Fintech perspectives from a bunch of policy wonks. The views expressed herein are those of the authors and should not be attributed to the International Monetary Fund, its Executive Board or its management.
The Kiffmeister is a former Senior Financial Sector Expert at the International Monetary Fund.
One of the first big retail central bank digital currency (CBDC) design decisions is the operating model. In a single-tier model the central bank performs all the tasks involved, from issuing and distributing the CBDC to running user wallets. In multi-tier models, the central bank issues and redeems CBDC, but distribution and payment services would be delegated to the private sector. Which model to adopt will depend on country-specific circumstances, such as financial sector breadth and depth, financial integrity standards compliance, and financial market infrastructure availability and supervision capacity.
In a single-tier model, CBDC transactions resemble transactions with commercial banks, except accounts would be held with the central bank. A payer would log in to an account at the central bank through a web or mobile application and request a transfer of funds to a recipient’s account, also at the central bank. The central bank would ensure settlement by updating a master ledger, but only after verification of the payer’s authority to use the account, enough funds, and authenticity of the payee’s account. This mode gives central banks more control over the product design and implementation process.
However, the single-tier model requires the central bank to assume an active role in distribution and payment services that may exceed the scope of its core mandate and capacity. Moreover, central banks would directly compete with existing digital payment service providers creating disintermediation risk. Conceptually, the single-tier model may be appropriate for a country with a well-resourced central bank in which the financial sector is extremely underdeveloped, so that there are no institutions to assume distribution and provision of payment services, as may be the case in some low-income countries.
In multi-tier models, the central bank issues CBDC but outsources some or all the work of administering the accounts and payment services. However, CBDC remains the liability of the central bank and thus CBDC holders would not be exposed to default risk of the engaged payment service providers (PSPs).
The multi-tier model has been the overwhelmingly preferred solution in CBDC pilots and the only launch so far. Running currency distribution is not something the central bank is well-suited to perform, requiring customer-facing activities that may be beyond their capacity. Also, the multi-tier model is less disruptive than the single-tier one as financial institutions play their traditional roles in distribution and payment services. In addition, this layered approach facilitates the integration of new types of consumer electronic devices without the need to alter the core of the system, and it supports the ability for third parties to build on top of the core (Shah and others, 2020; Armelius et al, 2021).
Different Flavors of Multi-Tier
Auer and Boehme (2021) discuss two different multi-tier models that differ in terms of the records kept by the central bank. In a “hybrid” architecture the central bank records all retail CBDC holdings and the CBDC is never on PSP balance sheets so that user holdings are not exposed to claims by PSP creditors in the event of PSP insolvency (first panel below).
In an “intermediated” architecture the central bank only runs a ledger of PSP wholesale CBDC holdings (second panel). Central banks may prefer this architecture due to privacy and data security concerns. However, the central bank still must honor CBDC holder claims in the event of PSP insolvency or data breaches, relying on the integrity and availability of the PSP’s records. This will require close supervision to ensure that the wholesale holdings add up to the sum of all retail accounts at all times.
Auer and Böhme (2020) suggest that, in an intermediated architecture, there be a legal framework that keeps user CBDC holdings segregated from PSP balance sheets so that the holdings are not considered part of a failed PSP’s estate available to creditors. They also suggest that the legal framework could give the central bank the power to switch user accounts in bulk from a failed PSP to a functional one. To do this expeditiously, the central bank would likely have to retain a copy of all retail CBDC holdings.
Bank of England (2020) proposes running a hybrid architecture on a “platform” in which the central bank provides a fast, highly secure and resilient technology infrastructure to provide the minimum necessary functionality for CBDC payments (the “core ledger” below). Payment interface providers would connect to it via an application programming interface (API) to provide customer facing CBDC payment services. This model effectively “combines indirect connection to the central bank with direct access to the central bank balance sheet and the CBDCs.” (Prates, 2020)
Overarching Multi-Tier Model Considerations
The multi-tier CBDC ecosystem should be designed to create economic incentives for PSPs to participate in ways that serve central bank interests (making the CBDC broadly available to the public, across regions, etc.). There should be a cost-effective business model for such PSPs with enough revenues from interest spreads, fees, and cross-subsidization, as well as controllable fixed and variable costs. Also, regulations should leave room for enough users to reach critical mass and incentivize network buildup while promoting PSP market competition.
For example, regulations that encourage interoperability of competing payment systems to encourage new entrants and reduce concentration risk should take care not to adversely impact network build-up. (For a new PSP, interoperability across PSPs could diminish the incentive of a startup to innovate since it could lower the value of a privately developed network. It could also restrict competition by excluding certain technical innovations or restricting new business models and reduce the value and increase the costs to PSPs. In addition, interoperability might increase overall risks if an innovative service provider has a higher risk profile.)
Central banks that have made the decision to explore retail central bank digital currency (CBDC) issuance are focusing on a common set of key design choices. These include the operating model, the technology platform (centralized versus decentralized database technology, or token-based), degree of anonymity/privacy, availability/limitations, and whether to pay interest. These design decisions are driven by country-specific factors and balance the need to achieve the policy objectives that launched the exploration process and be attractive to users and merchants. (For more detail on these factors and considerations see the 2020 IMF working paper on CBDC operational considerations.)
In this blog I want to talk about the technology platform decision, broadly speaking breaking down into those with centralized or decentralized ledger architectures, and ledger-less offline peer-to-peer stored value platforms. In a traditional centralized ledger (client-server model with no distributed components) transaction processing would entail the payor connecting to the central ledger keeper and initiating a funds transfer to the recipient’s account. The ledger would be updated after the payor has been confirmed as the account holder who has enough funds to carry out the transaction.
Alternatively, the ledger could be run on a distributed ledger technology (DLT) platform, in which the ledger is replicated and shared across several participants. With a DLT platform the central bank could have a centralized, decentralized or partially-decentralized authority for verifying and/or committing transactions. DLT platforms can be “public” (accessible by anyone) or restricted to a group of selected participants (“consortium” or “private”). Ledger integrity can be managed by a selected group of users (“permissioned”) or by all network participants (“permissionless”).
So far, central banks that have reached the proof of concept (PoC) and pilot stages of CBDC explorations have opted platforms that allow for control over platform access and participants, and role-based oversight and visibility of transactions (see table). Such platforms also ensure that the central bank retains full control over money issuance and monetary policy. They include centralized ledger and DLT private permissioned platforms, and digital bearer instrument platforms. Permissionless (decentralized authority) platforms have tended to fall short on scalability, and settlement finality, and financial integrity risk management.
