Category Archives: CBDC

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CBDC Report Identifies Cross-Border Payment Practicalities

A joint research report conducted by three central banks has concluded that Central Bank Digital Currencies (CBDC) have the capacity to upgrade cross-border payments and settlements.

Hypothetical proposals

Titled Cross-Border Interbank Payments and Settlements: Emerging Opportunities for Digital transformation, the paper was collaboratively authored by the Bank of Canada (BOC), Bank of England (BoE) and the Monetary Authority of Singapore (MAS). With them, a number of experts from commercial banks “led by HSBC”.

Specifically, the research project the proposal for three possible models to address issues and achieve what it calls “future-state capabilities”; these are the desired outcomes which have been gathered from research into “challenges and root causes of issues associated with cross-border interbank payments and settlements”.

Appraising the limitations of technological innovations within this space, the report acknowledges present initiatives that are taking place that “go some way” to address obstacles. However, it describes these as “incremental changes” and in order for a long-term solution to be established, there “may need to be a more fundamental paradigm shift” which are “enabled by new technology platforms”.

A study from IBM and the Official Monetary and Financial Institutions Forum (OMFIF) recently revealed that central banks have been exploring and trialing CBDCs with “mixed results”.

W-CBDCs

There are two types of CBDCs; firstly the “retail CBDC” which is designed for public use, and secondly “wholesale CBDCs”, which are limited to financial institutions and markets.

The report offers two approaches based on legacy models with one referring to the collection of initiatives currently underway or in the making and a second which is based on the expansion of real-time gross settlement (RTGS) operators roles for cross-border settlements, eliminating intermediary banks.

Weighted approach

A third model comes with three nuanced variations and focuses on the utilization of wholesale central bank digital currencies (W-CBDCs) for this process.

The first of the W-CBDC models is one that can only be “transmitted and exchanged only within their home jurisdictions”. This would require commercial banks to open wallets across multiple central banks should they desire to hold a number of currencies. The second broadens the scope a little further by suggesting for a W-CBDC that can operate “beyond their home jurisdictions”. For commercial banks, this would entail adopting multiple wallets within their respective central banks, and would require “each central bank to support multiple CBDC tokens”.

Finally, the third variation is ideal yet ambitious, and suggests a universal W-CBDC, “backed by a basket of currencies and accepted by all participating jurisdictions”. Conclusively, the report found the first jurisdiction-specific model offered few benefits as they are simply tokenized versions of existing models.

The other models that do not limit the scale of the system are, however, solid options to reduce counterparty credit, settlement and payment risks; also broadening access to RTGS systems. That said, the report identifies all of the W-CBDCs models as having particular drawbacks including not performing to present standards and that they “degrade” existing governance frameworks.

In discussion

The concept of CBDC’s has been around for some time, however, now it appears as though there is significant potential on the horizon, as a few nations around the world such as Thailand begin to embark on the CBDC journey.

This is also not the first time that the BoE or BOC have spoken publicly about CBDCs. Furthermore, Managing Director of the International Monetary Fund (IMF) Christine Lagarde recently gave a speech in Singapore on the matter, highlighting the several positives that can be drawn from this new fintech frontier.

 

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CBDC Study: Mixed Sentiments but Positive Outlook from 21 Central Banks

Central bank digital currencies (CBDCs) are currently being trialed and researched by a number of major central banks around the world.

Statistical findings

Released on 25 October 2018, the collaborative study between IBM Blockchain World Wire and the Official Monetary and Financial Institutions Forum (OMFIF) has found that 38% of the 21 central banks studied and trialed CBDCs to “inform the next upgrades” of their real-time gross settlement (RTGS) systems.

The remaining 62% were not active in this field, though the study does reveal a growing sentiment toward distributed ledger technology (DLT) in fintech, as well as smart contracts.

According to the report, central bank experiments with CBDC DLT systems resulted in “mixed results”, which it boils down to the mixed objectives set out by researchers, seemingly these goals are outlined by “novel avenues” being explored as opposed to the creation of an entire RTGS system replacement.

A majority of the respondents (76%) were unsure as to whether or not DLT is the solution, questioning its ability to live up to the hype with regulation being a contentious area. That said, the report notes that the central banks themselves are not putting sufficient effort into to researching the regulation of DLT payments and how they would work.

