Kiffmeister’s #Fintech Daily Digest (07/31/2021)*

Fed’s Brainard: Can’t wrap head around not having U.S. central bank digital currency

U.S. Federal Reserve Governor Lael Brainard reportedly laid out a range of reasons for “urgency” around the issue of developing a U.S. central bank digital currency (CBDC), including the fact that other countries such as China are moving ahead with their own. “The dollar is very dominant in international payments, and if you have the other major jurisdictions in the world with a digital currency, a CBDC offering, and the U.S. doesn’t have one, I just, I can’t wrap my head around that… That just doesn’t sound like a sustainable future to me.” She also pointed to the risk of stablecoins proliferating and fragmenting the domestic payment system. 

ECCB Launches DCash in Saint Vincent and the Grenadines

The Eastern Caribbean Central Bank (ECCB) has made DCash, the digital version of the EC Dollar, available for public use in Saint Vincent and the Grenadines, as part of its continuing central bank digital currency (CBDC) pilot launched on March 31, 2021. The initial rollout took place in Antigua and Barbuda, Grenada, Saint Lucia and St. Kitts and Nevis. 

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Kiffmeister’s #Fintech Daily Digest (07/30/2021)*

Ukraine central bank now officially allowed to issue digital currency

The National Bank of Ukraine (NBU) is now officially authorized to issue a central bank digital currency (CBDC). Ukrainian President Volodymyr Zelenskyy has signed a new Payment Services law, officially enabling the country’s central bank to issue a CBDC, the digital hryvnia. The new law authorizes the NBU to set up regulatory sandboxes for testing payment services and instruments based on emerging technologies. The new legislation also requires close collaboration between the Ukrainian central bank and local startups in the payment market, taking into account the demand of the private sector.

Crypto exchange Binance to wind down derivatives in Europe

Binance will wind down its futures and derivatives products offerings in Germany, Italy, and the Netherlands. With immediate effect, users from these countries will not be able to open new futures or derivatives products accounts. With effect from a later date to be announced in a further notice, users from these countries will have 90 days to close their open positions.  Also, Malaysia’s Securities Commission (SC) served a public reprimand against Binance, calling for the exchange and all of its entities to cease operations in the country. The SC stated that Binance continued to operate in Malaysia despite previous warnings. 

State Street Expands Cryptocurrency Services

State Street will provide crypto-asset fund administration capabilities for the firm’s private funds clients” in partnership with Lukka. Specifically, State Street will leverage Lukka’s product suite, which includes a proprietary middle and back-office data management solution, Reference Data, and Prime Pricing Data. 

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Kiffmeister’s #Fintech Daily Digest (07/29/2021)*

IMF sees “critical role” as world transitions to digital money

International Monetary Fund (IMF) staff called for a ramping up of the institution’s resources devoted to monitoring, advising on, and helping to manage the “far-reaching and complex transition” to digital money. According to one of the background papers, “the Fund has a critical role to play to help its members harness the benefits and manage the risks of digital money [which] must be regulated, designed, and provided so countries maintain control over monetary policy, financial conditions, capital account openness, and foreign exchange regimes”.

IMF staff also called for close collaboration with other stakeholders like the World Bank, the Bank for International Settlements along with its Innovation Hub, international working groups and standard-setting bodies, as well as national authorities. IMF Executive Directors were broadly supportive of the call for more resources, although many found the resource expansion strategy needed further prioritization and a more phased implementation, calibrated to actual developments and finer details on other work priorities.

IMF staff called for a total of 55 additional staff and experts (versus the current 15) to implement the called-for digital money strategy to be reached in about three years, with an approximately linear progression in hiring. They also looked to rotate staff from other organizations or central banks, with a mix of contractual and staff appointments providing flexibility to adapt resources as technology and policy challenges evolve. At the same time, the report recognizes that it will be challenging to find, recruit, attract, and absorb such new high-caliber and diverse talent into the organization. 

