Kiffmeister’s Global Central Bank Digital Currency and Stablecoin Monthly Monitor (June 2021)

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 Monetary Authority of Singapore (MAS) launched the Global CBDC Challenge, to seek innovative retail CBDC solutions to enhance payment efficiencies and promote financial inclusion. Partners include the International Monetary Fund, World Bank, and the Organisation for Economic Co-operation and Development. Firms around the world are invited to submit innovative solutions that can address 12 problem statements centered on the CBDC instrument, distribution; and infrastructure.  Finalists will pitch their solutions at November’s Singapore FinTech Festival , and up to three winners will be selected, with each receiving $50,000 in prize money. The deadline for application submissions is July 23.

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 hired Giesecke+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 Developments

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.

G7 authorities committed to international cooperation to ensure common global stablecoin standards, They continued to support the Financial Stability Board’s (FSB’s) ongoing work in reviewing regulatory, supervisory and oversight challenges to the implementation of its high level recommendations for global stablecoin arrangements. They continued to support the implementation of the G20 Roadmap to enhance cross–border payments and welcomed the publication of the FSB consultation on targets for addressing the four challenges of cross-border payments

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.

The Bank of England published a discussion paper that set out its emerging thoughts on new forms of digital money, including systemic stablecoins. It builds on the Bank’s previous discussion paper on CBDC published in March 2020 and the Financial Policy Committee’s expectations for stablecoins set out in the December 2019 Financial Stability Report. Broadly speaking, the paper proposes that stablecoins should meet equivalent standards to those imposed on commercial banks.

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.

What Is and Isn’t a Retail Central Bank Digital Currency (CBDC)? (Updated)

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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. 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.

Everest’s Bob Reid has suggested adding the condition that any retail CBDC be subject to the same rules and regulations as imposed on the jurisdiction’s other units of account. I’m still thinking this one over.

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.

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.

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?

Kiffmeister’s Central Bank Digital Currency and Stablecoin Monthly Monitor (May 2021)

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.

For more CBDC developments, please see the table below. Also, check out this month’s blog posts on CBDC technical platforms, and privacy/transparency issues.

Stablecoin Developments

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 Besshohere’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. 

Central Bank Digital Currency (CBDC) Privacy and Transparency: Not So Black and White

In designing central bank digital currency (CBDC), central banks face a trade-off between satisfying legitimate user preferences for privacy and mitigating financial integrity risk. Physical cash protects privacy because it is anonymous, but it also facilitates criminal financial transactions such as money laundering, financing of terrorism, corruption, and tax evasion.

A CBDC that gives authorities access to user identity and their transaction data would provide obvious financial integrity oversight benefits. However, such fully transparent CBDC might raise concerns around digital surveillance with CBDC potentially being instrumentalized against users, especially in jurisdictions where trust in public institutions is low. Also, such CBDC might disadvantage those without access to identification, which could impair financial inclusion efforts.

On the other hand, a fully opaque CBDC that hides users and their transactions from authorities, could introduce significant financial integrity risks, notably due to the ease and speed with which transactions can be performed and their potential global reach. Privacy preferences are not driven only by the desire to conduct illicit transactions but also to mitigate spamming and identity theft, and of being stalked or robbed (Kahn and others, 2005).

But there are many dimensions of anonymity and privacy with different CBDC design implications.

Dimensions of CBDC Anonymity and Privacy

Brookings (2020) and R3 (2021) specify two dimensions of privacy – anonymity and transaction privacy. Anonymity means that it is impossible to link transactions or activity to the sender or recipient. Under the EU General Data Protection Regulation (GDPR) identity data is considered personal data, i.e., any piece of information that relates to an identifiable person. This can range from pseudonymous keys or metadata (e.g., location data or online identifier) to personally identifiable information, like government ID numbers. A transaction is private if related metadata (e.g., whether it occurred, its amount, between who and when, whether the two parties have transacted before) is not revealed.

Then there is the question of who and how identity and transaction data is shared with. Bech and Garratt (2017) specify two types of financial anonymity – counterparty and third-party anonymity. Counterparty anonymity means that a payor need not reveal their identity to the recipient. Third-party anonymity means that the payor’s identity is invisible to all other parties, including the operator of the payment system.

