Group items tagged

The U.S. Federal Reserve Board (FRB) rescinded its 2022 supervisory letter establishing an expectation that the banks it regulates and supervises provide advance notification of planned or current crypto-asset activities. As a result, the FRB will no longer expect banks to provide notification and will instead monitor banks' crypto-asset activities through the normal supervisory process. The FRB is also rescinding its 2023 supervisory letter regarding the supervisory nonobjection process for bank engagement in dollar token activities.

The U.S. Federal Reserve Board (FRB) published an assessment of the offline digital payment payment services and analyzes their potential to mitigate internet outage risks and bolster digital payment resilience. It finds that many services branded as offline payment solutions are more accurately classified as hybrid solutions because they ultimately require internet access for clearing and settlement. Truly offline digital payment systems that exchange digital bearer instruments for instant, in-person settlement are still in early development stages. The note lays out a variety of risks associated with offline payment models, including risks related to double spending, security, user privacy, and merchant liability. It concludes that certain offline payment models are promising, but more research and wider uptake is needed for the technology to drive incremental gains in payment system resilience and reliability.

The Clearing House, owned by 24 large U.S. banks, is currently operating a real-time payments system.  An independent assessment found that the RTP network met all 36 criteria set by the FRB-sponsored Faster Payments Task Force. Those 24 banks have individually or collectively paid hundreds of millions of dollars to build that system.

The US Federal Reserve Board (FRB) published additional information on its program to supervise novel activities in the banks it oversees. Novel activities include complex, technology-driven partnerships with non-banks to provide banking services to customers; and activities that involve crypto-assets and distributed ledger or "blockchain" technology. The Fed also provided additional information on the process for Fed-supervised state banks to follow before engaging in certain dollar token or stablecoin activity, including demonstrating to its Fed supervisors that it has appropriate safeguards to conduct the activity safely and soundly.

The US Federal Reserve (FRB) announced that its new system for instant payments, the FedNow® Service, is now live. Banks and credit unions can sign up and use this tool to instantly transfer money 24/7 for their customers. To start, 35 early-adopting banks and credit unions, as well as the U.S. Department of the Treasury's Bureau of the Fiscal Service, are ready with instant payments capabilities via the FedNow Service. In addition, 16 service providers are ready to support payment processing for banks and credit unions.

The US Federal Reserve Board (FRB) published a paper that provides an overview of the literature on how a CBDC would affect the banking sector, financial stability, and the implementation and transmission of monetary policy in a developed economy such as the United States. A CBDC has the potential to improve welfare by reducing financial frictions in deposit markets, by boosting financial inclusion, and by improving the transmission of monetary policy. However, a CBDC also entails noteworthy risks, including the possibility of bank disintermediation and associated contraction in bank credit, as well as potential adverse effects on financial stability. A CBDC also raise questions regarding monetary policy implementation and the footprint of central banks in the financial system. Ultimately, the effects of a CBDC depend critically on its design features, particularly remuneration.

The Federal Reserve Board (FRB), in a unanimous decision, has again rejected Wyoming-chartered Custodia Bank's bid to become a member of the Federal Reserve System, after previously denying the application in January 2023. The initial rejection said Custodia's business model "presented significant safety and soundness risks," and claimed Custodia did not have a sufficient risk management framework in place." https://www.federalreserve.gov/newsevents/pressreleases/orders20230223a.htm

The US Federal Reserve Board (FRB) published a note that describes the general lifecycle of a stablecoin from its issuance to its redemption. It then categorizes various stabilization mechanisms and discuss how they work in practice. A key observation is that, although several stablecoins may peg their value to the same real-world asset, stabilization mechanisms can vary greatly in terms of maintaining stability with the reference asset, and so may have varying susceptibilities to the risk of runs from the stablecoin to the reference asset.

US Federal Reserve Board (FRB) Governor Christopher Waller spoke about the potential benefits and risks of blockchain-based asset tokenization and related the use of smart contracts. In particular, he pointed to the way that smart contract-enabled atomic settlement can mitigate settlement and counterparty credit risks by ensuring that the buyer will not pay if the seller does not deliver; and conversely, that the seller will not deliver if the buyer does not pay. However, smart contracts can have bugs and potential cyber vulnerabilities; and instantaneous settlement raises its own set of risks.

A paper co-written by Federal Reserve Board (FRB) staffer Elena Falcettoni proposes to differentiate individuals without a bank account but would like to have one (the "unbanked") from individuals that do not have a bank account and are not interested in having one (the "out of banking population"). While the unbanked mostly cite financial and past credit or banking history problems as reasons for not having a bank account, the out of banking population cites a growing mistrust toward the traditional banking system. The paper finds that the latter comprises over 70% of U.S. households without a bank account and concludes that to bank the unbanked (the other 30%) policy interventions should be aimed at encouraging financial institutions to offer more accessible and affordable services.