It has been generally believed that centralized platforms process transactions more quickly. VISA says their network can handle up to 65,000 transactions per second (TPS), while private DLT platforms have tended to be way slower (e.g., 10,000+ TPS). There is also the issue of “finality” – the point at which transferred funds become irrevocable. Some networks, like Bitcoin and R3 Corda, offer only what is called “probabilistic finality” which won’t cut it for a retail payment system.
Although all the pros and cons of DLT-based versus centralized ledger-based retail payment systems are out of scope of this post, it’s worth mentioning that DLT-based platforms may offer enhanced resiliency by reducing single points of failure. Also, potential data loss at one node can be recovered through replication of the ledger from other nodes when the network comes back online. But DLT-based platforms may experience attacks against the network layer, which includes the consensus mechanism by which database updates are approved, or smart contract exploits. (For more on such pros and cons, see Raphael Auer and Rainer Böhme’s Technology of Retail Central Bank Digital Currency article)
In the table below, I’ve listed what I believe to be the main players in the retail CBDC platform space. My main criterion for inclusion is that the platform has been used in a CBDC or sovereign digital currency pilot or proof of concept or has published something substantive to back up the claim that it offers a viable CBDC platform. I’ve tried to categorize them by whether they’re ledger- or token-based, and if they’re ledger-based, whether the ledger management is centralized or distributed. My plan is to make this a “live” table, and possibly add more columns based on your comments and suggestions. If you have platform suggestions that I’ve missed, please provide links to written material that supports the claim.
In a previous post I discussed what is and isn’t a retail central bank digital currency (rCBDC): A broadly available general purpose digital payment instrument, denominated in the jurisdiction’s unit of account, that is a direct liability of the jurisdiction’s monetary authority, and subject to the same rules and regulations as imposed on the jurisdiction’s other units of account. The gist of this is summarized in the following table.
I then went on to describe wholesale central bank digital currency (wCBDC) as being like an rCBDC, but being restricted to wholesale, financial market payments. But some will notice that I never mentioned the technology platform – whether it runs on a centralized or decentralized ledger, or whether there is even a ledger at all (i.e., “token” based). And that’s because discussions around rCBDC are generally agnostic about the platform type. However, it’s my sense that that is not the case for wCBDC.
And that may be because wCBDC is not really anything new. For example, a 2018 IMF staff discussion note characterized central bank reserves as a “wholesale form of CBDC used exclusively for interbank payments” which has been around for ages. And in 2020, ECB legal staff noted that “the issuance by central banks of digital liabilities and the corresponding holding, by third parties, of intangible money claims against the balance sheet of the digital liability-issuing central bank would not represent a genuine novelty.”
And a 2020 paper that surveyed wCBDC research found that “the overarching motivation for CBDC research by CBs is to assess the impact of distributed ledger technology (DLT) on financial market infrastructures (FMIs). Which all implies to me that when people say “wholesale CBDC” they really mean to say is “distributed ledger technology (DLT) based wholesale CBDC. This may be a trivial discussion but when we say “retail CBDC” we encompass all platforms (centralized, distributed and token-based) and as everyone knows I’m a stickler on definitions!
And although I don’t follow wholesale CBDC developments closely, I’ve tabulated below the experiments that have popped up in my Daily Digest. If I’ve missed any, please let me know in the comments! FYI I plan to keep the table updated on my Kiffmeister Chronicles blog. That’s also the best version of the table to use if you want to follow the live links in the “references” section.
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. The Monetary Authority of Singapore launched a Global CBDC Challenge, to seek innovative retail CBDC solutions to enhance payment efficiencies and promote financial inclusion, partnering with the International Monetary Fund and World Bank, among others. Stablecoin market capitalizations continue to increase although not at the torrid pace of recent months.
Retail Central Bank Digital Currency (CBDC) developments (see also Table 1 below)
Before jumping into the latest retail central bank digital currency (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. 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 June’s retail CBDC developments.
BTW during the month, I set out my definition of what is and isn’t a retail CBDC just so I could be clear that we’re all on the same page. I started with a BIS definition that I adhere to: a broadly available general purpose digital payment instrument, denominated in the jurisdiction’s unit of account, that is a direct liability of the jurisdiction’s monetary authority. There was some discussion on LinkedIn that has led me to propose adding: subject to the same rules and regulations as imposed on the jurisdiction’s other units of account. Furthermore, what do people think of adding something like usable for peer-to-peer transactions to the necessary conditions?
G7 Finance Ministers and Central Bank Governors remain focused on CBDC. They committed to work together on their wider public policy implications, noting that CBDCs could act as both a liquid, safe settlement asset and as an anchor for the payments system. Their objective is to ensure that CBDCs are grounded in long-standing public sector commitments to transparency, the rule of law and sound economic governance. CBDCs should be resilient and energy-efficient; support innovation, competition, inclusion, and could enhance cross-border payments; they should operate within appropriate privacy frameworks and minimize spillovers. G7 authorities will work towards common principles and publish conclusions later in the year.
The Bank of England published the feedback it received on the “Central Bank Digital Currency: Opportunities, Challenges and Design” discussion paper that was published in March 2020. In short, the feedback is encouraging the Bank to continue examining the case for a CBDC. But at the same time, it received clear feedback that the use case for a CBDC, which might justify its introduction, needed further research, refinement, and articulation, to inform a comprehensive assessment of the pros and cons of what would be a major decision. Additionally, some respondents expressed doubt that a CBDC was needed at all, given they considered that the intended benefits could be achieved through other forms of payments innovation.
US Fed Vice Chair Quarles made it clear that he is not a big fan of a digital dollar: “First, the U.S. dollar payment system is very good, and it is getting better. Second, the potential benefits of a Federal Reserve central bank digital currency are unclear. Third, developing a CBDC could pose considerable risks.”
The People’s Bank of China (PBOC) revealed the holding and transaction limit structures being applied to the wallets currently being used in its eCNY pilots. There are anonymous wallets that can be registered with only a mobile phone number, with maximum holding limits of 10,000 yuan, single transaction limits of 2,000 yuan, and daily cumulative payment limits of 5,000 yuan. And then there are less anonymous wallets with holding limits of 500,000 yuan, single transaction limits of 50,0000 yuan, and daily cumulative payment limits of 100,000 yuan, requiring that the users link the wallets to a bank account and meet full know-your-customer (KYC) requirements. Also, users can open sub-wallets to limit payments, set up conditional payments, and control information sharing.
