Fintech Daily Digest

The Bank for International Settlements (BIS) published a paper that, based on a representative survey of about 1,300 US consumers, found that women are less willing than men to share their financial transaction data in exchange for better offers on financial services. Differences in attitudes across groups, such as the willingness to take financial risks, concerns that data will become publicly available and concerns around personal safety, explain part of these gaps. The analysis also shows that older individuals are also less willing to share their data, perhaps as a matter of principle. This could result in biased samples and outcomes that are not in the interest of the underrepresented groups, e.g. in lending decisions, financial advice, and health applications.

"The aim of this study is a systematic presentation and brief analysis of (the majority of) the provisions of the proposal for a Regulation of the European Parliament and of the Council "on the establishment of the digital euro", which was submitted by the Commission on 28 June 2023 as part of its "Single Currency Package" (taking in particular into account its Explanatory Memorandum and most of its recitals). The key concerns raised and proposals for amendment made by the European Central Bank (ECB) in its related Opinion of 31 October 2023 are also discussed."

The International Swaps and Derivatives Association (ISDA) published a jurisdiction-agnostic guidance note to inform how counsel may approach a legal opinion on the enforceability of collateral arrangements entered into under certain ISDA collateral documentation where the relevant collateral arrangement comprises tokenized securities and/or stablecoins. This guidance note sets forth (i) a basic taxonomy of common tokenization structures and (ii) a non-exhaustive list of key issues to consider when analyzing the enforceability of collateral arrangements involving tokenized collateral.

The U.S. Consumer Financial Protection Bureau (CFPB) issued an interpretive rule that confirms that buy now, pay later (BNPL) lenders are credit card providers. Accordingly, BNPL lenders must provide consumers some key legal protections and rights that apply to conventional credit cards. These include a right to dispute charges and demand a refund from the lender after returning a product purchased with a BNPL loan. (BNPL allows customers to spread out payments into equal installments over time, and tends to be interest free. Unlike credit cards, however, consumers don't need a certain credit score to use BNPL.)

The U.S. House of Representatives voted 279-136 in favor of the Financial Innovation and Technology for the 21st Century Act (H.R. 4763), which aims to clarify which government agencies will have responsibility for overseeing specific tokens and digital asset platforms. FIT21 will significantly boost the oversight role of the Commodity Futures Trading Commission (CFTC) while significantly hobbling the Securities and Exchange Commission (SEC). FIT21 will now go to the Senate, and even if it did pass that hurdle, it would likely be by a margin sufficient to ward off a possible Biden veto of the bill as currently written.

Almost all of the firms that have submitted spot Ethereum (ETH) exchange-traded fund (ETF) applications with the U.S. Securities and Exchange Commission (SEC) have amended the applications to remove the possibility of staking. Staking allows ETH holders to earn yield on their holdings, a feature of proof-of-stake (POS) cryptocurrencies. ETH holders need to lock in their holdings for a set period to support the blockchain operations in exchange for the reward. However, the SEC sees staking as an illegal offering by crypto platforms, as it can be seen as the offering of unregistered securities. This is fueling optimism that the SEC will soon approve most of the applications.

The U.S. Securities and Exchange Commission (SEC) has approved the spot Ethereum (ETH) exchange-traded fund (ETF) 19b-4 filings from VanEck, BlackRock, Fidelity, Grayscale, Franklin Templeton, ARK 21Shares, Invesco Galaxy, and Bitwise. This will allow the spot ETH ETFs to be listed and traded on their respective exchanges, but the SEC still needs to sign off on their corresponding S-1 registration statements for trading to officially begin, and this could take months. This process differs from that followed in the January 2024 spot Bitcoin (BTC) ETF approval process in which both the 19b-4 and S-1 filings were approved almost simultaneously.

A key aspect of the U.S. Securities and Exchange Commission (SEC) spot Ethereum (ETH) exchange-traded fund (ETF) approval is that it considers each ETF to be a "Commodity-Based Trust Share". Several years ago the SEC classified ETH as a commodity, but when ETH migrated to the Proof of Stake (POS) protocol, the SEC reclassified ETH as a security.

The U.S. House of Representatives passed the CBDC Anti-Surveillance State Act (H.R. 5403) that requires the Federal Reserve to obtain congressional approval before issuing a central bank digital currency (CBDC). The bill seeks to amend the Federal Reserve Act, barring the Fed from providing direct consumer services or leveraging CBDCs for monetary policy (i.e., remunerating a CBDC) without Congress's explicit consent. As pointed out by Ledger Insights, the drafting is very sloppy, particularly by blurring the lines between retail and wholesale CBDC, and full enactment could have unintended consequences. For example, the sloppy drafting could prohibit the current practice of using remuneration on commercial bank reserves held at the Fed as a policy tool. https://www.govinfo.gov/content/pkg/BILLS-118hr5403rh/pdf/BILLS-118hr5403rh.pdf

According to Ledger Insights, the wording of the CBDC Anti-Surveillance State Act (H.R. 5403) recently passed by the U.S. House of Representatives is too broad and will have unintended consequences. The bill will require the Federal Reserve to obtain congressional approval before issuing a central bank digital currency (CBDC). However, the wording is very sloppy, particularly by blurring the lines between retail and wholesale CBDC. For example, it could prohibit the current practice of using remuneration on commercial bank reserves held at the Fed as a policy tool, by not recognizing that those reserve balances are already wholesale CBDCs, albeit not on a distributed ledger. However, hopefully that can be sorted out as it moves through Congress.

