Fintech Daily Digest

The Central Bank of the States of West Africa (BCEAO) has launched the pilot phase of the interoperable instant payment system (IPS) of the West African Economic and Monetary Union (UEMOA). 25 financial institutions across four countries met the criteria required to participate. A second group will join the pilot on August 12, 2024.The new interoperable 24/7 IPS infrastructure is capable of processing transactions of any kind, regardless of the account type.

The Reserve Bank of India (RBI) joined Project Nexus, a multilateral international initiative to enable instant cross-border retail payments by interlinking domestic fast payment systems (FPSs). Nexus, conceptualized by the BIS Innovation Hub aims to connect the FPSs of four ASEAN countries (Malaysia, Philippines, Singapore, and Thailand); and now India. Indonesia, which has been involved from the early stages, continues to be involved as a special observer. The platform is expected to go live by 2026. Once functional, Nexus will play an important role in making retail cross-border payments efficient, faster, and more cost effective.

The Central Bank of Papua New Guinea (CBPNG) is working with Soramitsu on a central bank digital currency (CBDC) proof-of-concept (POC) aimed at building a common payment platform across the Pacific Island region. Also, some areas of Papua New Guinea are plagued by instability, violence, and frequent occurrences of robberies and muggings, so the POC will explore digital technologies that will allow recovery of funds after such incidents. The project is being funded by the Government of Japan's Ministry of Economy, Trade and Industry's 2023 supplementary budget "Subsidy for Global South Future-Oriented Co-Creation Projects (Indirect Subsidy Project Related to the Survey on the Overseas Deployment of Infrastructure by Japanese Companies)."

Jahrbücher für Nationalökonomie und Statistik (JNS) published a paper by two Financial Network Analytics (FNA) staff that uses agent-based modelling to simulate retail central bank digital currency (CBDC) adoption, calibrated to Spain's retail payment ecosystem. Results suggest that the distribution of government subsidies via CBDC creates incentives to reduce the use of cash. Also, reverse waterfall functionality (automatic transfer of funds from bank deposits to CBDC wallets) and a positive remuneration spread to bank deposits are effective in fostering adoption. However, the model did not model banks as adaptive decision makers that would include their ability to counter CBDC remuneration.

This paper proposes a design and a first implementation for an offline-first digital euro. The protocol offers complete privacy during transactions using zero-knowledge proofs. Furthermore, transactions can be executed offline without third parties and retroactive double-spending detection is facilitated. To protect the users' privacy, but also guard against money laundering, bank and trusted third parties for law enforcement must collaborate to decrypt transactions, revealing the digital pseudonym used in the transaction. Importantly, the transaction can be decrypted without decrypting prior transactions attached to the digital euro. The protocol has a working initial implementation showcasing its usability and demonstrating functionality.

The Bangko Sentral ng Pilipinas (BSP) is reportedly progressing towards issuing its own wholesale central bank digital currency (CBDC), codenamed Project Agila, sooner than anticipated, with the proof-of-concept (POC) phase expected to conclude by the end of 2024. Deputy Governor Mamerto E. Tangonan confirmed that the CBDC could likely be launched in the earlier part of BSP Governor Eli M. Remolona Jr.'s six-year term, which runs from 2023 until 2029. Three uses cases mentioned; interbank settlement on weekends and holidays, securities settlement and cross border payments. With regards to the latter, the BSP is an observer of Project mBridge involving the BIS Innovation Hub and the central banks of China, Hong Kong, Thailand, the United Arab Emirates and Saudi Arabia. HyperLedger Fabric's distributed ledger technology (DLT) is being used for BSP's sandbox experiments.

Thailand's finance ministry is going ahead with a plan to pay a social benefit in digital currency. Up to 45 million Thais will be eligible to receive 10,000 baht (about $280) in digital money on August 1, 2024, about two-thirds of the average monthly income in the country. There are numerous restrictions on usage, including know your customer (KYC) verification that will exclude prisoners and people and businesses with records of economic abuse. There are also restrictions on the items that can be purchased with the digital currency.

Jordan's Ministry of Digital Economy and Entrepreneurship (MODEE) launched a national blockchain technology network, MODEE DLT, to enhance trust and transparency in government services. MODEE DLT has been integrated with the "Sanad" system to provide a decentralized and verifiable digital record of all Sanad transactions. Sanad is a government portal through which residents can access their government digital documents and personal records, apply for government services, digitally sign documents, and make bill payments.

The Bank of Canada (BOC) published a paper on how a central bank digital currency (CBDC) changes monetary policy transmission in a general equilibrium model with nominal rigidities, liquidity frictions, and a banking sector where commercial banks face a leverage constraint. It finds that the effects of a shock to the Taylor rule that governs interest on central bank reserves, is magnified with the introduction of a fixed-interest-rate CBDC. More generally, whether CBDC magnifies or abates the response of the economy depends on the type of shock (e.g., interest rate or quantity of reserves shock). The paper also finds that the response of the economy depends on the monetary policy framework-whether the central bank implements monetary policy through reserves or through CBDC-as well as central bank balance sheet rules that govern the quantity of CBDC and reserves.

IFI Global's "Global Developments in Central Bank Digital Currency" offers a holistic view of CBDC initiatives, unraveling the intricate web of motivations, challenges, and implications. From Africa to Asia, from Europe to Oceania, the book delves into country-specific developments, shedding light on the role of politics, culture, and informal institutions in shaping CBDC adoption.

The Deutsche Bundesbank (BuBa) published an analysis of how people pay in Germany, based on approximately 5,700 randomly selected members of the public aged 18 and over between September and November 2023. Of payment volumes, debit cards accounted for 32%, cash for 26%, transfers and direct debits 20%, credit cards 10%, and mobile payments 6%. In general, 44% of respondents prefer to pay with electronic payment methods, but 24% still prefer cash, and 94% of merchants accept cash at point of sale. The perceived benefits of cash include privacy preservation (63%), immediate and reliable settlement of payments (47%), and easy expense overview (41%).