The Bank of Thailand has hiredGiesecke+Devrient (G+D) for a CBDC proof of concept project. G+D’s Filia platform is multi-tiered. The central bank creates and issues the data files that represent monetary value, while distribution is carried out by commercial banks or other payment service providers. Filia can be used through various forms of digital wallets, such as smartphones, smartwatches and smart cards, without a bank account or disclosure of private data. It also allows for consecutive offline payments.
For more CBDC developments, please see the Table 1 below. There is also a Table 2 that summarizes the month’s many CBDC-related research reports (see end of post).
Stablecoin market capitalizations continue to increase although not at the torrid pace of recent months. Almost all are USD-pegged, and Tether’s USDT remains dominant ($63.1 billion, up $11.5 billion from end-April), followed by USDC ($25.2 billion, up $10.5 billion), BUSD ($10.2 billion, up $2.6 billion), DAI ($5.2 billion, up $1.5 billion) and UST ($1.9 billion, down $0.1 billion). According to Tether CTO Paolo Ardoino, USDT’s demand has been impacted by a significant decrease in open interest for bitcoin futures. USDT is the dominant stablecoin on most crypto derivatives exchanges.
The Basel Committee on Banking Supervision issued a public consultation on preliminary proposals for the prudential treatment of banks’ crypto-asset exposures. It divides crypto-assets into two groups. Group 1 is comprised of those eligible for treatment under the existing Basel Framework with some modifications (e.g., certain tokenized traditional assets and stablecoins). Group 2 is comprised of “other” crypto-assets, such as bitcoin, that do not fulfil the classification conditions. Banks would have to hold risk-based capital at least equal in value to their Group 2 crypto-asset exposures (i.e., the maximum of their long and short positions) to absorb a full write-off of the crypto-asset exposures.
According to Coinmetrics, none of the major stablecoins became seriously unpegged during the May 19 crypto flash crash. As prices drop, investors often rush to trade their crypto-assets into stablecoins, while the liquidations can cause stablecoins being used as collateral to be sold. This sudden shift in supply and demand can potentially knock stablecoin prices from their peg and threaten their stability. Although I and some others observed some USD stablecoins below 90 cents on some trading screens, apparently none actually traded there (see figure below).
Wholesale CBDC developments
The Bank for International Settlements (BIS) Innovation Hub, Banque de France and Swiss National Bank launched Project Jura that, together with a private sector consortium led by Accenture, will conduct an experiment using wholesale CBDC (wCBDC) for cross-border settlement on a distributed ledger technology (DLT) platform. The private sector consortium includes Credit Suisse, Natixis, R3, SIX Digital Exchange and UBS. It will involve the exchange of financial instruments against a euro wCBDC through a delivery versus payment (DvP) settlement mechanism and the exchange of a euro wCBDC against a Swiss franc wCBDC through a payment versus payment (PvP) settlement mechanism. These transactions will be settled between banks domiciled in France and in Switzerland, respectively.
On June 18, the Banque de France successfully conducted a wholesale CBDC experiment with SEBA Bank, as part of the experimental program launched in March 2020. The CBDC was used to simulate the settlement of listed securities and trigger their delivery in the TARGET2-Securities (T2S) test environment, using T2S’s conditional securities delivery (CoSD) feature. The Banque de France simulated CBDC issuance on a public blockchain, preserving control and confidentiality of transactions using a dedicated smart contract.
Table 1: Other Central Bank Digital Currency (CBDC) Developments
The PBOC continued to roll out more e-CNY pilots. The Beijing Local Financial Supervision and Administration Bureau is gave away 40 million yuan via 200,000 red envelopes, through apps of the Bank of China and the Industrial and Commercial Bank of China. The city of Shanghai handed out 19.25 million yuan via 350,000 digital red envelopes. And more than 200 vendors at and around the venues for the 2022 games in Shijingshan are now supporting payments made using e-CNY.
The Bank of Russia announced the establishment of the first pilot group for testing the digital ruble, bringing together 12 Russian banks. The Bank also reaffirmed its plans to complete a prototype digital ruble platform by the end of 2021 and roll out testing in January 2022.
The Bank of Ghana is in the advanced stages of introducing a retail CBDC. The e-cedi will go through three phases before it goes into circulation. The first phase, which is now underway, is focused on the design of the CBDC, and the second phase will look at implementation. In the final stage, a pilot would determine whether the digital currency will be feasible before it goes into circulation.
The Central Bank of Nigeria (CBN) is reportedly planning to launch a CBDC by the end of 2021. The CBN has been exploring CBDC for the last two years. One of the reasons the CBN is exploring CBDC is to make remittances travel easier from abroad to Nigeria.
The Banco Central do Brasil (BCB) is reportedly pushing for more time on the rollout of its central bank digital currency (CBDC). BCB told CoinDesk that “according to the current BCB assessment, the conditions for the adoption of a Brazilian CBDC will be achieved in two to three years.”
The National Bank of Rwanda is reportedly studying the possibilities of issuing CBDC, according to John Karamuka, the Director of Payment Systems at the central bank.
The Bank of Israel has reportedly conducted a pilot test of a digital shekel. However, a more recent Bloomberg report implies that it’s actually an Ethereum-based proof of concept test.
The Palestinian Monetary Authority is reportedly studying the possible issuance of a CBDC. Palestine does not have a currency of its own. Instead, the Israeli shekel serves as the de facto currency, alongside the Jordanian dinar and the U.S. dollar.
According to the Bank for International Settlements (BIS), a retail central bank digital currency (CBDC) is a broadly available general purpose digital payment instrument, denominated in the jurisdiction’s unit of account, that is a direct liability of the jurisdiction’s monetary authority. To this I would add, subject to the same rules and regulations as imposed on the jurisdiction’s other units of account. By “general purpose” is meant that it can be used by the public, for day-to-day payments rather than CBDCs restricted to wholesale, financial market payments. A liability issued by a monetary authority that is not in its own currency (i.e., where it does not have monetary authority) is not a CBDC. I’ve summarized this definition in the table below and have added that it can be used for peer-to-peer transactions, which the Banque de France also views as an essential characteristic.
