Kiffmeister’s #Fintech Daily Digest (02/28/2021)*

CBDC can transform payment transactions; poses disintermediation risk: RBI report

The Reserve Bank of India (RBI) “remains in readiness to operationalize central bank digital currency (CBDC) as and when necessary… with the eventual decline in the usage of (physical) currency gaining traction.” According to the RBI report, CBDC has the potential to bring about a sea change in payment transactions and quicken transmission, but poses a risk of disintermediation of the banking system, although this risk can be mitigated with a two-tier remuneration system for CBDCs, whereby transaction balances held by an individual remain interest free and are subject to a ceiling while CBDC balances of the individual over and above the ceiling are subject to a penal negative interest rate.  

What happens if bitcoin succeeds?

LSE Economist Jon Danielsson argues that most of us would not want to live in a society where bitcoin succeeds, although the internal contradictions and perverse consequences of crypto-asset success mean that they are destined for failure. The value proposition for bitcoin is that it will displace fiat money, and Danielsson argues that there can only be either full displacement or no displacement, but full displacement is not desirable or feasible. If it succeeds (full displacement) the big holders (“whales”) will become the wealthiest people in the world, and this would lead to greater inequality, social division and populism. However, if bitcoin becomes that successful, national authorities will jump in to protect their fiat currency monopolies, at which point the value of bitcoin heads to zero. 

Reasons Why Bitcoin May Fall to the $40,000 Level

According to the latest report from Glassnode, institutions and investors holding a large amount of Bitcoin reduced their holdings by 140,000 Bitcoins in February. 

* The views expressed herein are those of the author and should not be attributed to the International Monetary Fund, its Executive Board or its management.

Kiffmeister’s #Fintech Daily Digest (02/27/2021)*

The SEC Releases Compliance Notice on Future Crypto Regulations

The U.S. Securities and Exchange Commission (SEC) published the framework in which the agency will examine digital asset investments. Demanding regulatory compliance across areas ranging from custody, bookkeeping, registration requirements to conflicts of interest protocols, the SEC has made it clear to major broker-dealers and investment advisers that digital assets will face similar levels of scrutiny as traditional securities.  

Flare Brings Ethereum Compatibility to Stellar 

Flare Networks will integrate Stellar Lumens (XLM) with its smart contract platform, thereby offering compatibility with the Ethereum blockchain. Users will be able to create XLM-backed tokens and use those tokens with Ethereum-based DeFi projects. While Stellar already supports native smart contracts, its own contracts are not compatible with the Ethereum Virtual Machine. Flare Networks has previously announced integration with XRP, Litecoin, and Dogecoin.   

* The views expressed herein are those of the author and should not be attributed to the International Monetary Fund, its Executive Board or its management.

Kiffmeister’s #Fintech Daily Digest (02/26/2021)*

I’ll be publishing my next monthly Fintech Monitor on Monday, but here’s an update on last edition’s discussion of algorithmic stablecoins – both bad news and good news! 

Preconditions for a general-purpose central bank digital currency

This U.S. Federal Reserve paper identifies some high-level environmental preconditions that support a general-purpose CBDC in the United States. These preconditions are necessary, though not sufficient, and can be broadly grouped into five areas: clear policy objectives, broad stakeholder support, strong legal framework, robust technology, and market readiness. Within each area, detailed elements are discussed. These areas and elements are not exhaustive because many systems, tools, processes, and structures will need to be in place for a CBDC. In addition, many of these elements are interconnected. For example, engaging with a broad array of stakeholders and monitoring market readiness could inform clear policy objectives and vice versa. The paper does not attempt to prescribe how to address these preconditions; it aims to spark further inquiry. 

