Fintech Daily Digest

Progmat and Datachain, along with Japanese banks MUFG, SMBC and Mizuho, launched Project Pax, that aims to use stablecoins instead of correspondent banks for cross-border payments. However, so that corporate customers can trigger trade payments in the conventional manner via their banks, SWIFT payment messages will be integrated with the distributed ledger technology (DLT) based Progmat tokenized network, so clients don't touch the stablecoins. For cross-chain transactions between different blockchains, the platform will utilize Datachain's middleware and its Inter-Blockchain Communication (IBC) protocol. Prototype testing will start shortly, and Pax members plan to collaborate with other financial institutions, looking to go live in 2025. https://www.datachain.jp/news/progmat-and-datachain-launch-project-pax

The Centre for International Governance (CIGI) published Ori Freiman's paper that explores how Canada can craft a responsible and user-centric approach to its digital loonie project. It emphasizes meaningful public engagement in both technical design and regulatory processes -- drawing from the U.K. and European Union (EU) consultative approaches. It also highlights the importance of responsible personal data handling and clear regulatory language, learning from EU expectations and UK legislative concerns. It concludes with recommendations that span across five key areas, critical to the successful integration of the digital loonie within the fabric of society; the developmental approach, engagement strategy, regulation and consumer protection, regulatory novelty and further research.

The U.S. Federal Reserve Bank of New York (NY Fed) published an article that explains what tokenization is and how it works, and looks at how past innovation in financial markets might offer lessons for the future. Multiple successful experiments show efficiencies in a completely tokenized world-where money and securities are all tokenized and settlement can be automated and synchronized with smart contracts. Change takes time, and there may be a period of years where tokenized money would need to interact with traditional securities, or vice versa. As an example, the article points to the Swiss National Bank (SNB) Project Helvetia which initially tried to link the existing payment system to a tokenized securities system, but found that without tokenized cash operational burdens were added, not reduced. Hence, when Helvetia went live, it did so with wholesale CBDC.

Société Universitaire Européenne de Recherches Financières (SUERF) published a note that draws lessons from the success of India's Unified Payments Interface (UPI). It argues that this success majorly owes to ease of development of applications, easy use and zero-transaction fees for end-users. Further success factors have been strict data protection rules, active partnership with the private sector and adept regulation. The note also discusses the organization of the Indian payment market since the launch of UPI, and the changes in digital payment market in India, with a focus on payment volumes and values. It highlights the increasing investments in the payments market and increased adoption over time, and provides insights into the implications of payment systems for financial inclusion in India, and touches upon some challenges UPI faces.

Banco Central do Brasil (BCB) announced the 13 themes that will be trialed during the second phase of the Drex wholesale central bank digital currency (CBDC) pilots. The first phase involved testing processes such as issuing, transferring and settling digital treasury bonds with tokenized commercial bank deposits with wholesale CBDC utilized for interbank settlements. During the second phase, various financial services will be developed via smart contracts on the Drex platform created by 16 consortia or companies. The platform is a permissioned Ethereum network using Hyperledger Besu. https://www.bcb.gov.br/detalhenoticia/20300/nota

The European Central Bank (ECB) published its third report outlining the progress of the digital euro scheme Rulebook Development Group in developing a draft digital euro rulebook, consisting of a single set of rules, practices and standards for the harmonization of digital euro payments across the euro area.

Thailand's Securities and Exchange Commission (SEC) will ease restrictions on using digital assets for payments, and digital asset businesses under SEC supervision will be able to participate in the Bank of Thailand's Programmable Payment Sandbox. The updated regulations broaden the scope of services digital asset businesses can provide without being considered a means of payment and include new types of operators like digital asset custodial wallet providers. https://www.sec.or.th/TH/Pages/News_Detail.aspx?SECID=11085

Of almost 500 institutions surveyed by Citi, only 15% expressed a need CBDC for digital asset settlement versus 15% of respondents to a similar survey in 2023. Instead, there's a greater emphasis on alternative digital payment methods including nonbank stablecoins, tokenized deposits and tokenized money market funds. https://www.citibank.com/icg/docs/Citi_Securities_Services_Evolution_2024.pdf

The Central Bank van Aruba (CBA) published a paper that reviews the best implementation options for a retail digital florin. It concludes that an inclusively-resilient retail digital florin must at least exhibit a three-tiered know-your-customer (KYC) approach (to balance privacy and KYC efforts), have offline features, one-to-one conversion between commercial bank deposits and CBDC, be unremunerated, and based on permissioned distributed ledger technology (DLT). Cross-border payments have been tabled for future consideration. This paper represents the first of a five-step five-year evaluation and implementation process. The paper also revealed that in 2019, the CBA conducted a feasibility study on a local wholesale CBDC, but concluded that its risks may fall outside the CBA's risk appetite. The 2019 paper does not seem to be available online.