In previous versions of this tabulation, I included legal tender status as a key characteristic. A currency’s legal tender status entitles a debtor to discharge monetary obligations by tendering the currency to the creditor. However, a recent IMF working paper casts doubts on whether a digital currency can, or even should be given legal tender status. For example, designating CBDC as legal tender is not obvious if broad layers in the population are not positioned to technically receive it as a means of payment (e.g., not owning a computer or smartphone). Legally, it may not be possible either, because the creditor without access to the technology cannot accept the payment even if she wants to.
Anyways, this is the definition I’ve been applying to my real-time tabulation of retail CBDC explorers, but I frequently get suggestions to add new entries that don’t fit my definition. However, many turn out to be clearly wholesale CBDC, which are easy to identify and reject. And there are several more subtle ones that pop up, such as the Republic of Marshall Islands (RMI) SOV, and Cambodia’s Project Bakong, that I will briefly run through here. The SOV is easy to reject because there is no RMI monetary authority, and it is not denominated in the country’s unit of account, which is the U.S. dollar.
Cambodia’s Project Bakong has been sometimes called a quasi-form of CBDC but from my read of the white paper, it is arguably at most some form of synthetic retail CBDC. To me it appears to be a central bank-run interbank retail payments system that runs on distributed ledger technology rails that requires that any user balances be parked at the central bank. That makes it possibly a synthetic CBDC, in the same way that China’s AliPay and WeChat Pay are because they are required to park user funds at the People’s Bank of China. But in all these cases, the digital currencies are not issued by and direct liabilities of the central banks, so they’re not CBDC.
And the National Bank of Cambodia’s Chey Serey would seem to agree that Bakong isn’t a CBDC. “Instead, the platform augments the existing Fast and Secure Transfer (FAST), real-time retail payment system and Cambodian Shared Switch (CSS) that facilitate mainly interbank transactions among commercial banks and MFIs. They were launched respectively in 2016 and 2017 and are Cambodian riel (KHR) and US dollar account-based systems that do not interoperate with the twenty or so PSPs that serve mainly the unbanked. With the launch of Bakong, banks, MFIs and PSPs have a ready-made universal mobile app interface to connect users with FAST, CSS and each other.”
However, I have been long maintaining the Banco Central del Ecuador’s Dinero Electrónico mobile payment system in my CBDC explorer tabulation but being somewhat uneasy about its inclusion. The program, which operated between 2014 and 2018, allowed citizens to transfer USD balances in real-time from person to person using basic cell phones. From my read of a recent paper on the Dinero Electrónico it would seem to be a central bank-run USD asset-backed stablecoin. Like with the RMI, the USD is the country’s unit of account, but in this case the digital currency is indeed denominated in Ecuador’s unit of account, and it was issued by, and a liability of, the central bank. Hence, it’s a CBDC by my definition.
However, Marcelo Prates has suggested that digital currencies like the Dinero Electrónico is nothing more than a stablecoin issued by a central bank. Basically if the central bank can’t issue traditional money (reserves + cash), it can’t issue the “digital” version of this money. Hence, by this logic, only central banks that issue their own currency can issue CBDC, which precludes completely dollarized country central banks from issuing CBDC. Besides U.S. territories, these include Ecuador, El Salvador, Marshall Islands, Micronesia, Palau, Panama, Timor-Leste, and Zimbabwe. The same would go for countries in the eurozone and other currency unions. But would countries with currencies anchored to another country’s would still be able to issue CBDC?
BTW some might note that I don’t include in my tabulation the Avant smart card system created by the Bank of Finland in the 1990’s that was the world’s first CBDC. It is indeed a CBDC, but my tabulation seeks to cover CBDC projects that are potentially still live, whereas Avant shut down in 2006. However, I have added a new section to my tabulation for retail CBDC projects that have been shut down.
In that regard, I’m tempted to drop the Banco Central del Ecuador’s Dinero Electrónico from my CBDC explorer tabulation because it is now similarly defunct, and it is questionable whether the Ecuador central bank can even issue a CBDC. But alternatively, I could include the Avant as a CBDC that has launched/ piloted. Any thoughts out there?
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
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.
Tabulated below are all of the central bank and sovereign retail digital currency launches and pilots I know of that have revealed their technology partners and platforms. I didn’t include the South Korean pilot because they haven’t revealed their technology partners or platforms. Please keep in mind that this is just a first crack and comments and suggestions are welcome.
Crypto-asset prices spiked to new highs this month with Altcoins leading the way, although prices faded after Coinbase launched on April 14. Bitcoin finished down 3% on the month, and 11% off the all-time high price of $64,863 of April 14. By contrast, Altcoin market capitalization finished up 37% with XRP up 177%, Binance Coin 107% and Ethereum up 45%. The impetus continued to be continuing institutional investor interest in, and popularization of, crypto-assets. Meanwhile, central banks continued to advance their digital currency explorations, with the Bank of Japan launching its proof of concept (PoC) work and the Riksbank wrapping up its first round of PoC work.
Crypto-asset market capitalization increased about 14% from March 31 to $2,158 billion, although Bitcoin finished down 3% ($57,750) after hitting an all-time high of $64,863 into the mid-April Coinbase listing (see below). Altcoin markets led the way with capitalization up 37%, with Ethereum finishing up 45% possibly bolstered by the mid-April “Berlin” hard fork that reduced costs for certain transaction types, and introduced a new transaction envelope that will make it easier to package multiple transactions into a single transfer. It also paved the way for the “London” upgrade scheduled for the summer of 2021, that aims to reduce transaction costs (“gas fees”) on the network.
XRP continues to soar (+177% in April) after Ripple’s motion was granted to keep the financial records of CEO Brad Garlinghouse and his predecessor private from the U.S. Securities and Exchange Commission (SEC) in its lawsuit against the firm. The case hinges on the classification of XRP as a security (i.e., a financial asset from which the investor intends to profit), as opposed to a currency or medium of exchange. By failing to file a securities registration statement or seek special exemption, the SEC is accusing Ripple of violating multiple sections of the Securities Act of 1933. Ripple won another skirmish when it was granted permission to get access to the SEC’s documents related to its exemption of Bitcoin and Ethereum from being given “security” status. Emboldened by these wins, Ripple has filed a motion to dismiss the lawsuit entirely.
Moves towards “popularizing” crypto-assets continue. Venmo’s “Crypto on Venmo” started rolling out on April 20. The service will let its 70 million users buy, hold and sell crypto-assets (BTC, ETH, LTC and BCH) within its mobile app, using funds from their balance with Venmo, or a linked bank account or debit card. Also, Coinbase’s U.S. customers can now buy crypto on the exchange via debit cards and bank accounts linked to PayPal. Such purchases are limited to $25,000 per day.