Plans Advanced To Develop Bank of Jamaica Central Bank Digital Currency

The Bank of Jamaica (BOJ) announced plans to begin a central bank digital currency (CBDC) pilot in the second or third quarter of 2021. Over the last couple months, the BOJ has undertaken the requisite preliminary work relating to assessments and protocols aimed at receiving government approval for a pilot to run for a couple of months and be finished by the end of the year. If the pilot is successful, the BOJ aims to issue the new CBDC to the public in early 2022. The BOJ highlighted the benefits of CBDC which include increased financial inclusion, and providing another means of efficient and secured payments. Also, for deposit-taking institutions, the BOJ claimed that CBDC represents an opportunity to improve cash management processes and costs. 

Legal troubles may delay CBDCs

As the law will determine what type of central bank digital currency (CBDC) can be issued in each jurisdiction, getting the legal model right is a crucial step in introducing one. The current statutory language seems to provide the ECB with enough room to offer a digital euro directly to the public through digital accounts if it so chooses. However, for example, the US and Brazilian central banks are authorized to establish relations only with a limited set of institutions, notably banks, not with people or corporations. Without a change to these rules, digital dollars and digital reais would have to be distributed to the public through intermediaries, just like cash is made available today through banks. For all central banks considering issuing a CBDC, the time to tackle the legal troubles and seek legislative reform is now, because reaching a political consensus on this model may take time, since CBDCs raise many contentious issues, from changing the business of banking to creating new privacy risks. 

BSP Creates Sector for Interplay of Currency and Digital Money

The Bangko Sentral ng Pilipinas (BSP) established the Payments and Currency Management Sector (PCMS) to manage the interplay of physical currency and digital money. PCMS is tasked to maintain the safety and integrity of the local currency and to ensure a well-functioning payments and cash ecosystem that supports sustained and inclusive economic growth, in alignment with the BSP’s Digital Payments Transformation Roadmap. The new sector, which consolidates existing currency and payment management units, is responsible for producing banknotes, coins, and securities documents; refining gold; and printing of cards for the national ID. 

Ghana’s central bank launches fintech sandbox

The Bank of Ghana has launched a new regulatory and innovation sandbox to provide a controlled testing environment for new financial products and services, in partnership with US-based technology firm Emtech. Emtech has built cloud-based software specifically for central banks.  It said the sandbox would allow financial firms to interact with the central bank to test digital financial products while evolving [an] enabling regulatory environment. The sandbox is open to banks, specialised deposit-taking institutions and payment service providers. 

Quote of the day from Lawrence H. White

“Bitcoin is vulnerable to government surveillance and prohibitions that could quash crypto exchanges and drive trades underground. But it arguably could survive underground better than could a banking system based on commodity redeemability that must be openly accessible to be trustworthy. If Bitcoin will continue to thrive as an investment and medium-of-exchange-in-waiting “until the authorities do better” at managing fiat money (and at allowing financial privacy), then Bitcoin may thrive for a long time to come.” 

* The views expressed herein are those of the author and should not be attributed to the International Monetary Fund, its Executive Board or its management.

Kiffmeister’s #Fintech Daily Digest (02/25/2021)*

Coinbase announces filing of registration statement for proposed public direct listing of its Class A common stock

Coinbase has publicly filed an S-1 with the U.S. Securities and Exchange Commission (SEC) outlining its plans to complete an initial public offering (IPO) on the NASDAQ. Accrording to the filing, Coinbase intends to raise up to $1 billion and  trade under the ticker symbol of “COIN.”  

VersaBank to Launch VCAD, World’s First Bank-issued, Deposit-based Digital Currency

Canadian digital bank VersaBank plans to launch a Canadian dollar-pegged stablecoin. VCAD will be issued by VersaBank to financial intermediary partners in exchange for Canadian dollar deposits. The partners will then offer VCAD directly to individuals and businesses for use in commerce. VCAD will be redeemable for Canadian dollars as required. 

DEX trading volumes on the path to eclipse January’s high

With a few days left in February, decentralised exchange (DEX) processing volumes furing the month have surpassed $60 billion, according to Dune Analytics, already higher than January’s record level.

Mauritius FSC Releases Consultation Paper On The Regulatory Framework For The FinTech Service Provider Licence

The Mauritius Financial Services Commission (“FSC”) issued a consultation paper proposing the setting up of a comprehensive regulatory framework for a FinTech Service Provider Licence which will aim at offering providers of technology services to financial institutions with a set of guidelines to be adhered to, should they wish to operate in or from Mauritius. 