Digital Currency Design Considerations

The Financial Action Task Force (FATF) has issued standards that countries should implement to prevent money laundering and terrorist financing that will impact CBDC design considerations. In most instances, to comply with FATF standards, some information on CBDC users and transactions would need to be collected and, on a when-necessary basis, made available to competent authorities. However, some form of proportionality could be applied to reduce data requirements on low value transactions to foster adoption and usability, provide a more ubiquitous access to CBDC, and assuage data privacy concerns. For example:

  • Brookings (2020) suggests that the central bank could delegate account and identity management to one or more payment service providers (PSPs) who verify and record specific identity information, while the central bank sees only pseudonymous public keys. In this business model, individuals are at least pseudonymous with respect to the central bank and the transactions it processes if the PSPs adequately protect this identity information. However, the PSP can disclose the identity associated with a suspicious account to address regulatory compliance and anti-money laundering. See the table below for three examples of this type of business model in action.
  • The European Central Bank tested out “anonymity vouchers” in a proof of concept (ECB, 2019). These non-transferrable vouchers allow users to anonymously transfer a limited amount of CBDC over a defined period whereby a user’s identity and transaction history cannot be seen by the central bank or counterparties other than those chosen by the user. Hence, anonymous CBDC transfers can be enforced without recording the amount of CBDC that a user has spent, thereby protecting users’ privacy.
  • China’s eCNY design includes “controllable anonymity” in its design. Although the central bank will be privy to the identity of its users and their transaction data, users will have the ability to control what information they expose to counterparties (Qian, 2018). It aims to keep the degree of anonymity within a controllable range by requiring the disclosure of transaction data only to the central bank (Fan, 2020).
  • A stored value CBDC hardware solution that takes the form of a card or a mobile wallet app on which prepaid values are stored locally opens the possibility of almost complete anonymity. Such a wallet could conceivably be as anonymous and private as physical cash, although the central bank may require identification to enforce a one wallet per person policy or holding and/or transaction size limits to mitigate financial integrity risk. A couple of vendors (BitMint and WhisperCash) offer this CBDC platform option.
Holding/Transaction Limit StructuresData Access
Central Bank of the Bahamas Sand DollarPhysical/email address, phone number and photo for low-limit access (B$500 holding and B$1,500/month transaction). Plus, government-issued photo ID for higher limits (B$5,000 holding and B$10,000/month and B$100,000/year transaction).Transaction transparency to enable CB to monitor suspicious transactions and stop accounts. Pseudonyms ensure user anonymity. CB maintains ledger and server is encrypted.
Eastern Caribbean Central Bank DCashPhysical/email address, phone number, photo and birth date/place for low limit access (EC$1,000 to EC$2,700/month transaction depending on risk profile). Plus, full name and bank account for higher limits (EC$3,000 to EC$20,000/day).CB can see anonymized transaction data and outstanding CBDC in each digital wallet. Registered financial institutions can fully observe the identity of payers and payees and the purpose of transactions.
Central Bank of Uruguay e-PesoPhysical/email address, SIM card and national ID for low limit access (UYU30,000 wallet maximum). No higher limits except for businesses (UYU200,000).User data is segregated across different databases. Transaction data per (anonymous) digital wallet can be decrypted to reveal the user’s identity under very restrictive conditions – e.g., a competent authority prosecuting someone that has probable cause to access the transaction data.
People’s Bank of China eCNYSIM card for low limit access (¥10,000 holding,  ¥2,000/transaction and ¥5,000/day). Plus, full name, address, phone number and bank account for higher limits (¥500,000 holding, ¥50,000/transaction and ¥100,000/day).Controllable anonymity: The PBOC will be privy to the identity of its users as they are required to provide their real identities when they first sign up. However, users will have the ability to control what information they expose to counterparties

Digital currency privacy tradeoffs have sparked intense debate with seemingly irreconcilable differences of opinion. On the one hand, authorities do not want to allow anonymous CBDC because of potential financial integrity risks. Others don’t believe it’s possible to design a fully anonymous currency that’s resistant to double spending attacks. On the other hand, law-abiding users consider privacy an intrinsic non-negotiable right and nobody should have full oversight over their transactions. However, the choice between user anonymity and transparency doesn’t need to be black and white. For example, the recent digital euro public consultation found that, although potential users place a high value on transaction privacy, they don’t support full anonymity. Ultimate design choices will depend on the motivation for CBDC issuance, country specific circumstances and user preferences.

This post was co-written by Sonja Davidovic and the Kiffmeister

Retail Central Bank Digital Currency (CBDC) Technical Platform Criteria

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.

Digital CurrencyPartner FirmPlatform TechnologyPlatform Type
Bahamas Sand DollarNZIANZIA Cortex DLTDLT private permissioned
China e-CNYn/an/aCentralized ledger
ECCB DCashBittHyperledger FabricDLT private permissioned
Uruguay e-PesoRoberto GioriGSMTCentralized ledger
JamaicaeCurrencyDSC3Digital bearer instrument
Sweden e-KronaAccentureR3 CordaDLT private permissioned
Ukraine E-HryvniaStellarStellarDLT private permissioned
Ecuador dinero electrónicon/aMobile moneyCentralized ledger

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.

