Fintech Daily Digest

AXA Investment Managers (AXA IM) executed two transactions using the Banque de France's pilot distributed ledger technology (DLT) based wholesale central bank digital currency (CBDC), as part of the Eurosystem wholesale DLT settlement trials. The first was a €3 million investment by AXA IM, on behalf of AXA France, into a digital sovereign bond issued by the Republic of Slovenia. The transaction was executed on BNP Paribas' "Neobonds" tokenization platform with T+1 settlement on T+1 using the Banque de France's DL3S platform. The second experiment executed a fund share subscription of €1 million from Generali into AXA Court Terme with instant settlement process using digital CeBM via the IZNES blockchain platform. https://www.axa-im.com/media-centre/axa-im-continues-its-initiatives-test-blockchain-technology-part-ecbs-exploratory-work-central-bank

The Constitutional Law, State Structure, Judicial and Legal Issues, and Parliamentary Regulations Committee of the Kyrgyz Parliament has reportedly approved the draft law on the status of the digital som - in its first reading. It is designed to launch a pilot project for a prototype digital som and to establish its legal framework and status. Testing of the prototype is scheduled to begin in early 2025, and a final decision on the launch of the digital som is planned for the end of 2026.

The Reserve Bank of Fiji (RBF) has reportedly ruled out issuing a central bank digital currency (CBDC) for Fiji, and is instead focusing on modernizing its existing national payment system. In the meantime, the RBF will continue to keep a tab on how other central banks progress on CBDC as well monitor international new developments that may influence Fiji's payment system.

The Hong Kong Government has published in the Gazette the Stablecoins Bill, which seeks to put in place a regulatory regime for issuers of fiat-referenced stablecoins (FRS) in Hong Kong. The Bill aims to enhance the regulatory framework for virtual asset activities (VAs), by addressing the potential financial stability risks posed by FRS, ensuring adequate user protection, and harnessing the potential benefits of VAs and their underlying technologies. https://www.gld.gov.hk/egazette/english/gazette/file.php?year=2024&vol=28&no=49&extra=0&type=3&number=31

Ripple Labs CEO Brad Garlinghouse reported that the New York Department of Financial Services (NYDFS) has approved the firm's RLUSD stablecoin. Testing of RLUSD, which will be "complementary and additive" to Ripple's XRP, began on the XRP ledger and Ethereum mainnets in August 2024. https://x.com/bgarlinghouse/status/1866571228464460215

The Australian Securities & Investments Commission (ASIC) published a paper outlining proposals to update its crypto-asset information sheet. Generally, ASIC's existing approach to financial services licences will apply to digital assets. However, among other things, the paper proposes the addition of 13 practical examples of how the current financial product definitions apply to digital assets and related products.

The Reserve Bank of New Zealand (RBNZ) published the results of a public consultation on New Zealanders' views on a Kiwi central bank digital currency (CBDC). The vast majority of respondents expressed concern about the potential for government control, privacy, traceability, and autonomy. Many feared Digital Cash will be used to facilitate unacceptable intrusion into their privacy or social control, even if it is not originally designed to do so. In that regard, they want assurance that physical cash will still be issued by the RBNZ. In response, RBNZ said that it remains committed to a privacy-centric design for Digital Cash subject to financial integrity considerations.

The Bank of England (BoE) published a joint report with MIT Digital Currency Initiative (DCI) on how privacy enhancing technologies (PETs) could be used to enhance the privacy of a potential digital pound. The paper focused on pseudonymization, zero-knowledge proofs, and secure multiparty computing. It found that these technologies present opportunities for a central bank digital currency (CBDC) to be at least as private as current forms of digital money and potentially even more private as they mature. While PETs, on their own, do not guarantee privacy, the approaches explored in this paper seek to safeguard consumers' private information, enable compliance with existing regulations, and strengthen trust and confidence in a digital pound, should one be launched in the future.

The actions of the US federal banking agencies under Operation Choke Point 2.0 (OCP 2.0) have damaged the digital asset and blockchain business in the United States. For the last two to three years an atmosphere of fear has pervaded the industry as regulators have sought to de-bank industry participants, including individual investors. Subsequent to his podcast comments, Marc Andreessen characterized OCP 2.0 as "trickle down privatized domestic sanctions." The message of OCP 2.0 has been clear: stay away from crypto and you will not be bothered. That policy is about to change. And while prior harm cannot be undone, there are a number of practical steps the second Trump Administration and Congress can take to ensure that the prior policy is quickly reversed and does not come back.

"The recent surge in the price of Bitcoin has reignited debates about a cryptocurrency bubble, many of them based on intuition. This column takes a formal approach to the beliefs underlying both sides of the debate by introducing a model that builds on the classical framework for rational bubbles. If the price of a cryptocurrency can be justified from transactional demand, it may be a sound investment. However, if future investment inflows are needed to explain the price, that indicates a bubble, with payoffs resembling a Ponzi scheme."

A paper co-written by a European Central Bank (ECB) staffer suggests required fungibility conditions for reserve asset-backed stablecoins issued by different issuers on different platforms. These include interoperable payment and settlement technologies, payment settlement finality, and seamless stablecoin convertibility into the quasi-ultimate means of payment (e.g., central bank money). Also, issuers should have sufficiently strong liquidity and capital positions to meet redemption obligations, including to cover potential variations in liquid off-chain asset price volatility.