The IMF's Dong He published an update on ongoing work being undertaken by the IMF's Monetary and Capital Markets Department on the implications of central bank digital currency (CBDC) for monetary policy. He argued that universally convertible and interoperable CBDC could bolster the role of central bank money as both the ultimate settlement asset and the unit of account, and preserve the central bank's capacity to implement monetary policy effectively in the digital age. An important challenge will be to figure out how the demand for reserves would be affected by the introduction of CBDC. The operational framework may need to be reconfigured to deal with increased volatility in the demand for reserves, and central bank capital buffers may also need to be revisited if balance sheet materially increases in size and in financial risks because of CBDC adoption. An interest-bearing CBDC could amplify the passthrough from policy interest rates to broader monetary conditions, albeit at the risk of disintermediating banks if the interest rate is set too high. But even a non-interest-bearing CBDC could enhance the channels of monetary policy transmission, although the magnitude of this effect is anticipated to be modest and heavily reliant on country characteristics, such as the capacity of CBDC to advance financial inclusion or diminish the appeal of currency substitution.

SWIFT does more than cross-border messaging! The diagram below shows how SWIFT Real-Time Retail Payments Systems (RT RPS) work.

The Committee on Payments and Market Infrastructures (CPMI) published its work program and strategic priorities for its 2024/25. The program's key themes include the enhancement of cross-border payments, with a particular emphasis on the interlinking of fast payment systems, and digital innovations in payments, clearing and settlement. The latter will include tokenization in the context of money and payments, functionality of cross-border central bank digital currencies and central bank collaboration, and multicurrency and asset-linked stablecoin arrangements. https://www.bis.org/press/p240523.htm

Banco Central do Brasil (BCB) has has extended the Drex project timeline into 2025 because the technological solutions tested in the first phase "did not present the necessary maturity to guarantee compliance with all requirements legal issues related to the preservation of citizens' privacy". The BCB decided that it would be inappropriate to advance testing to a pilot phase (where real users are involved) until there is "certainty about the ability to meet privacy requirements". The next phase will seek to incorporate new functionalities, such as the implementation of smart contracts within the platform, so that the private institutions participating in the project will be able to create services and business models on the network, without being limited to those designed by the BCB itself. https://normativos.bcb.gov.br/Votos/BCB/202466/Voto_do_BC_66_2024.pdf

The World Federation of Exchanges (WFE) published a paper on the causal relationship between distributed ledger technology (DLT) settlement latency and market quality in the cryptocurrency domain. Focusing solely on public permissionless DLT networks, it finds that settlement latency significantly lowers liquidity and increases transaction costs. In addition, through the Huang and Stoll (1997) spread decomposition, we document that DLT settlement latency reduces the adverse selection costs and increases the inventory management costs faced by liquidity suppliers. Moreover, these effects are more pronounced in smaller trading venues and for the native cryptocurrency of the settlement blockchain. More broadly, this paper highlights the balance between decentralized, near-instantaneous settlement cycles offered by DLT and the potential adverse impacts on market quality.

The Bank of Israel (BOI) is inviting anyone (from Israel or abroad) interested in studying or experimenting with the use of a digital shekel to submit a request to join the Digital Shekel Challenge. Preference will be given to uses with innovative characteristics in the payments market, whether they are improvements to existing applications, or completely new applications. Contestants will be asked to technologically develop various use cases for the digital shekel, by using the application programming interface (API) layer at the center of the proposed two-tier central bank digital currency (CBDC) model. The API layer provides functionalities that enable service providers to connect to the digital shekel system and offer end users among the public a wide and innovative range of services, while maintaining end users' privacy and the security and reliability of the payment system.

"A few lines buried in the legal terms for the FedNow service, which is now live, create an important opportunity for digital wallet and payment app providers. While the new FedNow legal regime creates significant business opportunities for all players in this space, emerging nonbank payment providers may have the most to gain from this change. Early-stage startup founders and investors in particular should take note. These provisions allow nonbank providers access to FedNow under a remarkably open approach, with only a few requirements imposed on their relationships with customers and a back-end bank. The effect is to allow these nonbank providers to increase their reach beyond their own user base (as they are limited today) and potentially also enable payment flows across other apps and wallets and payment networks."

According to National Bank of Cambodia Governor Chea Serey, cross-border QR code payments made through Cambodia's Bakong digital payment system are set to boost the use of the nation's riel currency. Bakong can already be used for QR code-based payments between Cambodia, Thailand, Laos and Vietnam, and those involving China's UnionPay. These cross-border payments can only be carried out in riel, so Cambodian citizens need to have a riel Bakong account to make payments in Thailand, for example, while Thai tourists can only make QR code transactions in Cambodia if the place where they are shopping accepts riel. The central bank plans to enable cross-border payments using Bakong with India as early as June and is also working with Japan.

Banco de España has launched a second wholesale central bank digital currency (CBDC) trial, this time to test the settlement of natively digital bond transactions, and make coupon and redemption payments. The first trial, announced in January, included developing a tokenized deposit solution for interbank payments, and settling tokenized securities (i.e., not natively digital) transactions. https://boe.gob.es/boe/dias/2024/05/06/pdfs/BOE-A-2024-9112.pdf

PayPal's PYUSD stablecoin, which previously had only been available on Ethereum, has been deployed on Solana which offers "confidential transfers" as an optional feature. When enabled, it would allow merchants to provide confidentiality for transaction amounts to their consumers while maintaining visibility for regulatory purposes. According to PayPal, it chose the Solana blockchain for its high speeds with extremely low costs. https://solana.com/news/pyusd-paypal-solana-developer https://newsroom.paypal-corp.com/2024-05-29-PayPal-USD-Stablecoin-Now-Available-on-Solana-Blockchain,-Providing-Faster,-Cheaper-Transactions-for-Consumers