Kiffmeister’s #Fintech Daily Digest (07/18/2021)*

El Salvador May Launch National Stablecoin: Reports

El Salvador’s government is reportedly planning to issue a U.S. dollar stablecoin. The currency would actually be issued by the central bank, pegged to the value of the U.S. dollar and backed by reserves of real U.S. dollars. The cryptocurrency would be called the “Colón-Dollar,” a reference to the country’s former national currency that was replaced with the U.S. dollar in 2001. The president’s brothers reportedly met with representatives from Cardano, WhizGrid and Algorand at different times. 

Should there be a digital euro (or a digital dollar for that matter)?

The Bank of Finland’s Aleksi Grym kicked off an interesting Twitter discussion by asking whether there needs to be a digital euro (or digital dollar). One justification could be the threat to monetary sovereignty from other countries’ central bank digital currencies (CBDCs), foreign Bigtechs and other private money innovations (crypto-assets and stablecoins). Another view is that, if digital money and payments are an essential service, then digital euros and dollars are for those (i) who cannot afford the private options, or (ii) who trust the government to be a more reliable issuer than any private party. There is also the risk that private payment rails could become too important to fail.

Also, even in developed countries, using digital money and payments can be inefficient and expensive, and central banks can fill the gap because they’re not under pressure to make money on this. They don’t want to sell your personal data or show you ads. Furthermore, if the ability to make digital payments are seen as public goods that should available to all indiscriminately, only the state has the incentives to fund it. In any case, people can fall back to the CBDC if they dislike the private. In that respect, CBDC can be seen as a baseline for private entities to build on or compete with.

My view is that central banks shouldn’t be competing with private payment service providers unless there’s a clear market failure that other measures, such as regulations, can’t mitigate. But if a digital euro or dollar is deemed necessary, it should be aimed at small cash-like (i.e., anonymous) payments for users priced out of private digital payment rails. 

What constitutes an “offline” payment in the context of digital currency?

Razvan Dragomirescu set out his (and my) defining characteristics of “offline” payments in the CBDC context. First, if either party needs to be online during the transaction, or after the transaction to claim the funds, this is not offline. If the payee cannot use funds received offline from the payer to immediately pay someone else (offline), this is not an offline system. If the payee cannot verify that the payer is not double spending without going online, it is not an offline system.

Also, there should be no need to get online to sync with the network. The offline payments act as the network (with nodes following a common set of rules due to them running in secure elements that users can’t modify), there is no online network or server to sync with.  So the CBDC system is basically about transferring “IOUs” that are issued by the central banks and redeemable there.

*For those interested in intra-day updates and news that didn’t make the Daily Digest cut, please check out my Diigo fintech bookmarks: