Fintech Daily Digest

In 2016 the Australian Stock Exchange (ASX) engaged Digital Asset Holdings to replace its aging (launched in 1994) Clearing House Electronic Sub-register System (CHESS) securities settlement system. The replacement was to run with smart contract functionality written in DAML (Digital Assets Modeling Language). The whole project turned out to be a fiasco (check out David Gerard's timeline here) and it was shutdown in 2022 with ASX writing off AUD$250 million. Plus ASX users effectively wrote off the tens of millions of dollars spent on building interfaces to the failed system. In April 2024, a parliamentary enquiry concluded that the ASX and its regulators should have identified and monitored strategic technical risks such as scalability for the CHESS replacement project more carefully, and enhance their technology skills and experience at the most senior levels, and place less reliance on outsourcing their responsibility to contractors and consultants.

The International Working Group on Data Protection in Technology (the "Berlin Group"), chaired by the German Federal Commissioner for Data Protection and Freedom of Information (BfDI), published a working paper on central bank digital currency (CBDC) privacy-related risk factors. For example, the paper points out that the ECB must take a privacy and data protection by design and by default approach. In addition, it argues that a distributed ledger technology (DLT) architecture does not necessary entail a more privacy friendly solution, because data is immediately visible to all nodes in the network and immutability means that data can never be deleted or rectified (a right that is guaranteed in Europe's General Data Protection Regulation (GDPR). Also, some programmable features imply privacy and civil rights risks that may outweigh the potential benefits, due to legal and ethical concerns (for example automated decision-making without possibility of appeal and/or risk of censorship).

The Bank of Thailand (BoT) will test programmable payments in its Enhanced Regulatory Sandbox. Programmable payments automate transaction with predefined conditions for the payment of goods and services. This project will demonstrate the potential for applying technology to a wide variety of financial services, accompanied by appropriate risk management processes. The BOT will work in collaboration with the Securities and Exchange Commission, the Office of Insurance Commission, and the Fiscal Policy Office, Ministry of Finance, to evaluate the benefits and risks of financial innovations and to establish potential and suitable supervisory policies.

"Wholesale CBDCs were considered useful for banks. However, some institutions are keener than others, often depending on the application of the wholesale CBDC. Executives in the securities services sector are usually the most enthusiastic. On the payments side, JP Morgan's Umar Farooq appeared to have reservations during last month's Consensus event... However, at a big picture level, the objective of wholesale CBDC is to reduce risk. Instant settlement in central bank money for a wider range of applications could take a significant amount of risk out of the banking and capital markets system. If banks are subject to less risk, it might allow them to be more expansive in other areas.

The European Central Bank (ECB) published a blog post that explains what degrees of payments privacy future users of a digital euro can expect. It claims that it will promise better privacy and data protection than other current electronic means of payment, but not the same degree of privacy as cash although paying with an "offline digital euro" comes pretty close. Online digital euro payments will not be so private, because the commercial banks that run the user-facing parts of the platform will have full access to user identity and transaction information, just like they currently do on their own platforms. However, digital euro holder identities will be separated from the payment data, and the banks will pseudonymize user data so they are not visible to the Eurosystem.

94% of the 86 central banks surveyed (between October 2023 and January 2024) by the Bank for International Settlements (BIS) are exploring central bank digital currency (CBDC). 54% are experimenting with proofs of concept and 31% are running a pilot. Around 30% of central banks focus on retail CBDCs only and 2% are working on wholesale CBDCs only, and it is more likely that central banks will issue a wholesale CBDC within the next six years than retail CBDC. More emerging market (EMDE) central banks are likely to issue a retail CBDC on a distributed ledger than advanced economy (AE) central banks, perhaps reflecting a willingness to leapfrog moving from legacy systems to cutting-edge technologies. Also, this year the survey also provides insight into the use of stablecoins for payments and regulatory approaches to crypto-assets across the globe.

In April 2024 the European Central Bank (ECB) published a paper that shows the usefulness of digital euro safeguards, such as holding limits, that would limit the impact of the introduction of a digital euro on banks' liquidity and on their reliance on central bank funding. To this end, it assesses how banks might respond to the introduction of a digital euro while seeking to maximize profitability and manage their risks for a range of holding limit scenarios. The results of the simulated impact on key liquidity metrics show that, with safeguards in place and on aggregate, the liquidity metrics of euro area banks would decline but remain well above regulatory minimums. In addition, the central bank funding ratios of euro area banks would not increase materially on aggregate and would remain contained overall.

