponents of central bank digital currencies argue that the technology would boost financial inclusion and efficiency, critics warn that it poses financial, political, and environmental risks. But these concerns are overblown, especially when also weighed against CBDCs' potential to strengthen monetary policy."

Bank for International Settlements (BIS) staffer Tirupam Goel posted a paper discusses the pros and cons of reserve-backed tokens (RBTs) - stablecoins issued by well-regulated private entities that are solely and fully backed by central bank reserves. (The IMF calls them "synthetic CBDC") They are safer than, and can crowd out, current stablecoins, they can adopt a more flexible design than retail CBDCs and thus foster greater competition and innovation, and compared to bank deposits, RBTs are immune to runs and unencumbered by legacy features. However, they could disintermediate commercial banks during normal times and exacerbate runs during stress periods.

The European Central Bank (ECB) published an analysis of the environmental impact of euro banknotes as a means of payment based on the European Commission's Product Environmental Footprint (PEF) methodology. It accounted for all the activities of a full cash cycle of banknotes, from raw material acquisition and manufacturing to the disposal of euro banknotes. It found that the average annual value of cash payments per euro area citizen in 2019 was 101 micropoints (µPt), equivalent to an driving a standard car for 8 km. https://www.ecb.europa.eu/pub/pubbydate/2023/html/ecb.pefreport202312~81e945e7aa.en.html

The digital ruble launch will begin no earlier than 2025, after the completion of the proof-of-concept (POC) that started on August 15, 2023. The first group of participants consists of 600 Bank of Russia employees and 30 businesses in eleven cities. In 2024 the number of participants will expand, but will still remain limited. The POC will continue at least until the end of 2024 and, if necessary, will be extended. The Bank of Russia also noted that, although there are no transaction fees to users, merchants pay a 0.3% commission fee for accepting payments in digital rubles.

"Research on holding and use of cash involves many aspects, such as reasons for holding and hoarding cash, transactional demand for cash, cash management, type of spending paid with cash, type of consumer who pays cash, merchant acceptance, how consumers get cash, currency denominations, legal aspects, cash substitutes, and cost of cash. The purpose of this article is to introduce the reader to some of the research economists do on consumer holding and use of cash." https://www.aeaweb.org/content/file?id=15998

Stablecoin issuer Tether initiated a new voluntary wallet-freezing policy designed to combat activity connected with Sanctioned persons on the Office of Foreign Assets Control (OFAC) Specially Designated Nationals (SDN) List. This adds to the Sanctions controls Tether already enforces for wallets on its platform. Tether has taken additional precautionary measures, including freezing wallets previously added to the SDN List. "The primary objective behind this approach is to proactively prevent any potential misuse of Tether tokens and enhance security measures."

"In our overview of open banking in Europe, we look at what open banking really means in Europe relative to the rest of the world and caveat that its evolution into open finance is more than just about expanded scope. We then justify our choice to focus on the Netherlands, France, Spain and Switzerland instead of on Europe's top-four open banking performers of Sweden, Denmark, Norway and the UK."

The IMF published a paper that traces the development of fintech (excluding cryptocurrencies) and empirically assess its impact on financial stability in a panel of 198 countries over the period 2012-2020. The impact magnitude and statistical significance of fintech depend on the type of instrument (digital lending vs. digital capital raising). However, the overall effect turns out to be negative, albeit statistically insignificant, because of the overwhelming share of digital lending in the total. While digital capital raising is estimated to have a positive effect on financial stability in advanced economies, its effect is negative in developing countries.

"Stablecoin Standard is the industry body for stablecoin issuers globally. Our objective is to give the industry a shared voice, and engage with external stakeholders to promote the acceptance of stablecoins through education, resources, shared initiatives and the StableCheck™️ scheme. "

The Central Bank of the Republic of China (Taiwan) has completed a technical feasibility study for a wholesale central bank digital currency (CBDC) and is planning retail CBDC pilots to follow up on the proof-of-concept completed in 2022. Supporting tokenization is a main motivation for the wholesale CBDC work, including providing an anchor for tokenized deposits, stablecoins and a unified ledger, plus an additional payment option in a tokenized world. The retail CBDC work will include researching an offline solution. https://www.cbc.gov.tw/tw/cp-302-164924-0423d-1.html

According to a BearingPoint survey across seven European countries, cash is the most used payment method overall with contactless debit cards second. Cash use is significantly higher in Austria (79%) and Germany (71%), but respondents from Switzerland (63%), Ireland (61%), the Netherlands (57%), and France (55%) also show a relatively high level of cash use. Finland has a significantly lower frequency of cash usage at 43%.

