Kiffmeister’s #Fintech Daily Digest (11/23/2020)

China to Hold Second Lottery Trial of the Digital Yuan

On December 12, a shopping festival known as “Double 12” in China, the city of Suzhou will reportedly hold a giveaway designed to gauge usability of the digital yuan. The trial will be similar to one held in Shenzhen in October, that allowed residents to apply for a 200 yuan share of 10 million units of the central bank digital currency (CBDC) in a kind of lottery, worth around $1.5 million in total. The Suzhou event will trial additional aspects of the technology not activated in Shenzhen, including the digital yuan’s offline feature that allows users to touch smart devices to make transfers. 

Monetizing Privacy with Central Bank Digital Currencies

This NY Fed blog post discusses the implications of introducing a CBDC that offers consumers a low-cost, privacy-preserving electronic means of payment—essentially, digital cash. Central banks are better positioned, relative to private intermediaries, to commit to safeguarding data from outside vendors, because a central bank has no profit motive to exploit payments data. By helping consumers to monetize privacy, central banks would not be proposing a radical transformation to the payments landscape. Rather, they would be preserving aspects of payments that existed prior to the digital revolution. However, this would require regulators and lawmakers to rethink how to adapt current anti-money laundering practices. 

Digitalization, retail payments and Central Bank Digital Currency

This Banco de España paper written by the  Banco Central del Uruguay’s Jorge Ponce provides a rationale for central banks to have a deeper involvement in retail payment systems by building and keeping control of core components of these systems, considering competition and financial stability arguments. Central bank digital currency (CBDC) and fast payment systems (FPS) are assessed as alternative tools serving central banks to foster efficiency, resilience and security in retail payments, as well as to preserve financial stability. It concludes that, while central banks should build and keep control of the core components of either a CBDC or a FPS, private sector involvement will be optimal in a tiered architecture where payment services providers compete for customers, innovate and offer overlay services. 

Stablecoin risks potential and regulation

This Banco de España paper written by a couple of Bank for International Settlements staff discusses the regulatory challenges around stablecoins, and in particular potential “global stablecoins” such as Facebook’s Libra proposal. It makes the point that any regulatory responses should take into account the potential of all stablecoin uses, including embedding a robust monetary instrument into digital environments, especially in the context of decentralised systems. Looking forward, in such cases, one possible option from a regulatory standpoint is to embed supervisory requirements into stablecoin systems themselves, allowing for “embedded supervision”. Yet it is an open question whether central bank digital currencies (CBDCs) and other initiatives could in fact provide more effective solutions to fulfil the functions that stablecoins are meant to address. 

Vanuatu pioneers digital cash as disaster relief

Vanuatu is pioneering Unblocked Cash, a mobile-based development project using blockchain technology, along with tap-and-pay cards, to provide direct assistance to families recovering from disasters or acute financial distress. The cards can be ‘loaded’ with money, to act like a debit card, allowing families to directly buy food, medicine, clothes, and other emergency supplies, even hardware to rebuild destroyed homes. Traditionally, it typically costs between $2 – $3 to deploy $1 worth of aid post-disaster. The digital model reduces aid distribution costs by up to 75%, and reduces sign-on time from over an hour with older approaches to only three minutes.