Fintech Daily Digest

The South African Reserve Bank (SARB) published its Digital Payments Roadmap, aimed at realizing the overarching goals and strategies of the National Payment System Framework and Strategy: Vision 2025, including the promotion of competition and innovation, cost-effectiveness, interoperability and financial inclusion. In the Roadmap, the SARB commits to further exploring the issuance of retail and wholesale central bank digital currency (CBDC) over a two-year timeline. The work will follow up on the work that started in May 2021 to investigate the feasibility, desirability and appropriateness of issuing retail CBDC, and on the SARB's wholesale CBDC proof of concept work that goes back to Project Khokha 1, completed in 2018.

The European Central Bank (ECB) published a paper that discusses the potential impact of retail CBDC introduction on monetary policy implementation if it leads to a decrease in commercial bank deposits. Should this happen, bank holdings of central bank reserve holdings might shrink. However, the paper argues that uncertainty as to the timing and extent of any conversions of deposits into CBDC might prompt banks to scale up their demand for central bank reserves in order to hold larger precautionary buffers. Consequently, central banks might need to adjust their reserve supply and other features of their monetary policy implementation. In any case, the paper suggests CBDC design features could mitigate the risk of negative consequences for monetary policy implementation.

The Inter-American Development Bank (IDB) provided an update on Project FuSSE (Fully Scalable Settlement Engine), a joint project with the Bank for International Settlements (BIS) Innovation Hub and Bank of Canada. It is an initiative that offers open-source technology among central banks to facilitate the implementation of payment systems and other settlement infrastructures to advance financial inclusion Latin America and the Caribbean. It will also provide technical assistance for regulatory design and institutional capacity improvement.

Tether launches USDT on TON Network, Telegram Wallet Tether's US dollar-pegged USDT and gold-pegged XAUT tokens have launched on The Open Network (TON), facilitating peer-to-peer (P2P) cross-border payments via Telegram's Wallet app among over 900 million global users. TON is a blockchain network that Telegram started to develop in 2018, but they open-sourced it in 2020 after the U.S. Securities and Exchange Commission (SEC) charged the firm with violating federal securities laws.

The Bank of Japan (BOJ) published a progress report on its central bank digital currency (CBDC) proof of concept (POC) work. It's available only in Japanese, so I'm leaning on Norbert Gehrke's excellent summary. The BOJ is building an account-type CBDC ledger that covers everything from user wallets/apps to the intermediary and central systems. In parallel, the BOJ has established a CBDC Forum with 64 private companies organized into five working group themes, with more planned. The BOJ aims to steadily advance CBDC discussions through POCs and the CBDC Forum, although no decision has been made yet on actual CBDC issuance. https://www.boj.or.jp/paym/digital/dig240422a.pdf

The Banque Centrale de Mauritanie is partnering with Giesecke+Devriant (G+D) to design and introduce a potential CBDC complementing the Ouguiya national currency. The aim of the joint project is to gain a clear understanding of how a digital Mauritanian Ouguiya could benefit society and the country's economy. G+D will support the central bank in defining the requirements for a national CBDC and deliver the technical solution for initial testing of defined uses cases.

The Brookings Institute published a paper by Timothy Massad, U.S. Commodity Futures Trading Commission (CFTC) , on how blockchain-based stablecoins could undermine the global financial system plumbing that has been exploited by U.S. authorities to protect national security interests (e.g., by implementing sanctions). He discusses various regulatory and legislative options, and finds them either insufficient or disrespecting reasonable privacy expectations. Mr. Massad suggests that, at minimum, stablecoin issuers should be required to engage in enhanced monitoring of blockchains for suspicious transactions and consider when the issuer must "freeze" stablecoins.

The Reserve Bank of Australia (RBA) published a report on the benefits, design choices and challenges associated with linking fast payment systems (FPSs) across countries. It finds that connecting FPSs has the potential to considerably improve the speed and transparency of cross-border payments, benefiting both end users and service providers. Crucial to realizing these benefits are well-designed governance, scheme rules and payments processing capabilities, which help to manage risk and ensure a seamless cross-border payments experience. However, establishing an interlinking arrangement poses challenges, including dealing with differences in legal and regulatory frameworks across participating jurisdictions and agreeing on governance arrangements and scheme rules

The Kyrgyz Bank Interagency Working Group (IWG) on Regulatory Impact Analysis (RIA) wrapped up its work on the implementation of a potential digital som. Their comprehensive analysis delved into ten Kyrgyz Republic legislative acts related to the introduction of the central bank digital currency (CBDC), proposing crucial amendments in the process. During a meeting of the Steering Committee on Digital Som, the IWG demonstrated a demo version of the digital som on the (blockchain) platform of one of the CBDC platform providers of CBDC. Going forward, the project team will continue further work on research, analysis of proposals, as well as negotiations with CBDC platform. https://www.linkedin.com/posts/altynbek-kamchybek-uulu-0883b927a_digitalsom-regulatoryimpactanalysis-economicdevelopment-activity-7188456348999712768-PDZw/

The European Central Bank (ECB) is opposed to Apple's proposed changes to the iPhone's near-field communication (NFC) at the core of Apple Pay. The ECB argues that by not providing third parties with full access to the secure element (SE) of its NFC technology, Apple Pay maintains an unfair advantage against third-party payment apps on iPhones. Because of these limitations, contactless payments made through third-party apps on iPhone would be less user-friendly and ultimately be slower than Apple's offering. Also, iPhones would be incompatible with the digital euro, because the current enabling legislation requires the ability to do peer-to-peer (P2P) and offline payments, the latter which requires access to the SE.