* The views expressed herein are those of the author and should not be attributed to the International Monetary Fund, its Executive Board or its management.

Kiffmeister’s #Fintech Daily Digest (02/24/2021)*

Yesterday I reported that 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. However, the lawsuit did not cover the rumored role of Tether in a huge BTC pumping scheme. I discuss some of these broader issues in a new blog post here.

Launch of the ECCB DCash CBDC Pilot is Imminent

On February 13, 2021, Bitt, in partnership with the Eastern Caribbean Central Bank (ECCB), executed the first successful retail central bank digital currency (CBDC) consumer-to-merchant transaction using DCash, the ECCB digital currency. The transaction was completed at Geo F. Huggins’ Foodland, in the island of Grenada. The ECCB has begun to issue DCash to participating financial institutions to enable customer purchases at selected merchants, as part of the closed segment of the DCash pilot. This live exercise is the final step before the public launch in four of the ECCU’s eight sovereign member countries (Antigua and Barbuda, Grenada, Saint Kitts and Nevis and Saint Lucia). 

China Enlists Ant-backed MYbank in Expanding Digital Yuan Trial

Ant-backed MYbank and Tencent-backed WeBank will reportedly join the Peoples’s Bank of China (PBOC) digital yuan pilot. The e-wallets from the two firms will have exactly the same functions as those from the six state-owned lenders in the trial. 

The SEC’s Amended Complaint Towards Ripple Accuses Lead Executives of Manipulating XRP Price

The U.S. Securities and Exchange Commission (SEC) filed an amended complaint towards Ripple, accusing the firm of purposely misleading investors in relation to its XRP crypto-asset. The original complaint accuses Ripple Labs and its lead executives of being in violation of securities laws with $1.3 billion generated from XRP sales. It now alleges that they purposely manipulated XRP’s price by increasing and decreasing XRP sales depending on market conditions.  

Square Buys $170 Million More Bitcoin, Deepening Crypto Bet

Square purchased $170 million Bitcoin, raising its holdings to about 5% of the company’s cash and equivalents. Square reported that crypto-assets continue to be a growing part of its business through the use of its Cash App for Bitcoin transactions. The financial payments company’s involvement with Bitcoin is a reflection of CEO Jack Dorsey’s belief in crypto-assets and the open internet. 

Whales offloaded 140K Bitcoin this month: Glassnode

According to crypto market data aggregator, Glassnode, Bitcoin whales offloaded massive amounts of BTC during February. The whales (who hold between 1,000 and 10,000 BTC) and humpback (more than 10,000 BTC) buying spree peaked in January as they snapped up 80,000 BTC, but so far in February they appear to have taken heavy profits, offloading 140,000 BTC. 

Unleashing the potential of digital identity: a U.K. FCA sandbox observation

Since its first cohort in 2016, the U.K. Financial Conduct Authority (FCA) Regulatory Sandbox has supported 14 digital ID models. Also, there have been 15 applications for Direct Support to the FCA Innovation Hub and 6 of these are now receiving that support. Many other digital ID providers have engaged with the FCA through various channels such as the Anti-Money Laundering TechSprints. The FCA, in collaboration with The City of London, has also recently completed a pilot Digital Sandbox, which provides data access and a digital testing environment to help innovative businesses develop proof of concept. Two digital ID propositions participated in the pilot. 

* The views expressed herein are those of the author and should not be attributed to the International Monetary Fund, its Executive Board or its management.

Kiffmeister’s #Fintech Daily Digest (02/23/2021)*

Bitfinex Settles N.Y. Probe Into Tether, Hiding of Losses

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 lied about Tether’s USDT reserves. Within ninety days of the agreement February 18, 2021 effective date, and on a quarterly basis thereafter for two years, the firms will be required to publish reports on the composition of Tether reserves. Without admitting or denying any wrongdoing, Tether committed to publicly share these reports.

