Fintech Daily Digest

The European Central Bank (ECB) is inviting experts in offline payments to participate in conversations to explore options for an offline digital euro as part of its retail central bank digital currency (CBDC) work. It wants to understand the marketplace for using embedded secure elements (eSEs) and embedded SIMs (eSIMs) in user devices. Secure elements are standard-compliant chips that ensure safe data storage embedded in most smartphones and many wearables, typically for payments. eSIMs facilitate user network switches via software updates, instead of swapping physical SIM cards. Both could play roles in offline payment functionality. The experts are to be drawn from original equipment manufacturers (OEMs), mobile network operators (MNOs) and specialized trusted service managers, but none that are participating in any of the ECB public tenders on digital euro components. https://www.ecb.europa.eu/press/intro/news/html/ecb.mipnews240801.en.html

The European Commission has made commitments offered by Apple legally binding under EU antitrust rules. The commitments address the Commission's competition concerns relating to Apple's refusal to grant rivals access to a standard technology used for contactless payments with iPhones in stores ('Near-Field-Communication (NFC)' or 'tap and go').

Cash Bill Pay is a way to pay bills (like utilities, toll charges, etc.) in cash at a local retailer. With Walk-Up, a customer goes to a retailer's customer service desk with their biller's name and their account number. This info is entered into some software, the customer hands over cash to pay the bill, and gets a receipt as proof of payment. CheckFreePay, Western Union, and MoneyGram are some of the Walk-Up Cash Bill Pay providers. With Barcode, a customer presents a barcode either on a document or on a mobile phone to a retailer's cashier who scans it with a POS device. This barcode provides the needed information for the transaction. The customer hands over cash to pay the bill and gets a receipt as proof of payment. VanillaDirect, PayNearMe, KUBRA EZ-PAY are some of the Barcode Cash Bill Pay providers. The importance of Cash Bill Pay is that it provides a bridge for cash-preferred customers to make digital payments. It allows them to use cash and have face to face transactions. The usual fee charged the customer per transaction in the US is between $1 and $4. [Franklin Noll on LinkedIn]

The Bahamas' Parliament passed the Digital Assets and Registered Exchanges Act, 2024 (DARE 2024) 1.5 years after the collapse of Bahamas-headquartered FTX. It will tighten requirements for virtual asset service providers (VASPs) and put in place a full licensing regime. VASPs will be required to have a trade surveillance system in place, and insider trading, unlawful disclosure of information and market manipulation is prohibited. https://laws.bahamas.gov.bs/cms/images/LEGISLATION/BILLS/2024/2024-0019/2024-0019.pdf

The Birri Gubba Nation, an Australian indigenous sovereign nation, has signed a memorandum of understanding (MOU) with Sovereign Wallet, to establish a comprehensive national digital identity system to serve as account addresses for sovereign digital currency. Sovereign Wallet is a blockchain technology company that developed the MetaMUI CBDC Cloud Service for creating digital currencies, which the Yidinji Nation, another Australian indigenous nation, used to launch its Yidindji Dollar (SYD) in 2022. The Birri Gubba Nation national identity and digital currency systems are set to go live in September 2024. If it is structured like the Yidindji Dollar, it will be pegged to the Australian dollar (AUD), although the mechanism hasn't been revealed.

The BIS and the Bank of England have have developed a prototype data analytics pipeline which includes data collection, storage and analysis, that can provide supervisors with near real-time data about stablecoins' liabilities and their backing assets. Pyxtrial can provide insight into whether the backing assets exceed their liabilities at all times, and enhance the efficiency and responsiveness of the monitoring process, which helps supervisors to respond faster to potential risks.

The Latin American (LATAM) Journal of Central Banking published a paper on central bank digital currencies (CBDCs) in Latin America and the Caribbean, by staff from the Bank for International Settlements (BIS), Central Bank of Colombia, and American Enterprise Institute (AEI). The paper draws heavily from the Committee on Payments and Infrastructures (CPMI) annual survey of central banks regarding interest in, and motivations for, exploring CBDC in their jurisdiction.