PlatformSubstantiationClaimed TPS
DLT-based:  
NZIAPlatform used for Bahamas Sand Dollar?
HyperLedger FabricPlatform used in ECCB DCash pilot3,500
R3 CordaPlatform used for e-Krona proof of concept and also see R3 landing page?
StellarPlatform used for Ukraine E-Hryvnia CBDC proof of concept?
Algorandhttps://info.algorand.com/cbdc-algorand1,000
Hedera Hashgraphhttps://futuremtech.com/central-bank-digital-cash/10,000
Consenyshttps://pages.consensys.net/central-banks-and-the-future-of-digital-money?
Celohttps://celo.org/papers/future-of-digital-currencies?
Ripplehttps://ripple.com/insights/ripple-pilots-a-private-ledger-for-central-banks-launching-cbdcs/10,000+
Everesthttps://everest.org/wp-content/uploads/2020/09/Everest_Indonesia_Case_Study.pdf200,000
Centralized Ledger:  
Roberto GioriPlatform used in Uruguay e-Peso CBDC pilot?
Gnu Talerhttps://www.snb.ch/en/mmr/papers/id/working_paper_2021_0310,000+
Visahttps://arxiv.org/abs/2012.08003?
Token-based  
WhisperCashn/an/a
BitMintn/an/a
eCurrency Platform used for Jamaica pilot and also see white paper ?
G&D Filian/an/a

Central Bank and Sovereign Retail Digital Currency Platforms

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.

Digital CurrencyPartner FirmPlatformBlockchain Type
Bahamas Sand DollarNZIANZIA Cortex DLTDLT private permissioned
ECCB DCashBittHyperledger FabricDLT private permissioned
Uruguay e-PesoRoberto Giori CompanyCentralized ledgern/a
JamaicaeCurrencyCentralized ledgern/a
Swedish e-KronaAccentureR3 CordaDLT private permissioned
Ukraine E-HryvniaStellarStellarDLT private permissioned
Marshall Islands SOVAlgorandAlgorandDLT public unpermissioned
Ecuador Dinero Electrónicon/aMobile moneyn/a

Kiffmeister’s Global Fintech Monthly Monitor (April 2021)

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 Markets

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.

Source: https://coin.dance/stats/marketcaphistorical

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.

Features of Central Bank of the Bahamas Sand Dollar and Eastern Caribbean Central Bank DCash (Updated)

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.

 CBOB Sand DollarECCB DCash
Launch DatesPilot on December 27, 2019 and full launch on October 21, 2020Pilot started on March 31, 2021
Platform VendorNZIA – NZIA Cortex DLTBitt – Hyperledger Fabric
Expressions of interestOver 30 vendors evaluated?
Platform TypeDLT private permissionedDLT private permissioned
Falsification and double-spending controlSystem utilizes enhanced short-lived one-time web tokens?
AccessSmartphone & smart cardSmartphone only?
Transaction feesInitially no, but maybe yes laterNone during pilot
Interest bearing?NoNo
User tiers
Tier 1 requirementsPhysical/email address, phone number and photo.For “value-based“: Physical/email address, birth date/ place, phone number and photo.
Tier 1 transaction limitB$1,500/monthEC$1,000/m or EC$2,700/m
Tier 1 holding limitB$500 n/a
Tier 2 requirementsTier 1 requirements plus govt.-issued photo identificationFor “register-based“: Full name, address, phone number, and bank account
Tier 2 transaction limitB$10,000/m or B$100,000/yEC$3,000, EC$5,000, EC$20,000/d depending on risk profile
Tier 2 holding limitB$5,000n/a
High-value/business  
RequirementsBusiness license & VAT ID numberBusiness name, physical/email address, phone number
Transaction limitB$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
Holding limitB$8,000 or 1/20th of annual sales, up to an annual limit B$1 million. n/a
Offline?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.
Anonymity/Privacy?Transaction transparency to enable central bank monitor suspicious transactions and stop accounts. Pseudonyms ensure user anonymity. Central bank maintains ledger and server is encryptedCentral 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

Kiffmeister’s Global Fintech Monthly Monitor (March 2021)

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.

Source: https://coin.dance/stats/marketcaphistorical

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.

