Fintech Daily Digest

German government agency KfW is preparing to issue its first blockchain-based digital bond in the form of a crypto security in accordance with the German Electronic Securities Act (eWpG). The transaction is scheduled to be completed in summer 2024.

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.

Speaking at the Bank for International Settlements (BIS) Innovation Summit, Reserve Bank of India (RBI) Governor Shaktikanta Das said offline accessibility, which is in the works, will make the digital rupee an attractive choice for retail users. Governor Das said that the digital rupee should have the same benefits as cash - anonymity and finality of settlement. While there is currently a preference for the Universal Payments Interface (UPI) among retail users, Governor Das was hopeful that offline and programmable CBDC will change this going forward.

The U.S. Securities Industry and Financial Markets Association (SIFMA) will manage a distributed ledger technology (DLT) proof of concept (PoC) involving tokenized deposits, wholesale central bank money, U.S. Treasuries and other tokenized assets on a shared ledger. The goal is to test settlement on a common regulated venue under existing laws by simulating USD delivery versus payment transactions. This will build on a 2023 initiative involving several of the same institutions for the similarly named Regulated Liability Network (RLN).

The Hong Kong Monetary Authority (HKMA) has established the Project Ensemble Architecture Community to work with the industry to shape standards and provide suggestions to support the development of Hong Kong's tokenization market. The Community aims to develop a set of industry standards to support interoperability among wholesale central bank digital currency (WCBDC), tokenized money and tokenised assets. The Community will also assist in the design and implementation of a sandbox to launch by around mid-2024.

The El Salvador government has launched a proof-of-reserves website to provide real-time on-chain transparency of its Bitcoin holdings. The government currently holds 5,748 Bitcoin currently worth about $350 million. They were bought at an average cost of $43,097 per Bitcoin, for a substantial unrealized profit. https://nayibtracker.com/

Some Chinese cities have begun to pay employees with eCNY but most convert to cash immediately. Ledger Insights points out that this may be because few retail outlets accept it because of the zero acceptance fees paid by merchants, versus the 0.6% paid on other retail digital payment instruments. Apparently, point-of-sale (POS) equipment manufacturers earn a cut of merchant fees, so zero eCNY fees disincentivize conversion of POS equipment.

[On July 8th 2021] Banque de France successfully carried out a wholesale central bank digital currency (CBDC) experiment in cooperation with Banque Centrale de Tunisie. A wire transfer took place between two individuals, in commercial bank money through transfer of wholesale CBDC between the two central banks.

[On June 18, 2020] the Central Bank of Taiwan announced a multi-phase approach to central bank digital currency (CBDC) research, starting with retail CBDC in the first half of 2020 and moving to distributed ledger technology (DLT) based wholesale CBDC in the third quarter of 2020.

The Eurosystem successfully completed its first experiment in settling wholesale transactions tokenized on a distributed ledger technology (DLT) platform in central bank money. Oesterreichische Nationalbank tokenized and simulated delivery-versus-payment settlement of government bonds in a secondary market transaction.

Sveriges Riksbank published a paper that assesses the impact of a European Commission legislative proposal to open up the possibility for non-euro countries to allow their citizens and businesses to access digital euro services. It concludes that the impact will be minimal, but a digital euro could increase the need for an e-krona to safeguard the role of the Swedish krona and may have positive effects on the work on an e-krona. By taking advantage of the technology and regulatory framework being developed for a digital euro, the costs and complexity of the work on an e-krona can be reduced. Together with an e-krona, a digital euro could also improve and simplify cross-border payments.

The World Bank will issue the first CHF digital bond by an international issuer to settle in Swiss Franc wholesale central bank digital currency (CBDC) provided by the Swiss National Bank (SNB). The coupon and redemption payments on the seven-year CHF 200 million bond will be made using tokenized CHF on the SIX Digital Exchange (SDX). The SDX connects to conventional settlement systems such as Euroclear and Clearstream, via SIX SIS, allowing investors to hold the digital bond through their traditional custodians.

Early adopters of Kazakhstan's digital tenge central bank digital currency (CBDC) who are customers of Altyn Bank, Eurasian Bank and Halyk Bank can apply for virtual and plastic CBDC cards and use them for purchases across Mastercard and Visa global networks. Additionally, they can withdraw cash at ATMs, link their cards to Google Pay, Apple Pay and Samsung Pay, monitor their CBDC card balance and transaction history through mobile banking; and access other related services.

The IMF published a paper that draws lessons from ongoing experimentation and research to identify design and policy considerations when developing retail CBDC systems so they may be compatible for cross-border payments. The paper provides an analytical framework through the lens of five interrelated elements: access, communication, currency conversion, compliance, and settlement. For each element, the paper identifies key CBDC design choices, many of which can be tackled in the initial preparation phases.

The Hong Kong Monetary Authority (HKMA) and the People's Bank of China (PBOC) are expanding the scope of the e-CNY pilot in Hong Kong to facilitate the set up and the use of e-CNY wallets by Hong Kong residents, as well as the top-up of e-CNY wallets through the Faster Payment System (FPS). This marks the world's first linkage of a faster payment system with a central bank digital currency (CBDC) system. Users can now set up e-CNY personal wallets in Hong Kong, which requires only their Hong Kong mobile phone numbers. The e-CNY wallets can then be used for cross-boundary payments to merchants, but not person-to-person (P2P) transfers.

The Bank of Ghana (BOG) has reportedly completed the second phase of Project Digital Economy Semi-Fungible Token (DESFT), a joint project with the Monetary Authority of Singapore (MAS) and the United Nations Development Programme (UNDP). The first phase saw the development of the blockchain-based Universal Trusted Credentials (UTC) system that enables micro, small and medium enterprises (MSMEs) to efficiently verify authenticity of key information, such as basic credentials, licenses, certificates, and trade records across borders. In the second phase, a cross-border payment was made using UTCs, the eCedi CBDC and a Singapore dollar stablecoin, using the Purpose-Bound Money (PBM) protocol.

The Bank of England (BOE) has assessed the technical feasibility of using existing point-of-sale (POS) hardware, as currently used in the UK, to initiate digital pound payments. This involved a proof of concept (POC) that used EMV standards to send payment instructions from smart cards to POS devices, and then to an application programming interface (API). It demonstrated that, while existing POS terminals may not need to be modified to make online digital pound payments, they might need to be modified for offline payments.

The Basel Committee on Banking Supervision published a report that considers the implications of the ongoing digitalization of finance on banks and supervision, including application programming interfaces (APIs), artificial intelligence and machine learning, distributed ledger technology (DLT) and cloud computing. It also considers the role of big techs, fintechs and third-party service providers, and new business models.

The U.S. Senate voted for a bipartisan resolution to overturn the Securities and Exchange Commission's (SEC) SAB 121, the staff accounting bulletin that requires listed firms, including banks to include assets under custody as both an asset and liability on their balance sheets. Usually, as common sense would suggest, these such assets don't go on the balance sheet because they belong to the client. The House of Representatives has already passed a similar bill, but the White House has said that it will veto the bill.

The NBER published an empirical analysis utilizing detailed transaction data from India's digital rupee pilot to explore the dynamics between central bank digital currency (CBDC) and existing digital payment methods, as well as the implications of increased CBDC usage on traditional bank deposits. It finds that policies that increase transaction costs for current digital payment methods catalyze a substitution effect, bolstering CBDC adoption. Furthermore, an uptick in CBDC usage is associated with a notable decline in bank, cash, and savings deposits, suggesting potential paths to bank disintermediation.