Fintech Daily Digest

The U.S. Consumer Financial Protection Bureau (CFPB) published a report on consumers' use of "cash back" services. While people use various means of getting cash, one common method is to get "cash back" at a store when making a purchase with a debit or prepaid card. This option may be particularly important in banking deserts and in areas where banks and ATM operators charge significant fees. Retailers are essentially filling a void in access to cash, which has historically been supplied by banks and credit unions in an affordable way, and some retailers charge a fee for these transactions.

Moody's Ratings published a report on recent advances in quantum computing that will threaten encryption techniques used today. Data encryption standards able to withstand the power of quantum computers have been unveiled by the US National Institute of Standards and Technology (NIST) that will protect intellectual property and classified government documents from computers that leverage the properties of quantum mechanics to perform calculations exponentially faster than classical computers. However, the transition to post-quantum cryptography (PQC) will be long and costly.

The U.S. Federal Reserve Board (FRB) published an assessment of the offline digital payment payment services and analyzes their potential to mitigate internet outage risks and bolster digital payment resilience. It finds that many services branded as offline payment solutions are more accurately classified as hybrid solutions because they ultimately require internet access for clearing and settlement. Truly offline digital payment systems that exchange digital bearer instruments for instant, in-person settlement are still in early development stages. The note lays out a variety of risks associated with offline payment models, including risks related to double spending, security, user privacy, and merchant liability. It concludes that certain offline payment models are promising, but more research and wider uptake is needed for the technology to drive incremental gains in payment system resilience and reliability.

PLoS ONE published a paper that polled 2,001 American adults in 2022 to examine the associations between cryptocurrency ownership and individual level political, psychological, and social characteristics. Analyses revealed that 30% of the sample have owned some form of cryptocurrency and that these individuals exhibit a diversity of political allegiances and identities. We also found that crypto ownership was associated with belief in conspiracy theories, "dark" personality characteristics (e.g., the "Dark Tetrad" of narcissism, Machiavellianism, psychopathy, and sadism), and more frequent use of alternative and fringe social media platforms. The variables that most strongly predict cryptocurrency ownership are being male, relying on alternative/fringe social media as one's primary news source, argumentativeness, and an aversion to authoritarianism.

The Hong Kong Monetary Authority (HKMA) launched the Project Ensemble Sandbox to support institutional experimentation with tokenization. Four main themes were chosen for the initial round of experimentation, fixed income and investment funds, liquidity management, green and sustainable finance, and trade and supply chain finance. Also, an experimental wholesale central bank digital currency (CBDC) will enable interbank settlement between the tokenized deposits of banks. The HKMA will also explore collaborating with the BIS Innovation Hub Hong Kong Centre across one or more themes.

The European Central Bank (ECB) is hosting a virtual digital euro design focus session on September 9, 2024. The "digital euro design for the European payments market" is a technical forum aimed at payment service providers and professionals from the financial sector with an interest in the design of the digital euro and its impact on the European payments market. The entire focus session will be live streamed, recorded and published on the ECB's website shortly after the event, together with the slides presented.

The Reserve Bank of Malawi is looking to engage a consultant to further its central bank digital currency (CBDC) proof of concept work. The initiative aims at exploring the feasibility, benefits and challenges associated with the implementation of a CBDC in Malawi.

The Basel Committee on Banking Supervision (BCBS) published a working paper on the various risks faced by banks that transact on permissionless blockchains or similar distributed ledger technologies (DLTs). Certain risks stem from the blockchain's reliance on unknown or third parties, which makes it difficult for banks to conduct due diligence and oversight. These risks require new risk management strategies and safeguards. The paper finds that current practices for mitigating these risks remain in various stages of development and have not been tested under stress.

The World Federation of Exchanges (WFE) published good practice recommendations for crypto-asset custody providers. These include segregating client assets to ensure they are protected in the event of a company's bankruptcy, ensuring client assets remain bankruptcy-remote, having adequate insurance and/or surety bonds and disclose these policies in clear understandable terms, and seeking independent audits from reputable and credible auditors to provide an assessment of financial statements, process and controls.

The International Monetary Fund (IMF) published a technical assistance report that helped the Banco Central de la República Dominicana (BCRD) to assess a CBDC's potential macro-financial, legal, and financial integrity implications, and shared lessons from other countries' CBDC and digital money projects, technology considerations, practices for stakeholder engagement, and how CBDC can increase financial inclusion, among others. The mission advised the BCRD to continue the exploration of macro-financial implications of a CBDC, conduct the legal framework revisions should a positive decision of CBDC be taken, assess risks to financial integrity once a firmer design choice is made, and build up technology knowledge and capacity meanwhile.