How to issue a central bank digital currency

A Swiss National Bank working paper proposes a token-based central bank digital currency (CBDC) system without distributed ledger technology. It shows how earlier-deployed, software-only electronic cash can be improved upon to preserve transaction privacy, meet regulatory requirements in a compelling way, and offer a level of quantum-resistant protection against systemic privacy risk. The CBDC proposed here is based on blind signatures and a two-tier architecture, that purportedly guarantees perfect, quantum-resistant transaction privacy while providing anti-money laundering and counter terrorism financing protections for society that are actually stronger than those of banknotes. Neither monetary policy nor financial stability would be materially affected because a CBDC with this design would replicate physical cash rather than bank deposits.

ECB wants veto power on stablecoins in the euro zone

In a legal opinion on the European Union (EU) rules, the European Central Bank (ECB) said it should have the final word on whether a stablecoin should be allowed to launch in the euro zone. “Where an asset-reference arrangement is tantamount to a payment system or scheme, the assessment of the potential threat to the conduct of monetary policy, and to the smooth operation of payment systems, should fall within the exclusive competence of the ECB.” It added the proposed EU rules should be changed to say that its opinion on the matter is binding for national authorities assessing applications to issue stablecoins.   

Central banks of China and United Arab Emirates join digital currency project for cross-border payments

The Digital Currency Institute of the People’s Bank of China and the Central Bank of the United Arab Emirates have joined the m-CBDC Bridge central bank digital currency (CBDC) project for cross-border foreign currency payments. The m-CBDC Bridge initiative is run in partnership with the BIS Innovation Hub (BISIH), the Hong Kong Monetary Authority and the Bank of Thailand. It will further explore the capabilities of distributed ledger technologies by developing a proof-of-concept prototype to support real-time cross-border foreign exchange payment-versus-payment transactions in multiple jurisdictions, operating 24/7. It will analyse business use cases in a cross-border context with both domestic and foreign currencies. 

Following Flows II: Where do Miners Sell?

Miners are frequently blamed for causing dips in the price of Bitcoin. These accusations are often unsubstantiated—worse still, they’re sometimes based on faulty metrics that conflate mining pool payouts with miner spending, ultimately misleading their users. This CoinMetrics research finds that, in line with the conventional wisdom, we find that miners tend to prefer Huobi and Binance to other exchanges, but flows from mining addresses represent a small percentage of total exchange inflows, about 5.5%, and are not a major source of market volatility. 

Managing Risk in DeFi 

This paper examines potential implications, complexities and risks associated with the proliferation of consumer-facing decentralized finance (DeFi) applications within financial services. It provides a taxonomical overview of DeFi applications and identify four key risks for managers, practitioners and scholars.

* The views expressed herein are those of the author and should not be attributed to the International Monetary Fund, its Executive Board or its management.

Kiffmeister’s #Fintech Daily Digest (02/22/2021)*

China tightens online lending rules in fresh blow to Jack Ma’s Ant Group

China’s Banking and Insurance Regulatory Commission (CBIRC) has tightened rules governing how online lending platforms fund their loans, a move that analysts say could hit the valuation of Jack Ma’s Ant Group. Under the rule changes online lending platforms will have to contribute 30 per cent of the funding for loans they offer in partnership with banks. The CBIRC will also cap how much capital commercial banks can commit to online lending in co-operation with tech platforms. The new rules will come into force next year. 

India’s Regulator Tells Companies to Sell Bitcoin Prior to IPOs: Report

The Securities and Exchange Board of India (SEBI) is reportedly cracking down on high-level executives who hold Bitcoin and intend to take their companies public in the coming months. SEBI has asked promoters of such companies to sell off any cryptocurrencies they hold before raising funds from the public, adding that investment bankers and securities lawyers involved with any ongoing Initial Public Offering (IPO) process were already informed of the new regulation. 