Of all the legal frameworks available that wholesale CBDCs would have to abide by, the Principles for Financial Market Infrastructures (PFMIs) are most relevant, which are the international standards for “payment, clearing and settlement systems”, as defined by the Bank for International Settlements.

Expert views

Lael Brainard, Federal Reserve Board of Governors offers a quote to the report saying: “Digital tokens for wholesale payments and some aspects of distributed ledger technology – the key technologies underlying cryptocurrencies – may hold promise for strengthening traditional financial instruments and markets.”

The report concludes that cross-border collaboration is essential to overcoming the complexities that come with RTGS in domestic and cross-border payments.

Michelle Bullock, Assistant Governor (Financial System) of the Reserve Bank of Australia (RBA), writes that “cross-border payments are widely regarded as an area in which significant efficiency gains exist. Current processes are slow and costly, involving significant compliance burden and a number of different financial institutions in different jurisdictions.”

Offering somewhat of a solution, she adds, “New technologies and new business models could be used to address some of these frictions.”

Practicality

Aside the statistical results and opinions, the report also breaks down particular areas of the subject across five sections, also offering some suggestions for those seeking to create CBDCs and how to manage particular issues that may arise.

It also makes note of several countries that are actively exploring DLT solutions and engaging with the potential issuance of a national CBDC, such as the Bank of Thailand who is developing a wholesale CBDC and has successfully tested its key payment capabilities, and the Bank of Canada who have tested DLT in payment systems to mixed results.

Furthermore, the need for a cooperative international regulation effort is considered as “critical” by the study, writing that PFMIs offer a “solid foundation”, but are limited as a long-term solution due to the potential of “regulatory arbitrage in different jurisdictions”.

 

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Thai Central Bank to Test Digital Currency

The Bank of Thailand (BoT) has announced a landmark project which will see the launch of a Central Bank Digital Currency (CBDC) using R3’s Corda platform.

Project Inthanon Phase 1

As written in a 21 August press release from the BoT, Project Inthanon is in Phase 1. Iin this period, the BoT and participating banks will collaborate to design, develop and test a proof-of-concept (PoC) for domestic wholesale fund transfers using a “wholesale CBDC”.

A wholesale CBDC differs from a “retail CBDC” in the sense that wholesale limits usage to financial institutions and markets, as opposed to retail, which is for general public use.

It will use R3’s Corda, an open source distributed ledger technology (DLT) platform that is enterprise-focused. It positions itself as a tool for financial services, according to the official website, enabling “institutions to transact directly using smart contracts”.

The BoT describes this project as a “collaborative milestone”; there are eight banks confirmed as participants which include HSBC, Bangkok Bank Public Company Limited and Thanachart Bank Public Company Limited.

Team effort

Collaborators will be exploring the potential implications and benefits of DLT in a bid to “enhance efficiency of the Thai financial market infrastructure”; through this, they will create a PoC for a prototype.

The press release writes, “Key payment functionalities such as liquidity saving mechanism and risk management will also be developed and tested during this phase. Project Inthanon Phase 1 is expected to be completed by the first quarter of 2019 after which the BOT will publish a project summary accordingly.”

Thailand’s intention to explore a CBDC were first revealed in July when the Governor of the BoT gave a speech in Singapore. He described the growing acceptance of blockchain technologies within financial institutions in Asia and that the BoT, as well as other national banks, will begin looking into the concept.

CBDCs around the world

BoT also makes note of other financial institutions around the world who are also exploring the concept of a CBDC, naming the Bank of Canada, the Hong Kong Monetary Authority and the Monetary Authority of Singapore.

In July, a Senior Economist in the Funds Management and Banking Department for the Bank of Canada released a compelling and comprehensive research paper titled ‘Central Bank Digital Currency and Monetary Policy‘. In great detail, it explored CBDCs in the context of social welfare.

The study pointed out that having both cash and a CBDC within a country could result in lower welfare, estimating that economic welfare gains in Canada could increase marginally but increase nonetheless.

CBDCs aren’t a particularly new concept; other societies around the world such as Senegal in West Africa have experienced widespread benefits from the implementation of such a currency alongside the native fiat currency.

Larger nations such as the United Kingdom have also expressed interest, with the Bank of England openly contemplating the possibility of a CBDC.

 

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Bank of Finland’s FUD Main Feature of New Report on “Fallacy” of Crypto

The Bank of Finland has released a paper explaining why the country’s central bank regards cryptocurrencies as a “fallacy”, writes Cointelegraph.

