Kiffmeister’s FinTech Daily Digest (06/05/2020)

Central Bank Digital Currency: Central Banking for All?
This St. Louis Fed paper discusses how the introduction of a central bank digital currency allows the central bank to engage in large-scale intermediation by competing with private financial intermediaries for deposits. In such a world, because a central bank is not an investment expert and cannot invest in long-term projects itself, it relies on commercial banks to do so. The paper derives an equivalence result that shows that absent a banking panic, the set of allocations achieved with private financial intermediation will also be achieved with a CBDC. During a panic, however, it shows that the rigidity of the central bank’s contract with the investment banks has the capacity to deter runs. Thus, the central bank is more stable than the commercial banking sector. Depositors internalize this feature ex-ante, and the central bank arises as a deposit monopolist, attracting all deposits away from the commercial banking sector. This monopoly might endanger maturity transformation.

A Survey of Fintech Research and Policy Discussion
The aim of this St. Louis Fed paper is to provide a comprehensive fintech literature survey with relevant research studies and policy discussion around the various aspects of fintech. It also discusses policy implications, such as those related to open banking policy, ethical use of consumer data, and whether a cashless economy is expected in the near future. It concludes that it is debatable whether the future mainstream financial technology will be blockchain and DLTs, quantum computing, or something else — and how the industry and policymakers can best be prepared to keep pace with evolving technologies and the new adoption.

MakerDAO Weighs Accepting Real-World Assets as Crypto Loan Collateral
MakerDAO is in the process of voting on whether to further diversify the collateral it accepts for loans beyond crypto-assets and tokens to include real-world assets. Specifically, Maker would also allow supply chain invoices and musicians’ future royalty streams as security when it lends out DAI. These assets would be represented on the Ethereum blockchain by non-fungible tokens, the innovation that spawned CryptoKitties. Small businesses and artists could take the borrowed DAI, which usually trades 1-for-1 with the U.S. dollar, to crypto exchanges like Coinbase and convert it to cash.

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