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"Decentralized finance (DeFi) is composed of a variety of heterogeneous sectors that are interconnected through an input-output network of its tokens. We first use a panel data set to empirically document the evolution of the DeFi network across its different sectors. Instead of looking at the misleading measure of total value locked, we then employ a standard, theoretical production-network model to measure the value added and service outputs of the different DeFi sectors. Finally, based on a calibrated version of our model, we study which factors drive DeFi token prices and predict the equilibrium effects when network interconnectedness increases." [Bank of Canada]

Nigeria's CBDC experience shows that the widespread adoption of digital currencies and the transition to 100% cashless economies, will be difficult. The benefits of adopting CBDC may be outweighed by negative aspects, especially the lack of trust and acceptance by citizens. Politicians focus on highlighting the advantages of digital currencies. However, the example of Nigeria proves that people are well aware of the dangers of depriving them of cash, and thus freedom and privacy. An attempt to impose top-down control over the monetary sphere could trigger unrest and violent social protests with political and economic, and even systemic, consequences that are difficult to predict.

My SODA colleague Chris Ostrowski and Chris Hayes, in another CoinDesk article, make three predictions on the landscape for CBDCs and stablecoins in Europe and in the U.S. based on the trends they've seen through engagement with central bankers and policymakers.

"China is challenging the predominance of the American dollar by adopting digital currencies, which significantly reduce transaction costs and allow for smoother exchange in the marketplace. Efforts to strengthen the dollar must recognize the growing influence of digital currencies on the international landscape while understanding the importance of stability and predictability. The Fed should establish a wholesale digital currency to capture the importance of technological innovation while ensuring that volatility does not jeopardize the dollar's predominance." [Kevin Warsh, AEI]

The European Central Bank (ECB) has published a blog post that predicts the demise of Bitcoin. Authored by Ulrich Bindseil and Jürgen Schaaf, entitled "Bitcoin's Last Stand," the article claims that Bitcoin is in its "last gasp before the road to irrelevance." Noting that Bitcoin is rarely used real-world transactions, the authors hammer Bitcoin as "cumbersome, slow and expensive," adding that "the market valuation of Bitcoin is therefore based purely on speculation." It sounds like someone woke up on the wrong side of the bed!

The Bank for International Settlements (BIS) published a working paper that explores the characteristics of pre-pandemic (2016-2019) small business lending (SBL) in the United States, using proprietary loan-level data from two fintech SBL platforms (Funding Circle and LendingClub). The results show that fintech SBL platforms lent more in zip codes with higher unemployment rates and higher business bankruptcy filings. Moreover, fintech platforms' internal credit scores were able to predict future loan performance more accurately than the traditional approach to credit scoring, particularly in areas with high unemployment. Overall, fintech lenders have a potential to create a more inclusive financial system, allowing small businesses that were less likely to receive credit through traditional lenders to access credit and to do so at lower cost.

The rise of cryptocurrencies has demonstrated just how difficult it is both to enforce existing financial regulations in the context of new currencies and to predict how those new currencies will be used, and by whom. That's not a reason to forswear all new forms of currency but it is a reason to approach them cautiously and with an eye to the opportunities for abuse and illicit activity. It's also a reason to be less confident about what types of benefits a CBDC will realistically be able to offer, especially since many of those could potentially be addressed through other, less radical changes to existing financial institutions and instruments.

In the absence of high-certainty macroeconomic models that project the macroeconomic impact of cryptocurrency and stablecoins, the World Economic Forum (WEF) has published a white paper that seeks to forecast the potential effects based on qualitative assessments from global macroeconomists and credible literature in this space. Based on projected macroeconomic outcomes, the majority of economists interviewed predict that allowing cryptocurrency to play a regulated role in the economy will bring the highest macroeconomic net benefit to society. This is contingent on the responsible design and enforcement of regulation. A separate workstream within the WEF's Digital Currency Governance Consortium (DCGC) will deliver more detail regarding regulatory best practices at a later date.

The Bank of Spain published a paper that analyzes the impact of introducing a central bank-issued digital currency (CBDC) on the operational framework of monetary policy and the macroeconomy as a whole. It is based on a theoretical model that is calibrated to replicate the main monetary and financial aggregates in the euro area. It predicts that CBDC adoption implies a roughly equivalent reduction in banks' deposit funding, but this has a rather small effect on bank lending to the real economy. This result reflects the parallel impact of a CBDC on a central bank's operational framework. For relatively moderate CBDC adoption levels, the reduction in deposits is absorbed by an almost one-to-one fall in reserves at the central bank, implying a transition from a 'floor' system - with ample reserves - to a 'corridor' system. For larger CBDC adoption, the loss of bank deposits is compensated by increased recourse to central bank credit, as the corridor system gives way to a 'ceiling' system with scarce reserves.

"How could an immersive computer-generated environment ("the metaverse") impact services in the digital economy? Investment in virtual worlds has grown rapidly. Yet the technology still falls short of achieving fully immersive experiences. And despite hyperbolic predictions, various indicators show interest has fallen in the last two years. While some use cases show promise (eg gaming, education, healthcare), others seem distinctly gimmicky (eg virtual bank branches, land speculation). If the metaverse does succeed, it could mean: (i) a blurring of lines between the tradable and non-tradable sectors, (ii) greater cross-border economic integration and (iii) new demands on payment services. In principle, retail fast payment systems, retail central bank digital currencies or tokenised deposits could be designed to support services in the metaverse. To prevent virtual environments and money from becoming fragmented and dominated by powerful private firms, public policy would need to support efficient, interoperable payments and provide clear standards on data privacy, digital ownership and consumer protection."

Some light at the end of the BTC tunnel? Glassnode has noted that Bitcoin's adjusted Spent Output Profit Ratio (aSOPR) suggests that a further decrease in prices will leave many investors in the red according to when their holdings last moved on-chain. The SOPR reflects the profit-ratio of coins based on the price of Bitcoin when they were last moved on-chain. Despite the metric suggesting few investors are sitting on paper-profits, Glassnode interprets the data as bullish, because "in order for SOPR to go lower, investors would have to be willing to sell at a loss, which is unlikely given the current shape of the market [...] We have been looking for this reset in order to generate some stability in the market and pave the way for the next bull run."

"FTX has three different tiers of KYC requirements."

Oliver Wyman and JP Morgan published a joint report exploring how a multiple central bank digital currency (mCBDC) network could save corporates money. They estimate that corporate wholesale payments amount to $24 trillion a year and cost $120 billion, which could fall to $100 billion using an mCBDC network. The savings will come at the expense of banks, via the loss of correspondent banking fees and the reduction of corporate overnight balances by up to $10 billion. Plus, banks will have to pay to operate two sets of cross-border payment systems in parallel during this transition.