Kiffmeister’s #Fintech Daily Digest (10/19/2020)

Digital Money Across Borders: Macro-Financial Implications

A new IMF paper explores the complex interactions between the incentives to adopt and use central bank digital currency (CBDC) and global stablecoins (GSCs) across borders and discusses the potential macro-financial effects. Overall, the paper finds that CBDCs do not qualitatively change the economic forces that lead to the international use of currencies, as they are only digital forms of existing fiat currencies but quantitatively, they could reinforce the incentives behind currency substitution and currency internationalization. A CBDC is not a one-size-fits-all solution for lackluster economies, and it won’t save nations with high inflation or similar domestic issues. 

The paper speculated that Bigtechs could essentially bait-and-switch their stablecoins by linking them to fiat reserves at launch, only to de-peg them later on. These unbacked GSCs would then become something akin to a stateless currency unto their own. Their value could be preserved through Bigtech’s pledge to follow a credible set of rules and principles acting much like a central bank themselves. At some stage, once adoption reaches some critical mass, the peg to existing reserve currencies may no longer be needed to generate trust in the value of the GSC, and the GSC could become a fiat currency. 

Fed’s Powell warming to U.S. digital currency?

U.S. Federal Reserve Chairman Jerome Powell spoke about central banks digital currencies and said… go slow. “I actually do think this is one of those issues where it’s more important for the United States to get it right than it is to be first, given the dollar’s important role globally,” Powell said on an International Monetary Fund (IMF) panel on October 19. “Getting it right means that we not only look at the potential benefits of a CBDC, but also the potential risks and also recognize the important trade-offs.” He said that the Fed is open to collaborating with the private sector on a possible digital U.S. dollar, but reiterated that the central bank has not committed to actually launching one.

China’s $1.5 million digital currency giveaway impressed analysts. Shoppers, not so much

China’s experimental $1.5 million giveaway of digital yuan to Shenzhen citizens ended on Sunday with acclaim from currency analysts. Under the week-long programme, the People’s Bank of China (PBOC) gave 200 yuan to each of 50,000 consumers selected in a lottery in digital “red envelopes”. The online wallet was accessible via an app, without need for an existing bank account, with payments accepted via smartphone scans in downtown outlets in China’s fourth-biggest city, from luxury goods retailers to snack stores. However, skeptical reactions among some Shenzhen recipients of the giveaway – long used to scanning phones to pay for goods with other systems – showed the PBOC has work to do in convincing consumers of the benefits of a central bank-backed digital yuan. 

What CBDC Is (Not) About: The low-impact scenario

And speaking of potential CBDC flops… Absent stricter banking regulation, the central bank is subject to the same competitive forces as everyone else in the market: it needs to compete. Public money on its own is not a sufficient differentiator, particularly in ‘normal’ times (i.e. no acute financial crisis) where most people wouldn’t really know the difference, anyway. Instead, users first and foremost value convenience, speed, and ease of use – features which public sector services are not necessarily most renowned for. In the very competitive payments market, it is thus plausible that CBDC lacks a sufficiently compelling value proposition for warranting users to switch from well-established private solutions. The resulting low-impact scenario will have, as the name suggests, little implications for the structure of our monetary and financial systems.  

Peer-to-peer lending: ‘I’m 19,050th in the queue to get my savings back

Billions of pounds are tied up in the U.K.’s peer-to-peer (P2P) lending platforms, which put savers looking for a better return on their cash in touch with individuals or small businesses looking for a loan. This year, when the Covid-19 outbreak started escalating, many of the P2P sites experienced a surge in the numbers of customers wanting to liquidate their investments and withdraw their cash, and such customers are facing long waits. For example, pre-crisis, Ratesetter generally took only one day to return cash to investors seeking their money back, but it is currently still processing customer withdrawal requests that were made as far back as mid-March, when withdrawal requests peaked. 

Decentralized Finance (DeFi) –The Future of Finance?

DeFi potentially offers much higher returns to savers than high-street institutions. Compound, for example, has been offering an annualized interest rate of 6.75% for those who save with stablecoin Tether. Not only does a user gain interest, but it also receives Comp tokens, an added attraction. With two-thirds of people without bank accounts in possession of a smartphone, DeFi also has the potential to open up finance to them.