The World Federation of Exchanges (WFE) published a paper on tokenization that concedes that that it has many benefits that may make it the natural next step for financial markets, but that it requires substantial upfront investment without clear gains in markets that are already highly efficient. It found that the primary benefit of tokenization is fractionalization. And by making fractional assets available to a larger pool of investors, there's potential to enhance liquidity. However, as highlighted by Ledger Insights, the paper seems to mix up the separate concepts of atomic settlement, one of tokenization's key benefits, with instant delivery versus payment (DVP) "atomic" settlement, ignoring the fact that batching and netting can still be achieved when settlement is atomic. https://www.world-exchanges.org/our-work/articles/demystifying-tokenisation-embracing-future

The European Blockchain Sandbox announced the 20 participants in its second cohort. https://ec.europa.eu/digital-building-blocks/sites/display/EBSISANDCOLLAB/European+Blockchain+Sandbox+announces+the+selected+projects+for+the+second+cohort

The Bank of Ghana (BOG) confirmed the completion of the 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 English version of the Interim Report on Japan's "Design Outline of central bank digital currency (CBDC)", initially published in Japanese only in April 2024, has been published. The joint work by the Bank of Japan (BoJ), Ministry of Finance (MoF) and other relevant ministries identifies the basic considerations on main design issues and possible options for CBDC introduction. The report does not prejudge whether or not to introduce CBDC in Japan, but this preparation will help Japan introduce CBDC in the future without delay if the decision were made after discussions with the Japanese public.

Banca d'Italia published a paper in July 2003 that uses a theoretical model to study how the introduction of a central bank digital currency (CBDC) by a systemic economy can affect the choices of residents in a small open economy. It finds that an increase in the preference for the foreign CBDC induces a banking crisis and has a negative impact on GDP, the greater the more the foreign CBDC is perceived as deposit-like. Public authorities can mitigate these effects with multiple tools: by taxing the CBDC, by easing macroprudential requirements, or through FX interventions. A higher stock of foreign CBDC held by households can shield the small economy from an increase in the interest rate on external debt, if the remuneration of the CBDC remains constant.

The Italian Banking Association (ABI) published the results of its Project Leonidas (Liquidation Effective ONchaIn Dlt Asset on Check) distributed ledger technology (DLT) based wholesale central bank digital currency (CBDC) proof of concept (POC) work. The project, which concluded at the end of 2023, was carried out under the Banca d'Italia Milano Hub innovation center. It investigated the benefits of using DLT-based wholesale CBDC for interbank transactions, so that the capacity, efficiency and robustness requirements of central bank systems are met.

Worldline has published a white paper to serve as a resource to guide stakeholders through the multifaceted CBDC landscape. It provides insights and guidance to navigate the complexities and opportunities of this transformative financial technology.

The Bank of Korea (BOK) published a paper on the macroeconomic impact of introducing retail central bank digital currency (CBDC). What sets this paper apart from the many other papers that focus on the same question is that it pays more attention to the precise bank-issued instruments that the CBDC competes with - non-interest-bearing demand deposits and interest-bearing savings and term deposits. CBDC directly competes with physical cash and debit, but only indirectly with demand deposits. According to the paper's theoretical model, CBDC introduction can lead to significant negative impact on demand deposit holdings, but this is accompanied by offsetting increases in holdings of interest-bearing deposits. This implies that the efficacy of CBDC on output and welfare, if any, is quantitatively only marginal, relative to the findings in the previous studies with only one type of deposit.

BNY Mellon, Goldman Sachs and HSBC have successfully passed the €1 billion notional milestone in outstanding agency securities lending transactions using the HQLAX distributed ledger technology (DLT) platform. HQLAX creates digital collateral records (DCRs) to effect the simultaneous ownership exchange of loan identifiers (ISINS) and triparty collateral on a delivery vs delivery (DvD) basis. This eliminates intraday exposure and associated credit risk identified in most current collateral settlement practices.

The U.S. House of Representatives Financial Services Committee (FSC) hosted a hearing on asset tokenization. All of the witnesses agreed that tokenization can help increase liquidity, enhance price discovery, increase transparency, increase access, enable fractional ownership, among other things. Depending on the nature of a specific asset, however, existing laws or regulations may create uncertainty regarding a person's interest or property rights associated with a tokenized asset. Also, there was some aversion expressed towards tokenization's use of public permissionless blockchains. In any case, some of the witness's written testimonies are well worth reading.

Banco Central de Reserva del Perú (BCRP), in collaboration withe the Reserve Bank of India (RBI), signed an agreement with India's National Payments Corporation to implement a retail payments platform in Peru, similar India's Unified Payments Interface (UPI) platform. UPI is a real-time payment platform, available 24/7, that allows users to link multiple bank accounts in their mobile applications and pay through cell phone number, QR codes and virtual payment addresses.

Norges Bank published the results of a survey, conducted in January and February 2024, on the Norwegian population's awareness, ownership and use of crypto-assets. 96% of the Norwegian population aged 16 and over are aware of crypto-assets. 15% of the population have owned or own crypto-assets, and 11% of the population owned crypto-assets at the time of the survey. 73% of those who know about crypto-assets rate their own knowledge of crypto-assets as "very little" or "quite little". 2 out of 3 current crypto-asset owners have 5% or less of their financial savings in crypto-assets.

"As part of the Saudi Central Bank's (SAMA) pursuit to build a robust and innovative cross-border payments infrastructure in collaboration with various international financial institutions and central banks, SAMA has joined the Bank for International Settlements' (BIS) mBridge project as a participant in the Minimum Viable Product (MVP) platform."