Kiffmeister’s Global Fintech Monthly Monitor (January 2021)

Crypto-asset markets continued their bull run, with Bitcoin peaking at $41,940 mainly on strong institutional investor interest, before settling back to close the month at $33,839 (+16.6%). Ethereum and other altcoins had a strong month on continuing interest in decentralized finance (DeFi). Also supportive was the U.S. Office of the Comptroller of the Currency issuing regulations authorizing national banks to use distributed ledger technologies and related stablecoins to conduct payment activities. However, Tether continues to be dogged by controversy on questions regarding its reserves adequacy, and as stories about its possible role in Bitcoin pumping circulated.

Crypto-Asset Markets (see also Tables 1-3 below)

Crypto-asset market capitalization increased by about 31% from December 31 to $999 billion with the price of Bitcoin up 16.6% ($33,839). The main driver continued to be increasing institutional investor interest amid prospects of years of ultra-low interest rates and concerns about future inflation given expansionary monetary policies (Annex 1 below). Altcoin market capitalization was up 66%, with the price of Ethereum surging 85% on its major large role within decentralized finance (DeFi), and expectations related to upcoming technical upgrades aimed at making Ethereum more scalable. XRP also surged 90%, with some attributing it to it possibly being the next “Wall Street Bets” (WSB) target. The amount of crypto-assets on DeFi platforms increased 80% to $27.7 billion (from $15.4 billion on December 31).

Stablecoin market capitalizations continue to increase. Almost all are USD-pegged, and Tether remains dominant ($25.2 billion) despite the controversy that surrounds it (Annex 2 below). Tether is followed by USD Coin ($5.8 billion), Dai ($1.6 billion) and Binance USD ($1.5 billion). USD-pegged Empty Set Dollar (ESD) launched in September 2020 and one of the first algorithmic stablecoins to come to market, briefly held the #6 position. An algorithmic stablecoin adjusts its supply to maintain its peg. However, ESD broke its peg massively in January, trading down around $0.30 ($125 million) at end-January.

Source: https://coin.dance/stats/marketcaphistorical

New U.S. Secretary of the Treasury Janet Yellen said that crypto-assets are “a particular concern” when it comes to criminal activity and terrorist financing, going on to say that they “are used, at least in a transaction sense, mainly for illicit financing.” In fact, laundering volumes through crypto-assets are tiny compared to the volumes of cash laundered through traditional methods. Chainalysis reported that criminal activity represented only about $21 billion (or 0.34% of all 2020 crypto-asset transaction volume versus 2.1% in 2019). By comparison, And the United Nations estimates that between $800 billion and $2 trillion is laundered every year. Yellen later offered a more nuanced assessment.

Privacy-focused messaging app Signal, which now has around 40 million users, is exploring the addition of payments into the app. Significant engineering resources have reportedly been devoted to integrating privacy-focused Stellar blockchain-based payment system MobileCoin into Signal. Adding credence to this story is that Signal CEO Moxie Marlinspike serves as a technical adviser to MobileCoin, although he played it down, saying that the company had only done some “design explorations” around the idea.

Crypto-related regulatory developments (see also Table 4 below)

The U.S. Office of the Comptroller of the Currency (OCC) clarified that national banks and federal savings associations may use stablecoins to conduct payment activities and other bank-permissible functions and participate in distributed ledger technology (DLT) networks. The OCC letter said DLT networks “may be more resilient than other payment networks” due to the large number of nodes needed to verify transactions, which can in turn limit tampering, but banks need to understand the risks associated with the underlying activity and conduct a legal analysis of the DLT network activity.

The OCC conditionally approved crypto-asset custodian Anchorage’s application for a national trust charter, and the creation of Anchorage Digital Bank. With a banking charter, Anchorage can provide sub-custody services — like holding assets for a main custodian — for any financial institution. Anchorage is the first crypto company to receive a federal charter, though Kraken and Avanti have both received state charters for digital banking services in Wyoming. While the Wyoming charter enables both Kraken and Avanti to operate nationally, it comes with certain limitations.

It will be interesting to see where the OCC goes from here with crypto-friendly Acting Comptroller of the Currency having stepped down on January 14, to be replaced by Chief Operating Officer Blake Paulson.

The U.S. Financial Crimes Enforcement Network (FinCEN) extended the comment period for its proposed rules regarding crypto-asset transfers to personal (unhosted) wallets. Under them, exchanges would have to collect personal information for such transactions greater than $3,000, and report to FinCEN transactions that add up to more than $10,000 during a day. According to the accompanying FAQ the proposed rules are like existing FinCEN Currency Transaction Report rules. The original comment period was 15 days, most of which were holidays, but stakeholders now have until March 29.