Stablecoin market capitalizations continue to increase (see Annex). Almost all are USD-pegged, and Tether’s USDT remains dominant ($51.6 billion), followed by USDC ($14.7 billion), BUSD ($7.6 billion), DAI ($3.7 billion) and UST ($2.0 billion). Tether released another attestation that shows that its stablecoins are fully backed, to assuage rumors that it was not. However, the report still doesn’t describe how Tether’s reserves are invested. Coinbase started supporting Ethereum blockchain-based (ERC-20) USDT on its Pro platform. The ERC-20 variant comprises almost half of all outstanding USDT, although the TON-based variant is now larger.
Less than a week after the Fei protocol’s April 4 launch, Fei Labs found a vulnerability in the incentive calculation of the Ethereum-backed algorithmic stablecoin. The team patched the vulnerability on April 6, but it did not prevent the stablecoin from losing 30% off its peg. Fei uses a bonding curve to manage supply and demand based upon its collateralization levels and uses a system of ‘direct incentives’ to penalize the withdrawal of liquidity during periods of selling pressure. This caught many investors off-guard as they would have to take a hit when withdrawing their ETH collateral or the supposed dollar-pegged tokens it generated. However, by the end of the month it was closing back in on USD parity.
Coinbase reported first-quarter revenue that soared nearly 900% from $190.6 million in the same period last year, blowing past the $585 million nabbed in the fourth quarter. Meanwhile, the platform’s verified users (those with confirmed identities who are eligible to trade) swelled to 56 million at quarter’s end, compared to 34 million one year prior. Founded in June 2012, Coinbase debuted on Nasdaq on April 14, under the ticker COIN, the price spiking to $430 on opening day, but closing the month at $298.
The U.S. SEC has yet to approve a crypto-asset exchange-traded fund (ETF) although it extended its window to approve (or disapprove) VanEck’s Bitcoin ETF from May 3 to June 17. Also, investment manager Grayscale published a roadmap that implied it planned to convert two of its crypto-asset funds (GBTC and ETHE) into ETFs. Meanwhile, the Ontario Securities Commission has approved four Ethereum ETFs to trade on the Toronto Stock Exchange (TSE); 3iQ Corp, CI Global Asset Management, Purpose Investments, and Evolve Fund Group. And Horizons ETFs Management (Canada) launched the TSE-traded BetaPro Inverse Bitcoin ETF that will allow investors to take short positions on bitcoin futures.
According to Michael Morell, a former CIA acting director, the broad generalizations about the use of bitcoin in illicit finance are significantly overstated. This flies in the face of the false narratives spun by senior government officials, such as Treasury Secretary Janet Yellen, who issue public warnings about bitcoin’s alleged use by criminals. Morrell’s research concluded that there is probably less illicit activity in the bitcoin ecosystem than there is in the traditional banking system. Furthermore, he highlighted blockchain analysis as a highly effective crime fighting and intelligence gathering tool.
Crypto-related regulatory developments (see also Table 1 in the below-linked PDF)
Türkiye Cumhuriyet Merkez Bankasi has banned the direct and indirect use of crypto-assets for payments. According to its statement “payment service providers cannot develop business models in a way that crypto assets are used directly or indirectly in the provision of payment services and electronic money issuance and cannot provide any services related to such business models.” The regulation comes into force on April 30. Turkey ranks 29th out of the 154 countries on the Chainalysis’ Global Crypto Adoption Index, and number one in the Middle East.
A review of 16 leading crypto-asset exchanges, including the seven that contribute prices to the CME Bitcoin Reference Rate, found that just four were found to be subject to a significant level of trading-related regulation (itBit, eToroX, LMAX Digital, and Currency.com). Seven of the remaining exchanges, including Coinbase, operate as licensed Money Service Businesses (MSBs) or equivalent, but their trading activities are effectively unregulated. And three of the top exchanges appear not to be subject to any regulatory scrutiny whatsoever (Bittrex, Luno, and Bitfinex).
The U.S. House of Representatives passed the Eliminate Barriers to Innovation Act of 2021 (H.R. 1602) which includes a section on digital assets. The legislation seeks to set up a digital asset working group with representatives from the Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC). The overarching goal is to clarify when the SEC has jurisdiction over digital assets, in the case of when they are deemed securities and when the CFTC has a final say, in the case of when digital assets are classified as commodities.
U.S. Securities and Exchange Commission (SEC) Commissioner Hester Peirce unveiled an updated version of her proposed three-year regulatory safe harbor for token sales. The update adds “semi-annual updates to the plan of development disclosure and a block explorer”; an “exit report requirement” that “would include either an analysis by outside counsel explaining why the network is decentralized or functional, or an announcement that the tokens will be registered under the Securities Exchange Act of 1934”; and that exit report requirement “provides guidance on what outside counsel’s analysis should address when explaining why the network is decentralized.”
Other digital asset market developments (see also Table 1 in the below-linked PDF)
Robinhood experienced on and off again issues executing users’ crypto-asset trades on April 16, blaming it on unprecedented demand for crypto services. At the same time, Robinhood continues to face headwinds from regulators. For example, the Massachusetts Securities Division published has accused Robinhood of a “pattern of aggressively inducing and enticing trading among its customers – including Massachusetts customers with little or no investment experience.” Subsequently, Robinhood filed a complaint and motion in the Massachusetts State Court to block the complaint.
The People’s Bank of China (PBOC) has ordered Ant Group to “cut off” the “improper connections” between its payment platform and its financial products. More specifically, told the PBOC told Ant to become a financial holding company that will be regulated more like a bank, eliminate unfair competition in its payments business, end its monopoly on information, improve its corporate governance, and better manage liquidity risks in its major fund products (including downsizing its Yu’ebao money-market fund).
Retail Central Bank Digital Currency (CBDC) developments (see also Table 2 in the below-linked PDF)
On April 5, 2021, the Bank of Japan (BoJ) began its Phase 1 central bank digital currency (CBDC) proof of concept (PoC) work. In PoC Phase 1, the Bank plans to develop a test environment for the CBDC system and conduct experiments on the basic functions that are core to CBDC as a payment instrument such as issuance, distribution, and redemption. This phase will be carried out through March 2022. The BoJ will then move to Phase 2 to test more detailed functions of CBDC, and then, if necessary, on to Phase 3, in which private businesses and end-users will participate in a pilot program.
