Fintech Daily Digest

The Hong Kong Monetary Authority (HKMA) has commenced Phase 2 of the e-HKD pilot programme to delve deeper into innovative use cases and commercial feasibility for new forms of digital money, including e-HKD and tokenized deposits, that can potentially be used by individuals and corporates, within a real-world setting. 11 groups of firms from various sectors will test the settlement of tokenized assets, programmability and offline payments.

Malaysian scaled down its retail CBDC project In a June 11, 2024 speech, Bank Negara Malaysia (BNM) Deputy Governor Jessica Chew announced the scaling down of its retail CBDC project. "Given the highly efficient domestic retail payment systems operating today," the central bank is prioritizing enhancing the cross-border interoperability of fast payment systems, plus wholesale CBDC work.

The IMF published a paper that argues that successful CBDC adoption hinges not only on technical readiness and operational robustness, but also on strategic policy and design choices that target end-user and intermediary involvement from the outset. Central banks cannot take it for granted that CBDC, once launched, will be adopted and scaled up easily. The paper proposes a "REDI" framework that central banks can use to prepare for CBDC adoption comprised of (i) regulatory strategies, (ii) education and communication initiatives, (iii) design and deployment choices, and (iv) incentive mechanisms. The paper also makes several concrete recommendations including: -Early engagement with end-users focusing on identifying their needs and pain points, as well as social and cultural factors that influence their financial behavior. -Monetary and non-monetary incentives to encourage intermediary participation, including exclusivity agreements, subsidies for setup costs, and allowing for CBDC data monetization or charging for value-added services. -End-user incentives including sign-up bonuses, airdrops or lotteries upon onboarding, and once onboarded, usage incentives, such as cash-back offers and discounts on CBDC transactions. Incentives targeted specifically to merchants could include subsidies for setup costs, reduced transaction fees, tax exemptions, or volume-based rewards. -Implementing selected use cases (such as P2P, G2P or B2P payments) may help generate initial momentum (see also SODA's "test and deploy" implementation framework).

The Bank of Canada has now confirmed on its website that it is downshifting its retail central bank digital currency (CBDC) project. "The Bank is scaling down its work on a retail central bank digital currency and shifting its focus to broader payments system research and policy development... The body of knowledge built over recent years will be invaluable if, at some point in the future, Canadians, through their elected representatives, decide they want or need a digital Canadian dollar... The Bank will continue to monitor global retail CBDC developments and publish some related research, but the focus will be on preparing for the evolution of payments both in Canada and around the world, through policy research and analysis."

Starting in December, selected participants will reportedly be able to use tokenized deposits to make payments at domestic supermarkets and convenience stores. This initiative is part of a comprehensive usability test for a wholesale central bank digital currency (CBDC), conducted by the Bank of Korea (BOK) in collaboration with six major commercial banks. Basically, the BOK will issue CBDC to banks, which will then convert it into deposit tokens for use by consumers at designated retail locations. 100,000 individuals have been selected for the pilot, and participating banks are forming partnerships with retail outlets and developing dedicated digital platforms.

The Canadian Broadcasting Corporation (CBC) reported that the Bank of Canada has shelved its exploration of retail central bank digital currency (CBDC) issuance. This was based on an email sent by the Bank to the public broadcaster, which outlined its "significant research towards understanding the implications of a retail central bank digital currency" and that going forward its focus will be on preparing for the ongoing evolution of payments both in Canada and around the world, through policy research and analysis. Other than a steady stream of research papers on the topic, the last time the Bank released anything official on its digital loonie project was in November 2023. That was a report on public consultations that said that the "likelihood of a digital loonie being needed is still uncertain, and the ultimate decision whether to go ahead with one depends on the Parliament".