The U.K. Financial Conduct Authority (FCA) proposed new rules to maintain reasonable access to cash for personal and business customers across the United Kingdom. Under the proposals, designated banks and building societies will need to assess gaps in access to cash. These assessments need to take into account local factors such as demographics and transport. Where firms identify gaps, they will need to act to address these needs, like delivering reasonable additional cash services to fill gaps, and ensuring they do not close cash facilities, including bank branches, until any additional cash services identified are available.

The Basel Committee on Banking Supervision reviewed various elements of the prudential standard for bank exposures to crypto-assets published in December 2022. It agreed to consult on potential targeted revisions related to the criteria for stablecoins to receive a preferential "Group 1b" regulatory treatment. The Committee will also consult on various technical amendments to help promote a consistent understanding of the standard. The Committee concluded that crypto-assets that use permissionless blockchains create risks that cannot be sufficiently mitigated at present and therefore agreed to retain the existing "Group 2" treatment for them (1,250% risk weight). A consultation paper will be published before end-2023. https://www.bis.org/press/p231207.htm

"The Fed's new instant-payments system FedNow can be a game changer, giving people and businesses immediate access to their money and slashing fees that make it expensive to be poor in America. But for FedNow to work, banks must use it. Unfortunately, right now they aren't. Less than 1% of banks and credit unions have signed up, and many of these charge a lot for the service. "

"The UTXO design of Bitcoin exhibits partially characteristics of a token-based system and partially characteristics of an account-based system. A discussion on the difficulty to implement the economic notion of tokens in the digital domain, along with an exposition of the design of UTXO, is given in order to discuss why UTXO-based systems should be viewed as account-based according to the classical economic notion. Besides, a detailed comparison between UTXO-based systems and account-based systems is presented. Using the data structure of the system state representation as the defining feature to distinguish digital token-based and account-based systems is therefore suggested. This extended definition of token-based systems covers both physical and digital tokens while neatly distinguishing token-based and account-based systems."

"The implementation of Central Bank Digital Currency (CBDC) in social assistance distribution offers significant advantages, particularly in the context of developing countries. CBDC enables more transparent and traceable transactions, which are crucial steps in reducing corruption and fund misappropriation. Traditional systems often suffer from high transaction costs and slow settlement processes, but with CBDC, both of these issues can be minimized. CBDC also eliminates intermediaries in fund distribution, which is highly relevant in developing countries where distribution chains are often long and complex, increasing the risk of fund loss. "

"In 2022, Dutch people used their mobile phone or wearable device for contactless payment at points of sale as often as they paid in cash. The share of these new means of payment rose to 21%, while the use of banknotes and coins stabilised at 20% of total payments. Including the contactless variants, debit payments thus stabilised at 80% of all purchases. Young people, the over-65s and people who find it difficult to make ends meet still tend to prefer cash. This has been revealed by a joint study conducted by the Dutch Payments Association (Betaalvereniging Nederland) and De Nederlandsche Bank (DNB)."

"The 2022 Federal Reserve Payments Study (FRPS) collected data for the 2021 calendar year. This initial release includes top-line figures for the core noncash payment methods used in the United States by consumers, businesses, and governments, including payments by general-purpose and private-label cards, automated clearinghouse (ACH) transfers, and checks. This release also covers automated teller machine (ATM) cash withdrawals. Wire transfers, used primarily for large financial transactions, are excluded from these data."

Robinhood launched trading services for over 25 crypto-assets on its platform for all eligible European Union customers. This comes just a week after the firm launched its stock trading application in the United Kingdom. The new crypto app charges zero trading fees, and customers will also receive a percentage of their trading volume back every month in Bitcoin. The new platform also prioritizes transparency, allowing customers to view the spread, including the rebate received by the company from sell and trade orders in the app. https://newsroom.aboutrobinhood.com/robinhood-launches-crypto-trading-in-the-eu/

The Monetary Authority of Singapore (MAS) and People's Bank of China (PBOC) have agreed to allow tourists from either country to use the pilot digital yuan central bank digital currency (CBDC). Visitors to China have likely been able to use the digital yuan for some time, so the innovation here is that Chinese visitors will be able to use it in Singapore. This follows increasing integration between the digital yuan and Hong Kong, enabling visitors in both directions to use the CBDC, but given China's control over Hong Kong, that's rather different. https://www.mas.gov.sg/news/media-releases/2023/singapore-and-china-enhance-digital-finance-and-capital-markets-cooperation