The IMF published a paper on retail central bank digital currency (CBDC) ecosystem cybersecurity considerations. It is based on experiences from live CBDCs and informed by experiments conducted by central banks and international institutions for domestic use. It also draws from standard-setting body cybersecurity and resilience frameworks. It introduces digital risks and their impact on an interconnected CBDC ecosystem. It then describes CBDC attributes and examines pros and cons of commonly considered design options, and suggests potential mitigations. It concludes by delving into best practices for developing a cyber-resilient CBDC ecosystem.

LVGA are a local stablecoin. They can be purchased within the MyLugano app and collected through the cashback while shopping at local affiliated shops. Unlike other cryptocurrencies such as Bitcoin LVGA can be used only in Lugano and once obtained they cannot be exchanged or traded for other currencies. LVGA are not subject to fluctuation being "pegged" to the Swiss franc. Thus, they have no speculative intent but exists solely and exclusively as a form of incentive for local spending in Lugano.

German government-owned Bank aus Verantwortung (KfW) has issued €50 million of digital bearer bonds, settled on a delivery versus payment (DVP) basis using the Bundesbank's "trigger solution" in which a smart contract triggers a payment in central bank money by linking to the TARGET2 real-time gross settlement (RTGS) system. The pilot issuance was part of the European Central Bank's (ECB's) wholesale distributed ledger technology (DLT) settlement trials using central bank money. The bonds were issued on the Polygon blockchain. Redemption will take place on 28 November before the ECB's trials end.

The IMF published a Fintech Note that offers a framework to help countries navigate, as well as tools to help them manage, the trade-offs between central bank digital currency (CBDC) data use and privacy protection. It addresses retail CBDC, as data access and privacy-preserving considerations in a wholesale environment are similar to those of the traditional real-time gross settlement (RTGS) systems. It emphasizes the role of institutional arrangements, data collection, access and storage policies, design choices, and technological solutions. At a given level of preference for privacy, central banks can facilitate better use of CBDC data through robust transparency and accountability arrangements, sound policies, and judicious adoption of privacy-by-design approaches including the use of privacy-enhancing technologies.

The Bank of Japan (BOJ) published a survey of global deposit tokenization projects. With the emergence of stablecoins, these initiatives seem to seek an extension of functionality in payment and settlement systems by applying new technologies, such as distributed ledger technology (DLT), to bank deposits as a traditional means of payment. The main reason such initiatives prefer leveraging deposit money is said to be its affinity with the two-tier monetary system and possibly with existing laws or regulations. However, there remain some issues that require further clarification on how payments with tokenized deposits are categorized in the private law system, and how smart contracts provide implications for non-functional requirements and legal certainty.

The Asian Development Bank (ADB) published a brief that shows how various jurisdictions and national standard-setting organizations are drawing up their own guidelines to define and regulate digital and crypto-assets. It highlights the comprehensive and tech-agnostic principles devised by the International Institute for the Unification of Private Law (UNIDROIT), explains how they treat existing and emerging digital assets, and why they could make transactions safer and more efficient.

The Qatar Financial Centre (QFC) published the new QFC Digital Assets Framework 2024 which is in line with the Qatar Central Bank's Third Financial Sector Strategy. It establishes the legal and regulatory foundation for digital assets, including the process of tokenization, legal recognition of property rights in tokens and their underlying assets, custody arrangements, transfer, and exchange. The framework also provides for the legal recognition of smart contracts.

The Bank of Russia is expanding its central bank digital currency (CBDC) pilot programme. The new phase, which started on September 1, 2024, will involve up to 9,000 people and 1,200 companies, versus the 600 people and 22 firms that took part in the previous stage. The latest phase will enable dynamic QR code payments and business-to-business transfers. Digital ruble transactions will be available to the customers of the same 12 banks that have been participating in the pilot testing since its start in August 2023, and more banks will be added.

Ripple will add smart contracts to the XRP Ledger (XRPL) developer ecosystem and XRPL mainnet, although it's still in its research phase and the firm did not provide a definite time frame for deployment. It also invited programmers familiar with Ethereum virtual machine (EVM) languages to explore possibilities on its sidechain. Ripple also said the sidechain was created for developers using Ethereum-based smart contracts. This gives a familiar environment for deploying DApps, allowing them to use Solidity, a programming language used to build smart contracts on Ethereum. https://ripple.com/insights/expanding-programmability-on-the-xrp-ledger/

The U.S. National Bureau of Economic Research (NBER) published a paper that analyzes the effect of a major central bank digital currency (CBDC) - the digital euro - on the payment industry, finding "remarkably" heterogeneous effects. Stock prices of U.S. payment firms decrease, while stock prices of European payment firms increase in response to positive announcements on the digital euro. Bank stocks do not react. The results are consistent with the notion that the development of the digital euro is driven by a desire for strategic autonomy in payments, pointing to a novel geopolitical dimension of CBDCs.