Fintech Daily Digest

Moody's and Elliptic have formed a strategic alliance to integrate on-chain blockchain data with traditional off-chain data sources to screen virtual asset service providers (VASPs). The solution leverages Elliptic's real-time on-chain data, which categorizes the exposure of digital asset transactions to illicit activity and combines this with Moody's off-chain data within an integrated risk engine. Together, it provides a comprehensive overview of a VASP, helping institutions understand who they are doing business with and the associated risk.

The Latin American Journal of Central Banking (LAJCB) published a paper that uses a theoretical model to examine how the introduction of central bank digital currency (CBDC) impacts small open economies (SOE). The main results are: (i) CBDC always increases the welfare of financially unconstrained households; however, it increases the welfare of constrained households when the cost of carrying cash is high enough and when the government purchase level is sufficiently low; (ii) CBDC increases the fiscal income by bringing more agents out of the informal economy, improving fiscal sustainability; (iii) CBDC improves the terms of trade as it strengthens the domestic currency.

The National Bank of the Kyrgyz Republic (NBKR) launched an ideation aimed at improving the prototype of its digital som central bank digital currency (CBDC). The goal is to ensure technological improvement of existing payment solutions and innovations, and at the testing stage to take into account the interests of citizens, business, government and the financial sector. Key areas of interest include system integration, security, user experience, and international interoperability.

The Bank for International Settlements (BIS) Innovation Hub London Centre and the Bank of England launched Project Keystone that aims to develop a standardized data analytics platform focused on ISO 20022 data. The increased use of ISO 20022 standards for payment messages in real time gross settlement (RTGS) systems means many central banks will adopt the protocol in the coming years. Ninety-three percent of payment system operators have already either implemented ISO 20022 or are working to implement it in their systems.

The U.S. Treasury Department Financial Crimes Enforcement Network (FINCEN) officially withdrew its proposed rule, introduced in 2020, that would have imposed know-your-customer (KYC) requirements on unhosted wallets. Basically, it became clear that it would be practically impossible for exchanges and other virtual asset service providers (VASPs) to implement the proposed rules. https://www.federalregister.gov/documents/2024/08/16/2024-16461/semiannual-agenda#p-72

Tether plans to launch a stablecoin pegged to the United Arab Emirates dirham (AED) fully backed by liquid UAE-based reserves. It will launch in collaboration with UAE-based Phoenix Group and Green Acorn Investments. It will join Tether's slate of stablecoin products that include USDT, EURT, CNHT, MXNT, XAUT and aUSDT.

The Republic of Palau's Ministry of Finance reported the successful completion of Phase 2a of its National Government Payment Service Project. Phase 2a involved integrating a Ripple-based stablecoin system into Palau's financial infrastructure. Phase 2b aims to continue the development of the ecosystem, with a specific focus on integrating more comprehensive financial, legal, and business frameworks. This phase will also address the scalability of the payment system and ensure its robustness against potential security threats. https://www.palaugov.pw/wp-content/uploads/Palau-National-Payment-System-Phase-2a-Final-Report.pdf

G+D's Lars Hupel published a summary of a Giesecke+Devrient (G+D) and UDPN Alliance cross-border payments proof of concept (POC). It involved connecting the Universal Digital Payments Network (UDPN) multilateral global messaging network and G+D's Filia® retail central bank digital currency (CBDC) platform. The UDPN network comprises a distributed ledger technology (DLT) based application layer where smart contracts can be deployed and called for core UDPN functions (e.g., transfer, swap). The POC implemented payments from hypothetical EUR (running on Filia®) to Indian Rupee (INR) (running on UDPN). This included transfers between end-user wallets, currency conversion, liquidity management, CBDC issuance, identity, and wallet management.

The National Bank of Cambodia (NBC) introduced the Bakong Tourists app. By downloading the app and registering with an email, tourists can top up their accounts and use the KHQR code to pay for goods and services, reducing the need for cash and ensuring a seamless experience during their stay. https://www.nbc.gov.kh/english/news_and_events/press_releases_info.php?id=208

The European Central Bank (ECB) is planning a special focus workshop on innovations in business-to-business (B2B) payments and the role digital central bank money could play on October 9, 2024. The potential of private undertakings such as e-money tokens (e.g., stablecoins), commercial bank money tokens (CBMT) and other, similar forms will also be discussed. The workshop would be an opportunity to gather input from stakeholders on the challenges and needs arising from new uses cases related to B2B payments. It would also provide a forum in which to assess these against the objectives of the ongoing initiatives both of the European payments industry and the Eurosystem's retail payments strategy and initiatives.

The Bank of Ghana (BOG) published draft guidelines on digital asset regulation for feedback from the public and industry stakeholders. The central bank proposes an eight-pillar crypto regulation framework, mainly intensifying the registration and reporting requirements of crypto exchanges or virtual asset service providers (VASPs). The proposed regulations will require crypto exchanges to monitor and report suspicious transactions and comply with the Financial Action Task Force's (FATF's) Travel Rule. https://www.bog.gov.gh/wp-content/uploads/2024/08/Draft-Guidelines-on-Digital-Assets.pdf

Starting with iOS 18.1, iOS developers will be able to offer near-field communication (NFC) contactless transactions using the secure element (SE) from within their own apps on iPhones, separate from Apple Pay and Apple Wallet. Using the new NFC and SE, application programming interfaces (APIs), developers will be able to offer in-app contactless transactions for in-store payments, car keys, closed-loop transit, corporate badges, student IDs, home keys, hotel keys, merchant loyalty and rewards cards, and event tickets, with government IDs to be supported in the future. The only catch is that developers will need to enter into a commercial agreement with Apple, request the NFC and SE entitlement, and pay the associated fees. This follows a commitment made by Apple to the European Commission in July 2024 to grant European iOS developers similar NFC and SE access to address antitrust charges. Even the new commitment is not fully global in scope. The NFC and SE APIs will only be available to developers in Australia, Brazil, Canada, Japan, New Zealand, the United Kingdom, and the United States, although additional locations are said to follow.

