Fintech Daily Digest

The European Investment Bank (EIB) issued €100 million of digital bonds that will be settled using the Banque de France's pilot wholesale central bank digital currency (CBDC) as part of the European Central Bank (ECB) wholesale distributed ledger technology (DLT) settlement trials. (The Banque de France actually refers to the wholesale CBDC tokens issued on its DL3S DLT platform as "tokenized representations of central bank money (CeBM)".) The bonds will be issued on the HSBC Orion platform. https://www.eib.org/en/investor-relations/press/all/fi-2024-13-eib-digital-bond-eurosystem-explanatory-work

The Oesterreichische Nationalbank (ONB) published a paper that studies the impact the introduction of the digital euro might on Austrian banks from a financial stability perspective, based on the premise that the digital euro will not bear interest and will be subject to a holding limit. With respect to bank liquidity risk and profitability, it finds substantial effects only for extreme scenarios and high holding limits. Lower holding limits effectively contain adverse outcomes both with respect to interest income losses and liquidity risk. Overall, we conclude that the introduction of a digital euro would not pose a threat to the stability of the Austrian banking system provided the digital euro is subject to a carefully designed holding limit and remuneration model. From a purely financial stability perspective, low holding limits would be preferable to higher ones.

The ECB published a paper (co-written by Ulrich Bindseil) that uses scenario analyses to illustrate the key drivers of the impact of central bank digital currency (CBDC) on central bank profitability. It finds that CBDC will have broadly the same balance sheet and profit implications as the issuance of banknotes. It shows that pure exchange of banknotes for CBDC has no further implications on central banks' balance sheets, and thus their financial risks, profits and capital. This is different, however, for other exchanges of monetary liabilities, such as commercial bank deposits, which increase the amount of unremunerated central bank monetary liabilities and may require the creation of additional reserves for banks via the corresponding additional central bank assets. The last two points would tend to give rise to higher income for central banks in a positive interest rate environment. However, these risk implications can be managed via well-established frameworks and likely be mitigated by measures to limit CBDC take-up.

On May 9th, 2024, the US Federal Reserve System announced that it was "seeking input" on a proposal to expand the operating hours of two "wholesale" payment services it operates, Fedwire Funds Service (h"Fedwire") and the National Settlement Service (NSS). Wholesale payment services are responsible for transferring direct liabilities of central banks between financial institutions, particularly, in value terms, for the settlement of interbank dues. At present Fedwire and the NSS only transfer funds on weekdays, excluding holidays. The proposed expansion would have them run 22 hours a day, seven days a week, holidays included. This paper by George Selgin explains those potential gains. It then surveys the Fed's repeated postponement, over the course of almost a decade, of plans to provide for weekend and holiday Fedwire and NSS operating hours, arguing that in delaying for so long the Fed has neglected its duty, as the United States' monopoly provider of wholesale settlement services, to adapt those services to changing needs.

Anisa Plepi and Peter Schendner posted a paper that proposes a framework for aggregating and categorizing viewpoints on fundamental issues concerning tokenization and assessing the causal effects of tokenization on market outcomes, using bonds as an example. The framework starts with a taxonomy of bond tokenization use cases according to the tokenization model, which is fed into a causal model to assess how would the outcomes, characterizing its lifecycle processes change if a bond had been tokenized instead of using the traditional infrastructure. Or alternatively, how would the outcomes of interest change if a bond had been exchanged in the traditional infrastructure instead of being tokenized? The paper then proposes an outcomes matrix to estimate the effects of tokenization on particular outcomes for which there are 25 metrics. The framework then conceptualizes the Swiss National Bank (SNB) Project Helvetia tokenization approach and evaluate its effects on efficiency and liquidity.

The European Central Bank's (ECB's) Ulrich Bindseil posted a paper he wrote with Omid Malekan on time structure phenomena in finance, money, payments and settlement and how they are affected by progress in information and communications technology (ICT). While technology is a key driver of the evolution towards immediacy and continuity, they note that in some instruments, settlement lags and discontinuities have remained unchanged for long periods of time despite significant ICT progress, and they identify cases in which even ideal ICT would not seem to imply immediacy and continuity. For example, two-sided transactions in which not only money, but also another often less liquid asset has to be settled, may be resistant to shorter settlement cycles until the role of intermediaries and number of layers are reduced, possibly via decentralized finance (DeFi).