Other digital asset market developments (see also Table 5 below)

Decentralized exchanges (DEX) are on track to surpass previous all-time high volumes. They had already transferred more than $27 billion in transaction volume during the first half of January, the 2nd highest total since September 2020’s $29 billion. September 2019’s $29 billion total. DEX use smart contracts on blockchain networks like Ethereum to let users swap between digital assets without transferring tokens to an exchange wallet or verifying their identity. Decentralized finance (DeFi) apps Uniswap and Sushiswap are the most popular DEX.

In other DeFi-related news:

  • The Acting Comptroller of the Currency argued that decentralized finance (DeFi) could pave the way for “self-driving banks” and national bank charters might one day be granted to DeFi protocols.
  • Decentralized non-custodial crypto trading platform ShapeShift will start routing orders through DeFi applications to avoid complying with know-your-customer (KYC) requirements. 
  • Opium Finance launched a collateralized debt obligation product (CDO) product for Compound Finance’s automated lending markets.

Celo, a decentralized financial app, is adding a new stablecoin, backed by the Euro. The Euro stablecoin will be backed by a basket of cryptocurrencies that are algorithmically adjusted to maintain a stable price. The Celo Euro is the second stablecoin to launch on the platform after the Celo Dollar, launched in June 2020. e-Money is launching a suite of European-currency stablecoins on Avalanche’s Contract Chain, including digital Euros, Swiss Francs, Norwegian Krone, Swedish Krona, and Danish Krone.

CBDC developments (see also Table 6 below)

Most central banks are exploring CBDC according to the third annual Bank for International Settlements survey. Central banks collectively representing a fifth of the world’s population are likely to launch retail CBDCs in the next three years. 86% of the 65 central banks surveyed said they were at least considering the pros and cons of issuing CBDC (up from 80% last year). 60% of them are now conducting experiments or proof of concepts (versus 42%), while 14% are moving forward to development and pilots. Emerging market central banks are leading the way, citing financial inclusion and payments efficiency as top motivating forces.

The European Central Bank (ECB) concluded the digital euro public consultation that was launched in October 2020. 8,221 citizens, firms and industry associations submitted responses to an online questionnaire, a record for ECB public consultations. An initial analysis of raw data shows that privacy of payments ranked highest among the requested features of a potential digital euro (41% of replies), followed by security (17%) and pan-European reach (10%). The ECB will publish a comprehensive analysis of the public consultation in the spring. Also, the ECB and European Commission are jointly reviewing at the technical level a broad range of policy, legal and technical questions.

China’s government backed Blockchain Service Network (BSN) is building a universal digital payment network (UDPN) to integrate various countries’ central bank digital currencies (CBDC). The beta version of UDPN is expected to launch in the second half of 2021, and completion is expected in five years. The BSN aims to enable a standardized digital currency transfer method and payment procedure. The new system intends to bring together systems like banking, insurance, enterprise resource planning and mobile apps through APIs to provide a cost-effective global payment solution. 

General fintech/bigtech developments (see also Table 7 below)

Ant Group and other bigtechs/fintechs coming under increasing pushback from authorities.

Ant Group has set up a working group to rectify its business practices under the close watch of Peoples’ Bank of China and other financial regulators. The regulators will tell Ant Group which parts of its fintech platform need to be regulated as financial institutions, and the portions of the business that need new operating licenses. The licensed financial services businesses will then be moved into a holding company and subjected to regulatory scrutiny. China’s State Council has laid out guidelines for establishing a financial holding and said companies must apply to the PBOC to do so by November 1, 2021. 

The China Banking and Insurance Regulatory Commission and the People’s Bank of China jointly issued the “Notice on Regulating Commercial Banks to Carry Out Personal Deposit Business Through the Internet”. It clarified that commercial banks shall not carry out fixed deposit and fixed-activation deposit business through non-self-operated online platforms, including but not limited to non-self-operated online platforms to provide marketing promotion, product display, information transmission, purchase entrance, interest subsidy and other services.

Special purpose acquisition companies (SPACs) gain traction for fintechs seeking to go public.

Special purpose acquisition companies (SPACs) have gained traction among private companies looking to go public, as COVID-19 creates uncertainty in the initial public offering (IPO) market.  A SPAC is a shell company dedicated to buying or merging with another company so it can be listed on the stock market, without going through an IPO’s expensive and lengthy (2-3 years for an IPO versus 3-4 months) process. SPACs represented nearly 50% of all capital raised by U.S. operating companies in 2020, with more than $70 billion in proceeds raised (Figure 2). Because SPACs are typically smaller than operating companies, they accounted for more than half of all new listings in 2020. And three weeks into 2021, 57 SPACs ($15.7 billion) had already floated on U.S. exchanges. And crypto platform Bakkt is set to merge with VPC Impact Acquisition Holdings, a deal expected to be valued at $2.1 billion.

