Fintech Daily Digest

The Bank for International Settlements (BIS) published a paper that assesses the evolving regulatory landscape for issuers of single fiat-pegged stablecoins. It compares regulatory frameworks issued by 11 authorities in seven jurisdictions to identify emerging trends and commonalities in their respective frameworks. It finds that many regulatory approaches have similar key requirements, but there are relevant differences in regulatory regimes. For example, in-scope stablecoin definitions vary significantly across regulations, and there are notable differences in the specifics of the regulatory treatment of reserves, and in relation to segregation and custody.

The Reserve Bank of Australia (RBA) published a paper that explores the merits of introducing a retail central bank digital currency (CBDC) in Australia, focusing on the extent to which consumers would value having access to a digital form of money that is even safer and potentially more private than commercial bank deposits. The results suggest that the average consumer attaches no value to the added safety of a CBDC. This is consistent with bank deposits in Australia already being perceived as a safe form of money, and physical cash issued by the RBA continuing to be available as an alternative option. Privacy settings of a CBDC, which can take various forms, look more consequential for the CBDC value proposition. However, no clear relationship was found between safety or privacy valuations and the degree of consumers' cash use.

The Kansas City Fed published an article by Franklin Noll that analyzes the underwhelming adoption of retail CBDC in the three Caribbean jurisdictions where they have been launched (Bahamas and Jamaica) or are being piloted (Eastern Caribbean Currency Union). It concludes that, to spur adoption it needs to add value relative to cash, be widely accepted, readily accessed, and easily used. Also, the new platform may need to be integrated into existing payments systems; into ways that consumers, merchants, and banks do business; and, ultimately, into people's lives.

The European Securities and Markets Authority (ESMA) published an analysis of crypto-asset market structures, secondary trading and their relevance for the European Union. It finds that crypto-asset market capitalizations and trading volumes are significantly concentrated in a few assets, with a high reliance on the US dollar and the South Korean won as market on- and off-ramps. Only around 20% to 30% of transactions involve fiat currencies and most transactions occur within the system itself. Also, trading volumes are highly concentrated in a few crypto exchanges, with the largest exchange (Binance) accounting for almost half of global trading volumes.

The Atlantic Council published an updated version of their "Standards And Interoperability: The Future Of The Global Financial System" white paper calling for calling for global interoperability standards around central bank digital currency (CBDC). It sets some common definitions and understanding of the current state of international standards for those seeking to understand the current state of international standards and existing gaps and areas for improvement. It also notes that, standards ensuring consistency and seamless functionality are not static; they must be flexible enough to accommodate advancements in digital currency technology, shifts in economic priorities, and changing societal perspectives on digital assets. https://digitaldollarproject.org/standards-and-interoperability-the-future-of-the-global-financial-system/

The Journal of Financial Regulation (JoFR) published a paper that offers a framework to assess the factual decentralization of blockchain-based decentralized finance (DeFi) financial infrastructures, which is crucial for regulatory assessments. It explores various potential sources of centralized control, either endogenous or through inherited dependencies on other projects ("centralization vectors"). It finds that many DeFi projects are subject to such vectors that are likely critical, and taking them into account substantially reduces the number of DeFi projects that are genuinely decentralized. The paper argues that if a project has significant centralization vectors it can and likely should be regulated. On the other hand, for truly decentralized projects, the regulatory focus should remain on the on- / off-ramps to / from the spheres of on-chain centralized finance (CeFi) and (traditional) CeFi.

Hong Kong Monetary Authority (HKMA) CEO Eddie Yue remains skeptical about the benefits of a retail central bank digital currency (CBDC). H started by listing some of the potential benefits, including serving as a fundamental layer to facilitate interoperability and interlinking between various future digital economy participants. Also, it could act as a bridge between different types of privately-issued digital money, and ensure all private money to be exchangeable with a public money on demand and at par. He also envisioned that a retail CBDC could be a potential "backbone" and anchor, bridging a legal tender and digital assets, offering price stability and confidence needed to empower more innovations, and developing a vibrant sector and ecosystem for digital assets in Hong Kong. Nevertheless, Mr. Yue said that more research is needed on whether its benefits outweigh the risks, particularly "given the generally efficient and competitive retail payment ecosystem in Hong Kong" [and the HKMA] will continue to take a use-case driven approach in thinking about whether and when to introduce a retail CBDC." https://www.hkma.gov.hk/eng/news-and-media/speeches/2024/04/20240411-1/

"Most studies on central bank digital currencies focus on the effects after they become well established. This column analyses the macroeconomic effects in the transition to the new equilibrium. Using a two-country model with financial frictions, it shows that, under plausible assumptions for demand for central bank digital currency, the transition is characterised by volatility in the digital currency, cash, and deposits, leading to volatility in loan rates, investment, and consumption. Binding caps on holdings of the digital currency during the transition period are shown to be most effective in reducing disintermediation and output losses and in minimising international spillovers."

The European Central Bank (ECB) published a slew of PowerPoint presentations from its two parallel central bank digital currency (CBDC) workstreams (wholesale and retail).