The Riksbank concluded the first phase of its e-krona central bank digital currency (CBDC) proof of concept (PoC). Working with Accenture, the objective was to test a blockchain-based R3 Corda technical platform to increase the Riksbank’s knowledge of how an e-krona could function and be used as a complement to cash. The next phase of the PoC will test the platform’s capacity to manage retail payments on a large scale and will include potential distributors. It will also test offline functionality and integration with existing point-of-sale terminals, and different means of storing private keys to the tokens and the tokens containing e-kronor.
The Bank of Thailand has set its agenda for a retail central bank digital currency (CBDC) with preliminary testing protocols scheduled to begin in Q2 2022. As part of its plans, the central bank published a preliminary report detailing its CBDC thesis. The main motivations are increasing financial inclusion and reducing the risk of private stablecoins undermining the central bank’s “monetary sovereignty and financial stability.” The central bank will begin its CBDC developmental efforts by engaging with stakeholders followed by cost-benefit analysis to ascertain the opportunities, risks and challenges.
The European Central Bank (ECB) published in-depth results of their digital euro consultation. The survey, which ran from October 20, 2020 to January 12, 2021 and collected 8,221 responses, asked 18 questions pertaining to the benefits and challenges of issuing a digital euro and on its possible design. It found that privacy is the most demanded feature followed by security and usability. 47% of respondents were from Germany, which is notorious for its continuing high levels of cash usage, and most respondents (33%) come from the tech industry. More than two-thirds of respondents acknowledge the importance of intermediaries providing innovative services that allow access to a digital euro and indicate that it should be integrated into existing banking and payment systems. They would like additional services provided on top of basic digital euro payments.
The Bank of England and the U.K. Treasury announced the creation of a Central Bank Digital Currency (CBDC) Taskforce that will (i) coordinate exploration of CBDC objectives, use cases, opportunities and risks, (ii) guide evaluation of the design features, and (iii) support a rigorous, coherent and comprehensive assessment of the overall use case. Also, the Bank of England established a CBDC Unit, and created a CBDC Engagement Forum to engage senior stakeholders and gather strategic input on all non-technology aspects of CBDC, and a CBDC Technology Forum to gather input on all technology aspects of CBDC.
General Fintech Developments (see also Table 3 in the below-linked PDF)
The People’s Bank of China (PBOC) and four other regulatory agencies summoned 13 domestic internet platform companies including Tencent, JD Finance and ByteDance for talks on their financial businesses. The firms were urged to bring their online lending and deposit-taking businesses in line with regulatory requirements, and to to refocus on their payment service business, enhance their transaction transparency and break any information monopolies.
Paxos Trust Company completed a same-day settlement of US-listed equity trades in partnership with Instinet and Credit Suisse on its Paxos Settlement Service permissioned blockchain solution. Paxos said the project demonstrated its ability to enable same-day settlement for trades conducted throughout the day. In the current system, settlement can only occur the same day if trades are completed before 11 AM ET and therefore is rarely utilized. The platform is said to be interoperable with the legacy clearing system and can facilitate settlement on any time cycle.
The Bank of England unveiled a new type of omnibus account as part of its real-time gross settlement service. With it an operator of a payment system can hold funds in the omnibus account to fund their participants’ balances with central bank money. This account co-mingles funds from different entities for the purposes of wholesale settlement. Fnality sees these new accounts as supportive of the opportunity to use tokenized cash assets to enable on-chain wholesale exchange of value.
Fnality uses an Ethereum-based permissioned blockchain that will run on chain payment systems in multiple currencies in each jurisdiction. When a bank wants to make a payment, it transfers money from its central bank account to the Fnality omnibus account, which then tokenizes it. The bank then uses the tokens to make a payment, and the recipient bank can then opt to convert the received tokens back to central bank money, or it could use the tokens for further payments.
The Monetary Authority of Singapore and the Bank of Thailand launched the linkage of Singapore’s PayNow and Thailand’s PromptPay real-time retail payment systems. Customers of participating banks in Singapore and Thailand will be able to seamlessly and securely transfer funds of up to S$1,000 or THB25,000 daily across the two countries, using just a mobile number. The fees will be affordably priced and transparently displayed to senders prior to confirming their transfers.
The European Investment Bank (EIB) launched a €100 million two-year digital bond issuance on an Ethereum-based public blockchain platform. The EIB paid the three underwriters (Goldman Sachs, Santander and Societe Generale) using Banque de France-issued wholesale CBDC. Societe Generale – FORGE provided the end-to-end services to issue and manage the digital-native security tokens.
Miscellaneous commentary and research
A Bank of Canada paper proposed a framework to allow authorities to understand the defining characteristics of stablecoin arrangements, to be specific about any concerns they may have, and to be objective in their treatment from issuer to issuer. First, it classifies arrangements into three parts, coin structure, related transfer system(s) and related financial service(s), and then categorizes the attributes of each one. Secondly, it identifies specific risk scenarios that are relevant to the stablecoin arrangement, and thirdly, it quantifies the range of probable loss and possible frequency associated with the identified risk scenarios.
A BIS paper assessed emerging crypto-asset financial integrity regulatory approaches and supervisory practices and identifies policy priorities to address common challenges faced by financial authorities. It points to opportunities to adopt new approaches, like blockchain analytics, that take advantage of the inherently data-rich nature of the crypto-asset sector. Also, the inherently cross-border nature of crypto-assets, as well as the uneven global implementation of international standards in this area, make international cooperation a critical component for effective supervision.
The ECB published a report on the use of distributed ledger technology (DLT) in securities post-trade processes. It categorized securities issuance and post-trade processes into models depending on how DLT is used in each case, drawing implications for the use of DLT at different stages of the securities life cycle, from issuance to custody and settlement. It recommends that, to prevent market fragmentation, the adoption of DLT-based solutions should be based on common practices and standards that enable DLT systems to interact with both each other and conventional systems.
I’ve tabulated the key features of the two active central bank digital currency (#CBDC) projects in the Caribbean area. The Central Bank of the Bahamas (CBOB) went live with its Sand Dollar on October 21, 2020 after a ten month pilot, and the Eastern Caribbean Central Bank (ECCB) started a twelve month pilot of its DCash on March 31, 2021 on four of the eight island countries under its currency union. This is all based on publicly-available information – hence some of the question marks. If there are errors of omission or commission, please let me know in the comments! Also, see below for an updated version of the PDF version of the table that includes the Central Bank of Uruguay 2017-2018 e-Peso pilot.