The Reserve Bank of Australia (RBA) and the Australian Treasury published a report summarizing their research to date on central bank digital currency (CBDC) and their current assessment of CBDC issues in Australia. It concludes that a clear public interest case to issue a retail CBDC has yet to emerge, as Australians are generally well served by the capabilities and resilience of the current retail payments system. However, the report highlights the role that wholesale CBDC, alongside other forms of digital money and infrastructure upgrades, could play in enhancing the functioning of wholesale markets. Hence, the report also sets out a three-year roadmap for future work on digital money in Australia, including Project Acacia, which will explore opportunities to uplift the efficiency, transparency and resilience of wholesale markets through tokenization and new settlement infrastructure.

The Official Monetary and Financial Institutions Forum (OMFIF) published its annual survey-based digital assets report. 26 survey respondents comprised of bond issuers, banks and investors, the majority of which were public sector bond issuers, indicated a slow but steady gathering of momentum behind the adoption of blockchain and distributed ledger technology (DLT). About 38% said they are looking at adopting them in debt issuance. Central bank digital currency (CBDC) was chosen by 59% of respondents as the preferred cash settlement for tokenized assets, with only 23% favoring bank-issued stablecoins (e.g., tokenized deposits).

UK Finance released the results of the experimentation phase of the Regulated Liability Network (RLN) which explored the potential for tokenized deposits and programmability among eleven financial institutions. The overall conclusion was the RLN provides a viable innovation platform, and the next step is to engage with regulators. Five use cases were trialed, ranging from buying a home to the settlement of a tokenized bond, finding significant benefits and exploring various revenue models. It found 40 specific business benefits grouped into five higher level ones; (i) greater settlement efficiency, (ii) the ability to address authorized push payment fraud, (iii) simplifying customer journeys, (iv) reducing the cost of failed payments and (v) greater payment efficiencies. https://www.ukfinance.org.uk/policy-and-guidance/reports-and-publications/rln-reports-2024

The Institute of International Finance (IIF) released the names of 41 firms selected to participate in the Bank for International Settlements (BIS) Project Agorá, aimed at modernizing correspondent banking using a unified ledger, tokenized deposits and wholesale central bank digital currency (CBDC) from seven central banks. The seven central banks are the Banque de France, Banxico, New York Fed, Swiss National Bank, Bank of England, Bank of Japan, and Bank of Korea. Thirty five of the selected institutions are banks representing the seven jurisdictions. The others are Visa, Mastercard and SWIFT, Eurex Clearing, Euroclear and the SIX Digital Exchange. https://www.iif.com/About-Us/Press/View/ID/5880/Private-sector-partners-join-Project-Agor-

Sveriges Riksbank has called for regulations to ensure that Swedish companies and public authorities, who are legally obliged to accept cash, have access to functioning services for daily takings and petty cash. With banks having largely stopped providing cash services to businesses, only cash-in-transit company Loomis AB is offering these services and almost exclusively by the and entirely on a commercial basis. Banks have chosen to fulfil their obligations by providing deposit machines with limits that are too low for many businesses, and have limited access to petty cash by closing down manual services. The Riksbank also underscored that access to cash is necessary to strengthen civil preparedness regarding payments.

Design options for interoperability and funds locking across digital pounds and central bank money (arXiv) arXiv published a paper by Barclays staff that analyzes the design options for supporting "functional consistency" across digital pounds and commercial bank money. It focuses on three key capabilities: communication between digital pound ecosystem participants, funds locking, and interoperability across digital pounds and commercial bank money. It explores them via three payments use cases: person-to-person push payment, merchant-initiated request to pay, and lock funds and pay on physical delivery. It then presents and evaluates the suitability of design options to provide the specific capabilities for each use case and draw initial insights. The paper concludes that a financial market infrastructure (FMI) providing specific capabilities could simplify the experience of ecosystem participants, simplify the operating platforms for both the Bank of England and digital pound payment interface providers (PIPs), and facilitate the creation of innovative services.

Hedera has become a founding premier member of the Linux Foundation's newly launched decentralized trust initiative, and contributed its entire source code, including its hashgraph consensus algorithm and all core services, tools and libraries, to the Foundation. The contribution, which forms the new project "Hiero," aims to allow developers to collaborate on decentralized trust technologies globally under an open-source framework.