The paper, reading like a film title and dramatically called the ‘The Grand Illusion of Cryptocurrencies’, was written by Aleksi Grym, whose improbable role at the bank is ‘Adviser on Digitalization and Head of the Digital Central Bank process in the Financial Stability and Statistics Department’.

Grym’s paper suggests that DLTs are no different from other record keeping systems and cryptocurrencies as they demonstrate how poorly understood money is today as a concept. It claims that they muddle “our sense of fact and fiction”.

“For all intents and purposes, that ledger is a centralized ledger. The fact that there are multiple synchronized copies of it, distributed across a network, is irrelevant, as each one has the same data,” it argues.

He adds, erroneously, that cryptocurrency is “unrelated to the fundamental characteristics of money”, as money functions as a unit of exchange, and has a store value which digital currencies such as Bitcoin don’t.

The report bases its findings on several studies of cryptocurrencies conducted by Finland’s central bank, siding with the “speculative bubble” theory; a term used by many Bitcoin detractors elsewhere to argue against its adoption. Grym adds that a CBDC would be tantamount to a bank account at the central bank. Money, he argues, is created from “liquidity transformation”, not thin air.

The article reflects some legislators view that cryptocurrency is used for criminal activity or is security against “real or imagined” state oppression, or even simply the thrill of trading.

Bitcoin and digital currencies have had numerous detractors over past years, but perhaps not so blatantly at the state level, with perhaps the exception of China. Popular media has played a fundamental role in this.

As Gareth Jenkinson, writing for Cointelegraph, recently pointed out, accuracy, for one thing, is out of control often allowing subjectivity taking over its place. In this way, he writes, “cryptocurrency has forced its way into the minds of the masses” but usually through the popular media, damaging the fundamental truths about Bitcoin and cryptocurrencies in the process:

“The spin, positive or negative, will be dependent on how the sector grows and addresses its own shortcomings in order to build trust and understanding in the global community”.

 

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Norway’s New Online Gambling Monopoly Could Attract Crypto

Norway has presented new gambling regulations to the EU for approval which may affect how cryptocurrency is utilized in this part of the country’s entertainment sector, reports Norske Casino.

The new restrictions have been proposed by the Norwegian government essentially to inhibit other providers operating apart from the country’s two state-run casino chains. The two companies cover all gambling services throughout Norway.

In past years, there has been an influx of several internationally-licensed companies attracting gamblers online in Norway, despite the activity being illegal under the country’s gambling legislation. The new proposed rules will make it illegal for banks and financial institutions to process payments online and offending companies will be asked to report users details to regulatory authorities.

Cryptocurrency has now become a topical point of interest given that new legislation, if passed, requires conventional banking to support online casino services. It is feared by the government that players wanting to use the unlicensed providers can avoid the financial system and bypass their bank accounts by using cryptocurrency wallets for payments and receipt of winnings.

It appears that this is a loophole that will be pursued and utilized by bettors as there is little that authorities can do due to the cost and time consumed in order to find user identities.

Norway’s current regulations regarding cryptocurrency use in the country are fairly flexible, allowing many providers to accept cryptocurrency payments. At present, there is no specific law telling Scandinavian banks how to view cryptocurrency, although there is anti-money laundering legislation already in place.

An official document was recently released by Norway’s central bank (Norge bank) which announced its intent to launch its own cryptocurrency. This is very much in keeping with current trends, showing increasing numbers of central banks looking into the viability of creating national cryptocurrencies.

Norway has become an increasingly cashless society. As far back as 2016, it was reported that as few as 6% of Norwegians even used cash. One bank, DNB, has even stopped using cash as a result.

 

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South Korea Still Reticent on National Crypto After Task Force Report

South Korea’s central bank has announced says it has no plans to launch its own central bank digital currency (CBDC), reports Coindesk.

This announcement came after another last month which suggested that South Korea was, in fact, looking at the feasibility of such a move. It had been suggested in May that a task force had been set up in January to examine if a CBDC would adversely affect South Korea’s financial system.

The original statement said that the Bank of Korea (BoK) was looking at similar movements globally by central bank counterparts, this after it had confirmed it was considering using blockchain technology for an ambitious “cash-free” society pilot.

