Fintech Daily Digest

Distributed ledger technologies (DLTs) and blockchains are often used synonymous, however they are fundamentally distinct. While DLTs serve as shared data management systems, blockchains are an example of an application, that is functionally closer to file transfer protocols. This article aims to elucidate the disparity between DLTs and blockchains, emphasizing that blockchains are indeed not a suitable mechanism to store information. [Chris Kameir]

Technology and product innovation are opening new doors which enable collateral managers to optimise and allocate collateral more effectively, posting collateral faster and with greater precision than has been possible in the past.

QualitaX published a paper on the ERC-6123, an open-source standard for creating and managing derivative contracts on Ethereum and EVM-compatible networks. By leveraging ERC-6123, market participants can benefit from a more streamlined, secure, and efficient approach to derivatives management, addressing many of the challenges present in traditional OTC markets.

Stablecoins and the New Payments Landscape Coinbase believes stablecoins represent the next major leap forward for payments and capital movement, particularly as it's becoming easier for merchants and other entities to integrate this technology into their economic workflow - even compared to a couple years ago. Most recently, Coinbase announced a partnership with payments provider Stripe to offer USDC on Base for crypto payouts and on their fiat-to-crypto onramp, while Visa, Mastercard and PayPal have all launched their own stablecoin initiatives in recent years. Other notable mentions include Shift4, Nuvei, Worldpay and Checkout.com. That said, stablecoins require greater regulatory clarity and a smoother crypto user experience to more firmly establish the foundations for their potential.

This survey starts with a high-level overview of the technical workings of zero-knowledge proofs (ZKPs) with a focus on an increasingly relevant subset of ZKPs called zk-SNARKS. While there have been prior surveys on the algorithmic and theoretical aspects of ZKPs, our work is distinguished by providing a broader view of practical aspects and describing many recently-developed use cases of ZKPs across various domains. These application domains span blockchain privacy, scaling, storage, and interoperability, as well as non-blockchain applications like voting, authentication, timelocks, and machine learning. Aimed at both practitioners and researchers, the survey also covers foundational components and infrastructure such as zero-knowledge virtual machines (zkVM), domain-specific languages (DSLs), supporting libraries, frameworks, and protocols. We conclude with a discussion on future directions, positioning ZKPs as pivotal in the advancement of cryptographic practices and digital privacy across many applications.

Stablecoins' Multiple Investment Risks (Moody's) Moody's published a paper on the multiple risks of fiat-backed/pegged stablecoins. "As the number of stablecoins grows, they are more frequently being used in traditional finance, where they have the potential to lower transaction fees and make cross-border payments more efficient. Moreover, stablecoins are increasingly used to buy and sell securities, filling the void caused by the current absence of wholesale central bank digital currencies (CBDCs) compatible with distributed ledger technology (DLT). However, stablecoins are subject to multiple risks and have therefore not always lived up to their promised stability."

The U.S. Securities and Exchange Commission (SEC) is reportedly not likely to appeal the August 7, 2024 ruling by Judge Torres on its lawsuit against Ripple Labs. Although the judge ruled against Ripple, the $125 million civil penalty imposed was less than the $2 billion that the SEC was seeking. However, an injunction was imposed to prevent further violations of Section 5 of the Securities Act, regarding Ripple's sales of XRP tokens. The SEC was reportedly happy that the Court found that the fact that Ripple has shown a "willingness to push the boundaries of the [Court's summary judgment] Order [that] evinces a likelihood that it will eventually (if it has not already) cross the line".

JP Koning writes that, before anti-money laundering laws arrived in Switzerland, anyone could walk into a Swiss bank and open an account without showing any ID. The bank would then issue you a bearer savings book. Ownership of the savings book was considered by the bank to be proof of ownership of the underlying funds in the account. The person who opened the account could keep the book or, if they wanted to, pass it on to someone else without notifying the bank, at which point this second person was now entitled to the underlying funds, who could pass the book on to a third person, etc. In essence, Swiss banks were issuing their own version of cash or stablecoins.

The National Bank of the Kyrgyz Republic (NBKR) published a draft of proposed amendments to the country's central banking legislation to firm up the legal status of a digital som central bank digital currency (CBDC). These amendments affect eight key legislative acts, including the Civil Code, Budget Code, Code of Offenses, Tax Code, Law on Consumer Protection, Law on Payment Systems, and Law on Banks and Banking Activity. Public feedback, comments and suggestions must be submitted by September 7, 2024. https://www.nbkr.kg/newsout.jsp?item=31&lang=ENG&material=120922

U.S. District Court for the Southern District of New York Judge Analisa Torres has ordered Ripple Labs to pay a $125 million civil penalty and said the firm was "permanently restrained and enjoined" from violating U.S. securities laws as part of a case brought by the Securities and Exchange Commission (SEC) regarding Ripple's sales of XRP tokens. The penalty is less than the $2 billion that the SEC was seeking, but more than the $10 million maximum that Ripple had proposed. Although this seemingly closes the long-running case, the SEC may appeal the judgment. Also, Judge Torres expressed doubts that Ripple won't violate federal securities laws in the future give "Ripple's willingness to push the boundaries" of the court order. https://storage.courtlistener.com/recap/gov.uscourts.nysd.551082/gov.uscourts.nysd.551082.974.0_1.pdf