Russia's State Duma passed a bill that will allow businesses to use crypto-assets in international trade, as part of efforts to skirt Western sanctions imposed after Russia's invasion of Ukraine, starting on September 1, 2024. The final step requires the approval of the Federation Council and the President's signature. Under the new law, the Bank of Russia will create an experimental infrastructure for cryptocurrency payments, details of which have yet to be announced. https://ria.ru/20240730/gosduma-1962953668.html?in=l

[March 7, 2024] Qatar Central Bank (QCB) launched its instant 24/7 payment service 'FAWRAN', in continuation of QCB's efforts to develop the infrastructure of payment systems and keep pace with the latest developments in the field of payment systems and electronic transfer of funds. FAWRAN also facilitates financial and commercial transactions between the bank accounts of individuals and companies. FAWRAN will enable the sender to verify the name of the beneficiary (addressee) before completing the transfer process, and ease of use through the banks' mobile phone applications, in addition to the use of alternative identifiers that are easier to identify the beneficiary such as (mobile phone number, alias) instead of the international account number (IBAN).

Qatar Central Bank (QCB) launched a "Request to Pay" option through Fawran instant payment service that was launched in March 2024. Request to Pay allows customers to send a payment request from the payee to the payer. The payer will then receive the request, including the payee's name, the required amount to be transferred and the option to accept or reject the request. In case of acceptance, the required amount will be transferred instantly to the payee's account. The participating banks are Doha Bank, Qatar Islamic Bank, Commercial Bank, Masraf Al Rayan and Qatar International Islamic Bank. https://x.com/QCBQATAR/status/1818149749276450924

The Reserve Bank of India (RBI) published its annual report on currency and Finance in which it reported that as of June 2024, 5 million users (versus 1.3 million a year earlier) and 0.4 million merchants (versus 0.3 million) were participating in e-Rupee CBDC retail pilot. https://rbi.org.in/Scripts/AnnualPublications.aspx?head=Report%20on%20Currency%20and%20Finance

Banca d'Italia published a paper on the FROSTed Byzantine Fault Tolerance (FBFT) protocol, an approach to DLT proof of authority (PoA) validation meant to strengthen the security of the ledger, its tolerance to faults or attacks, and the confidentiality of validators. It combines the practical byzantine fault tolerance (PBFT) algorithm with the flexible round-optimized Schnorr threshold (FROST) signature scheme. The resulting system is an alternative platform for a distributed, resilient transactional system. Operated by a set of trusted actors, distributed at geographic scale, it holds potential for mission-critical applications, such as wholesale and retail CBDC, and asset tokenization schemes.

The Bank of England (BOE) published a discussion paper on innovation in money and payments. While it covers payments across the board, it aims to gather feedback for planned wholesale central bank digital currency (CBDC) trials. These will include a synchronization (or "trigger") solution that settles transactions involving assets that are tokenized on distributed ledger technology (DLT) platforms using the real time gross settlement (RTGS) system. The BOE also wants to trial a digital securities transaction in which an end user makes a tokenized deposit payment. Finally, it will test interoperability with global initiatives like the Bank for International Settlements (BIS) Project Agorá for cross-border payments. Comments are due by October 31, 2024. https://www.bankofengland.co.uk/paper/2024/dp/the-boes-approach-to-innovation-in-money-and-payments

U.S. Presidential hopeful Donald Trump announced that if elected, he would create a strategic bitcoin reserve in the United States. "It will be the policy of my administration to keep 100 percent of all bitcoin the US government currently holds or acquires in the future … as a core of the strategic national bitcoin stockpile," he said. Right now, the U.S. government owns more than 210,000 bitcoin that were seized via illegal operations. Trump also pledged to create a framework for ensuring the safe expansion of stablecoins, and doubled down on his vow to scrap any effort to issue central bank digital currency (CBDC). He also defended the right to crypto-asset self custody and promised to fire Securities and Exchange Commission (SEC) Chair Gary Gensler.