The Institute of Electrical and Electronics Engineers (IEEE) published a paper that presents HybCBDC, a central bank digital currency (CBDC) system design that tackles the tension between offering payments with cash-like confidentiality while allowing for enforcement of financial integrity regulations. HybCBDC offers cash-like confidential payments and means to enforce regulations. HybCBDC builds on a hybrid access model for using monetary items of a CBDC and combines an account-based and an unspent transaction output (UTXO)-based subsystem to record payments. Each subsystem is operated based on different but interoperable DLT subsystems.

The Bank of Canada (BOC) published a paper presents a framework for analyzing different economic models of CBDC ecosystems. For an intermediated CBDC to be successful, central banks will need to develop sustainable economic models where intermediaries and end users derive value and central banks achieve their policy goals. The paper analyzes the trade-offs of three of the eight potential CBDC ecosystem models, each with different levels of central bank involvement in activities of the ecosystem and the usage of different policy levers. The policy levers considered in the framework are control over intermediary access to the CBDC network, prices and quality standards. The analysis suggests that a central bank provision of network infrastructure enables direct control over intermediary access requirements, prices and quality standards upstream. Providing a CBDC wallet increases development costs but allows the central bank to set quality standards downstream and to promote competition. Delegating the network service to a regulated entity reduces costs for the central bank but may limit its strategic autonomy to control upstream pricing and intermediary access.

In collaboration with the Italian Banking Association Innovation Lab (ABI Lab) and 8 of its banking partners, the Banque de France (BdF) settled, in its DL3S platform and in a tokenized representation of central bank money (CeBM), several automated wholesale payments instructed by ABI Lab's Leonidas distributed ledger technology (DLT) platform. Leonidas is an emanation of the highly successful Spunta project launched by ABI Lab in 2020, which now manages 200 million transactions yearly. Leonidas aims at calculating and settling liquid balances between participating banks, and experimenting settlement in central bank money. A similar experiment has been completed with JP Morgan S.E. using its ONYX DLT platform.

The U.K. Ministry of Justice has introduced new legislation aiming to clarify that digital assets can be considered as "property" in the United Kingdom. It follows an extensive review by the U.K. Law Commission, which drafted the legislation and conducted a consultation. https://cloud-platform-e218f50a4812967ba1215eaecede923f.s3.amazonaws.com/uploads/sites/30/2024/07/Digital-assets-as-personal-property-supplemental-report-and-draft-Bill-web-version.pdf

The Bank of Russia wants the country's largest banks to support a digital ruble for retail and commercial use by July 2025, after which a full launch will take place. Customers will have to be able to "open and top up digital ruble accounts, make transfers, and accept digital rubles in their infrastructure". The Bank has sent its proposals to amend the relevant laws to the Russian Ministry of Finance. Smaller banks will be given until July 1, 2026 to follow suit, While other credit institutions have to make sure they comply with the requirement by July 1, 2027. https://cbr.ru/eng/press/event/?id=20992

The National Bank of Kazakhstan (NBK) has entered a new phase of its digital tenge project by introducing the concept of programmable money for government spending. The central bank has been actively engaging with the Ministry of Finance, including the Treasury and Tax Authority, to integrate their systems with the digital tenge platform. This will enable pilots for transparent public procurement, social digital vouchers, and other innovative scenarios. The NBK is finding that the combination of electronic procurement, digital treasury, digital tax administration, and smart payment rails can significantly increase the efficiency and transparency of public finances.

The United Nations Development Programme (UNDP) published an article by Heng Wang on potential central bank digital currency (CBDC) design features that drive financial inclusion. From users' perspectives, CBDCs need to (i) provide low-cost and safe electronic payment services and to provide benefits like accessibility for vulnerable people, (ii) align with values, experiences, and needs of potential users, and address concerns like privacy, safety, (iii) simplify access to CBDCs (especially for vulnerable groups), easy access to CBDC wallets, user-friendly interfaces, clear terms and conditions, (iv) be tested comprehensively through pilots and sandboxes to refine their design and ensure safety, and (v) the benefits and costs should be visible and understood by users.