Fintech Daily Digest

The U.S. House of Representatives could not gather enough support to override President Joe Biden's veto of a resolution affecting a Securities and Exchange Commission (SEC) rule on banks recording cryptocurrency held in custody for customers as a liability on their balance sheets. In a July 11 vote, 228 House members voted to override President Biden's veto of H.J.Res. 109, overturning SEC Staff Accounting Bulletin (SAB) No. 121 - 60 votes short of the two-thirds majority required. However, Rep. Maxine Waters (D-Calif.) said the SEC has been negotiating with banking industry representatives about "targeted modifications" to the policy and "may be close to reaching an agreement."

The Bank of Canada (BOC) published a paper that describes the ecology of automated market makers (AMMs) used for the pricing and trading of crypto assets within decentralized finance (DeFi). It uses blockchain data to identify trends in user adoption and trading volumes of AMMs. Given the range of AMMs available and the diversity of their designs, the paper performs case studies on four platforms-Uniswap, Curve, Sushiswap and Balancer-to represent the AMM market. It describes the designs of these four AMMs in terms of their products or services, governance, incentives for participation and risks. Finally, the paper describes the characteristics of AMMs that require considerations with respect to the application of a regulatory framework to AMMs.

Taiwan's Central Bank of the Republic of China (CBRC) reportedly may start testing a CBDC prototype in collaboration with the Ministry of Digital Affairs "digital voucher" system at the end of 2024 or early 2025. The Taiwanese government has previously issued stimulus vouchers to boost consumption. In the planned pilot, the Ministry would oversee voucher distribution, while the central bank would manage the subsequent payment and settlement operations after users spend the digital vouchers from their wallets. A local media source said that the digital voucher system could commence testing in August and go live in October. The CBDC prototype would not employ blockchain or smart contracts.

The Bank of Canada (BOC) published a paper that argues that there is now and will continue to be a fundamental need for a relevant retail public money (cash or central bank digital currency (CBDC)) as part of a well-functioning monetary system in which public and private money coexist and complement each other while trading at par, allowing money to move back and forth safely and efficiently. The paper posits that increasing demand for digital payments and the declining use of cash could lead to a loss of the uniformity of money, adoption of alternative units of account and exclusion of some segments of the population. This could lead to frictions and potential abuse of market power by private money providers that could reduce the efficiency of the economy. Also, to perform its interlinking function, retail public money needs to be a viable payment option and a practical mechanism to transfer between private forms of money. The paper argues that a properly designed CBDC would help fill the gap and maintain the relevance of a retail public money in the economy.

Martijn Siebrand of ABN AMRO made the case for using public blockchain for tokenization. He was talking as part of a Tokeny webinar, where Tokeny provides a solution that layers permissions and compliance for public blockchain tokens using smart contracts. ABN AMRO has run various trials on private and public blockchain networks, and chose the latter. It started with a project involving a secondary trade of the European Investment Bank's first digital bond on Ethereum. The second initiative was a €450,000 bond issuance for APOC Aviation using the Stellar blockchain. Late last year it worked with real estate firm Vestada on a €5 million green bond issuance on the Polygon blockchain. Meanwhile, Tokeny's Greg Cignarella described the appeal of public blockchains as a shared infrastructure.

The challenges faced by stablecoins are not entirely new - a deep dive into 334 historical currency pegs - when a country's central bank or government fixes the exchange rate for its currency - since 1800 reveals valuable lessons. Our analysis of this unique dataset covering more than 300 currency pegs since 1800 found that only 14% of currency pegs survived, with the median lifespan of failed or discontinued pegs ranging from 8-10 years. Among the remaining 51%, 30% were stopped, 6% joined the euro system and only 14% survived. Successful pegs were more often found in smaller, autocratic nations or oil-exporting economies with robust financial backing.