U.S. Federal Reserve Board (FRB) Governor Christopher J. Waller spoke about the maturing stablecoin market and the potential challenges that could impede it from reaching its full potential. Stablecoins must demonstrate not only clear use cases, but also a clear commercial case to be economically viable. Plus, the public sector needs to set clear and targeted legal and regulatory frameworks and coordinate those frameworks across states and national boundaries to enable private sector innovation at a global scale.

The Federal Reserve Board (FRB) published an article on crypto-asset censorship resistance, focusing on settlement layer cooperation by block proposers. It found that, although public permissionless blockchains are designed to be censorship resistant, even blockchains with broad user bases are not immune to the potential for certain transactions to be excluded due to external pressure. Further, concrete design features-such as financial incentives, which are intended to permit the expression of views, however controversial-do not appear to be effective in strengthening censorship resistance. However, system censorship resistance seems to be reinforced by the large players who value censorship resistance as a primitive feature.

The Federal Reserve is conducting in-house experiments with a hypothetical digital dollar for research purposes, though it hasn't yet committed to issuance that would require a formal policy process involving the government and other stakeholders. A multidisciplinary team, with application developers from the Federal Reserve Banks of Cleveland, Dallas, and New York, is working with a policy team at the Fed to study the implications of digital currencies on the payments ecosystem, monetary policy, financial stability, banking and finance, and consumer protection.

"Earlier this year, I spoke about whether the Fed should offer a general-purpose central bank digital currency (CBDC) to the American public. My skepticism about the need for a CBDC, which I still hold, comes in part from the real and rapid innovation taking place in payments. My argument-simple as it sounds-is that payments innovation, and the competition it brings, is good for consumers. The market and the public are telling us there is room for improvement in the U.S. payment system. We should take that message to heart and provide a safe and sound way for those improvements to occur."

The Federal Reserve Bank of New York's New York Innovation Center (NYIC), in collaboration with members of the U.S. financial services sector, published the findings of a proof of concept (PoC) that explored the feasibility of an interoperable network for wholesale payments operating on a shared multi-entity distributed ledger. The research project, undertaken jointly with private sector organizations, experimented with the concept of a regulated liability network (RLN), a theoretical payment infrastructure designed to support the exchange and settlement of regulated digital assets. The experiment successfully simulated both the domestic and cross-border scenarios, identifying shared ledger technology as a potential solution to support payment innovation.

"I really hate to do this, @CaitlinLong_ as I count myself a fan of yours as well as a fan and friend of Manhoman Singh, whose work you mention. But I'm afraid your thread commending some aspects of Liberty Street's stablecoin post strikes me as more self-serving than accurate."

A federal judge has rejected Wyoming-based Custodia Bank's argument that it is entitled to a Federal Reserve master account and membership with the Fed. Judge Scott Skavdahl, of District of Wyoming, denied Custodia's motion for judgement on, writing that federal laws do not require the nation's central bank to give every eligible depository institution access to its master account system, nor did the provided evidence suggest that the Federal Reserve Board of Governors influence a regional branch of the Fed to deny its application for an account. Custodia is now "reviewing the Court's decision and all of [its] options, including appeal".

The New York Fed published an article that presents an overview of financial stability risks associated with digital assets, adapting the Federal Reserve's framework for monitoring financial stability in the traditional financial system. The overview reveals that the observed fragility of digital assets is associated with several financial vulnerabilities: valuation pressures of crypto assets, funding risk in most crypto sectors, the widespread use of leverage, and a highly interconnected crypto ecosystem. However, to date, these vulnerabilities have made a limited contribution to systemic risk given that the digital ecosystem is relatively small, is not a major provider of financial services, and exhibits limited interconnections with the traditional financial system.

The Federal Reserve Bank of Minneapolis published a paper that advocates for a legal prohibition or capital tax on "bitcoin" to support governments' abilities to run permanent primary deficits. To be more accurate, the paper uses bitcoin as a metaphor for risk-free private-sector securities that are in fixed supply and that are not a claim to any real resources or "useless pieces of paper". The analysis seems to be based on the idea that risk averse consumers are willing to hold government securities and bitcoin even when the real return on these securities is very low. The virtually impenetrable analysis suggests that the existence of "bitcoin" forces the government maintain a balanced budget, which some might view as a good thing.

The New York Federal Reserve Bank (NY Fed) published an article that discusses the evolution and growth of stablecoins, noting their significant increase in market capitalization since 2019, primarily concentrated in Tether and USDCoin. It highlights a shift in collateral towards U.S. Treasury securities and reverse repurchase agreements and finds that stablecoins, especially riskier ones, experience capital inflows following large increases in bitcoin prices, reflecting a link between stablecoin demand and overall crypto ecosystem activity, which updates previous findings about outflows during negative bitcoin price shocks for riskier stablecoins.