System utilizes enhanced short-lived one-time web tokens
Smartphone & smart card
Initially no, but maybe yes later
None during pilot
Tier 1 requirements
Physical/email address, phone number and photo.
For “value-based“: Physical/email address, birth date/ place, phone number and photo.
Tier 1 transaction limit
EC$1,000/m or EC$2,700/m
Tier 1 holding limit
Tier 2 requirements
Tier 1 requirements plus govt.-issued photo identification
For “register-based“: Full name, address, phone number, and bank account
Tier 2 transaction limit
EC$3,000, EC$5,000, EC$20,000/d depending on risk profile
Tier 2 holding limit
Business license & VAT ID number
Business name, physical/email address, phone number
B$20,000/m or 1/8th of annual revenues whichever is greater.
EC$25,000/d to EC$300,000/d based on risk rating
B$8,000 or 1/20th of annual sales, up to an annual limit B$1 million.
Users can make a pre-set dollar value of payments when communications access to the Sand Dollar Network is disrupted. Wallets would update against the network once communications were re-established.
The party initiating the transfer (sender) must have an internet connection. If the receiver is offline the payment will still be processed, and they will see the change in their balance as soon as they are back online.
Transaction transparency to enable central bank monitor suspicious transactions and stop accounts. Pseudonyms ensure user anonymity. Central bank maintains ledger and server is encrypted
Central bank can see anonymized transaction data and outstanding stock of DCash in each digital wallet. Registered financial institutions can fully observe the identity of payers and payees and the purpose of transactions
The crypto-asset bull run continued, with Bitcoin hitting a new all-time high ($61,557) before settling back to close the month at $59,483 (+28%). The main drivers were moves by Visa and PayPal to bring crypto to the people, and continuing interest in decentralized finance (DeFi) reflected in the strong performance altcoins (market capitalization up +50%) although the Financial Action Task Force appears to be taking aim at DeFi applications. On the central bank digital currency front, the Eastern Caribbean Central Bank launched a 12-month pilot, and the Bank of Jamaica will launch an 8-month one in May.
Crypto-Asset Markets (see also the Annex in the PDF version)
Crypto-asset market capitalization increased by about 37% from February 28 to $1,972 billion with the price of Bitcoin finishing up 28% ($59,483) after hitting an all-time high of $61,557 (Figure 1). Altcoin markets led the way with capitalization up 50%. Providing overall impetus were moves by Visa and PayPal to bring crypto to the “people”.
Visa will allow the use of USD Coin stablecoins to settle transactions on its payment network. Visa piloted the program with payment/crypto platform Crypto.com and plans to offer the option to more partners later this year. It used the Ethereum blockchain and strips out the need to convert digital coin into traditional money for settlement. Crypto.com sent USDC to Visa’s Anchorage Ethereum address.
PayPal launched Checkout with Crypto that will allow U.S. PayPal Bitcoin, Litecoin, Ethereum or Bitcoin Cash holders to check out with crypto seamlessly within PayPal at millions of global online businesses. Customers pay no transaction fees, but a spread will be built into the conversion from crypto to USD. There are no additional integrations or fees required by the business. All transactions are settled in USD and converted to the applicable currency for the business at the standard PayPal conversion rates.
One of the hottest crypto-assets in March was Terra (LUNA) finishing at about $18.81 (+252% over the month) likely due to the launch of Anchor, a savings protocol on the Terra blockchain. Anchor offers a principal-protected stablecoin savings product that accepts TerraUSD deposits and pays a stable interest rate. According to its white paper, Terra combines the price stability and wide adoption of fiat currencies with Bitcoin’s censorship-resistance to offer fast and affordable settlements. This article presents an overview of the Terra ecosystem and where it’s heading.
Stablecoin market capitalizations continue to increase (see Annex). Almost all are USD-pegged, and Tether’s USDT remains dominant ($40.5 billion), followed by USDC ($10.8 billion), BUSD ($3.5 billion), DAI ($3.0 billion) and UST ($1.6 billion). Tether released an attestation dated February 28, 2021 and delivered by accounting firm Moore Cayman that shows that its stablecoins are fully backed, to assuage rumors that it was not. However, the report doesn’t describe how Tether’s reserves are held.
The Bank of Thailand (BOT) issued a warning against baht-denominated stablecoin Thai Baht Digital (THT), citing a sixty-year-old law, that makes the “creation, issuance, usage or circulation of any material or token for money is a violation of Section 9 of the Currency Act 1958.” The BOT will is also planning to introduce stablecoin regulations as soon as this year. They will only cover stablecoins, and not crypto-assets. However, the purview of the framework will not only include Thai baht-backed stablecoins, but also all digital currencies backed by foreign currencies and other assets.
Crypto-related regulatory developments
The Financial Action Task Force (FATF) is going after decentralized finance (DeFi) applications in its recent draft guidance. The FATF said its standards may not apply to the DeFi platform underlying software or technology, but entities involved with the decentralized application (DApp) such as owners or operators that may now be considered virtual asset service providers (VASPs). Virtual asset (VA) escrow services, including services involving smart contract technology, brokerage services, order-book exchange services, advanced trading services, and custody providers will all considered VASPs.
The upper chamber of Wyoming’s legislature reportedly passed a bill that, if approved, would clear the way for decentralized autonomous organizations (DAOs) to become incorporated under state law. The legislation would make it easier and cheaper to set up a DAO and give legitimacy to many crypto-asset projects. DAOs are entities that operate through smart contracts, with financial transactions and rules encoded on a blockchain, effectively removing the need for a central governing authority.
Other digital asset market developments (see also Table 1)
U.S. crypto-asset fund managers are applying with the U.S. Securities and Exchange Commission (SEC) to launch crypto-asset exchange-traded funds (ETFs). The SEC has until April 29 to deliver an initial decision on the VanEck Bitcoin ETF filing (45 days after the March 15 submission’s official publication on the SEC website on March 15). The Chicago Board Options Exchange filed with the SEC to list the Bitcoin ETF that Van Eck filed for SEC approval in January. Fidelity Investments has filed to list a new Bitcoin ETF. The Wise Origin Bitcoin Trust aims to track Bitcoin’s daily performance using the Fidelity Bitcoin Index PR, an index that is derived from several price feeds. Also, Grayscale Investments has posted at least nine ETF related positions to LinkedIn.
