Fintech Daily Digest

German government-owned Bank aus Verantwortung (KfW) has issued €50 million of digital bearer bonds, settled on a delivery versus payment (DVP) basis using the Bundesbank's "trigger solution" in which a smart contract triggers a payment in central bank money by linking to the TARGET2 real-time gross settlement (RTGS) system. The pilot issuance was part of the European Central Bank's (ECB's) wholesale distributed ledger technology (DLT) settlement trials using central bank money. The bonds were issued on the Polygon blockchain. Redemption will take place on 28 November before the ECB's trials end.

LVGA are a local stablecoin. They can be purchased within the MyLugano app and collected through the cashback while shopping at local affiliated shops. Unlike other cryptocurrencies such as Bitcoin LVGA can be used only in Lugano and once obtained they cannot be exchanged or traded for other currencies. LVGA are not subject to fluctuation being "pegged" to the Swiss franc. Thus, they have no speculative intent but exists solely and exclusively as a form of incentive for local spending in Lugano.

The IMF published a paper on retail central bank digital currency (CBDC) ecosystem cybersecurity considerations. It is based on experiences from live CBDCs and informed by experiments conducted by central banks and international institutions for domestic use. It also draws from standard-setting body cybersecurity and resilience frameworks. It introduces digital risks and their impact on an interconnected CBDC ecosystem. It then describes CBDC attributes and examines pros and cons of commonly considered design options, and suggests potential mitigations. It concludes by delving into best practices for developing a cyber-resilient CBDC ecosystem.

The International Monetary Fund (IMF) published a technical assistance report that helped the Banco Central de la República Dominicana (BCRD) to assess a CBDC's potential macro-financial, legal, and financial integrity implications, and shared lessons from other countries' CBDC and digital money projects, technology considerations, practices for stakeholder engagement, and how CBDC can increase financial inclusion, among others. The mission advised the BCRD to continue the exploration of macro-financial implications of a CBDC, conduct the legal framework revisions should a positive decision of CBDC be taken, assess risks to financial integrity once a firmer design choice is made, and build up technology knowledge and capacity meanwhile.

The World Federation of Exchanges (WFE) published good practice recommendations for crypto-asset custody providers. These include segregating client assets to ensure they are protected in the event of a company's bankruptcy, ensuring client assets remain bankruptcy-remote, having adequate insurance and/or surety bonds and disclose these policies in clear understandable terms, and seeking independent audits from reputable and credible auditors to provide an assessment of financial statements, process and controls.

The Basel Committee on Banking Supervision (BCBS) published a working paper on the various risks faced by banks that transact on permissionless blockchains or similar distributed ledger technologies (DLTs). Certain risks stem from the blockchain's reliance on unknown or third parties, which makes it difficult for banks to conduct due diligence and oversight. These risks require new risk management strategies and safeguards. The paper finds that current practices for mitigating these risks remain in various stages of development and have not been tested under stress.

The Reserve Bank of Malawi is looking to engage a consultant to further its central bank digital currency (CBDC) proof of concept work. The initiative aims at exploring the feasibility, benefits and challenges associated with the implementation of a CBDC in Malawi.

The European Central Bank (ECB) is hosting a virtual digital euro design focus session on September 9, 2024. The "digital euro design for the European payments market" is a technical forum aimed at payment service providers and professionals from the financial sector with an interest in the design of the digital euro and its impact on the European payments market. The entire focus session will be live streamed, recorded and published on the ECB's website shortly after the event, together with the slides presented.

The Hong Kong Monetary Authority (HKMA) launched the Project Ensemble Sandbox to support institutional experimentation with tokenization. Four main themes were chosen for the initial round of experimentation, fixed income and investment funds, liquidity management, green and sustainable finance, and trade and supply chain finance. Also, an experimental wholesale central bank digital currency (CBDC) will enable interbank settlement between the tokenized deposits of banks. The HKMA will also explore collaborating with the BIS Innovation Hub Hong Kong Centre across one or more themes.

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.

The U.S. Federal Reserve Board (FRB) published an assessment of the offline digital payment payment services and analyzes their potential to mitigate internet outage risks and bolster digital payment resilience. It finds that many services branded as offline payment solutions are more accurately classified as hybrid solutions because they ultimately require internet access for clearing and settlement. Truly offline digital payment systems that exchange digital bearer instruments for instant, in-person settlement are still in early development stages. The note lays out a variety of risks associated with offline payment models, including risks related to double spending, security, user privacy, and merchant liability. It concludes that certain offline payment models are promising, but more research and wider uptake is needed for the technology to drive incremental gains in payment system resilience and reliability.