The latest statement claims that it does not plan to launch its own digital currency over fears it could destabilize the economy, with the BoK going as far as to say it could pose a “moral hazard” due to the instability it would cause to financial markets. According to the Korea Times, Bok also issued a statement suggesting that digital currencies do not perform as fiat money.

The latest report goes on to examine alleged elements of risk associated with a CBDC. A BoK Economist said that “our thoughts are that digital currencies have been exposed to various categories of risk associated with credit, liquidity and legal management”, adding that traditional and digital currency operating side by side could create “social costs and undermine social welfare”.

The central bank has further suggested that there is hope for CBDC, but that they would need far more rigorous testing despite their obvious potential to impact on the current banking system.

Press source Yonhap mentions that BoK wants closer scrutiny and regulation on private crypto users regarding the actual size of their holdings so as not “to inflate their collateral and produce more e-money”, adding that a central bank should take full charge of the issue of banknotes and electronic money.

 

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Former FDIC Chair Warns US Federal Reserve It Needs Own Cryptocurrency

Sheila Bair, former chair of the US Federal Deposit Insurance Corporation (FDIC), has suggested that the Federal Reserve Bank should seriously consider the prospects of a central bank issued digital currency (CBDC), reports Yahoo Finance.

The concept of a cryptocurrency called FedCoin has provoked interest over past years, based on an idea proposed in 2014 by blogger JP Koning. Since then, the idea has been much discussed and the term is now generically used to describe a CBDC which could be overseen by the Federal Reserve, IMF, and the World Bank.

Currently, the US government can stimulate and slow economic activity in periods of recession and boom. A CBDC, in theory, would not have the same kind of culpability to large fluctuations in value given proper oversight and management by a centralized authority, suggests Coindesk.

Bair has her warnings regarding the Feds status quo regarding its crypto machinations, suggesting, “If it does not stay ahead of this technology, not only could banking be disrupted — but the Fed itself could also be at risk.”

Bair points out that centralized digital currencies would be “much more effective tools for conducting monetary policy to address economic cycle”, but does warn that credit availability issues do mean that consumers holding all of their funds in CBDCs could cause credit deficits without ensuring banks could remain competitive with Fedcoin. This would require careful Fed legislation.

Bair’s comments on the viability of CBDCs by the central bank are timely as government officials around the world are considering the merits of cryptocurrencies like Bitcoin in structure, but state-controlled in vision.

Major central banks now experimenting with digital currencies and blockchain are growing, including The Bank of England, the Banque de France, the People’s Bank of China, the Bank of Canada, the Central Bank of Russia and the Dutch Central Bank.

This is not the first call for a Fed digital currency. Kevin Warsh, former Federal Reserve governor, suggested earlier this year that the creation of a “FedCoin” needed “serious consideration”, as reported in the New York Times.

 

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Not Yet for CBDC Says Italian Central Bank

Italy has decided that at this present time it has no inclination to embark on a CBDC, according to the deputy governor Fabio Panetta of the Bank of Italy in a statement on Thursday, reported Coindesk.

During a keynote address to the SUERF and BAFFI CAREFIN Centre Conference held at Bocconi University, he focussed his attention on the volatility of cryptocurrency, rather than its advantages, although he did make some positive reference to CBDCs low costs when he suggested amusingly:

“Since it would be completely dematerialized, a CBDC would have very few or no storage costs and would be a convenient way for households and firms to keep liquid wealth. Mattresses could be freed from their role of vaults!”

His main concerns were similar to many other central banks globally who are going through the same process of investigating the principal of a CBDC versus crypto assets.

“In fact – just like banknotes – a [central bank digital currency (CBDC)] would be a liability of the central bank and would be backed by its assets. It would be supported by the credibility of the central bank and ultimately, by the rule of law. Crypto-assets, on the other hand, are a liability belonging to nobody: there is no asset that backs them up and no clear governance structure that can guarantee trust… the value of a CBDC would not suffer from the excessive volatility that affects crypto-assets.”

He also focussed on an ethical issue that could arrive from bank’s intervention in regard to the traceability and anonymity of consumer transactions, suggesting banks might be able to trace all consumer transactions and make decisions on an individual’s creditworthiness based on such information.

He spoke of other complexities which might arrive from offering a CBDC which the bank may not be prepared for at this time, although he did hint that “a world with digital cash” was worthy of its current research, but the time for action hadn’t arrived yet.

