Fintech Daily Digest

The joint Bank of England (BOE) and U.K. Financial Conduct Authority (FCA) Digital Securities Sandbox consultation closed on May 29, 2024. Ledger Insights reviewed four sets of feedback representing a wide range of opinions. Two aspects mentioned the most were the lack of discussion of digital payment instrument and volume limits. I would like to provide a link to the actual consultation feedback, but it Looks like Ledger Insights had access to some inside track.

The Bank for International Settlements (BIS) Project mBridge is accepting value added products and new use cases as it reaches minimum viable product stage (MVP). The project aims to explore multi-central bank digital currency (CBDC) platform shared among participating central banks and commercial banks, built on distributed ledger technology (DLT) to enable instant cross-border payments and settlement. The project was launched in 2021 by the BIS Innovation Hub, in collaboration with the Bank of Thailand, the Central Bank of the United Arab Emirates, the People's Bank of China and the Hong Kong Monetary Authority. The Saudi Central Bank is now joining mBridge as a full participant. There are also now more than 26 observing members.

The National Bank of Rwanda (NBR) is looking to develop its CBDC in the next two years, as part of efforts to streamline the financial system and position Rwanda as an important player in the future global economy. The central bank launched a public consultation in early May 2024 that closes at the end of June 2024, after which about six months of proof of concept work will commence. It looks to have "everything on the table within the next two years". The NBR's preferred option is to have a retail CBDC distributed through banks, but it is also looking at indirect (or "synthetic") CBDC, although the central bank is mindful of the potential bank disintermediation risk under the latter option.

The Bank for International Settlements (BIS) will collaborate with several central banks to explore how instant cross-border payments could be improved using a modular foreign exchange component combined with settlement in wholesale central bank digital currencies (CBDCs). Project Rialto will explore a new automatic FX settlement layer using wholesale CBDC as a safe settlement asset that could be deployed for interlinked instant payment systems or digital asset systems. Project Rialto is named after the famous bridge in Venice which connects two sides of the Grand Canal.

Chinese news outlets have reported that the digital yuan app no longer carries the 'pilot' label. It dismissed the reason as an administrative one, saying the pilot mode persists. However, even if the digital renminbi is still in pilot mode, we believe this may indicate the central bank digital currency (CBDC) might be nearing the end of its pilot phase and starting preparation for production.

The Qatar Central Bank (QCB) has completed the development of the infrastructure for its wholesale central bank digital currency (CBDC) project. In the next phase which will extend to October 2024, the central bank will test and develop selected applications of distributed ledger technology (DLT) based wholesale CBDC to settle large payments with a group of local and international banks in a trial environment. The project will focus on applications that increase access to capital markets for operating banks in the country, enhance domestic settlement, and improve the efficiency of securities transactions.

U.S. President Joe Biden has vetoed congressional resolution H.J. Res.109, which seeks to repeal Securities and Exchange Commission (SEC) Staff Accounting Bulletin (SAB) No.121. SAB 121, published in March 2022, makes it prohibitively expensive for U.S. financial institutions to provide crypto-asset custody services by requiring them to consolidate these assets on their balance sheet. https://www.whitehouse.gov/briefing-room/presidential-actions/2024/05/31/a-message-to-the-house-of-representatives-on-the-presidents-veto-of-h-j-res-109/

According to the latest Reserve Bank of India (RBI) data, there was just 800,000 rupees (less than $10,000) wholesale central bank digital currency (CBDC) outstanding at end-March 2024. The RBI has been piloting wholesale CBDC since November 2022, including for settling government bond secondary market transactions, and interbank lending in call money markets. However, the small numbers could be attributable to banks converting CBDC to central bank reserves to earn interest, or the central bank may be automatically converting them at the end of the day, which is what the Swiss National Bank (SNB) did in the earlier phases of its Project Helvetia experiments. The digital rupee retail CBDC isn't catching fire either, with only 2.34 billion rupees ($28 million) outstanding at end-March 2024, versus 34,778.05 billion rupees of banknotes in circulation. https://www.rbi.org.in/Scripts/AnnualReportPublications.aspx?year=2024

Crunchfish has recently implemented and patented a novel approach with balance reconciliation. Private transactions are encrypted and sent to the backend, but where the keys used for the transaction are wallet keys, in contrast to prior art using public keys controlled by either the issuer or an escrow agent. In this way the payer is in full control of the privacy of their transactions even if all private transactions are sent to the online ledger encrypted. In this innovative way, regulatory requirements for transactional traceability are balanced with requirements for privacy where the payer is in full control of the encrypted transactional data for amounts below defined thresholds, defined by the issuer and the regulator. If the issuer suspects an attack by the payer, the issuer can contact the payer for permission to decrypt the data. In case the payer is not willing to grant access, the issuer may decide to lock the wallet or disallow any more private transactions.

CoinMetrics has published an analysis of the potential Ethereum (ETH) network impact of the U.S. Securities & Exchange Commission (SEC) May 23, 2024 approval of spot ETH exchange traded funds (ETFs). An important condition of the approval was that such ETFs will not be able to stake the tokens, which could shrink circulating supply, and improve the health of Ethereum's consensus layer and the staking ecosystem as a whole.