There’s also an interesting little nugget in one of the reports for us central bank digital currency (CBDC) watchers: “A February 2021 survey of IMF mission chiefs suggests central bank digital currencies (CBDCs) are being closely analyzed, piloted, or likely to be issued in 111 member countries.”

New SWIFT Go service transforms low-value cross-border payments

SWIFT has launched SWIFT Go, a low-value cross-border payments service that allows businesses and consumers to make direct transfers from their bank accounts. The company is using tighter service level agreements between institutions and pre-validation of data to provide end customers with a fast and predictable payments experience with upfront visibility on processing times and costs. Go is built on the high-speed rails of the SWIFT global payments interface (gpi) that increases the speed, traceability, and transparency of global fund transfers. Seven global banks, which collectively handle 33 million low-value cross-border payments per year, are already live with the service. 

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Kiffmeister’s #Fintech Daily Digest (07/28/2021)*

Binance Is Making It Harder to Trade Bitcoin Anonymously Amid Regulatory Troubles

Binance is placing more restrictions on customers who haven’t completed all steps of its user verification process, in an effort to better comply with local regulations. New users on the exchange will be limited to daily withdrawals of 0.06 Bitcoin (about $2,000). if they have only completed the platform’s Basic Account Verification. The previous limit was 2 BTC per day ($70,000). The Basic level asks for name, nationality, date of birth, and address. The Intermediate level asks for identification and photos, while Advanced Verification also requires a proof of address in the form of a utility bill or bank statement. 

Digital euro experimentation scope and key learnings

On July 14, the European Central Bank (ECB) announced that they had been joined by experts from the euro area national central banks to conduct experiments aimed at assessing different central bank digital currency (CBDC) design features. More specifically, four experiments were conducted in a multidisciplinary environment and also involving academics and the private sector: 

  • The first workstream focused on an account-based system and tested the issuance, redemption and distribution of a digital euro using a network architecture built on the existing, centrally managed architecture of the TARGET Instant Payment Settlement (TIPS) system, which is operated by the Eurosystem.
  • The second workstream focused on the ability to combine existing systems (conventional centralized ledgers) with newer technologies, such as distributed ledger technology (DLT), in a tiered approach. In this approach, the central bank would issue digital euros and provide them to intermediaries in the first tier, while intermediaries would distribute those digital euros to end-users in the second tier. Technical papers from this workstream have been published by the Banque de France and Banca D’Italia.  
  • The third workstream looked into how a technical solution for a digital euro built on the blockchain technology could perform in terms of the number of payments and money-holders and its energy costs, and how digital identities could be linked and privacy ensured. It showed that the innovative digital euro technology based on the blockchain is highly scalable, meaning that the number of payments made with the digital euro can easily be increased if needed. A technical paper on this workstream was published by Esti Pank (the Estonian central bank).
  • The fourth workstream focused on offline payment solutions (i.e. hardware-based bearer instruments) that could facilitate the use of a digital euro as a bearer instrument. It identified challenges to designing and enforcing time-sensitive rules, such as setting a transaction limit over a certain time frame, as these would require a connection with the online ledger from time to time to ensure that the rules were not breached.

Why is the United States Lagging Behind in Payments?

According to a paper by Diem/Novi’s Christian Catalini and Andrew Lilley, there are at least three ways to remove frictions in payments and rapidly expand the number of individuals and businesses that can access the financial system and cheaply transact in real time. The first is to bring deposits on a single ledger through a central bank digital currency (CBDC), so that transfers between banks are not limited by external liquidity constraints or third-party rails. The second approach is to follow countries such as India and Mexico and increase the throughput of always-on real-time gross settlement (RTGS) systems, the model the US Federal Reserve is pursuing with the introduction of FedNow, targeted for 2023. The third approach is to facilitate the growth of interoperable, stablecoin payment rails by creating the right regulatory framework for these new types of networks to safely increase competition in payments. 