Morocco’s central bank to investigate the use of CBDC

Morocco’s central bank Bank-Al-Maghrib (BAM) has reportedly launched an exploratory committee to investigate the pros and cons of a central bank digital currency (CBDC) for the Moroccan economy. But this could be the same old news that was reported back in 2019 because there’s nothing new reported on the BAM website.

Can Governments Stop Bitcoin?

The only way to kill Bitcoin is to make it so that people don’t need it anymore. If no one wants a devaluation-proof, censorship-resistant, permissionless, borderless, non-discriminatory, teleporting financial asset, then no one will feed it energy, and it will die. Perhaps humanity can come up with another technology that addresses these needs. But until then, Bitcoin will thrive. 

People Are Now Searching for NFT More than DeFi on Google

Non-Fungible Token (NFT) mania is now outpacing decentralized finance (DeFi). The search interest for NFT gained traction in the middle of January 2021, and last week more people were busy learning about digital collectibles more than DeFi in the US, as per Google Trends. 

How Common is Crypto?

According to Statista, reliance on remittances and the prevalence of P2P phone payments have led to a steep rise of cryptocurrency use in Nigeria. Almost a third of Nigerians said this applied to them. Recently, businesses in the country have been adding crypto plugins to their phone payment options, adding another way in which Nigerians can use cryptocurrency in their everyday lives. The second and third highest rates of cryptocurrency use in the survey were recorded in Vietnam and the Philippines, respectively. Again, remittance payments play a role in the widespread use of cryptocurrency. 

* The views expressed herein are those of the author and should not be attributed to the International Monetary Fund, its Executive Board or its management.

Kiffmeister’s #Fintech Daily Digest (02/20/2021)*

Non-technical analogy to explain the security and resilience of an ideal offline token-based CBDC

WhisperCash‘s Razvan Dragomirescu provided this great Twitter thread to push back on claim of the recent Riksbank staff memo that, in order for a central bank digital currency (CBDC) to be cash-like, it would require verification by a remote ledger in order to avoid double spending. It dismissed the possibility of using local devices that cannot be tampered with and programmed so that a token cannot be spent more than once, claiming that such 100% tamper-proof devices do not exist. And here’s Razvan (slightly edited by me):

A purely offline CBDC would not come without rules. They would be enforced by a trusted agent of the central bank, in the form of software running inside a TEE or secure element. These would include rate limits on transactions, maximum balances, unique keys per card, etc. In the event of a complete compromise of one card (however unlikely or expensive), the attacker can theoretically mint or double spend any amount. However, she cannot force other legitimate users to bypass the issuer rules on their cards.

For instance, a per-transaction limit of EUR 500 means she can only spend it in increments of EUR 500. A maximum limit of 10 transactions per day or 3 transactions from the same user per day means she can only spend the newfound fortune slowly and in small denominations. You can double spend but you cannot impersonate another user, so you have to use your real (KYC-ed) identity when paying. Maximum balances and maximum offline transaction values mean high value items cannot be bought/sold this way.

It would be like counterfeiting quarters to try and buy a Lamborghini, or buying $10 worth of grocery at the checkout counter by minting a thousand counterfeit pennies one by one. It would be hard to pay for anything meaningful (fast enough to avoid detection), hard to carry in large enough volumes and can still put you in jail for currency counterfeiting if caught. This is better than counterfeit physical cash that can be spent in any volume, to anyone and leaves no trace.

A Third Bitcoin ETF Takes Aim at North American Market

CI Global Asset Manager filed a preliminary prospectus for its CI Galaxy Bitcoin ETF Bitcoin exchange-traded fund (ETF) with the Ontario Securities Commission. The ETF, if approved, would be Canada’s third after Evolve and Purpose launched their own this week. Purpose’s ETF launched yesterday on the Toronto Stock Exchange.  

What Is a Non-Fungible Token (NFT)?