According to National Commercial Bank (NCB) Jamaica, the sole commercial bank providing wallets for JAM-DEX, the use of the central bank digital currency (CBDC) has been low. NCB CEO Jamaica Bruce Bowen said this may be linked to the few usage options for the CBDC, along with the process. Merchant adoption has been slow, despite the Bank of Jamaica committing funds earlier in 2024 for a technology provider to upgrade 10,000 of the more modern point of sale (POS) machines to support JAM-DEX. Also, Bowen noted that usage of NCB's Lynk digital wallet has been strong, few users are converting their bank deposit balances to JAM-DEX. https://radiojamaicanewsonline.com/business/ncb-says-use-of-jam-dex-low

"Russian President Vladimir Putin has signed a new law to establish experimental legal frameworks to advance digital technologies, particularly cryptocurrencies, in international trade. The legislation allows for the modification of laws to facilitate cryptocurrency transactions, including cross-border trade, and grants the Bank of Russia oversight of pilot projects related to digital currencies."

The Australian Securities and Investments Commission (ASIC) has sued the Australian Securities Exchange's (ASX), alleging it made "misleading and deceptive" statements over its now-abandoned project to replace its aging systems with blockchain technology. ASIC claims the ASX had no "reasonable basis" to publish statements that claimed its Clearing House Electronic Subregister System (CHESS) trading platform was "on track for go-live" and was "progressing well", when in fact it "was not tracking to plan". https://asic.gov.au/about-asic/news-centre/find-a-media-release/2024-releases/24-177mr-asic-sues-asx-for-alleged-misleading-statements/?altTemplate=betanewsroom

Four German firms, DG Nexolution, DZ Bank, Festo and Giesecke+Devrient (G+D) have developed a prototype solution to support machine to machine (M2M) payments in offline mode using tokenized deposits. "Offline" in this case means that the machines are not connected to the public Internet or a company network. The data exchange during payment is either wired via Ethernet or wirelessly via Bluetooth, near-field communication (NFC) or a wireless local area network (WLAN). Therefore, the technology can also be used in security areas or in difficult environments such as mining., and with older machines that are not connected to networks can be integrated. The prototype demonstration involves two wallets integrated with control units typically used on machines. A smart card is used to load money into the wallet, and the machines can transfer money between them. https://www.dg-nexolution.de/dam/jcr:c658188d-5003-44f3-a431-3efa4db068d6/pressemitteilung-dg-nexolution-cbmt-projekt.pdf

The U.S. Federal Reserve Bank of Philadelphia (Philly Fed) published a paper on difference in how large holders of Ethereum (ETH) behave compared with smaller holders of ETH relative to price movements and the volatility of the cryptocurrency. It finds that large ETH holders tend to increase their ETH holdings prior to a price increase, while small ETH holders tend to reduce their ETH holdings prior to a price increase. In other words, ETH returns tend to move in the direction that benefits crypto "whales" while reducing returns (or increasing loss) to "minnows." Additionally, it finds that the volatility of ETH returns seems to be driven by small retail investors rather than by the crypto whales. While these price dynamics do not necessarily suggest that there is overt market manipulation occurring within the ETH market, understanding them is essential for regulators in designing policies and guidelines to discourage abusive behavior and for market participants to better manage risk in crypto markets.

Crunchfish published a paper that argues that virtual secure elements (SEs) provide better security to retail CBDC offline platforms than hardware-based SEs. It says that hardware-based SEs are less secure due to the separation from payment app that breaks the chain of trust between the two communicating endpoints. This can result in potential attacks by replacing either endpoint with malicious ones or tampering with them and modifying their behavior during runtime. As the hardware-based SE does not have full visibility of the payment app and the mobile operating system (OS), it cannot determine the identity of the app or whether the app has been tampered with, and must "blindly" trust the OS and the app. A trusted client application for offline payments implemented in an app-integrated virtual secure element, on the other hand, has no trust gap issues and runs securely even on rooted/jailbroken mobile devices.

G+D's Lars Hupel writes that eSIMs replace traditional, removable SIM cards with an embedded SIM chip directly on the device. SIM cards no longer need to be physically replaced for an update. Instead, a new eSIM can be simply downloaded. Starting with the iPhone 14 in 2022, Apple has stopped shipping physical SIM trays in the US. New models use eSIM only. By 2030, the eSIM adoption rate will reach 80% in Latin America, Southeast Asia and the Eurozone, while Middle East and North Africa is expected to reach 70%. Secure CBDC wallets could be run easily on eSIMs. https://www.gi-de.com/en/spotlight/digital-security/time-to-adopt-the-esim

David Birch writes that an offline central bank digital currency (CBDC) is essential for a cash alternative, especially in areas with poor internet connectivity or during emergencies. The article proposes a shift in terminology from online/offline to local/remote and hub/edge transactions. It argues that all transactions should be device-to-device (edge) transactions, regardless of whether the devices are nearby or distant. This would create a more scalable and resilient system, similar to cash. While security concerns exist for a device-to-device system, the article suggests potential solutions like transaction limits, auditing, and field-upgradable security algorithms.