BIS Innovation Hub and MAS publish proposal for enhancing global real-time retail payments network connectivity

The Bank for International Settlements Innovation Hub (BISIH) Singapore Centre and the Monetary Authority of Singapore (MAS) proposed blueprint for enhancing global payments network connectivity via multilateral linkages of countries’ national retail payment systems. Titled Project Nexus, this blueprint outlines how countries can fully integrate their retail payment systems onto a single cross-border network, allowing customers to make cross-border transfers instantly and securely via their mobile phones or internet devices. 

Mastercard Works With Startups to Ease Use of Cryptocurrencies

“Startups focused on crypto and digital assets will now be able to join Mastercard’s Start Path program, which gives fledgling companies access to the network’s executives and technology to help them grow, Mastercard said Tuesday in a statement. Seven crypto-focused startups have joined the program so far, including Uphold and Domain Money, which are building investment platforms for digital assets.” 

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Kiffmeister’s #Fintech Daily Digest (07/27/2021)*

Which jurisdictions head up the retail CBDC league table?

Jonas Gross and I take a deep dive into the leading retail central bank digital currency (rCBDC) efforts. While much attention is focused on the ruminations of China, Europe and the United States, aside from China, smaller jurisdictions are actually leading the way. Although the People’s Bank of China launched their rCBDC pilot in April 2020, Banco Central del Uruguay completed its first pilot already in April 2018, the Central Bank of the Bahamas fully launched their Sand Dollar in October 2020, and the Eastern Caribbean Central Bank launched a pilot in March 2021.

Amazon: No, We Have No Plans to Accept Bitcoin Payments

“Amazon has come out and flatly denied a British newspaper’s report that the e-commerce colossus was planning to accept bitcoin payments by the end of the year. ‘Notwithstanding our interest in the space, the speculation that has ensued around our specific plans for cryptocurrencies is not true,’ a spokesperson for Amazon told CoinDesk by email. “We remain focused on exploring what this could look like for customers shopping on Amazon.” 

Crypto-assets as National Currency? A Step Too Far

The International Monetary Fund (IMF) is warning of the dire consequences of a jurisdiction adopting a crypto-asset as a national currency. For example, government revenues would be exposed to exchange rate risk if taxes were quoted in advance in a crypto-asset while expenditures remained mostly in the local currency, or vice versa. Also, most jurisdictions considering such a move have adopted a major foreign currency as their own, thereby “importing” the credibility of the foreign monetary policy. Neither of these is possible in the case of widespread crypto-asset adoption. Hence, for example, if all prices were quoted in Bitcoin, the prices of imported goods and services could fluctuate massively. In addition, banks and other financial institutions could be exposed to the massive fluctuations in crypto-asset prices. Also, legal tender status requires that a means of payment be widely accessible. However, internet access and technology needed to transfer crypto-assets remains scarce in many countries, raising issues about fairness and financial inclusion. 

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Which jurisdictions head up the retail CBDC league table?*

While much attention is focused on the retail central bank digital currency (rCBDC) ruminations of China, Europe and the United States, aside from China, smaller jurisdictions are actually leading the way. Although the People’s Bank of China launched their rCBDC pilot in April 2020, Banco Central del Uruguay completed its first pilot already in April 2018, the Central Bank of the Bahamas fully launched their Sand Dollar in October 2020, and the Eastern Caribbean Central Bank launched a pilot in March 2021. In this post, Jonas Gross and I take a deep dive into these leading rCBDC efforts.

Overview and overall retail CBDC landscape

According to our CBDC Tracker there are currently at least 57 central banks exploring retail CBDC (rCBDC), of which 15 have either launched, piloted, or are in the very advanced exploration stages. We say “at least” because our count is based on reliable public sources (almost all from the central banks themselves). However, according to the Bank for International Settlements (BIS), 58 of the 65 central banks surveyed at end-2020 were exploring rCBDC. In any case, the growth in the number of rCBDC explorers has been remarkable (see figure below).