Source: https://www.nasdaq.com/articles/a-record-pace-for-ipos-2021-01-14

The way it works is that investors give the SPAC money for up to two years while it looks for a merger target. In return, they get a unique right to withdraw their investment before a deal goes through that minimizes potential losses. The potential upside is huge if the SPAC shares rise because investors also get warrants giving them the right to buy more shares at a discounted price in the future. However, a recent study found that most SPAC share prices fell post-merger, and there are questions around incentive alignments between SPAC sponsors, target companies and investors.

Miscellaneous commentary and research (see also Table 8 below)

The Bank for International Settlements’ Innovation Hub (BISIH) set out its work program, focusing on six key areas: suptech and regtech, next-generation financial market infrastructures, central bank digital currency (CBDC), open finance, green finance, and cyber security. The CBDC theme will include a proof-of-concept platform using multiple wholesale CBDCs to explore the feasibility of faster and cheaper cross-border payments, and a technological research project and associated prototype(s) for tiered retail CBDC distribution architectures.

Projects are to be spread across the three existing Hub Centres and new locations coming online in 2021. Priorities to be supported by the BIS Innovation Network, a network of experts drawn from the BIS’s 63 member central banks. They are chaired by Susan Slocum (Reserve Bank of Australia, Suptech & Regtech), Siritida P Ayudhya (Bank of Thailand, Next Generation FMIs), Marius Jurgilas (Bank of Lithuania, CBDC), Aristides Andrade Cavalcante Neto (Central Bank of Brazil, Open Finance), Tomer Mizrahi (Bank of Israel, Cyber Security) and Sharon Donnery (Central Bank of Ireland, Green Finance).

Annex 1: Institutional Investors are Driving the Bull Market.

JP Morgan has attracted a lot of attention with its Bitcoin investment thesis based on it potentially replacing gold as an alternative store of value. They posit a maximum Bitcoin long-run price target of $146,000 to match the total private sector investment in gold via bars, coins and exchange-traded funds (about $2.7 trillion).  But they caution that this scenario is conditional on Bitcoin volatility converging to that of gold, and that short-term price dynamics are very sensitive to institutional investment flows.

Most institutional investors participate through investment funds like Grayscale Investment’s closed-end crypto-asset trusts. As publicly traded trusts that report to the U.S. Securities and Exchange Commission, they relieve institutional investors to forget about storage, custody and security of their holdings. Grayscale is the dominant crypto fund manager in terms of assets under management ($26 billion).

As a result, for example, Grayscale Bitcoin Trust (GBT) has accumulated more than 3% of total Bitcoin supply, which is a much higher proportion of liquid supply.  (Glassnode analysis found that only 22% of outstanding Bitcoin are currently in constant circulation and available for buying and selling, plus the market is very concentrated – about 2% of accounts control 95% of all Bitcoin supply.)  Also, GBT’s unit price sometimes significantly exceeds its native asset value (NAV). It was 33 basis points in early January but it dropped briefly below 10 bps before closing January around 40 basis points.

Price premia over NAV occasionally appear on exchange-traded funds (ETF) but rarely surpass about 3%. When they do, authorized participants step in to arbitrage the gap away by creating or redeeming shares of the ETF. But GBT has a six-month lockup, and secondary offerings are only allowed directly for Bitcoin. Some institutional investors buy GBT this way, effectively at its NAV, with the intent of selling after the lockup expires to capitalize on that premium. Cynics say that the lockup allows Grayscale to profit if the fund trades at a discount. Grayscale could profit by buying its own stock at a discount. 

Underscoring the importance of Grayscale in crypto markets, JP Morgan has suggested that there could be a significant market correction if Bitcoin’s price fails to break out above $40,000 soon, and they see daily flows into GBT of $100 million are needed for such a breakout to occur. So far that pace has been kept up. To January 29, GBT bought 40,000 Bitcoin versus the 26,000 that have been mined.

However, Grayscale  competitors are popping up, like Osprey Bitcoin Trust that will launch with a 0.49% management fee (versus GBT’s 2%). Money-losing business intelligence firm MicroStrategy made Bitcoin its primary reserve asset and sold $650 million convertible notes to buy more Bitcoin (Morgan Stanley acquired 10.9% stake in the firm). SkyBridge, headed by ex-White House Communications Director Anthony Scaramucci, launched a Bitcoin Fund. Also, BlackRock is planning to add cash-settled Bitcoin futures as an eligible investment to three funds.

Annex 2: Controversy Continues to Dog Tether.