A Norwegian government-sponsored task force concluded that there's no rush for the central bank to launch an e-kroner. However, work should be started "on the necessary regulatory changes" for a possible introduction of a CBDC that may become relevant in future. "The committee doesn't currently see a need to introduce digital central bank money for reasons of financial inclusion, privacy or emergency preparedness, but doesn't rule out that a central bank digital currency may in the future be a relevant instrument for safeguarding these considerations." https://www.regjeringen.no/no/dokumenter/nou-2024-21/id3074368/?ch=1

The U.K. HM Treasury published its National Payments Vision, in which it committed to continue the design phase for a retail central bank digital currency (CBDC) in partnership with the Bank of England. It reconfirmed that no decision has been taken on whether to implement a digital pound, but any decision to proceed would be accompanied by the introduction of primary legislation, ensuring full Parliamentary scrutiny by both Houses of Parliament, before any launch. Legislation would be preceded by a further public consultation and would guarantee users' privacy and control of their money. "Irrespective of the final decision, by partnering with the private sector on proofs of concept and experiments, the work will support private innovation in digital currency technologies [and] deepen the retail payments expertise of the UK public authorities."

On November 14, 2024, the U.K. Chancellor of the Exchequer announced that HM Treasury plans to launch a distributed ledger technology (DLT) based Digital Gilt Instrument (DIGIT) pilot. No details were provided, but according to an earlier Bloomberg story, it could launch within two years. Also on November 14, UK Finance, a trade association for the U.K. banking and financial services sector, published a paper that it submitted in April 2024 to HM Treasury and the Debt Management Office, with options for such a pilot. These were an "evolutionary" approach to be deployed in three phases over 18 months, and a "big bang" approach that could be deployed in 12 to 18 months. https://www.gov.uk/government/speeches/mansion-house-2024-speech https://www.ukfinance.org.uk/policy-and-guidance/reports-and-publications/uk-finance-digital-gilt-roadmap

In September 2024, the Subhadra Yojana, a direct transfer initiative for women in the state of Odisha, became India's first government program to allow beneficiaries to receive payouts in digital rupee central bank digital currency (CBDC). Approximately 12,000 beneficiaries received the first annual Rs 10,000 instalment and were notified of the deposit via text messages. https://en.wikipedia.org/wiki/Subhadra_Yojana

The Swiss National Bank (SNB) published the results of its pilot test of a monetary policy operation on the SIX Digital Exchange (SDX) distributed ledger technology (DLT) platform. As part of Project Helvetia III, in June 2024 the SNB issued digital SNB Bills settled in wholesale central bank digital currency (CBDC) in a production environment. The Bills were redeemed sever day later. It showed that implementing monetary policy on a DLT-based infrastructure is feasible and effective. While the corresponding processes bring about some improvements, new challenges emerge. The SNB concluded that "the question of whether to conduct monetary policy operations on a DLT-based infrastructure is premature [and] ramping up such operations would also entail significant investment for the SNB, its counterparties as well as infrastructure providers". https://www.snb.ch/en/publications/research/economic-notes/2024/economic_note_2024_04

CoinDesk published research that purports to show that retail has evolved into smart money over time in the crypto-asset market. Investors who hold less than one BTC continue to accumulate, as they have been doing for the past two months. Humpback whales who hold over 10K BTC, continue to distribute coins, extending the two-month trend. Long-term holders, on average, seem unfazed about this rally and continue holding onto bitcoin, demanding higher prices. The data challenges the narrative that whales are the smart money of the ecosystem. The feature image shows that whales have been selling into price strength, while retail has been buying the rally.

"Our paper below critiques the recent working paper by Bindseil and Schaff (2024), which presents a negative assessment of Bitcoin's long-term viability, framing it as a speculative asset with limited intrinsic value and significant risks. The paper portrays Bitcoin's volatility, lack of productive contribution, and wealth concentration as critical flaws, while positioning CBDCs as a superior solution for modern financial systems. In this critique, we explore Bindseil and Schaff's core assertions, the methodological weaknesses in the working paper, and their framing of Bitcoin versus CBDCs."