The U.S. Securities and Exchange Commission (SEC) has delayed giving a decision on spot Ethereum exchange-traded fund (ETF) proposals from both Grayscale Investments and Franklin Templeton. The regulator said it would need more time to review the proposals from the top fund managers.

The IMF published a paper on central bank digital currency (CBDC) developments in the Middle East and Central Asia (ME&CA) region. A survey of IMF country teams representing 31 ME&CA countries found that 19 are considering issuing or exploring CBDC, most of which are at the research stage, although a few are at the proof-of-concept (POC) stage (Bahrain, Georgia, Saudi Arabia, United Arab Emirates). Kazakhstan is most advanced in its CBDC journey, having initiated two digital tenge pilots. The region's fragile and conflict-affected states and low-income countries (LICs) have expressed limited interest. The paper also includes three country case studies (Jordan, Kazakhstan, and Libya).

The OECD published a paper that provides evidence of increased concentration of decentralized finance (DeFi) liquidity provision in decentralized exchanges (DEXs) and automated market makers (AMMs). A low trade count is observed in liquidity pools where DeFi liquidity provision is concentrated, with 20% of the pools of some of the DEXs examined accounting for more than 90% of the trading volume of these DEXs. Also, a small number of liquidity providers participating in the examined pools represent a significant part of the trading activity. This could exacerbate DeFi vulnerabilities, with possible impact on market functioning, price discovery, and competitive dynamics.

Custodia Bank will appeal the US District Court ruling in Wyoming that supported the decision of the Federal Reserve Bank of Kansas City to deny Custodia a master account. This move is part of Custodia's continued efforts to secure direct access to the Kansas City Fed's payment systems, which it deems crucial for the growth of its operations. The appeal marks the latest development in a prolonged legal battle that goes back to 2022. The On March 29, 2024 ruling highlighted the Fed's discretionary power in granting or denying master accounts, the judge stating that "Federal laws do not require the Federal Reserve to give every eligible institution a master account."

In February 2023, the Bank for International Settlements (BIS) Innovation Hub published its 2023 workplan that included Project Pyxtrial, aimed at building a stablecoins monitoring platform to ensure that the backing assets at least match the stablecoin issuance. That was the last I heard of it, but I just came across a request for quotation (RFQ) that was published in August 2023 for "visionary partners with outstanding experience and technological capabilities to join [the London Centre] to design and build prototypes of the data reporting pipeline. The RFQ was supposed to have closed in September 2023 and the work started in October.

IndusInd Bank successfully implemented the Reserve Bank of India's (RBI's) programmable central bank digital currency (CBDC) pilot. It was executed as an alternate form of CBDC wherein the bank can program the end use of funds being disbursed to farmers in lieu of generation of carbon credits. IndusInd Bank initiated the programmable CBDC disbursement to 50 farmers in Ratnagiri district of Maharashtra, which will expand to 1000 farmers. Phase 2 of the project will focus on Safai Karmacharis, aiming to increase their income by leveraging revenues generated from the collection, recycling, and repurposing of plastic waste.

Bank of Namibia (BON) launched its Instant Payment Project, with a targeted launch year of 2025. It will be focusing specifically on enhancing financial services in rural areas and the informal sector, thereby reducing cash dependency, and increasing transactional efficiency. Designed for inclusivity, the platform will be accessible on any device, including non-smartphones, ensuring that everyone can use it effortlessly. And according to Finextra, BON will partner with NPCI International Payments, the firm behind India's Unified payments Interface (UPI). https://www.finextra.com/newsarticle/44088/namibia-signs-on-for-indias-upi-tech

The Bank for International Settlements (BIS) published a paper that uses granular, transaction-level data from Aave, a leading player in the distributed finance (DeFi) lending market, to study investor motivations. The theoretical and empirical findings reveal that the search for yield predominantly drives liquidity provision in DeFi lending pools, whereas borrowing activity is mainly influenced by speculative and, to some extent, governance motives. Both retail- and large investors seek potential high returns through market movements and price speculation, however the latter engage in DeFi borrowing relatively more than the former also to influence protocol decisions and accrue more significant governance rights.

More than 90% of stablecoin transactions aren't coming from genuine users, according to VISA and Allium Labs. Their new metric strips out transactions initiated by bots and large-scale traders to isolate those made by real people. Out of about $2.2 trillion in total transactions in April 2024, just $149 billion originated from "organic" payments activity. https://visaonchainanalytics.com/

The National Bank of Rwanda (NBR) launched a public consultation on the potential issuance of central bank digital currency (CBDC). A detailed feasibility study, launched in 2023, formed the basis of its approach, that identified four "sweet spots" for a Rwandan CBDC: (i) increase resilience against possible network outages, power failures and natural disasters, (ii) improve innovation and competition, (iii) contribute to achieving the cashless economy national initiative over time, and (iv)develop faster, cheaper, more transparent, and more inclusive crossborder remittances. The consultative paper recommends a cautious iterative approach with multiple proofs of concepts and pilots.