Before moving on to who’s doing what, it is important to be clear as to what is and is not rCBDC. The BIS defines rCBDC as 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 is also wholesale CBDC, which is limited to a set of predefined user groups, typically financial institutions. That’s not what we’re talking about here. Also the “direct liability of the monetary authority” condition precludes the Marshall Islands SOV and Cambodia’s Project Bakong.

We categorize the status of the 57 central banks that we track based on their exploratory stages (see figure below). There are 5 jurisdictions that have either fully launched (Bahamas) or have launched pilots (China, Eastern Caribbean Central Bank, Jamaica, and Uruguay). Another 12 are in the advanced stages of rCBDC research, of which 5 have started (or soon will start) proofs of concept (Ghana, Japan, Korea, Sweden, and Ukraine). Proofs of concept (PoCs) differ from pilots as the former takes place in a laboratory environment (e.g., among central bank staff) and the latter involves “real world” testing, typically over limited time periods among limited populations.

The largest category comprises 40 central banks that are in the exploratory stage, typically consisting of desk research and perhaps some reaching out to technology platform providers. Some in this group may actually belong in the “advanced” group, but we have no direct evidence of that as we mainly analyze central bank communication.

Leading CBDC explorers

In the following, we talk about worldwide rCBDC explorers in more detail, focussing on the five rCBDC projects that have either fully launched or have launched pilots. In particular, we discuss the Bahamian Sand Dollar, the Eastern Caribbean DCash, the Chinese e-CNY, and the Uruguayan e-Peso in detail. Due to the lack of available open-source information, we don’t talk about the Jamaican CBDC project. We compare these projects and classify them according to the following criteria:

  • Status: In which phase is the rCBDC project? 

  • Date of launch: When has the rCBDC system or the rCBDC pilot been launched?

  • Objectives: Why does the central bank intend to issue a rCBDC?

  • Offline payments: Are offline rCBDC payments without internet connection possible?

  • Technology provider: Which company is the rCBDC technology provider? Is the rCBDC infrastructure based on a distributed or a centralized ledger?

We don’t talk about CBDC remuneration and distribution as both are similar for all projects. All projects considered follow a (cash-like) zero remuneration and are distributed via a two-tiered system from licensed payment services providers to end-users. 

Sand Dollar: The only fully launched rCBDC in the world

Overview. The Bahamas is the first and only jurisdiction worldwide that has fully launched a rCBDC. It is available across the whole jurisdiction, i.e., all 700 islands, and, thus, for all 380,000 inhabitants. The Central Bank of the Bahamas (CBoB) launched the Sand Dollar in October 2020, after conducting several pilots in the islands of Exuma starting in December 2019 and Abaco starting in February 2020. The Sand Dollar is based on a distributed ledger technology (DLT) provided by the technology company NZIA Limited.

Objectives. The CBoB has issued the Sand Dollar as part of its payment system modernization initiative mainly to achieve the following four objectives: First, the efficiency of the existing Bahamian payment systems should be increased through more secure transactions and faster settlement speed. Today, the Bahamian economy is highly dependent on cash. This dependence raises high maintenance, distribution, and transaction costs but also increases dependence on ATMs to withdraw banknotes. However, in the Bahamas, this dependence is particularly problematic as the amount of bank breaches available declined sharply. Second, the Sand Dollar should improve financial inclusion as, according to the CBoB, there are severe gaps in the access to financial services. Thus, an easily accessible rCBDC might improve financial inclusion. Third, the rCBDC system should provide non-discriminatory access to payment systems without regard for age, immigration, or residency status. Fourth, the rCBDC should be used to fight money laundering, counterfeiting of money, and other illicit activities mainly stemming from the high market share of cash. Hence, the Sand Dollar utilizes different limits for users and companies (see below) to participate in the payment system. 