Moody's Ratings published a report on recent advances in quantum computing that will threaten encryption techniques used today. Data encryption standards able to withstand the power of quantum computers have been unveiled by the US National Institute of Standards and Technology (NIST) that will protect intellectual property and classified government documents from computers that leverage the properties of quantum mechanics to perform calculations exponentially faster than classical computers. However, the transition to post-quantum cryptography (PQC) will be long and costly.

The U.S. Consumer Financial Protection Bureau (CFPB) published a report on consumers' use of "cash back" services. While people use various means of getting cash, one common method is to get "cash back" at a store when making a purchase with a debit or prepaid card. This option may be particularly important in banking deserts and in areas where banks and ATM operators charge significant fees. Retailers are essentially filling a void in access to cash, which has historically been supplied by banks and credit unions in an affordable way, and some retailers charge a fee for these transactions.

Coinmetrics published an update on stablecoin markets. It finds that stablecoin flows have turned positive, pushing total supply above $160 billion towards record-highs. The stablecoin landscape continues to expand in diversity, use cases, and risk profiles, from fiat-collateralized and crypto-backed to interest-bearing and protocol-native stablecoins. With stablecoin collateral increasingly composed of U.S dollar equivalents and real-world assets, changes in the interest rate environment could impact profitability and attractiveness of various stablecoins.

On September 1, 2024, Russia will reportedly soon start trials of cryptocurrency exchanges and the use of digital tokens for cross-border transactions to help firms circumvent international sanctions. It will use Russia's National Payment Card System (NPCS) to swap between rubles and cryptocurrencies. The NPCS already features infrastructure for functions like interbank settlement and clearing, and it is overseen by the central bank. According to Ledger Insights, stablecoins pegged to Chinese yuan and a BRICS currency basket will feature in the trials.

The RBI is set to launch the Unified Lending Interface (ULI) that will provide lenders digital access to customer's financial and non-financial data -- including land records -- stored in various silos to help them extend frictionless credit, especially to farmers and micro, small and medium enterprises (MSMEs). This cuts down the time taken for credit appraisal, especially for smaller and rural borrowers. The ULI architecture has common and standardized APIs, designed for a 'plug and play' approach to ensure digital access to information from diverse sources. This reduces the complexity of multiple technical integrations. https://rbi.org.in/Scripts/BS_SpeechesView.aspx?Id=1456

Reserve Bank of India (RBI) Governor Shaktikanta Das says that the retail central bank digital currency (CBDC) pilot has over 5 million users and 16 banks participating. Programmability functionalities are also being tested, and new use cases aimed at testing features such as anonymity and offline availability are proposed to be rolled out gradually. He also said that there should not be in any rush to roll out a system-wide CBDC until a comprehensive understanding of its impact on users, on monetary policy, on the financial system and on the economy. Such understanding would emerge from generation of user data in pilots.

The Financial Services Regulatory Authority (FSRA) of Abu Dhabi Global Market (ADGM) has published Consultation Paper No. 7 of 2024 containing proposals to enhance its regulatory framework to allow the issuance of Fiat-Referenced Tokens (FRTs). It adopts adopt a risk-based and proportionate approach based on appropriate regulatory requirements that incorporate the necessary safeguards to ensure that FRT issuers operate in a safe and sound manner and informed by current practices in leading jurisdictions. The latter include the New York Department of Finance, the European Union's Markets in Crypto-Assets Regulation, the Monetary Authority of Singapore, HM Treasury and the Financial Conduct Authority in the United Kingdom, and the Hong Kong Monetary Authority.

"Women perceive crypto as one of the most unattractive hobbies a man can have, even more so than watching anime, cosplaying or reading comic books, according to a recent survey. Crypto was seen as the ninth-most unattractive hobby for males, the Aug. 24 survey by the Date Psychology blog found, which was a convenience sample of 814 people, 48% of which were female. The authors noted that based on past surveys, their sample population disproportionately includes women of "high social status," with a high level of education and who are predominately white... The results show that females thought reading was the most attractive hobby for a man (98.2%), followed by knowing or learning a foreign language (95.6%) and playing an instrument (95.4%)."

Wyoming will launch a stablecoin in the first quarter of 2025, backed by short-term U.S. Treasury securities, to give individuals and businesses a faster and cheaper way to transact while creating a new revenue stream for the U.S. state. The state plans to issue the token to an exchange so the exchange can issue it to the retail user. There will be a "buffer" in the reserves to account for any potential deviations and full transparency to establish and maintain public trust. Wyoming plans to use several different public blockchains, although it hasn't specified which ones.