The Qatar Central Bank (QCB) published its guidelines for the oversight of distributed ledger technology applications or systems provision and usage by QCB-regulated entities to ensure that their usage is safe, secure and efficient.

The German Banking Industry Committee (GBIC) published the results of a proof of concept (POC) for its distributed ledger technology (DLT) based commercial bank money token (CBMT) project. CBMT is focused on serving large corporates, especially industrial companies, allowing them to hold tokens from multiple banks and to make P2P (B2B) transactions 24/7/365. Results confirmed that the CBMT is viable and offers considerable potential, enabling the realization of a variety of use cases across corporate functions. Results also showed that the CBMT works across a variety of DLT platforms, has the potential to scale and should present no barrier to integration into existing systems via application programming interfaces (APIs). https://die-dk.de/media/files/240716_DKBDI_position_CBMT_final.pdf

The European Central Bank (ECB) published two documents discussed at the June 28, 2024 meeting of the European Retail Payments Board (ERPB) technical session of the digital euro. One was a summary of inputs on the methodology for calibrating holding limits, and the other was on the strategies for conducting euro user research and engaging with market participants (payment service providers and merchants). https://www.ecb.europa.eu/euro/digital_euro/timeline/profuse/shared/pdf/ecb.deprep240723_item4_feedback_holding_limit_factors.en.pdf https://www.ecb.europa.eu/euro/digital_euro/timeline/profuse/shared/pdf/ecb.deprep240723_item2_user_research_experimentation.en.pdf

The European Central Bank (ECB) published a paper that explores the relationship between banks, and stablecoins and their issuers, focusing on the mechanical effects on banks' capital and liquidity ratios when issuing stablecoins or collecting deposits from stablecoin issuers. The analysis reveals that converting retail deposits into stablecoin issuers' deposits weakens a bank's liquidity coverage ratio (LCR), turning a retail deposit into a wholesale deposit, even when these funds are reinvested in high-quality liquid assets (HQLA). If a credit institution issues its own stablecoins, the impact on its LCR depends on whether it can identify the stablecoin holders; unknown holders weaken the LCR which could incentivize banks to issue stablecoins where they can continually identify the holders to benefit from more favorable liquidity treatment. The study also finds that when retail customers of bank A buy a stablecoin issued by a non-bank that keeps reserves at bank B, both banks could see an unexpected decline in their liquidity ratios, as bank A loses stable retail deposits and bank B gains volatile wholesale deposits.

The Bank for International Settlements (BIS) published a paper on the economics of crypto exchange tokens, which are blockchain-based assets issued by crypto exchanges that may promise holders discounts on transaction fees and access to certain platform services. They are an important funding source for centralized crypto exchanges, and they have been at the core of some of the biggest disruptions in the crypto industry. The paper develops a tractable model for the exchange rates of crypto exchange tokens that incorporates user demand, investment demand, and commonly observed pledges by exchanges to buy back tokens. It derives closed-formed solutions for the valuation of exchange tokens and the time required to fulfill the pledge. Buyback pledges increase the amount of funding raised by selling tokens. However, the additional amount raised is always less than the discounted cost of the buyback pledge. Future price manipulation by investors can further increase the cost of the buyback pledge.

Banco Central do Brasil (BCB) is looking to integrate artificial intelligence (AI) based apps into its Drex central bank digital currency (CBDC). Specifically, it plans to incorporate instant payment methods like Pix and leverage AI technologies similar to OpenAI's ChatGPT. Central bank President Roberto Campos Neto envisions a future where multiple banking apps are replaced by a single, comprehensive super app that aggregates financial data and uses AI to offer personalized financial services.

The Swiss Financial Market Supervisory Authority (FINMA) published guidance on the issuance of stablecoins. It provides information on aspects of financial market law that arise in relation to stablecoin projects and the impact of such projects on the supervised institutions. The guidance also draws attention to the increased risks in the areas of money laundering, terrorist financing and the circumvention of sanctions. In particular, the identity of all persons holding the stablecoins must be adequately verified by the issuing institution or by appropriately supervised financial intermediaries. In other words anonymous transfers are prohibited.

U.S. Presidential hopeful Donald Trump announced that if elected, he would create a strategic bitcoin reserve in the United States. "It will be the policy of my administration to keep 100 percent of all bitcoin the US government currently holds or acquires in the future … as a core of the strategic national bitcoin stockpile," he said. Right now, the U.S. government owns more than 210,000 bitcoin that were seized via illegal operations. Trump also pledged to create a framework for ensuring the safe expansion of stablecoins, and doubled down on his vow to scrap any effort to issue central bank digital currency (CBDC). He also defended the right to crypto-asset self custody and promised to fire Securities and Exchange Commission (SEC) Chair Gary Gensler.

The Bank of England (BOE) published a discussion paper on innovation in money and payments. While it covers payments across the board, it aims to gather feedback for planned wholesale central bank digital currency (CBDC) trials. These will include a synchronization (or "trigger") solution that settles transactions involving assets that are tokenized on distributed ledger technology (DLT) platforms using the real time gross settlement (RTGS) system. The BOE also wants to trial a digital securities transaction in which an end user makes a tokenized deposit payment. Finally, it will test interoperability with global initiatives like the Bank for International Settlements (BIS) Project Agorá for cross-border payments. Comments are due by October 31, 2024. https://www.bankofengland.co.uk/paper/2024/dp/the-boes-approach-to-innovation-in-money-and-payments