Offline payments, access, and international use. Users can transact the Sand Dollar for free both digitally via smartphones (iOS and Android) and via a physical prepaid card. This prepaid card can be used for payments at every point-of-sale where Mastercard payments are accepted. Currently, it is not possible to conduct offline transactions as the money is not stored locally on the smartphone or the prepaid card, but has to be synchronized online. For receiving money, it is necessary to possess a central bank approved e-Wallet. In general, users with a bank account and a government-issued ID are allowed to transact B$10,000 of Sand Dollars monthly and hold B$5,000 worth. Non-residents and users that do not (or can’t) prove their identity and/or who do not want to (or can’t) link to a bank account, are faced with a transaction limit of B$1,500 per month and a balance limit of B$500 to limit potential illicit use. Business users have higher transaction and holding limits based on annual revenues. However, it is currently not possible to transact with the Sand Dollar outside the Bahamas. 

Resources: Whitepaper and Homepage

DCash: First rCBDC pilot in a currency union

Overview. DCash, the rCBDC project in the Eastern Caribbean Currency Union (ECCU), is the first rCBDC pilot worldwide conducted in a currency union. The Union consists of the eight Carribean countries with approximately 1.4 million inhabitants, namely Anguilla, Antigua and Barbuda, Commonwealth of Dominica, Grenada, Montserrat, St Kitts and Nevis, Saint Lucia, and St Vincent and the Grenadines. The developing and testing phase of the pilot started in March 2019, rollout and implementation started in March 2021 in the member countries Antigua and Barbuda, Grenada, Saint Lucia and Saint Christopher (St Kitts), and Nevis. DCash is also based on a DLT developed by the technology provider Bitt.

Objectives. The Eastern Caribbean Central Bank seeks to achieve the following objectives with DCash. As for the Sand Dollar, payment efficiency should be increased. Today, cash is the mostly used means of payment in the ECCU leading to high economic costs. Furthermore, current digital payment methods and banking services are highly inefficient. Payment service providers usually charge a high transaction fee and require a relatively high minimum transaction amount. Also methods to settle cheque transactions remain slow and do not fully support the more and more digitized commerce. Further broad objectives include increasing opportunities for financial inclusion, growth, competitiveness, and resilience for citizens in the ECCU.

Offline payments, access, and international use. Offline DCash transactions are currently not possible. When initiating a payment, internet connection is required. If connection is lost, the payment will still be processed, but the adjusted balance will not be visible immediately but only as soon as connection is restored. International transactions both for non-residents in the ECCU and for non-residents abroad is, in contrast to the Bahamas, possible so that transactions work regardless of the physical location. Transactions can be conducted via a mobile App available for all iOS and Android users, conducted free of charge, and no minimum payment amount is required. Participating financial institutions and approved service providers manage access to the DCash system via converting bank deposits into rCBDC. Additionally, for users without a bank account, there are so-called value-based wallets that can be loaded at participating merchants and approved service providers that convert physical cash into DCash. While these wallets offer low know-your-customer (KYC) requirements and don’t require a bank account connection, they have low monthly transaction limits to limit potential illicit use (EC$1,000 to EC$2,700 depending on the user’s risk profile). There are also register-based wallets with higher limits that require a bank account linkage, varying from EC$3,000 to EC$10,000 per day.

Resources: Homepage

e-CNY: First CBDC pilot in an advanced economy

Overview. China was one of the first industrialized economies that started exploring rCBDCs back in 2014 and has already designed and developed their rCBDC system e-CNY. Since April 2020, this infrastructure is being tested excessively in terms of a large-scale pilot. In contrast to DCash, the pilot has not been revealed country-wide for the approximately 1.4 billion Chinese citizens but is open to selected entities in the whole country. The pilot is continuously being extended so that already households, banks, companies, merchants, etc. are testing the infrastructure. Possibly, e-CNY could be fully launched at the Winter Olympics in 2022. In contrast to the Sand Dollar and DCash, e-CYN is not based on a distributed ledger, but provides capabilities to build DLT applications on top of the centralized infrastructure. However, details about the technology used are not communicated by the People’s Bank of China (PBoC).

