Fintech Daily Digest

The Centre for International Governance Innovation (CIGI) published a paper that explores the democratic governance required to make an informed decision on whether to issue a CBDC and, if one is to be issued, how to develop and implement it responsibly. It reveals a disconnect in Canadian CBDC discussions: while the government is responsible for the decision to issue such a currency, political engagement on the topic has been limited. Policy recommendations aimed at fostering democratic oversight, public engagement and the protection of rights in light of the potential development of a digital Canadian dollar are provided. For example, the paper suggests that Canada could leverage existing collaborative initiatives, such as the Canadian Digital Regulators Forum, to create a more comprehensive and inclusive CBDC governance framework.

The Central Bank of Eswatini (CBE) published a paper co-written with Giesecke+Devrient (G+D) on the design characteristics of a potential domestic retail central bank digital currency (CBDC). It also reported on proof of concept (POC) tests of online and offline payment use cases involving selected CBE staff members. A digital lilangeni would be fully interoperability with the existing payment methods and wholesale and retail infrastructures, and be available 24/7/365 in (near) real-time manner. Also it would be unremunerated, as it will be primarily aimed to be a means of payment and not a savings vehicle. Although it would not be run on a distributed ledger technology (DLT) platform, it would be built on a distributed database, operated and permissioned by the CBE.

The Bank of Canada (BOC) published a paper that uses a general equilibrium monetary model to explore the impact of introducing "tokenized money" (central bank digital currency (CBDC) or tokenized deposits) on stablecoins. It finds that when tokenized monies pay a high interest rate and guarantee a high degree of anonymity, they crowd out stablecoins. Conversely, with low anonymity and low interest rates, tokenized monies become collateral, promoting stablecoin development. CBDCs dominate tokenized deposits because a central bank can better economize on scarce collateral assets, and banks face incentive problems and do not internalize the societal cost of their activities, generating negative externalities.

"Wirtschafts und Infrastrukturbank Hessen (WIBank), the Helaba owned German development bank, issued a registered bond on a public blockchain. It was settled in a delivery versus payment transaction (DvP) using the Bundesbank's Trigger solution, which initiates settlement on the TARGET2 payment system. The transaction was part of the Eurosystem's wholesale DLT settlement trials."

The Government of Palau launched a prototype of its blockchain-based savings bond system, Palau Invest, which will offer Palauan citizens, via a mobile app, a simple way to invest in their country while earning returns. The funds raised will be allocated to key national projects such as bridges, roads, and public infrastructure. The project is sponsored by the Japanese Ministry of Economy, Trade, and Industry (METI) Global South Future-Oriented Co-Creation Project. The system runs on Soramitsu's SORA v3 Hub Chain's Hyperledger Iroha 2-based network.

Capgemini published its annual World Payments Report that reflects the views of 600 corporate treasurers from across three industries: insurance, retail, and automotive. It also includes payments insights from focused interviews and surveys with over 200 senior payment executives of leading banks, financial service organizations, payment service providers, industry associations, and central banks representing all regions of the globe. The report finds that supportive regulations and innovative industry initiatives, especially regarding open finance and instant payments, have resulted in surging non-cash payments in the Asia-Pacific region. Also instant payments, now operational in over 80 markets, are picking up speed.

The European Central Bank (ECB) published a paper that documents the very different short-term (12-week) responses of stablecoins and money market funds (MMFs) to crypto and U.S. monetary policy shocks since 2019. It shows that crypto shocks are inconsequential for MMFs and traditional financial markets but negatively affect stablecoins. In contrast, U.S. monetary policy shocks significantly affect MMFs and stablecoins, but in opposite directions. While prime MMF assets grow after contractionary monetary policy shocks, stablecoin market capitalization significantly declines.

"Aigul [September 27, 2024] Central Bank Payment News (CBPN) published an article by Aigul Bakesarieva, Head of the Digital Som Project Group, National Bank of the Kyrgyz Republic on central bank digital currency (CBDC) developments at her central bank. On May 25, 2022 the Board of the National Bank launched the digital som concept based on a two-tier retail model. The digital som will be a unique digital token that will be stored in a special digital wallet, with transfers . occurring directly from one digital wallet to another. "

ABN AMRO and Rabobank issued €1.1 million of one-month digital commercial tokenized on the Deutsche Börse Clearstream D7 distributed ledger technology (DLT) based platform. The Luxembourg transaction was settled atomically using a wholesale central bank digital currency (CBDC) issued by the Banque de France, as part of the Eurosystem's DLT trials for wholesale settlement using central bank money. This is Clearstream's 5th use case at the European Central Bank (ECB) trials on the D7 platform.

"The Central Bank of Paraguay, through Resolution No. 7/21, approved the regulations of the Working Group on Digital Currency of the Central Bank of Paraguay (CBDC, for its acronym in English), in order to monitor the different international initiatives on CBDC, as well as analyzing the implications of an eventual implementation of some type of CBDC by the BCP. The motivation to explore a CBDC is its use as a means of payment. A digital currency issued by the BCP could provide complementary money to the public, adhering to the development of the national payment system, as long as the security of the transactions is preserved."