The Federal Reserve Bank of New York (NY Fed) published a study of the impact and effectiveness of regulation in decentralized systems, using sanctions imposed in 2022 by the U.S. Department of Treasury's Office of Foreign Assets Control (OFAC) on the Tornado Cash (TC) crypto-asset mixer. It documented an immediate and lasting negative impact on TC following the sanction announcement. This conclusion was based on tracking Ethereum block proposers and the builders responsible for selecting transactions for settlement. Many large builders cooperated with the sanctions. A couple of builders who did not comply with the sanctions, acting for philosophical reasons rather than monetary motives, were responsible for most of the ongoing TC transactions. https://www.newyorkfed.org/research/staff_reports/sr1112.html

GooglePay, Walmart-backed PhonePe and AmazonPay, plus Indian fintech firms Cred and Mobikwikare, are reportedly seeking to join the Reserve Bank of India (RBI) e-rupee central bank digital currency (CBDC). Initially, the RBI had permitted only banks to offer e-rupee via their mobile applications, but in April 2024 it said payment firms could also offer e-rupee transactions via their platform once approved by the RBI.

A key aim of the National Bank of Cambodia's Bakong digital currency payment system, launched in 2020, was to encourage a higher proportion of transactions in the local riel rather than dollars. Cambodia is a heavily dollarized country with roughly 80% of transactions taking place in US dollars. However, during the first half of 2024 the riel was used in 43% of Bakong transactions, versus 34.2% in 2023. One of the key tactics to encourage use of the local currency is to only support cross-border payments using riel. According to Leger Insights, "while often [incorrectly] described as a central bank digital currency (CBDC), Bakong is closer to a tokenized deposit initiative with the Bakong currency backed by balances at commercial banks".

The Bank of Japan (BOJ) published an executive summary of a presentation and panel session on the "future of wholesale payments at the FIN/SUM 2024 on March 6, 2024. Three consecutive sessions the course of developments in this area, the emergence of new forms of money, and challenges of the current practice. Of these sessions, the panel discussions brought together business leaders, industry experts, and academics to illustrate the future landscape of the wholesale payments ecosystem.

"Building on prior concepts of electronic money (eCash), we introduce a digital currency where a physical unclonable function (PUF) engenders devices with the twin properties of being verifiably enrolled as a member of a legitimate set of eCash devices and of possessing a hardware-based root-of-trust. A hardware-obfuscated secure enclave (HOSE) is proposed as a means of enabling a PUF-based propagation-of-provenance (POP) mechanism, which allows eCash tokens (eCt) to be securely signed and validated by recipients without incurring any third party dependencies at transfer time. The POP scheme establishes a chain of custody starting with token creation, extending through multiple bilateral in-field transactions, and culminating in redemption at the token-issuing authority. A lightweight mutual-zero-trust (MZT) authentication protocol establishes a secure channel between any two fielded devices. The POP and MZT protocols, in combination with the HOSE, enables transitivity and anonymity of eCt transfers between online and offline devices."

The Hong Kong Monetary Authority (HKMA) signed a memorandum of understanding ( MOU) with the People's Bank of China (PBoC) to establish a cooperation framework to support the linkage of the payment systems of the Mainland and Hong Kong. "These efforts pave the way towards seamless and efficient cross-boundary payment connectivity between Hong Kong and the Mainland, unlock new opportunities for businesses and individuals in both places, and further cement Hong Kong's role as a leading international financial center." https://www.hkma.gov.hk/eng/news-and-media/press-releases/2024/08/20240802-5/

Bank Indonesia (BI) published its Indonesian Payment System Blueprint (BSPI) 2030, in which it provides an update on its digital rupiah central bank digital currency (CBDC) work. The central bank completed the first of three proof of concept phases CBDC work during the first half of 2024, the basic issuance and redemption of a distributed ledger technology (DLT) based wholesale CBDC . The BI is now readying to start the second phase in which it plans to explore the integration of a wCBDC with a digital securities ledger to test issuing, transferring and redeeming digital securities, conduct central bank operations, and extending the functionality of digital securities, including programmability, composability and tokenization. https://www.bi.go.id/id/publikasi/kajian/Pages/Blueprint-Sistem-Pembayaran-Indonesia-2030.aspx

The Central Bank of Azerbaijan (CBA) reportedly has no plans to issue a digital currency (CBDC), as it currently sees no prospects for its successful implementation. Governor Taleh Kazimov cited "challenges related to operations and financial sector stability".

The eSIM ecosystem offers an equivalent level of security and protection to that provided by the removable SIM card. The protocols are based on state-of-the-art cryptographic mechanisms and secure the privacy of the end user. A public key infrastructure (PKI) governed by the Global System for Mobile Communications Association (GSMA) provides a secure authentication of the entities of the ecosystem. Manufacturers or providers of eSIM solutions have to undergo GSMA certification in order to be admitted into the ecosystem.

The Association for Financial Markets in Europe (AFME) published a report on its recommendations for supporting the development of capital markets and increased access to finance through new technologies. It outlines a series of priorities, including tokenization and digital assets, where it calls for loosening legal requirements that require central securities depositories (CSDs) which aren't always necessary for distributed ledger technology (DLT) based settlement platforms. Additionally, AFME would like to see legal clarification relating to the Settlement Finality Directive around probabilistic settlement on public blockchains. https://www.afme.eu/Portals/0/DispatchFeaturedImages/AFME_Digital%20Finance%20in%20the%20EU.pdf