Objectives. Mu Changchun, Director-General of the Digital Currency Institute of the PBoC, said during the BIS Innovation Summit 2021 that the PBoC seeks to reach the following three objectives. First, financial inclusion should be increased by providing an easily accessible rCBDC. Second, the rCBDC system should increase payment system resilience, efficiency, and safety, and support “fair competition”. In China, mobile payments are used heavily, which makes Chinese dependent on digital private sector infrastructures. The PBoC wants to establish a public payment infrastructure that is independent of the private sector and also allows for transactions if, in times of emergency, such payment infrastructures are not available. Third, the PBoC wants to increase monetary sovereignty by manifesting its role and lower the use of non-fiat denominated money, such as cryptocurrencies, and foreign currencies.  In the recent whitepaper on the e-CNY, it was further said that the e-CNY should explore the improvement of cross-border payments. Even if the e-CNY is currently mainly designed to be used for domestic payments, it should in the future allow for cross-border use. 

Offline payments, access, and international use. The current e-CNY pilot also features offline payments as digital e-CNY tokens are stored on the phone and can also be transferred in an offline way from phone to phone. Today, it remains unclear in which form non-residents are allowed to use the e-CNY. As the PBoC stresses that the e-CNY might not be available for non-residents worldwide without limits, it seems reasonable to assume that e-CNY will be mainly available for residents, visitors, e.g. for the Winter Olympics, and tourists from China abroad. However, the exact design has not been revealed yet. Like those covered above, the e-CNY uses balance and turnover limits, depending on the registration process. Users who register only their SIM cards face very low limits (maximums of ¥2,000 per transaction and ¥5,000 per day, and maximum holdings of ¥10,000) versus those who undergo full know-your-customer requirements and link their bank accounts (¥50,000 per transaction, ¥100,000 per day, and ¥500,000 holding). 

Resources: White Paper

e-Peso: First recent CBDC pilot

Overview. The Banco Central del Uruguay (BCU) ran the first rCBDC pilot in recent times. The first rCBDC was actually the Avant card system operated by the Bank of Finland from 1993 to 2006. Some might argue that the Banco Central del Ecuador Dinero Electrónico that operated between 2014 and 2018 was a rCBDC, but some others argue that it was merely a synthetic rCBDC, i.e., e-money fully backed by central bank money, because Ecuador is completely dollarized. In any case, in 2014 the BCU was approached by the Roberto Giori Company, a firm specialized in money security, with a preliminary rCBDC proposal, and after three years of planning and risk analysis, a six-month country-wide e-Peso pilot was launched in November 2017. The BCU considered it successful and technology worked without incidents. The BCU continues to analyze and study the possibility of rCBDC issuance.

Objectives. The BCU’s main motivation for exploring rCBDC issuance is to reduce the cost of managing physical cash. Also, rCBDC may facilitate financial digitalization by providing a platform for startups developing new products and services, and for incumbent financial institutions to offer better products and services. In addition, they are hopeful, based on empirical evidence, that the penetration of electronic means of payment will reduce crime rates. Finally, the CBU could plug into granular real-time payments data, which is not available with physical cash, to sharpen monetary policy analysis and efficiency.

Offline payments, access, and international use. Offline payment functionality was not tested during the pilot, and there has been no mention of offering it in future pilots, or ultimate launch. The e-Peso pilot was aimed at domestic usage only and no mention has been made of including that in the future. The e-Peso pilot did not apply the tiered user limits applied in the above projects. There were no daily transaction limits but individual wallet balances  were limited to UYU30,000 and merchant wallets were limited to UYU200,000. 

Resources: Pilot Recap and Peer Review

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Kiffmeister’s #Fintech Daily Digest (07/26/2021)*

Amazon ‘definitely’ lining up Bitcoin payments and token, confirms insider

Amazon is reportedly looking to accept Bitcoin payments by the end of the year, and is investigating its own token for 2022. Amazon is also currently looking for a “Product Lead” to develop its digital currency and blockchain strategy and product roadmap.