On July 30, 2024, the Bank of England (BOE) published a paper on its proposed approach to innovation in money and payments. It includes developing additional functionalities for the real-time gross settlement (RTGS) system such as extending settlement hours and a synchronization interface that would allow RTGS to connect to external ledgers, including those based on programmable platforms, and settle assets in central bank money. The bank is also planning a programme of experiments for a wholesale central bank digital currency (CBDC). Broadly these would cover, DvP securities transactions, PvP foreign exchange transactions and interoperability with other global ledger initiatives. The use of tokenized money and programmable payments is also up for discussion. https://www.bankofengland.co.uk/paper/2024/dp/the-boes-approach-to-innovation-in-money-and-payments

"Siemens has issued its second digital bond, a €300 million one year bond using the SWIAT permissioned blockchain. Settlement took just minutes and used Germany's Trigger solution, which triggers a central bank money payment on the TARGET 2 system. Last year Siemens issued a €60 million 'crypto security' bond on the Polygon blockchain which still required two-day settlement. The issuance formed part of the European Central Bank's (ECB) wholesale DLT settlement trials." https://press.siemens.com/global/en/pressrelease/siemens-remains-pioneer-another-digital-bond-successfully-issued-blockchain

SWIAT (Secure Worldwide Interbank Asset Transfer), established by DekaBank in February 2022, is a software developer for blockchain-based digital financial services platform for regulated financial market players to flexibly issue, trade and settle any type of asset - traditional or digital - on the blockchain. It was determined from the start that the platform would be open to partners to be built as a market consortium, and eventually expanded into an international network. It competes with the likes of the Regulated Liability Network (RLN) and Singapore's Partior (backed by Standard Chartered, JP Morgan and DBS Bank).

Russia's Sberbank plans to start operations with the country's digital ruble for its customers in early 2025. Sberbank is among Russian banks expected to join the project in the second round of testing CBDC, along with about 20 other financial institutions. https://www.moscowtimes.ru/2024/09/03/intervyu-sberbank-rasschityvaet-nachat-operatsii-s-klientami-v-tsifrovykh-rublyakh-v-nachale-2025-goda-a141054

The U.S. National Bureau of Economic Research (NBER) published a paper that analyzes the effect of a major central bank digital currency (CBDC) - the digital euro - on the payment industry, finding "remarkably" heterogeneous effects. Stock prices of U.S. payment firms decrease, while stock prices of European payment firms increase in response to positive announcements on the digital euro. Bank stocks do not react. The results are consistent with the notion that the development of the digital euro is driven by a desire for strategic autonomy in payments, pointing to a novel geopolitical dimension of CBDCs.

Ripple will add smart contracts to the XRP Ledger (XRPL) developer ecosystem and XRPL mainnet, although it's still in its research phase and the firm did not provide a definite time frame for deployment. It also invited programmers familiar with Ethereum virtual machine (EVM) languages to explore possibilities on its sidechain. Ripple also said the sidechain was created for developers using Ethereum-based smart contracts. This gives a familiar environment for deploying DApps, allowing them to use Solidity, a programming language used to build smart contracts on Ethereum. https://ripple.com/insights/expanding-programmability-on-the-xrp-ledger/

The Bank of Russia is expanding its central bank digital currency (CBDC) pilot programme. The new phase, which started on September 1, 2024, will involve up to 9,000 people and 1,200 companies, versus the 600 people and 22 firms that took part in the previous stage. The latest phase will enable dynamic QR code payments and business-to-business transfers. Digital ruble transactions will be available to the customers of the same 12 banks that have been participating in the pilot testing since its start in August 2023, and more banks will be added.

The Qatar Financial Centre (QFC) published the new QFC Digital Assets Framework 2024 which is in line with the Qatar Central Bank's Third Financial Sector Strategy. It establishes the legal and regulatory foundation for digital assets, including the process of tokenization, legal recognition of property rights in tokens and their underlying assets, custody arrangements, transfer, and exchange. The framework also provides for the legal recognition of smart contracts.

The Asian Development Bank (ADB) published a brief that shows how various jurisdictions and national standard-setting organizations are drawing up their own guidelines to define and regulate digital and crypto-assets. It highlights the comprehensive and tech-agnostic principles devised by the International Institute for the Unification of Private Law (UNIDROIT), explains how they treat existing and emerging digital assets, and why they could make transactions safer and more efficient.

The Bank of Japan (BOJ) published a survey of global deposit tokenization projects. With the emergence of stablecoins, these initiatives seem to seek an extension of functionality in payment and settlement systems by applying new technologies, such as distributed ledger technology (DLT), to bank deposits as a traditional means of payment. The main reason such initiatives prefer leveraging deposit money is said to be its affinity with the two-tier monetary system and possibly with existing laws or regulations. However, there remain some issues that require further clarification on how payments with tokenized deposits are categorized in the private law system, and how smart contracts provide implications for non-functional requirements and legal certainty.

The IMF published a Fintech Note that offers a framework to help countries navigate, as well as tools to help them manage, the trade-offs between central bank digital currency (CBDC) data use and privacy protection. It addresses retail CBDC, as data access and privacy-preserving considerations in a wholesale environment are similar to those of the traditional real-time gross settlement (RTGS) systems. It emphasizes the role of institutional arrangements, data collection, access and storage policies, design choices, and technological solutions. At a given level of preference for privacy, central banks can facilitate better use of CBDC data through robust transparency and accountability arrangements, sound policies, and judicious adoption of privacy-by-design approaches including the use of privacy-enhancing technologies.