JP Koning shared his thoughts on the court's recent decision that Tornado's smart contracts, the immutable ones, are not sanctionable.

Court documents filed in a Freedom of Information Act (FOIA) lawsuit against the United States Federal Deposit Insurance Corporation (FDIC) showed the US regulatory body asked certain financial institutions to pause crypto banking activities. In a Dec. 6 filing in the US District Court for the District of Columbia, the court released "pause letters" sent by FDIC officials to the boards of directors for different US banks, whose names were redacted. According to the letters sent in 2022, the FDIC requested the institutions "pause all crypto asset-related activity" in response to the uncertain regulations around digital assets.

The Bank for International Settlements (BIS) and its central bank partners demonstrated that regulatory compliance can be embedded in cross-border transaction protocols. Project Mandala, which has reached proof-of-concept stage, aims to automate compliance procedures, enhance transparency of country-specific policies and provide real-time reporting and monitoring for regulators and supervisors. This architecture integrates a peer-to-peer messaging system, rules engine and proof engine. It ensures that all necessary compliance checks have been completed before the payment instruction is initiated, after which the system automatically generates a compliance proof, which accompanies any digital settlement asset or payment instructions across borders.

A paper co-written by a Deutsche Bundesbank staffer conducts a quantitative analysis to calculate a potential digital euro holding limit. It draws on a detailed dataset including individual bank level as well as aggregated banking group data for the entire euro area. It uses data and a simulation approach on the number of accounts in individual institutions and on account balance distribution. To assess the De impact on banks, the analysis is conducted for two different points in time reflecting different monetary policy environments with accommodative and restrictive stance. The effects of the CBDC are considered in three holding limit scenarios. The calculations reveal a lower bound holding limit of around 1,000 euro that almost all banks can handle. The results show a strong heterogeneity between the various euro area banks, as many could offer significantly higher limits. For the implementation of holding limits, the paper therefore proposes a model that has a low mandatory limit which every institution must offer, while providers can decide for themselves whether they like to offer a higher limit depending on their individual situation and customer base, subject to an approval process.

The Securities Industry and Financial Markets Association (SIFMA) published the results of Regulated Settlement Network (RSN) proof-of-concept that explored the possibilities for shared ledger-based digital settlement using U.S. Treasury securities and tokenized cash. It found that multi-asset and cross-network settlement could be enhanced through a shared-ledger financial market infrastructure (FMI) that contains tokenized securities, central bank deposits, and commercial bank deposits where each institution operates its own partition. The network enabled a common settlement infrastructure that is 24/7, programmable, and offered precise settlement capabilities to allow financial institutions to optimize their collateral and liquidity positions. At the same time, the network alleviated challenges such as market fragmentation and uncertainty throughout the settlement process.

Bangko Sentral ng Pilipinas and participating financial institutions (FIs) have completed proof-of-concept work on Project Agila. Agila allow FIs to transfer funds to each other even during off-business hours, including evenings, weekends, and holidays, using wholesale central bank digital currency (CBDC). The evaluation with FIs covered functional, performance, security, exploratory, end-to-end and programmability testing.

Banco de España published a paper that explores the financial stability nexus within a monetary ecosystem that has been expanded to include a central bank digital currency (CBDC). It highlights the importance of partially adapting the two-tier system of money by implementing certain limits, as envisaged in CBDC plans. The endogenous mitigation of the risks through improved bank competition often attributed to CBDCs is uncertain and may be insufficient from a systemic risk perspective. The introduction of exogenous mitigants, like CBDC holding limits calibrated on the basis of a robust methodology, seems instrumental to ensure the consistency of a monetary ecosystem that includes a CBDC. Hence, the paper addresses some fundamental methodological issues related to these limits, such as the rationale for alternative targets for the limits, the influence of disintermediation speed, the time horizons involved in the limitation and adaptation process, and the role of regulatory and market frictions.

The Bank for International Settlements (BIS) published a paper that analyzes how retail central bank digital currencies (CBDCs) and fast payment systems (FPSs) compare with each other and why some jurisdictions have opted for a retail CBDC, while others have chosen to introduce an FPS or both. Interviews with central banks in 14 jurisdictions around the world show that some see a case for both to fulfil different policy goals and complement one another. The paper's key conclusion is that the choice between a retail CBDC or an FPS, or both, is very contextual and will depend on the market features, ecosystem and degree of maturity and innovation of existing payment infrastructures in a country.

As part of the ECB wholesale DLT settlement trials using central bank money, HQLAᵡ was involved in an intraday repo transaction where Goldman Sachs borrowed cash from Clearstream in exchange for collateral held on the HQLAᵡ DLT platform. HQLAᵡ is a collateral mobility solution in which assets held by custodians are locked and digitized in the HQLAᵡ digital collateral registry, with the legal agreements enabling collateral to transfer instantly using DLT. In this case, the cash leg of the transaction used the Bundesbank's Trigger solution. The trades were agreed via the Eurex Repo F7 trading system, and Deutsche Börse's Clearstream D7 digital securities platform was used as the market system operator.