“If central banks decided to make an asset – the CBDC – free of credit and liquidity risk, possibly remunerated, and available to anybody at no cost, their role in the economy would fundamentally change… Are central banks ready to play this new role and to deal with the attendant complexities? In the short term, my answer is no.”

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Bank of Thailand Seeks Efficiency Through Blockchain Solutions

Veerathai Santiprabhob, the Governor of the Bank of Thailand, has confirmed that the government-supported central bank will be further exploring the utilization of blockchain technology to provide a more efficient inter-bank payment system.

The bank will be undertaking a project to investigate the practicality of using blockchain technology to support a wholesale digital currency while also ensuring that inter-mediation activity is reduced and transactions within the system are highly secure.

In his speech at an international investment forum in Singapore, Santiprabhob noted the increasing acceptance of blockchain technology in the financial environment of Asia. He stated that Bank of Thailand and other national banks will co-develop a new way of conducting inter-bank settlement using wholesale central bank digital currency (CBDC).

Already, CBDCs are being used in a number of countries and many nations across the world are considering the feasibility of their introduction. In his speech, Santiprabhob advised that, like other central banks, the goal was not to immediately bring CBDC into use, but rather to explore its potential and implications.

He also confirmed that Thailand had commenced the Inthanon project which would be focused on increasing the efficiency of a number of key financial transactions and activities, such as the settlements, as well as Letters of Guarantee. This would include improving validation processes while reducing processing time and costs.

Thailand’s central bank has been going through a process of adaptation, including the introduction of legislative changes with a new Payment System Act, to prepare itself for ongoing developments in technology and increased digitization of financial processes. It is anticipated that through the adoption of innovative blockchain based processes there will be substantial reductions in fees and charges for business operators when compared to the traditional financial environment.

The governor also remarked, “These efforts should pave the way for faster and cheaper transactions and validation due to less inter-mediation needed compared to the current systems.”

Efficiency enhancements had already been identified as part of a trial associated with the issuing of bonds by the Central Bank. Santiprabhob noted that the project had been able to “speed up saving bond allocation to retail investors from 15 days to 2 days”.

The formal support for the Inthanon project clearly demonstrates a recognition by the Bank of Thailand of the role that blockchain technology will be playing in the official financial environment.

 

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IMF: Fiat Needs New Ideas to Compete with Crypto

Fiat currencies need work, according to an International Monetary Fund (IMF) official, suggesting that they need new ideas to make them more of an attractive proposition for users in the “digital age”, according to Cointelegraph.

Dong He, IMF’s Deputy Director of the Monetary and Capital Markets Department, has published an article suggesting that the way to make fiat currencies “more attractive”, and, thereby, more competitive in the light of potential competition from cryptocurrencies, require three main areas needing improvement.

Dong said that fiat currencies, in the hands of central banks, need to become “more stable units of account” with fresh ideas, referring back to an earlier statement by IMF Managing Director Christine Lagarde who claimed that “…the best response by central banks [to crypto] is to continue running effective monetary policy while being open to fresh ideas and new demands, as economies evolve.”

IMF boss Lagarde has developed a positive, if not guarded, approach to cryptocurrency development in past months, according to an earlier report by Bitcoin News. In the last weeks, the French lawyer commented in an official IMF blog post that both “crypto-condemnation” and “crypto-euphoria” should be substituted by taking a clear-minded and rational approach to the regulation of cryptocurrencies. She wrote:

“Just as a few technologies that emerged from the dot-com era have transformed our lives, the crypto-assets that survive could have a significant impact on how we save, invest and pay our bills. That is why policymakers should keep an open mind and work toward an even-handed regulatory framework that minimizes risks while allowing the creative process to bear fruit.”

Dong echoed Lagarde’s view that regulation is necessary but added that it necessitates a way of ensuring that a soft- handed regulation of cryptocurrencies would give them an “unfair competitive advantage” and that this should be avoided. He said, “That means rigorously applying measures to prevent money laundering and the financing of terrorism, strengthening consumer protection, and effectively taxing crypto transactions.”

The deputy director went on to say that the issuing of a CBDC could reduce transaction costs for individuals and small businesses as well as allow long-distance transactions. This he said would make “central bank money user-friendly in the digital world by issuing digital tokens of their own to supplement physical cash and bank reserves”.

In March, Lagarde said that crypto markets must be regulated by the same laws that apply to traditional markets and that regulations must be developed on a global scale with help from the IMF.

 

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