“A NFT (non-fungible token) is a special cryptographically-generated token that uses blockchain technology to link with a unique digital asset that cannot be replicated. Non-fungible tokens differ from popular cryptocurrencies such as Ether (ETH), Bitcoin (BTC) and Monero (XMR), which are fungible; for example, you can exchange one Bitcoin for any other Bitcoin. Although the usage of NFTs has spread in various industries, they’re synonymously associated with the gaming and digital collectibles sectors and are most commonly found as a specific Ethereum token built on the ERC-721 standard. However, in 2021, their use is starting to spread to other blockchains like Binance Smart Chain’s BEP-721 protocol.” 

* The views expressed herein are those of the author and should not be attributed to the International Monetary Fund, its Executive Board or its management.

The Best of the Centralized and Decentralized Worlds*

Please check out this post about the potential convergence of decentralized finance (DeFi) and central banking by my colleague Sonja Davidovic on our new Global Fintech Intelligencer blog: 

There is a perception that DeFi and central banks are worlds apart. However, these two worlds should explore common ground that can unlock the best possible solution for the end-consumer – the transparency and efficiency of the DeFi space paired with safe and reliable liquidity and reduced compliance burden provided by central banks. After all, it should be about working towards one common goal – to provide the safest, most efficient, and reliable user experience in payments.
Click here for more…
* The views expressed herein are those of the author and should not be attributed to the International Monetary Fund, its Executive Board or its management.

Kiffmeister’s #Fintech Daily Digest (02/19/2021)*

Crypto markets continue to surge ahead with Bitcoin hitting new all-time highs ($54,828 so far today) and its total market capitalization spiked through the $1 trillion level!

Bermuda to Pilot Digital Dollar for Rum Sales

Canadian fintech firm Bidali has reportedly launched a pilot to test a digital Bermuda dollar with the support of the Bermuda government. Under the pilot program, popular local rum company Gosling’s Limited will be accepting digital Bermuda dollars through the Stellar network. From there it hopes to expand to other businesses in Bermuda. Bermuda is a British island territory that does not have a central bank and the Bermuda dollar is pegged one-to-one to the U.S. dollar – it’s effectively a non-digital government-issued stablecoin with one USD in reserve for every Bermuda Dollar that’s issued. Also, since 2019, Bermudans have been able to pay taxes with USDC stablecoins. 
DeFi Money Market (DMM), one of the earliest projects aiming to bring real-world assets on-chain, has ceased operations as a result of U.S. Securities and Exchange Commission (SEC) inquiries. Users deposit DAI, USDC, USDT, or ETH to the DMM smart contract in exchange for DMM mTokens that offered over 6% interest rates on the real-world car loans that backed them. DMM runs off a custom-built Chainlink oracle. The SEC subpoena requested information about the mTokens, the DMG governance tokens, and other details surrounding DMM’s operations and governance.     
According to David Gerard (Mr. “Attack of the 50 Foot Blockchain“) “the obvious comparison is when the SEC first started noticing that ICOs were unregistered offerings of securities, in late 2017 — in particular, the administrative order against Munchee in November 2017.” And we all know what happened to ICOs… 
And speaking of David Gerard, this post on 19th century stablecoins is pretty cool! “The U.S. wildcat banking era, more politely called the “free banking era,” ran from 1837 to 1863. Banks at this time were free of federal regulation — they could launch just under state regulation. Under the gold standard in operation at the time, these state banks could issue notes, backed by specie — gold or silver — held in reserve. The quality of these reserves could be a matter of some dispute. The wildcat banks didn’t work out so well. The National Bank Act was passed in 1863, establishing the United States National Banking System and the Office of the Comptroller of the Currency — and taking away the power of state banks to issue paper notes.” Read on here for more fascinating details!

Purpose Bitcoin ETF, North America’s first Bitcoin exchange-traded fund (ETF), got off to a stellar start in its debut on the Toronto Stock Exchange, with investors exchanging $165 million worth of shares. “The U.S. currently has several active filings for a Bitcoin ETF, including the ones from VanEck Associates and Bitwise Asset Management, but the price swings notorious in cryptocurrenies and allegations of industry manipulation remain hurdles to regulator approval.” 
* The views expressed herein are those of the author and should not be attributed to the International Monetary Fund, its Executive Board or its management.