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.

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. 

Why All the Fuss About Tether?

Bitfinex and Tether reached a $18.5 million settlement with the New York Attorney General (NYAG) over allegations that they hid the loss of commingled client and corporate funds and misrepresented the truth about the reserves backing Tether’s USDT stablecoin. The two firms also agreed to provide to the NYAG quarterly reports on the composition of Tether reserves over the next two years, starting within ninety days of the February 18, 2021 effective date of the settlement. Without admitting or denying any wrongdoing, Tether committed to publicly share these reports. However, the lawsuit did not cover the rumored role of Tether in a huge BTC pumping scheme.

According to the Financial Stability Board, stablecoins are crypto-assets that aim to maintain a stable value relative to a specified asset, or a pool or basket of assets. U.S. dollar pegged USDT is the biggest stablecoin by market capitalization.

Although USDT’s market capitalization is a small fraction of BTC’s ($35 billion versus $940 billion on February 24, 2020) in terms of trading volume it is by far number one. USDT’s main use case appears to be as a crypto-asset trading on-ramp for residents of countries where there are crypto-asset trading bans and/or capital controls, and as a “reserve currency” for unbanked exchanges.

Is USDT fully backed U.S. dollar assets?

Tether claims that USDT is always 100% backed by currency and cash equivalents, plus “other assets and receivables from loans made by Tether to third parties, which may include affiliated entities.” In an ongoing lawsuit launched in 2019 by the New York Attorney General (NYAG) against Tether parent iFinex, it came to light that Tether had loaned $850 million of USDT’s reserves to its sister company Bitfinex. Since then, Tether has been dogged by suspicions that USTD is not 100% backed by U.S. dollar assets, although Tether claims that the Bitfinex loan has been paid off.

Tether has not helped its cause with its opacity regarding USDT’s reserve holdings. Although not audited, other stablecoin issuers at least publish monthly attestations that they are fully backed. However, attestations remain very vague about what comprises the reserves. The last time Tether published anything like an attestation for USDT was in 2017., but  claim full details will be released later in 2021.

What kinds of assets back USDT?

But even if USDT’s are fully backed, questions remain around what they are invested in, although the other stablecoin issuers are not paragons of transparency. The USDC attestation report only tells us the reserves are held in segregated accounts at US federally insured depository institutions and in approved investments. The BUSD and PAX reports are equally vague, telling us that the reserves are held at US depository institutions sometimes in amounts backed by debt instruments expressly guaranteed by the full faith and credit of the US Government. Gemini’s attestations seem more transparent and imply that all of the reserves are invested in US Treasury securities.

The perception that Tether’s investments aren’t exactly top-tier, is not contradicted by the redemption restrictions: “Tether reserves the right to delay the redemption or withdrawal of Tether Tokens if such delay is necessitated by the illiquidity or unavailability or loss of any Reserves held by Tether to back the Tether Tokens, and Tether reserves the right to redeem Tether Tokens by in-kind redemptions of securities and other assets held in the Reserves.” (Crypto traders get around this by buying BTC with USDTs on an exchange that trades the BTC/USDT pair, transferring them to an exchange that trades the BTC/USD pair, and cashing them out.)

Is Tether part of a Bitcoin pumping scheme?

Some claim that USDT issuance is part of a BTC price pumping scheme. For example, a 2019 paper found that Bitcoin purchases with Tether “are timed following market downturns and result in sizable increases in Bitcoin prices. Rather than demand from cash investors, these patterns are most consistent with the supply-based hypothesis of unbacked digital money inflating cryptocurrency prices.” See also David Gerard’s succinct description of the process in this Twitter thread.

But according to Frances Coppola, USDT’s asymmetric mechanics both support and disprove this claim. An opposing theory says that what look like BTC pumps are merely Tether reacting to BTC price volatility by supplying more “lubrication” to markets. The “lubrication” idea stems from Tether’s key role as a “reserve asset” for unbanked crypto platforms. Also, a recent paper used USDT deviations from its fiat currency peg to show that USDT acts as a “safe haven” for crypto-asset investors. They found evidence of significant premiums over parity during the crash in non-stable crypto-assets in early 2018 and during the March 2020 COVID-19 crisis. Discounts were found to derive from liquidity effects and collateral concerns. For example, USTD spiked to as low as around $0.90 in April 2017 when doubts were raging about the sufficiency of Tether’s reserves.   

So, if BTC’s price is falling, investors wanting to cash out is likely to increase demand for USDT, which will in turn raise its price. In normal circumstances, arbitrage is probably sufficient to maintain the peg. But when BTC is experiencing high volatility – in either direction – demand for USDT can increase far faster than arbitrageurs can bring it down. To prevent the dollar peg breaking, therefore, Tether must respond to this extra demand by issuing more USDT. And issuing more USDT increases exchange liquidity, making it easier to purchase or sell BTC and therefore feeding the price movement. So wild swings in BTC’s price might not be triggered by USDT issuance, but they… can be fed by it.

Conclusions

If Bitfinex and Tether follow through on their commitment to be more transparent about Tether’s reserves, rumors about USDT being backed by flaky assets may be put to bed, although questions remain around possible Tether BTC pumping. Also, it is a big if! However, the NYAG settlement does reduce a major crypto market black swan risk if, as Bryce Weiner believes, the market plumbing absolutely depends on USDT, making it effectively too big to fail.