The Bank for International Settlements (BIS) published its vision for a "Finternet" of multiple financial ecosystems interconnected with each other, much like the internet. The envisioned system leverages tokenization and unified ledgers, underpinned by a robust economic and regulatory framework, to dramatically expand the range and quality of financial services. The paper provides a blueprint for how key technical characteristics like interoperability, verifiability, programmability, immutability, finality, evolvability, modularity, scalability, security and privacy can be incorporated, and how varied governance norms can be embedded.

UK Finance announced work on a new UK Regulated Liability Network (RLN) experimentation phase with eleven of its members. The UK RLN is envisaged as a common "platform for innovation" across multiple forms of money, including existing commercial bank deposits and a shared ledger for tokenized commercial bank deposits. It will focus on three use cases; payment-upon-delivery for a physical product, the process of buying a home, and digital bond settlement. The experimentation phase will run until summer 2024 and will cover customer and business benefits, technical feasibility via proofs of concept in a technology sandbox, and the legal framework.

Andrew Abir, Deputy Governor of the Bank of Israel (BOI), floated the idea of a remunerated digital shekel, as a way to push banks to up their games. "We could consider that the digital shekel, which will be built to be able to pay interest directly on the public's holdings, would actually do that. Of course, we will need to think about this carefully - for example, by setting it at a lower level than the Bank of Israel policy interest rate, and/or by limiting the types of users who will be eligible for it and the maximum amount on which interest would be paid."

The World Economic Forum (WEF) published a report that explores the potential of wholesale central bank digital currency (CBDC) to unlock new economic models and integration points. Four areas of differentiated value for are highlighted. First they can realize a global settlement window by harmonizing foreign exchange (FX) and securities markets settlement times to overcome operational hour disparities among key trading corridors. Second, they can expand payment-versus-payment arrangements through cost-effective solutions that can support a diversity of currencies to enhance currency liquidity. Third, they can mutualize data across parties by securely transmitting settlement data across parties and jurisdictions to support automation, reduce settlement risk, and enhance trade and post-trade activities. Lastly, they tokenize credit risk-free settlement media for settling tokenized securities and supporting emerging tokenized payment instruments.

The Reserve Bank of New Zealand (RBNZ) launched its second retail central bank digital currency (CBDC) consultation (the first one was in 2021). Based on feedback and preparation of a business case, a decision will be made on whether to proceed to a "preparation" phase. The consultation document advocates for "digital cash" accessible to everyone, including those that don't have a bank account, and should be usable when the power is out or the internet is down, and work via physical cards, and on devices like phones and or watches. https://consultations.rbnz.govt.nz/money-and-cash/digital-cash-in-new-zealand/

The U.S. Federal Reserve published a paper that examines the financial stability risks in times of stress associated with central bank digital currency (CBDC) under different design options. The analysis is based on lessons derived from historical case studies of bank runs as well as on an analytical framework that allows for the characterization of the mechanisms through which a CBDC can affect financial stability. It then discusses an extensive array of policy tools that can be employed to mitigate these risks.

The Deutsche Bundesbank will work with the Massachusetts Institute of Technology's Digital Currency Initiative (MIT DCI) to investigate pivotal CBDC design questions, such as the implementation of data protection and privacy. Deutsche Bundesbank President Dr. Joachim Nagel said that the Eurosystem would not have access to digital euro users' personal information, and that consumers should have more control over their personal data. https://www.bundesbank.de/en/press/speeches/digital-euro-vision-advances-and-challenges-929800

The Bank of Thailand (BOT) published an English version of its update on its retail central bank digital currency (CBDC) technical testing. The original version was published in late March 2024 in Thai and, because Google Translate was returning gibberish, I wasn't able to ascertain whether the latest work was a pilot or proof of concept (POC). However, according to the new document, it is clearly a proof of concept because the 4,000 individual users that participated were employees of the BOT and the three intermediaries that took part. In any case, the POC successfully demonstrated the potential of the technology behind the retail CBDC system, but the BOT said it has no plans to launch one and will use the technology design to further develop a more efficient payment system.

The Hong Kong Monetary Authority (HKMA) provided guidance to banks on their use of distributed ledger technology (DLT). While banks will be able to use public blockchains in some cases, they should not be the first choice, and in all situations they must take steps to compensate for heightened risks. For example, a solution could use zero knowledge proofs to prevent access to sensitive data, or the application can store the sensitive elements off-chain. Banks also need to provide contingency planning for situations such as forks, 51% attacks, network congestion or if the network goes offline temporarily or permanently. https://www.hkma.gov.hk/media/eng/doc/key-information/guidelines-and-circular/2024/20240416e1.pdf

"Drawing on industry expertise and academic research, the whitepaper identifies a range of potential use cases for genAI in the derivatives market, including document creation, market insight and risk profiling. It also explores regulatory issues in key jurisdictions and addresses the challenges and risks associated with the use of genAI. The paper concludes with a set of recommendations for stakeholders. These include investing in talent development, fostering collaboration and knowledge sharing with technology providers, prioritizing ethical AI principles and engaging with policymakers to promote an appropriate regulatory framework."

"We propose a new theory of stablecoins based on common knowledge. We contrast this with the 'better money' theory of stablecoins, which emphasises marginal improvements over the standard origin of money theory as: medium of exchange, unit of account, store of value."