Tether has been accused of running a huge Bitcoin pumping scheme. Adding fuel to claims of shadowy motivations behind Tether issuance are suspicions that the stablecoin is not fully backed (see below). But according to Frances Coppola, Tether’s asymmetric mechanics both support and disprove this claim. An opposing theory says that what look like Bitcoin pumps are Tether reacting to Bitcoin price volatility by supplying more “lubrication” to crypto-asset markets. The idea stems from Tether’s key role as a “reserve asset” for unbanked crypto platforms. Bryce Weiner believes that this crypto-asset market dependency makes Tether too big to fail – i.e., if Tether collapses crypto-asset markets will crash.

Meanwhile, a lawsuit launched by the New York Office of the Attorney General (NYAG) against Tether’s parent iFinex in April 2019 continues to trundle along. It alleges that Bitfinex was dipping into Tether’s reserves to cover up $850 million in missing funds. Most recently, iFinex asked the New York Supreme Court to give it another 30 days to produce all the documents demanded by the NYAG. The original deadline was January 15, which itself was an extension on an original December 16 deadline, although Tether has claimed that, so far, more than 2.5 million documentation papers have been delivered.

Table 1: Crypto-Asset Market Capitalization ($billions)

December 31, 2020January 30, 2021Change
Bitcoin$541.7$636.7+$95 (17.5%)
Altcoins$218.2$362.1+$143.9 (65.9%)
Total$759.9$998.8+$238.9 (31.4%)

Table 2: Top Five Crypto-Asset Market Capitalization and Prices (January 30, 2020)

Market Cap ($billions)Price
Bitcoin$628.1$33,839 (+16.6%)
Ethereum$155.61,357 (+83.6%)
XRP$18.9$0.40 (+82.5%)
Polkadot$15.2$16.83 (+81.2%)
Cardano$9.5$0.36 (+99.6%)

Table 3: Top Five Stablecoin (all USD) Capitalization (January 30, 2020)

Market Capitalization ($billions)
Tether$25.2 (+$4.3)
USD Coin$5.8 (+$2.1)
Dai$1.6 (+$0.5)
Binance USD$1.5 (+$0.6)
Paxos Standard$0.6 (+$0.3)



Table 4. Other Crypto-Related Regulatory Developments
The U.K. Financial Conduct Authority ban on the sale of crypto-referenced derivatives and exchange-traded notes to U.K. retail investors came into effect on January 6. Also, such products can no longer be included in individual savings accounts and self-invested personal pensions.
The National Bank of the Kyrgyz Republic completed the drafting of two bills designed to recognize and regulate the country’s crypto sector.
Serbia’s new Law on Digital Assets went into effect, and the Serbian parliament adopted a set of amendments to the tax regulations covering digital assets.
The Bangko Sentral ng Pilipinas released new guidelines for the virtual asset service providers operating in the Philippines, imposing new restrictions and mandating licenses for operations.
CoinMENA, a Bahrain-based soon-to-launch crypto exchange certified by the Shariyah Review Bureau, acquired a crypto-assets services company license from the Central Bank of Bahrain.

Table 5. Other (Other) Digital Asset Market Developments
Gemini is launching the Gemini Credit Card in the United States. Customers will earn up to 3% in crypto-asset rewards deposited into the user’s Gemini account. Meanwhile, Gemini Trust Company now has more than $10 billion in total crypto under custody. 
Ripple introduced a detailed response that addressed allegations surrounding the U.S. Securities and Exchange Commission (SEC) lawsuit filed against the firm in December.
Visa CEO Al Kelly said his firm is in a position to make crypto-assets more “safe, useful and applicable” and may add them to its payments network.
BTCetc Bitcoin Exchange Traded Crypto (BTCE) recorded average daily trading of EUR57 million on the Deutsche Bourse in the first 11 days of January, including a record of $100 on January 4. BTCE has also surpassed $375 million assets under management (AuM).
The CoinShares Physical Bitcoin exchange-traded product (BITC) went live on January 19 and was listed on the SIX Swiss Exchange. BITC will be physically backed, meaning it will hold the underlying assets it is designed to track. Each unit of the product will be backed with 0.001 Bitcoin.
The bitcoin fund from Canada’s 3iq Corp, listed on the Toronto Stock Exchange, has reached over C$1 billion in market capitalization.
Circle rolled out a new application programming interface (API) that will allow for the seamless transfer of the USDC stablecoin to USD via automated clearinghouse (ACH) systems.
The Stock Exchange of Thailand will reportedly launch a digital asset trading platform in the second half of this year to allow trading on all types of digital token assets excluding cryptocurrencies.

