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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."

PLoS ONE published a paper that polled 2,001 American adults in 2022 to examine the associations between cryptocurrency ownership and individual level political, psychological, and social characteristics. Analyses revealed that 30% of the sample have owned some form of cryptocurrency and that these individuals exhibit a diversity of political allegiances and identities. We also found that crypto ownership was associated with belief in conspiracy theories, "dark" personality characteristics (e.g., the "Dark Tetrad" of narcissism, Machiavellianism, psychopathy, and sadism), and more frequent use of alternative and fringe social media platforms. The variables that most strongly predict cryptocurrency ownership are being male, relying on alternative/fringe social media as one's primary news source, argumentativeness, and an aversion to authoritarianism.

As Shannon taught us, effective communication is not just about capacity-it's about encoding information to suit the channel. By leveraging multimodal interaction, predictive AI, and hybrid approaches to interface design, we can create intelligent systems that amplify human capabilities. As such, it's likely that the next era of human-computer interaction will not be about replacing GUIs with conversational interfaces, but harmonising the two into systems that are greater than the sum of their parts.

Telematics and Informatics (TAI) published a paper on the adoption and continuance intentions of blockchain-based stablecoins for cross-border remittances. Relying on survey data from 866 U.S.-based adults engaged in remittance activities, its findings reveal that digital and financial literacy independently increase the likelihood of stablecoin adoption, while their interaction synergistically enhances predictive accuracy. Demographic analysis indicates that stablecoin remittance users tend to be younger, more educated, and involved in higher-value transactions. Among the 26% of remittance users who adopted stablecoins, continuance intentions are primarily driven by satisfaction and perceived usefulness. This points to a cyclical dynamic, where meeting user expectations leads to greater satisfaction, which in turn reinforces the perceived usefulness of stablecoins. The results underscore the importance of promoting both digital and financial literacy, improving user experience, and effectively communicating tangible benefits to encourage the continued adoption of stablecoins for remittance transactions.

The IMF published a paper that presents a practical legal-analytical framework to assess how private law rules can be designed to support the wide circulation and safe holding of token-based central bank digital currency (CBDC) primarily intended for retail use. It follows a previous IMF working paper that examined the legal foundations of CBDC under central bank law and its treatment under monetary law-the main public law aspects of CBDC. A private law framework is also needed, because unlike account-based CBDC, token-based CBDC constitutes from the legal perspective a new form of money and hence raises a lot of challenges under private law. This legal nature will shape how token-based CBDC can be transferred, held in custody, "deposited" with commercial banks, and pledged. It is also be crucial that private law rules establish with certainty how ownership and other rights in token-based CBDC can be transferred between economic agents. In most jurisdictions, the private law regime for token-based CBDC will likely need to be augmented by a comprehensive legislative intervention to provide a sufficiently robust and predictable legal foundation for this new digital currency. In designing such a legislative framework, countries will need to consider carefully whether to anchor it in a broader framework for digital money or assets.

Forbes published an article by Christian Catalini that examines the intensifying competition in the stablecoin market, where companies like PayPal, Coinbase, Circle, Tether, and even traditional financial giants like Visa and Mastercard are vying for dominance. Drawing an analogy to the commoditization of electricity, Catalini argues that stablecoins risk becoming undifferentiated utilities, with margins squeezed by competition and regulatory pressures. The two primary revenue levers for issuers -- reserve yields and transaction fees -- are both under threat as users demand higher returns and payment rails become commoditized. The "stablecoin sandwich" model (converting local currency to stablecoins for cross-border transfers, then back to local currency) represents current momentum, but Catalini predicts that only institutions closest to central banking, like banks themselves, will ultimately have the cost advantage in minting stablecoins. He concludes that the real winners won't necessarily be those creating the best stablecoins, but rather those controlling the distribution channels-the wallets, apps, and merchant relationships-through which these digital currencies flow.

Banking crypto exposes banks to an unpriceable type of credit risk related to chargebacks. If a consumer claims that a transaction was unauthorized or that they did not receive the goods and services ordered, they can initiate a chargeback with their bank. When that happens, the consumer's bank has a right to claw the funds back from the merchant's bank. That leaves the merchant's bank holding the bag unless it can recover the funds from the merchant. If the merchant is bankrupt or absconds, the merchant's bank-the payment processor-is stuck with the loss. As long as chargeback levels are predictable, payment processors can price for them. However, not only is there probably a relatively high baseline level of chargebacks for crypto, the chargebacks are also likely to be highly correlated whenever there is a market crash or allegations of fraud about a particular coin. So, if cryptos crash, chargebacks are likely to soar at the very time when the risk of the crypto company customer going bankruptcy rises. So the scenario that the payment processor is facing is that it will be hit with a tidal wave of chargebacks and that it will not be able to recover them from the crypto company, but will instead just have an unsecured claim in the crypto company's bankruptcy. The implication here is that no amount of crypto-friendly bank regulation is going to change the fact that prudent risk management committees will eschew crypto companies.

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.