The Swiss Financial Market Supervisory Authority (FINMA) published guidance on the issuance of stablecoins. It provides information on aspects of financial market law that arise in relation to stablecoin projects and the impact of such projects on the supervised institutions. The guidance also draws attention to the increased risks in the areas of money laundering, terrorist financing and the circumvention of sanctions. In particular, the identity of all persons holding the stablecoins must be adequately verified by the issuing institution or by appropriately supervised financial intermediaries. In other words anonymous transfers are prohibited.

Banco Central do Brasil (BCB) is looking to integrate artificial intelligence (AI) based apps into its Drex central bank digital currency (CBDC). Specifically, it plans to incorporate instant payment methods like Pix and leverage AI technologies similar to OpenAI's ChatGPT. Central bank President Roberto Campos Neto envisions a future where multiple banking apps are replaced by a single, comprehensive super app that aggregates financial data and uses AI to offer personalized financial services.

The Bank for International Settlements (BIS) published a paper on the economics of crypto exchange tokens, which are blockchain-based assets issued by crypto exchanges that may promise holders discounts on transaction fees and access to certain platform services. They are an important funding source for centralized crypto exchanges, and they have been at the core of some of the biggest disruptions in the crypto industry. The paper develops a tractable model for the exchange rates of crypto exchange tokens that incorporates user demand, investment demand, and commonly observed pledges by exchanges to buy back tokens. It derives closed-formed solutions for the valuation of exchange tokens and the time required to fulfill the pledge. Buyback pledges increase the amount of funding raised by selling tokens. However, the additional amount raised is always less than the discounted cost of the buyback pledge. Future price manipulation by investors can further increase the cost of the buyback pledge.

The European Central Bank (ECB) published a paper that explores the relationship between banks, and stablecoins and their issuers, focusing on the mechanical effects on banks' capital and liquidity ratios when issuing stablecoins or collecting deposits from stablecoin issuers. The analysis reveals that converting retail deposits into stablecoin issuers' deposits weakens a bank's liquidity coverage ratio (LCR), turning a retail deposit into a wholesale deposit, even when these funds are reinvested in high-quality liquid assets (HQLA). If a credit institution issues its own stablecoins, the impact on its LCR depends on whether it can identify the stablecoin holders; unknown holders weaken the LCR which could incentivize banks to issue stablecoins where they can continually identify the holders to benefit from more favorable liquidity treatment. The study also finds that when retail customers of bank A buy a stablecoin issued by a non-bank that keeps reserves at bank B, both banks could see an unexpected decline in their liquidity ratios, as bank A loses stable retail deposits and bank B gains volatile wholesale deposits.

The European Central Bank (ECB) published two documents discussed at the June 28, 2024 meeting of the European Retail Payments Board (ERPB) technical session of the digital euro. One was a summary of inputs on the methodology for calibrating holding limits, and the other was on the strategies for conducting euro user research and engaging with market participants (payment service providers and merchants). https://www.ecb.europa.eu/euro/digital_euro/timeline/profuse/shared/pdf/ecb.deprep240723_item4_feedback_holding_limit_factors.en.pdf https://www.ecb.europa.eu/euro/digital_euro/timeline/profuse/shared/pdf/ecb.deprep240723_item2_user_research_experimentation.en.pdf

The German Banking Industry Committee (GBIC) published the results of a proof of concept (POC) for its distributed ledger technology (DLT) based commercial bank money token (CBMT) project. CBMT is focused on serving large corporates, especially industrial companies, allowing them to hold tokens from multiple banks and to make P2P (B2B) transactions 24/7/365. Results confirmed that the CBMT is viable and offers considerable potential, enabling the realization of a variety of use cases across corporate functions. Results also showed that the CBMT works across a variety of DLT platforms, has the potential to scale and should present no barrier to integration into existing systems via application programming interfaces (APIs). https://die-dk.de/media/files/240716_DKBDI_position_CBMT_final.pdf