"This article discusses the rationale for the Eurosystem exploring central bank money settlement of transactions registered on DLT platforms, the results of its analysis so far and the envisaged next steps. Section 2 provides background on the role of central bank money in the settlement of wholesale financial transactions. Section 3 discusses market developments regarding the use of new technologies, such as DLT, for wholesale financial transactions. Section 4 discusses the implications of a potential market uptake of DLT for the Eurosystem's wholesale central bank money settlement infrastructures. Section 5 outlines the Eurosystem's plans to further explore how wholesale financial transactions recorded on DLT platforms could be settled in central bank money."

"We present a survey in which delve into blockchain consensus algorithms and conduct a comparative analysis of all the consensus algorithms to provide information about each protocol's advantages and drawbacks. This survey starts with the standard proof-of-work consensus protocol applied in bitcoin cryptocurrency and its limitations on the ground of the following parameters: throughput (transactions per second), latency, forks, fault tolerance, double spending attacks, and power consumption. The rest of the consensus algorithms in this paper have been systematically covered to address the limitations of proof-of-work. This paper also covered Raft and PBFT consensus algorithms suitable for permissioned networks. Although the PBFT consensus protocol has a high throughput and a low latency, it has limited node scalability. The PBFT has a low byzantine fault tolerant rate."

The Bank of Canada (BOC) published a paper that presents empirical findings regarding the adoption of mobile payments and digital wallets, based on a survey of Canadian adult consumers. It found that five out of six use a smartphone regularly, but they have not started to use mobile payments at the same rate as other payment innovations such as contactless cards. This is possibly because current mobile payment technology may not justify the costs of switching for consumers. However, according to the empirical evidence, providing access to payments with features similar to mobile payments to those without a mobile phone would result in usage rates exceeding the current use among mobile phone owners. Therefore, people who are unable to acquire or choose not to own a mobile device might have unmet payment needs.

The Bank of Israel (BOI) remains committed to plans for a digital shekel currency to improve Israel's payments system and foster innovation, but is unlikely to launch one ahead of other advanced economies, according to Deputy Governor Andrew Abir. He wants an eventual central bank digital currency (CBDC) to pay interest to create competition with bank deposits and provide an incentive for the public to hold it. It will operate in a two-tier model, with a wide range of participants providing services on the digital shekel platform, including banks, plus other payment companies, fintech or Bigtech companies, consumer clubs, and retail entities. Participants will support regular payment use cases, plus advanced and innovative use cases. https://www.boi.org.il/en/communication-and-publications/speeches-and-presentations/9-7-2024en/

Visa published a report on its tokenized deposit trial with HSBC and Hang Seng Bank, which involved (i) settling high value real estate transaction and (ii) settling Visa card payments. In Hong Kong there are restrictions on faster payment amounts, so the real estate transaction supported a high value instant payment with tokenized deposits. With tokenized deposits, when a payee transfers money to a recipient, the sending bank burns the tokens and the recipient bank mints them so they appear in the recipient's wallet. Instant settlement is facilitated by wholesale CBDC, with the token and CBDC exchanges happening simultaneously, so there's no settlement risk. https://usa.visa.com/content/dam/VCOM/regional/na/us/Solutions/documents/e-hkd-and-the-future-of-global-money-movement.pdf?linkId=492498536

Sveriges Riksbank published a paper that analyses central bank digital currency (CBDC) electricity consumption compared to existing retail payment services. Findings indicate that the energy use per transaction of an e-krona is comparable to that of card payments. However, there are significant differences depending on whether the design of the infrastructure for the e-krona is centralized or decentralized, where a centralized solution tend to be less energy consuming than a decentralized solution. Algorand's proof-of-stake public-permissioned network was chosen to represent the decentralized platform, and Hedera's private-permissioned network the centralized platform, and the transactions volumes were assumed to be similar to that of cash-based transactions.