[August 22, 2019] The Rwandan central bank is looking into ways it could potentially issue its own digital currency to make the processing of transactions more efficient and to boost economic growth. "There are still concerns about how exactly you convert the entire currency into digital form, how to distribute that and how fast can you process those transactions," Financial Stability Director-General Peace Masozera Uwase said. "Challenges come in, if technology is down how do you deal with such issues? "We will join in once we are ready."

On September 18, 2024, the Reserve Bank of Australia (RBA) announced the launch of Project Acacia to build on the lessons from the previous year's central bank digital currency (CBDC) pilot by focusing on opportunities to uplift the efficiency, transparency and resilience of wholesale markets through tokenized money and new settlement infrastructure. Subsequent phases of the project may involve cross-border applications with regional central banks. In October 2024 the RBA and the Digital Finance Cooperative Research Centre, will publish a consultation paper inviting industry engagement. The project is scheduled for completion in the second half of 2025.

The United Arab Emirates (UAE) has exempted crypto transactions from paying value-added tax (VAT) effect November 15, 2024 and applied retroactively to transactions since January 1, 2018. The UAE has essentially classified virtual assets in the same bucket as traditional financial services - several of which are already exempt from VAT. https://tax.gov.ae//Datafolder/Files/Legislation/Executive%20Regulation%20of%20Federal%20Decree%20Law%20No%208%20of%202017%20-%20Publish%20-%2004%2010%202024.pdf

Roberto Garavaglia has explored the implications of the Apple iOS 18.1 update's opening of access to iPhone secure elements to developers to allow them to offer contactless near field communication (NFC) transactions directly within their apps, outside of the Apple Pay and Apple wallet ecosystem. This will open the use of Apple devices not only for payments, but also for digital access and identification. Developers will be able to integrate a wide range of services, from in-store payments to digital keys for cars, company badges, loyalty cards and government documents. However, challenges remain with regard to Apple's control and compliance with European standards.

The IMF published a paper that analyzes how the issuance of central bank digital currency (CBDC) could affect monetary operations, which include central banks managing the demand and supply of reserves to achieve a desired stance of monetary policy. The note outlines three scenarios: CBDCs substituting cash, commercial bank deposits, and reserves, with implications varying based on design features and market developments. It discusses how these scenarios influence balance sheets and reserves, potentially drawing short-term interest rates away from the policy target and complicating liquidity forecasting. Furthermore, the note shows how central banks could calibrate monetary operations such as engaging in a fine-tuning operation and provide additional reserves on demand to ensure that central banks can maintain their monetary policy stance. Finally, careful design of CBDCs, such as setting criteria for access, holding quantity, and remuneration, can mitigate adverse effects on monetary operations.

The Bank of Canada (BoC) published a paper how digital payments can be made more cognitively accessible, focusing on removing cognitive barriers present in many digital interfaces and products. It proposes an inclusive approach since involving people with cognitive disabilities in design, testing, and refinement is crucial. The proposed framework centers on system learnability and user workload as the two key measures of cognitive accessibility in digital payment and banking interfaces. A prototype interface is developed and tested for voice payments, which successfully demonstrates that the framework provides an effective iterative design approach to enhance cognitive accessibility and usability.

Bank of England (BoE) Executive Director of Financial Market Infrastructure Sasha Mills outlined the need for tokenized wholesale transactions to be settled in central bank money. "If central bank money is unable to interact with new technologies, there could be a risk of high value wholesale settlement activity moving away from central bank money to private settlement assets, weakening financial stability." Options include the use of the BoE's omnibus account facility, extending real-time gross settlement (RTGS) system hours, and wholesale CBDC. https://www.bankofengland.co.uk/speech/2024/october/sasha-mills-keynote-speech-at-the-digital-assets-week

Visa launched its Tokenized Asset Platform ( VTAP), a business-to-business (B2B) solution designed to enable banks to bring fiat currencies on chain in a safe, seamless, and efficient manner. VTAP provides a platform for banks to mint, burn and transfer fiat-backed tokens, such as tokenized deposits and stablecoins, and experiment with use cases. VTAP is also designed to enable banks to use their fiat-backed tokens within smart contracts. In addition, Visa's vision is to enable interoperability across different blockchains for banks utilizing the VTAP platform.

Banco Central do Brasil (BCB) is incorporating decentralized finance (DeFi) principles into ongoing experiments toward developing ecosystems that use "synthetic" central bank digital currency (CBDC) as payment instruments. Digital asset transactions would be settled in "Drex" wholesale CBDC issued by the BCB within the distributed ledger technology (DLT) Drex Platform. The BCB also plans to speed up its Open Finance tokenization efforts and bring decentralized finance (DeFi) into the regulatory perimeter. https://www.bcb.gov.br/conteudo/home-ptbr/TextosApresentacoes/Ap_RCN_Brunnermeier_3_10_24.pdf https://www.youtube.com/watch?v=x27Mz_CdwtI

Payala is cryptographically secure digital payment technology smartcard-based digital payments ecosystem that provides users with a multi-currency digital wallet that is resilient highly resistant to cyberattack and operates when offline for business-to-customer, government-to-populace, and peer-to-peer transactions. The platform has been successfully field-tested and utilized in the Pacific region in an austere, low infrastructure environment.