Central bank digital currency for the UK

This column summarizes the findings from a Centre for Macroeconomics survey of experts on the UK economy, who were nearly unanimous in agreeing that a Bank of England-issued digital currency would benefit the British economy. Half of the panel also believed that a digital currency would have limited impact on the UK banking system. 

Crypto Exchanges FTX, Binance Limit Traders to 20 Times Leverage

Binance and FTX are reducing maximum leverage on offer to traders to 20 times, instead of 125 and 101, respectively. While crypto exchanges moved to rein in the most extreme use of the strategy, they are far from turning it off — with 20-times leverage still higher than what’s offered in standard U.S. stock-market accounts.

Tether Executives Said to Face Criminal Probe Into Bank Fraud

A U.S. Department of Justice (DoJ) probe into Tether is homing in on whether executives behind the USDT stablecoin committed bank fraud, a potential criminal case that would have broad implications for the crypto-asset market. The DoJ is scrutinizing whether Tether concealed from banks that transactions were linked to crypto-assets. 

Cash and COVID-19: The impact of the second wave in Canada

The Bank of Canada published some survey-based insights into how COVID-19 has affected the demand for, and the usage of, cash. Cash in circulation increased from $83 billion before the pandemic to more than $100 billion by the end of 2020, mostly due to large-denomination bank notes ($50 and $100). Actual cash usage was more prevalent among older, less-educated and low-income individuals.

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Kiffmeister’s #Fintech Daily Digest (07/25/2021)*

Mondex Memories and CBDC

This blog post makes a nice backdrop to my regular reminder that anonymous peer-to-peer (P2P) offline digital currency is not an impossibility, as some claim. In fact, it’s been done before. Mondex was a stored value digital currency platform that took the form of a rechargeable smart card on which prepaid values are stored locally.

“We feel that an offline capability is essential for a central bank digital currency (CBDC). Networks break, whether through lack of coverage, software or hardware failure, high demand or cyberattack (or even physical attack). It’s better if the wheels of commerce can keep turning in any of these circumstances.”

My Two Cents Worth

Mondex was not alone. There was also MintChip and VisaCash. However, none of them developed enough customer acceptance to become viable. Also, at the time, computer scientists argued that such smartcards could never be strong enough to support existing  currency schemes. However, rapid technological progress since then is likely to have addressed some of these security concerns, such as the complex offline capable dynamic data authentication/combined dynamic data authentication security features for stored value cards. 

In fact, the Bank of  Canada is currently investigating what they call a “universal access device” (UAD) to securely store and transfer CBDC in a cash-like way. In terms of their requirements, a UAD should be manufactured at a low cost and issued by the Bank to ensure maximum inclusion. A UAD could embed a local, secure store of value, be network-independent and operate for long periods on a local power source. If there is an infrastructure failure, a UAD may prevent the interruption of digital transactions.

And WhisperCash and BitMint are a couple of private companies working on UAD-like applications. In particular, WhisperCash has actual working prototypes, dedicated smart cards, and solutions that work on basic featurephones. 

The Riksbank is Not a Believer

However, the Swedish Riksbank, in a recent working paper, claims that “all CBDCs will need a ledger that keeps track of CBDC ownership regardless of whether they are token-based.” They assert, with no substantiation, that:

“It is possible to make exact copies of digital tokens, because a digital token is essentially a string of zeros and ones. Regardless of where it sits, this piece of data is imminently copyable. We can reproduce it exactly, in as many copies as we wish, without harming the original. We often encounter the argument that digital signatures make it impossible to counterfeit digital tokens. Yes, that is true, but copies can still be made. Are they not counterfeits? We have also heard the argument that notes and coins cannot be double spent because they are “handed” over to the receiver. But this is obviously not the case. The point is rather that it is sufficiently hard/expensive to make copies that are completely indistinguishable from the original (as in the case of digital tokens). 