Table 6. Other CBDC Developments
The Reserve Bank of India (RBI) is exploring the possibility as to whether there is a need for a digital version of fiat currency and in case there is, then how to operationalize it.
The Indian government will introduce a Bill during the next Lok Sabha session to create a “facilitative framework” for the RBI to issue CBDC, and ban most private crypto-assets.
The PBOC continued to give away digital yuan via “red envelope” lotteries, the latest in Shenzhen of 100,000 envelopes of 200 digital yuan to city residents. with another one planned for February. And Chengdu will reportedly roll out a 50 million digital yuan lottery pilot too.
ZhongAn Online P&C Insurance and China Construction Bank are issuing insurance policies paid for in digital yuan.
Ant Financial has reportedly quietly conducted a small-scale limited-time test of digital yuan via its AliPay mobile payment app in two tea stores at a shopping mall next to its Shanghai headquarters.
The PBOC called for wider acceptance of cash in economic activities and vowed to punish those who refuse to accept cash payments in the wake of a widening gap in access to digital services.
The Ministry of Digital Transformation of Ukraine and the Stellar Development Foundation signed a Memorandum of Understanding and Cooperation that included partnering on, among other projects, developing the National Bank of Ukraine’s digital currency (e-hryvnia).
The Banque de France successfully settled €2 million of simulated equity shares with French investment firm IZNES on a DLT-based wholesale CBDC platform provided by U.K.-based SETL. 

Table 7. Other General Fintech Developments
Visa called off its deal to buy fintech start-up Plaid for $5.3bn after the US Department of Justice sued to block the transaction on antitrust grounds. Plaid makes software that allows banks and fintechs to plug into consumers’ various financial accounts.
The OCC approved LendingClub’s acquisition of Radius Bank, subject to certain conditions including a minimum $250 million capital contribution from LendingClub. This marks the end of LendingClub’s transition from its original P2P lending business model to a digital banking model.
Walmart is partnering with Ribbit Capital, an investor in stock-trading platform Robinhood, to “deliver tech-driven financial experiences tailored to Walmart’s customers and associates.
TransferWise is the first firm to pilot the Visa Cloud Connect platform, which provides a secure cloud-based connection to VisaNet, enabling TransferWise to expand its debit card program.
2020 was a big year for U.K. crowdfunded securities offerings according to Equity Crowd Expert. In total, £332 million was raised, led by Crowdcube and Seedrs, responsible for 90% of the offerings.
Bank Negara Malaysia’s new digital bank licensing framework will apply a simplified regulatory framework for the first three to five years on banks with no more than RM3 billion of assets.
The U.K. government published a consultative paper seeking views on how it can ensure its regulatory framework is equipped to harness the benefits of new technologies, supporting innovation and competition, while mitigating risks to consumers and stability.
JP Morgan is launching a digital bank to offer consumer banking services in the United Kingdom, and has already hired 400 people.
The Central Bank of Kenya outlined a digitalization plan to modernize the country’s domestic payment landscape, including defining open banking standards.
Saudi Arabia’s International Islamic Trade Finance Corporation partnered with the Bangladesh’s City Bank to execute the world’s first Shariah-compliant cross-border blockchain transaction.
The State Bank of Pakistan launched “Raast” (or “direct way”), a new instant digital payment system in a bid to boost financial inclusion and government revenue to culminate in early 2022. 
The Central Bank of Nigeria released new guidelines for quick response code (QR) payments and a regulatory sandbox
The NY Fed is looking for a Director of its NY Innovation Center. A principal function of the Center is will to collaborate with the Bank for International Settlements Innovation Hub.
The Reserve Bank of India is establishing a working group to study digital lending in the regulated and unregulated financial sectors so that an appropriate regulatory approach can be put in place.
Contactless was the preferred way to pay in the United Kingdom, accounting for nine-in-ten of all eligible card transactions in 2020, according to figures from Barclaycard.
The Bank of France will shut down 14 of its 37 cash handling centers by the end of 2022 as the Covid-19 pandemic accelerates a decline in the use of notes and coins.
Luxembourg has amended its legal framework to enable account keeping institutions such as banks to provide DLT-based dematerialized securities.

Table 8. Other Miscellaneous Commentary and Research
The OECD published a paper on asset tokenization; the digital representation of real (physical) assets on distributed ledgers, or the issuance of traditional asset classes in tokenized form.
A Bank for International Settlements paper found that e-commerce has ramped up during the pandemic. The growth has differed across sectors and over different stages of the pandemic.
A joint study by the German Federal Ministry of Finance and the Deutsche Bundesbank concluded that demand for programmable payments is rising in Germany. 
A Bank of Canada paper analyzed the trade-offs between the safety and convenience of aggregating digital currency balances in addresses, electronic wallets and banks.