The Cambridge Centre for Alternative Finance (CCAF) published its 2nd Global Crypto-Asset Regulatory Landscape Study. The report describes and compares emerging practices in crypto-asset regulation, focusing on 19 representative jurisdictions and encompassing key dimensions of regulatory frameworks. The objective is to identify areas of convergence and divergence in the implementation of regulatory frameworks. In the conclusion this study indicates, where possible, early lessons for financial authorities, particularly in emerging market and developing economy (EMDE) jurisdictions. The report is published alongside a global online tracker of crypto-asset regulatory frameworks, within the CCAF's Global Regulatory Innovation Dashboard (GRID).

The Association for Financial Markets in Europe (AFME) published a response to a call for submissions from the European Commission (EC) Directorate-General for Financial Stability, Financial Services and Capital Markets Union (DG FISMA) on any issues and opportunities relating to the deployment of DLT based infrastructure and services in the European Union (EU) that may merit the EC's attention. AFME's overarching view is that a transformative potential of DLT is that can enable companies and individuals to access a shared, peer-validated database as a single-source-of-truth, without the need to centralize data and transaction processing with a single actor. This increases accessibility by participants, data security and immutability, and data transparency in the real economy. Innovation in finance plays a key role in this vision, which will only begin in earnest with the updating of capital markets infrastructure.

It seems that more and more central banks in Europe are rediscovering one of the beauties of cash: its resilience. It won't fail in a power cut or seize up during a cyber attack (although, of course, ATMs might). As Brett Scott, author of Cloudmoney: Cash, Cards, Crypto and the War for our Wallets, notes , any society that runs purely on digital platforms operated by large financial institutions "is going to have major resiliency problems."

ABN AMRO executed four repo pilot trades with DLT-based wholesale central bank digital currency (CBDC) utilizing tokenized commercial paper (CP) as collateral in late October 2024. This served to test one of three payment options (in this case the one being led by the Banque de France) that are part of the ECB's DLT-based wholesale settlement trials. ABN AMRO issued €1.1 million of the tokenized CP that was used as collateral in the latest transaction, which involved four reverse repo transactions between ABN AMRO Bank, ABN AMRO Clearing, and Rabobank, cleared by Eurex Clearing. In a repo Repo (repurchase) transaction one party (e.g., Bank A) sells securities to another party (e.g., Bank B) and agrees to buy them back later at a slightly higher price. ABN AMRO Bank's Treasury regularly uses repos for balance sheet management.

Intesa Sanpaolo issued €10 million in commercial paper (CP) using Clearstream's D7 tokenization platform, using the Bank of Italy's TIPS Hashlink solution for settlement. TIPS Hashlink is one of three payment options that are part of the European Central Bank's (ECB's) distributed ledger technology (DLT) based wholesale settlement trials. Rather than use the on-chain central bank money (i.e., central bank digital currency) being used in the other two trails, the Hashlink interoperability mechanism is used to settle the transaction using the ECB-run Trans-European Automated Real-time Gross settlement Express Transfer (TARGET) Instant Payment Settlement (TIPS) system. This is apparently only the second test of this platform, the other being a €25 million Cassa Depositi e Prestiti (CDP) digital bond issue in July 2024. https://www.ledgerinsights.com/cdp-issues-digital-bond-on-polygon-blockchain-using-new-italian-law/

Travelers from several countries in Asia and Europe can now use their mobile payment apps to pay at over 875,000 merchants across Nepal. This is enabled by a partnership between Nepal Clearing House Limited (NCHL) and Ant International, the operator of Alipay+. The collaboration, allows users of Alipay+ to make payments by scanning NEPALPAY QR codes. Supported payment apps include Alipay (China), AlipayHK (Hong Kong SAR), MPay (Macao SAR), Touch 'n Go eWallet and MyPB (Malaysia), GCash (Philippines), Naver Pay and Toss Pay (South Korea), TrueMoney (Thailand), Hipay (Mongolia), Tinaba (Italy), Changi Pay, and OCBC Digital (Singapore).

According to McKinsey & Company, the initial excitement about the disruptive potential of central bank digital currency (CBDC) has waned, given its limited uptake so far. Nonetheless, they foresee CBDCs playing three roles in payments: First, they will set the minimum base level of functionality, cost, and services that users can expect from a digital currency. Second, they will provide an alternative to help keep the price of commercial offerings in check. And finally, they will serve as an alternative to large but often opaque private-sector stablecoins.