The President of the Central Bank of the Republic of China (CBRC), Yang Chin-long, said that developing a central bank digital currency (CBDC) is not a competition and that the central bank is focused on steady progress over speed. Yang said the central bank is conducting experiments in three scenarios to enhance domestic payment efficiency and innovation, retail and wholesale CBDC and the application of tokenization technology to digitally transform wholesale CBDC and commercial bank currency, supporting various asset tokens. The CBRC is also conducting proofs-of-concept and collaborating with participating banks to build a common platform for tokenization. https://www.cbc.gov.tw/tw/cp-302-170834-8653d-1.html

Partior completed a proof of concept for FX payment versus payment (PvP) settlement using its blockchain network, with JP Morgan, DBS Bank and Mizuho. The trial showcased the effectiveness of Partior's FX PvP solution in eliminating FX settlement risk across both emerging market and advanced economy currencies, and same-day-value trades, with 24x7 real-time and atomic settlement. It also highlighted the solution's capability to provide just-in-time liquidity across these currencies as well as real-time visibility and status throughout the transaction life cycles for participants.

The Monetary Authority of Singapore (MAS) published a white paper on the first phase of its Global Layer One (GL1) tokenization initiative. GL1 is envisaged as a public permissioned distributed ledger technology (DLT) network developed by regulated institutions for use by the financial industry across jurisdictions to deploy inherently interoperable digital asset applications, governed by common standards and technology for assets, smart contracts, and digital identities. Financial institutions will be able to develop, deploy and use applications for financial industry use cases along the value chain, such as issuance, distribution, trading and settlement, custody, asset servicing, and payments. The whitepaper details the design principles, objectives, considerations and potential uses of GL1. GL1 plans to expand collaboration with more policymakers, central banks, regulators, international standards setting bodies and financial institutions as work on GL1 progresses.

The Digital Euro Association (DEA) published a paper that dissects the Markets in Crypto-Assets Regulation (MiCAR) and its transformative impact on the stablecoin landscape. It explores the diverse regulatory approaches to stablecoins across major jurisdictions and how MiCAR might serve as a model for global regulation. The paper discusses the potential market opportunities MiCAR offers for stablecoin issuers, including enhanced consumer trust, clearer regulatory guidance, and increased access to the European market. Also, it covers the significant challenges stablecoin issuers face under MiCAR, from stringent compliance requirements to operational and technological strains, and how these hurdles might impact smaller issuers and market dynamics.

According to a paper by Leonidas Zelmanovitz and Bruno Meyerhof Salama, retail central bank digital currency (CBDC) can be considered a form of "monetary devolution," that shifts the power, at least in part, from commercial banks to central banks. They discuss the institutional incentives of digital currencies in general and monetary devolution in the United States in particular. Next they outline an alternative that incorporates the technological edge provided by CBDCs. This alternative would be the creation of wholesale CBDCs to serve as the monetary base for settling retail payments with stablecoins. Designed as such, CBDCs could preserve the current balance between private and public money.

The Basel Committee approved a set of changes to the crypto-asset standard that was first published in December 2022. However, the standard will only be published later this month. It also finalized the set of tables and templates for banks to use in crypto-asset disclosures. https://www.bis.org/bcbs/publ/d567.htm

Germany reinsurer Hannover Re has collaborated with Schroders Capital on a pilot tokenization project, designed to enhance the way insurance-linked securities are invested and managed. On an internal-only basis, Schroders successfully enabled reinsurance contracts to be tokenized and traded on a public blockchain platform using smart contracts. This allowed a number of time-consuming processes to be automated. For example, by integrating key catastrophe insurance data sources into the smart contracts payments to appropriate recipients could be automatically triggered if qualifying natural disaster events occurred. [Source: Artemis.bm]

Giesecke+Devrient (G+D) has unveiled its Filia Unplugged offline payment solution that can be integrated into existing digital payment platforms, including tokenized deposit systems, instant payment systems, or mobile money services. It enables use cases such as peer-to-peer payments (P2P) or payment-to-business (P2B) payments. The solution stores monetary tokens on a hardware wallet (e.g. the SIM card of a smartphone) and requires only two wallets to operate, which can then be used without an online connection, for example via near field communication (NFC).