Meanwhile, the CI Galaxy Bitcoin ETF launched on the Toronto Stock Exchange (TSE). The new ETF will join the Purpose Bitcoin and Evolve Bitcoin ETFs, both of which launched in February. And less than two months after launching its Bitcoin trust, Canada’s Ninepoint Partners is planning to change its offering to an ETF on the TSE. Deutsche Borse’s electronic trading platform, Xetra launched its first Ethereum-based exchange-traded products (ETPs). The products are physically backed and listed on the Regulated Market of the Frankfurt Stock Exchange and cleared by Deutsche Börse Group’s Eurex Clearing.
Valkyrie Digital Assets filed with the U.S. SEC for a new ETF that would invest in companies that hold bitcoin on their balance sheets. And JPMorgan has filed a request with the U.S. SEC to approve a debt instrument linked to 11 firms that have all invested in Bitcoin and other crypto-assets. The debt instrument will enable investors to have direct exposure to a basket of cryptocurrency-focused firms.
Retail Central Bank Digital Currency (CBDC) developments (see also Table 2 in the PDF version)
The Eastern Caribbean Central Bank launched its DCash CBDC pilot on March 31. Consumers can sign up to use DCash through participating financial institutions and authorized DCash agents. The 12-month pilot will roll out initially in four countries; Saint Kitts and Nevis, Antigua and Barbuda, Grenada, and Saint Lucia.
The city of Chengdu launched China’s largest digital currency trial to date, following those already completed in Beijing, Suzhou and Shenzhen. Prior to Chengdu, there had been six trials of the “Digital Currency, Electronic Payment” (DCEP) project in China, with a total distribution of 120 million digital yuan. Chengdu’s trial, which will conclude March 19, is for an additional 40 million digital yuan.
The Bank of Jamaica will be piloting a retail CBDC from May to end December 2021, using eCurrency Mint’s centralized ledger technology platform. Issuance and distribution will be fully integrated with the Bank of Jamaica’s JamClear Real Time Gross Settlement System. It will be issued to deposit-taking institutions and authorized payment providers in the same manner that it issues cash. The Bank of Jamaica Act is to be amended, giving the central bank the sole authority to issue digital currency.
The Bank of Japan will start experimenting with retail CBDC, by first testing the technical feasibility of the core functions and features required for CBDC through proof of concepts (PoC). It has established a “Liaison and Coordination Committee on Central Bank Digital Currency” through which it will share details of and provide updates on the PoC with the private sector and the government and will seek consultation on future steps to facilitate smooth PoC implementation.
The Bank of Thailand provided a preliminary assessment of its exploration of the use of a CBDC and distributed ledger technology (DLT) for business-to-business invoice payments. The tests demonstrated that DLT can increase payment efficiency for businesses by allowing users to set various conditions on the CBDC (programmable money) to enhance flexibility in handling business activities. However, they encountered some limitations with their DLT set up, particularly in supporting large transaction volumes and preserving transaction privacy, but explorations will continue.
International Monetary Fund (IMF) staff concluded that the issuance of the sovereign digital currency (SDC) SOV by the Republic of the Marshall Islands (RMI) as a second legal tender would raise risks to macroeconomic and financial stability as well as financial integrity. Also, SOV issuance could jeopardize the RMI’s last US dollar corresponding banking relationship. This combined with anti-money laundering and combatting the financing of terrorism risks could disrupt external aid and other important financial flows, resulting in significant economic drag.
Ripple is piloting a private version of the public, open-source XRP Ledger to provide central banks with a secure, controlled, and flexible platform for issuing and managing digital currencies. Moving money on the CBDC Private Ledger will reportedly be cost-effective, reliable, and close to instantaneous. It will initially handle tens of thousands of transactions per second but can scale to hundreds of thousands.
Wholesale CBDC developments (see also Table 2 in the PDF version)
A Bank for International Settlements (BIS) paper explored how interoperating multi-central bank digital currency (mCBDC) arrangements could reduce cross-border payment inefficiencies. This could be especially relevant for emerging market economies poorly served by the existing correspondent banking arrangements. Yet competing priorities and history show that these benefits will be difficult to achieve unless central banks incorporate cross-border considerations in their CBDC development from the start and coordinate internationally to avoid the mistakes of the past.
General Fintech Developments (see also Table 3 in the PDF version)
State Street launched a peer-to-peer repo program for the buy-side that they say enables competitive financing costs across a broader range of collateral types and yield enhancement opportunities compared to traditional repo markets. State Street guarantees the payment obligations of cash borrowers to cash lenders within the program following a default, thus facilitating bilateral trading by counterparties with varying credit and capital strength. Program participants trade with one another pursuant to a common master repurchase agreement, negotiating trade terms with approved counterparties within the program’s broader requirements guidelines.
Banco Central do Brasil cleared the way for Facebook’s WhatsApp messaging service to let its users send each other funds using the Visa and Mastercard card networks, months after vetoing WhatsApp’s initial attempt. However, WhatsApp is only allowed to do peer-to-peer payments, not involving merchants, unlike the free Pix service, which can be used to pay businesses and individuals. Facebook is still seeking approval to operate with merchants.
The Bank of Thailand (BOT) and the State Bank of Vietnam (SBV) have deployed a retail payment connectivity system that makes use of an interoperable QR Code in order to simplify cross-border payments between the two countries.
SPAC issuance surpassed last year’s fundraising record just halfway through March. At that point SPACs had raised $79.4 billion globally since the start of the year (versus $79.3 billion over all of 2020), and 264 new SPACs have been launched (versus 256 over all of 2020). SPACs are listed shell companies that raise funds to acquire a private company with the purpose of taking it public, allowing targets to sidestep a traditional initial public offering. The U.S. SEC reportedly opened an inquiry into SPACs, asking banks to provide the information on deal fees, volumes, and what controls banks have in place to police the deals internally. Also, the U.K. Financial Conduct Authority will be consulting on amendments to its Listing Rules and related guidance to strengthen protections for SPAC investors.
Miscellaneous commentary and research (see also Table 4 in the PDF version)
The GSMA annual State of the Industry Report on Mobile Money revealed a dramatic acceleration in mobile transactions attributed to COVID-19 lockdown restrictions limiting access to cash and financial institutions. The number of registered accounts grew by 13% globally in 2020 to more than 1.2 billion. The fastest growth was in markets where governments provided significant pandemic relief to their citizens, value of government-to-person payments quadrupling during the pandemic.