A-priori it seems that a simple solution to the double spending problem would be to use local devices that cannot be tampered with and program them such that a token cannot be spent more than once. Unfortunately, such 100 per cent tamper-proof devices do not exist. Furthermore, the economic incentives for tampering with the devices are strong, and the system would not support “graceful degradation”. The latter means, essentially, that that it is sufficient for one device or one vendor to be malicious for the whole system to break down. These challenges might be mitigated by a sufficiently large chance and cost of being caught in double spending CBDC tokens. But, that would require that it is possible to trace down where the double spending has taken place, something that again introduces the need for a ledger.” 

The gauntlet has been thrown down!


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Kiffmeister’s #Fintech Daily Digest (07/24/2021)*

Central Bank of Colombia Announces First Blockchain Bond Pilot Program

El Banco de la República Colombia participated in a blockchain bond program pilot. Issued by Colombian commercial bank Davivienda, with counseling from the Inter-American Development Bank (IDB), this pilot pilot saught to explore the benefits of the new technology and study its application for future bond issues. The bonds will be issued and managed using IDB’s LACChain blockchain platform, and the role of the central bank will be to run an observing node in the blockchain and support settlement in its high-value payments system.  

Swift goes live with payment pre-validation service

SWIFT’s Payment Pre-validation service that enables banks to verify payee account details before an international payment is sent, removing a key point of friction in cross-border transactions, went live. One of the leading causes for settlement fails or delays is incorrect beneficiary information. And because they are detected late in the process, these issues can be among the most time-consuming and costly to resolve. The new service allows a sending bank to confirm account details, via an API, with the receiving bank from the start of the process so that any data or account problems are identified up front. 

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Kiffmeister’s #Fintech Daily Digest (07/23/2021)*

Nigeria’s Central Bank Targets October for CBDC Proof of Concept Launch

The Central Bank of Nigeria (CBN) is reportedly launching a central bank digital currency (CBDC) proof of concept (PoC) by October 1, 2021. The source is said to be the information technology director for the bank, Rakiya Mohammed, who disclosed that the CBN had been researching since 2017 to develop and adopt the digital currency. The project called ‘GIANT’ will run on the hyper-ledger fabric blockchain. The announcement was supposedly made at the 306th Banker’s Committee meeting, but I have found no mention of it on the CBN website. Also there’s some confusion about whether it’s a pilot or PoC, because the article says that a “pilot” will be launched by October 1, but a PoC wouldn’t happen until year end, which is obviously back assward. If anyone out there has more concrete information please pass it on! 

Chinese electricity bills to become payable using digital yuan

The People’s Bank of China digital yuan wallet app will reportedly include an electricity bill payment feature designed by the country’s State Grid. Users will be able to pay their electricity bills through the digital yuan app directly and do not need to link payment to a bank card. The new function will be tested in nine cities and regions, including Xiong’an New Area, Suzhou, Chengdu, Shanghai, Xi’an, Dalian, Changsha and Qingdao, and at the Winter Olympics in Beijing in 2022.

JPMorgan Extends Banking Services to Bitcoin Exchanges

JPMorgan Chase has reportedly taken on Coinbase and Gemini Trust as banking customers, the first time the bank has accepted clients from the cryptocurrency industry. The accounts were approved in April, and transactions are just starting to be processed. The bank is primarily providing cash-management services to the firms and handling dollar-based transactions for the exchanges’ U.S.-based customers. It will process wire transfers, and deposits and withdrawals through the Automated Clearing House network, an electronic funds-transfer system. 

Allianz launches blockchain claims solution in 23 countries

“Allianz, Europe’s largest insurer, went into production mid-May with a solution to streamline international motor insurance claims. The enterprise blockchain platform has been deployed across 23 European subsidiaries. By using blockchain, there is a single source record of the decision about each claim. That cuts time spent on administration and hence cost, and it means the claim is settled faster for the customer.”

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