According to my real-time tabulation, 55 central banks are exploring or have recently explored retail central bank digital currency (CBDC) and the pace of development is accelerating. Stablecoin outstandings continue to soar while doubts were raised about the quality of the underlying reserves of Tether’s USDT and Circle’s USDC, which account for 80% of outstandings. Also, some USD stablecoins may have had challenges holding their pegs during the May 19 crypto-asset market crash.
Retail Central Bank Digital Currency developments (see also table below)
Before jumping into the latest retail CBDC developments, let’s summarize where things currently stand. First, of the 65 central banks that responded to the Bank for International Settlements (BIS) annual survey carried out in the last quarter of 2020, 50 are actively engaging in retail CBDC work[JK1] . According to my real-time tabulation, 55 central banks are exploring or have recently explored retail CBDC, and I count 20 that the BIS didn’t survey, so the real number may be at least 70. Now we have that trivia out of the way, here are May’s retail CBDC developments:
The US Federal Reserve plans to publish a discussion paper this summer that will explore the implications of fast-evolving technology for digital payments, with a particular focus on the possibility of issuing a central bank digital currency (CBDC). The paper will complement Federal Reserve System research that is already underway. For example, the Boston Fed is collaborating with researchers at the Massachusetts Institute of Technology in a multiyear effort to build and test a hypothetical CBDC, and they expect to publish the first results of their work this summer.
The Digital Dollar Project (DDP) will launch at least five pilot programs over the next 12 months with interested stakeholders and DDP participants to measure the value of and inform the future design of a U.S. CBDC or “digital dollar.” The selection process is already underway, with the first three to be announced within the next two months. The DDP intends to make its CBDC test ground transparent and accessible to all stakeholders, public and private.
The Riksbank announced the next phase of its R3 Corda-based distributed ledger technology-based e-krona pilot. This phase will move on from having only simulated participants, to involving external actors (Handelsbanken and TietoEVRY) as participants in the test environment, making it possible for the Riksbank to evaluate the integration between the participants’ existing systems and the technical platform for the e-krona pilot. The Riksbank will, for instance, be testing an integration of the payment flows developed during the first year of the pilot with the participants’ internal systems.
Stablecoin market capitalizations continue to increase, ending the month at $105.1 billion. Almost all are USD-pegged, and Tether’s USDT remains dominant ($61.2 billion, up $9.6 billion from end-April), followed by USDC ($22.5 billion, up $7.8 billion), BUSD ($8.5 billion, up $0.9 billion), DAI ($4.4 billion, up $0.7 billion) and UST ($1.9 billion, down $0.1 billion). For the first time, Tether revealed the breakdown of its reserves that back its USDT stablecoin. As of March 31, 2021 they were composed of 49.6% commercial paper, 18.4% fiduciary deposits, 12.6% secured loans (none to affiliates) and 10% in corporate bonds and precious metals. The remaining 9% was held in the form of various cash equivalents. It was met with criticism for its paucity of detail, such as the credit quality and terms to maturity of the investments.
And fast-growing USDC seems to be following USDT into murky waters. USDC lists monthly attestation reports by Grant Thornton LLP, but the September 2020 one is missing, and they still haven’t published the April one yet. Also JP Koning has pointed out that Circle’s boilerplate USDC reserves investment disclosure changed between February 28 and March 31 (see below). Circle added the phrase “and in approved investments” but Circle doesn’t disclose its investment guidelines in its user agreement. They are probably guided by US state money transmitter regulations, but they are all over the place in terms of their restrictiveness, Texas‘s being quite strict, and Montana doesn’t seem to have any!
Some stablecoins appeared to be finding it challenging to maintain their fiat (i.e., USD) pegs in the days around the May 19 crypto-asset market crash. I’ve had some discussions on LinkedIn about how real some of this “untethering” (in the case of USDT) is, given that some data sources show that everything is business as usual. Although the source is in doubt, the snapshot taken below when Bitcoin spiked down to near $30,000, shows the possible extent. And JP Koning has documented the struggles of TerraUSD (an algorithmic stablecoin) here.
Facebook’s Diem is shifting its main operations from Switzerland to the United States, and withdrawing its application for a license from Switzerland’s Financial Market Supervisory Authority. Diem will partner with California state-chartered Silvergate Bank who will become the exclusive issuer of Diem’s USD stablecoins and will manage the USD reserve. And Diem Networks US will register as a money service business with the U.S. Financial Crimes Enforcement Network. Novi, which is the operating arm of Diem, will also need to have a money transmitter license in all of the U.S. states in which it wants to operate. So far it has 37 but there are notable gaps (e.g., California, Florida, New York, etc.).