According to Nerdwallet's "2024 State of Consumer Credit Report" buy now, pay later (BNPL) plans are the second-most used form of credit payment among US consumers, with nearly 25% recently using it. BNPL allows people to enter payment agreements at the point of sale, generally without the credit requirements of a credit card or traditional loan, and most often without interest. Among the 2,061 US adults polled in April 2024, 37% of parents of minor children have used BNPL in the past 12 months, compared with 20% of nonparents of minors. And 40% of Gen Z (ages 18-27) and 36% of millennials (ages 28-43) have used BNPL during that time, compared with just 20% of Gen X (ages 44-59) and 12% of baby boomers (ages 60-78). https://www.nerdwallet.com/article/credit-cards/2024-consumer-credit-report

The Bank for International Settlements (BIS) published a paper that explores how tokenization through the application of the unified ledger concept could enhance the functioning of correspondent banking by harnessing new technology to address key pain points in cross-border payment chains. It could unlock streamlined pre-screening and atomic settlement, and pave the way for superior customer verification and anti-money laundering (AML) procedures. Also, tokenization could substantially reduce duplication and miscoordination, thereby revitalising cross-border payments by fostering a robust network of correspondents and corridors.

The Bank of Japan (BOJ) held its seventh "CBDC Forum" and published the secretariat's presentation, which Norbert Gehrke kindly summarized in English. The presentation outlines the BOJ's stance on CBDC, delves into the specifics of the proof-of-concept work currently underway, and elaborates on the structure and activities of the CBDC Forum, which involves private sector stakeholders. https://www.boj.or.jp/paym/digital/dig240529b.pdf

Wallet, a third-party cryptocurrency wallet app on Telegram, will impose stricter know your customer (KYC) rules to access all features. Before the update, users did not need to complete any KYC, but they will have to provide their name, birthdate and phone number for "basic" transaction limit levels. "Extended" access will require the user's national identification, and providing the residential address remove all transfer limits. https://wallet.helpscoutdocs.com/article/239-identity-verification

PayPal's PYUSD stablecoin, which previously had only been available on Ethereum, has been deployed on Solana which offers "confidential transfers" as an optional feature. When enabled, it would allow merchants to provide confidentiality for transaction amounts to their consumers while maintaining visibility for regulatory purposes. According to PayPal, it chose the Solana blockchain for its high speeds with extremely low costs. https://solana.com/news/pyusd-paypal-solana-developer https://newsroom.paypal-corp.com/2024-05-29-PayPal-USD-Stablecoin-Now-Available-on-Solana-Blockchain,-Providing-Faster,-Cheaper-Transactions-for-Consumers

Banco de España has launched a second wholesale central bank digital currency (CBDC) trial, this time to test the settlement of natively digital bond transactions, and make coupon and redemption payments. The first trial, announced in January, included developing a tokenized deposit solution for interbank payments, and settling tokenized securities (i.e., not natively digital) transactions. https://boe.gob.es/boe/dias/2024/05/06/pdfs/BOE-A-2024-9112.pdf

According to National Bank of Cambodia Governor Chea Serey, cross-border QR code payments made through Cambodia's Bakong digital payment system are set to boost the use of the nation's riel currency. Bakong can already be used for QR code-based payments between Cambodia, Thailand, Laos and Vietnam, and those involving China's UnionPay. These cross-border payments can only be carried out in riel, so Cambodian citizens need to have a riel Bakong account to make payments in Thailand, for example, while Thai tourists can only make QR code transactions in Cambodia if the place where they are shopping accepts riel. The central bank plans to enable cross-border payments using Bakong with India as early as June and is also working with Japan.

"A few lines buried in the legal terms for the FedNow service, which is now live, create an important opportunity for digital wallet and payment app providers. While the new FedNow legal regime creates significant business opportunities for all players in this space, emerging nonbank payment providers may have the most to gain from this change. Early-stage startup founders and investors in particular should take note. These provisions allow nonbank providers access to FedNow under a remarkably open approach, with only a few requirements imposed on their relationships with customers and a back-end bank. The effect is to allow these nonbank providers to increase their reach beyond their own user base (as they are limited today) and potentially also enable payment flows across other apps and wallets and payment networks."

The Bank of Israel (BOI) is inviting anyone (from Israel or abroad) interested in studying or experimenting with the use of a digital shekel to submit a request to join the Digital Shekel Challenge. Preference will be given to uses with innovative characteristics in the payments market, whether they are improvements to existing applications, or completely new applications. Contestants will be asked to technologically develop various use cases for the digital shekel, by using the application programming interface (API) layer at the center of the proposed two-tier central bank digital currency (CBDC) model. The API layer provides functionalities that enable service providers to connect to the digital shekel system and offer end users among the public a wide and innovative range of services, while maintaining end users' privacy and the security and reliability of the payment system.

The World Federation of Exchanges (WFE) published a paper on the causal relationship between distributed ledger technology (DLT) settlement latency and market quality in the cryptocurrency domain. Focusing solely on public permissionless DLT networks, it finds that settlement latency significantly lowers liquidity and increases transaction costs. In addition, through the Huang and Stoll (1997) spread decomposition, we document that DLT settlement latency reduces the adverse selection costs and increases the inventory management costs faced by liquidity suppliers. Moreover, these effects are more pronounced in smaller trading venues and for the native cryptocurrency of the settlement blockchain. More broadly, this paper highlights the balance between decentralized, near-instantaneous settlement cycles offered by DLT and the potential adverse impacts on market quality.