The U.S. Federal Reserve proposed guidelines for what sorts of financial institutions can have access to accounts at the central bank and its related payment services. “With technology driving rapid change in the payments landscape, the proposed Account Access Guidelines would ensure requests for access to the Federal Reserve payments system from novel institutions, such as stablecoin issuers, are evaluated in a consistent and transparent manner that promotes a safe, efficient, inclusive, and innovative payment system, consumer protection, and the safety and soundness of the banking system.”
Sovereign Digital Currency Developments
IMF staff concluded that the issuance of the SOV crypto-asset by the Republic of the Marshall Islands (RMI) as a second legal tender (in addition to the US dollar) would raise macroeconomic, financial stability and financial integrity risks. Also, SOV issuance could jeopardize the RMI’s last remaining US dollar corresponding banking relationship. All of these combined could disrupt external aid and other important financial flows, resulting in significant economic drag. As a result, the government conducted a comprehensive due diligence study on the SOV based on which the RMI Parliament is considering repeal of the 2018 SOV Act under which the SOV would be issued.
|Other Central Bank Digital Currency (CBDC) Developments|
|Thanks to the Bank of Japan’s Masaki Bessho, here’s a very nice slide deck explaining the Bank of Japan’s approach to retail CBDC, providing some detail on the proof of concept work started in April.|
|The National Bank of the Republic of Kazakhstan will conduct a comprehensive study of the benefits and risks of issuing retail CBDC. It will start with the definition of the tasks solved by the digital currency, the method of its emission and distribution, the technology used, the impact on monetary policy, financial stability and the payment ecosystem.|
|The Bank of Israel is accelerating its research and preparations for a possible future retail CBDC launch. The draft model envisages a two-tier framework in which the central bank provides digital shekels to payments service providers who would then act as the interface to the general public.|
|Banco Central do Brasil published its guidelines for the potential issuance of retail CBDC. The project will focus on an unrenumerated digital real that will operate on a two-tier business model, with an eye towards cross-border interoperability and integration.|
|The South African Reserve Bank has embarked on a study to investigate the feasibility, desirability and appropriateness of issuing retail CBDC. The study will include proofs of concepts across different technology platforms, considering a variety of factors, including policy, regulatory, security and risk management implications. The CBDC feasibility study is expected to be concluded in 2022.|
|The Bank Indonesia (BI) is reportedly planning to launch a digital rupiah and is assessing which platform it will use. The BI is also examining how CBDC will help it meet its monetary policy and payment systems objectives, including by assessing the readiness of the financial infrastructure. The digital rupiah will remain the only legally accepted currency for payment, and BI will regulate it the same way it regulates banknotes and card-based transactions.|
|The Bank of Mauritius is reportedly targeting a year-end rollout for a retail CBDC pilot. It is amid finalizing its position papers and will soon publish concrete examples of its initiatives. The IMF has been providing CBDC technical assistance, including advising on possible CBDC designs.|
|The Bank of Korea launched an open bidding process to select a technology supplier partner to research the practicalities of launching a distributed ledger technology-based two-tier retail CBDC in a test environment. It’s slated to begin in August and continue through June of next year.|
|A new smart card that features biometrics specifically designed to work with the People’s Bank of China (PBOC) e-CNY CBDC, is reportedly being created. Smart card maker Chutian Dragon is reportedly working with IDEX Biometrics, a Norwegian provider of advanced fingerprint identification and authentication solutions, on a new card-based e-CNY digital wallet solution.|
|The Hong Kong Monetary Authority (HKMA) and the PBOC recently tested cross-border e-CNY transactions, involving a PBOC-designated bank, as well as merchants and bank staff. Also, the HKMA is “discussing and collaborating with the PBOC on the next phase of technical testing, including the feasibility of broadening and deepening the use of e-CNY for cross-boundary payments.”|
|EMTECH-spearheaded Project New Dawn (PND) is a technical implementation of a retail CBDC that runs on an Ethereum-based platform. PND is also working with the Hedera Hashgraph Network, to develop further understanding how to use interoperability to provide trust in the private sector part of the two-tiered CBDC network.|
|A joint paper from SWIFT and Accenture looked at wholesale CBDC opportunities and challenges for international payments, sets out practical requirements for the adoption of wholesale CBDC at scale, and outlines how SWIFT can support the financial community as new solutions are developed. SWIFT is planning a host of trials over the next few months to test how its platform could interact with the cross-border use of wholesale CBDCs.|