Kiffmeister’s #Fintech Daily Digest (08/29/2021)*

Ethereum’s Blockchain Split in Two

Last week, Ethereum’s blockchain has split in two from a bug in a previous version of the chain’s main node software. The software, known as Geth, makes up roughly 75% of Ethereum nodes and as much as 73% of Geth nodes have yet to update to the new version to fix the bug. That meant that around 50% of Ethereum nodes were running a split-off chain with out-of-date and bugged software that could allow double-spends. However, it had little impact as most of the miners had already switched to updated versions of Ethereum software. It seems that it was mostly non-mining nodes that had yet to make the switch to the new version of the software. 

Private Digital Currency and Monetary Sovereignty

This paper by the Bank of Canada’s Scott Hendry and Yu Zhu confirms the validity of central bank concerns that wide adoption of a private digital currency and decline in the use of central bank money may undermine monetary sovereignty. The analysis is based on a theoretical model in which fiat money and the digital currency differ in the types of transactions that they can serve, with the latter dominating in online transactions. Although the central bank wants to maintain the value of the fiat money by keeping low inflation in case households want to use the fiat money for transactions, a welfare-maximizing central bank would also want to encourage households to use e-money for transactions where e-money has an advantage. This can be achieved by raising inflation of fiat money since it is a substitute for e-money, and the incentive to raise inflation would dominate if the usage of fiat money was sufficiently low. However, if the use of the central bank money becomes sufficiently low, this leads to high inflation and low welfare. The paper concludes that, to defend monetary sovereignty, the central bank should maintain or expand the use of central bank money, for example, by offering a central bank digital currency (CBDC) designed to be a perfect substitute for the private e-money.

Avanti Applies to Become a US Federal Reserve Member Bank

Wyoming-based Avanti Financial Group has filed an application to become a Member Bank of the Federal Reserve. This membership application is different from Avanti’s prior application to obtain payment system access from the Federal Reserve via a master account, which Avanti filed in October 2020 and which remains pending. Avanti meets the requirements for both membership and payment system access, and with this latest application, Avanti becomes the first digital asset bank to seek formal regulation by the Federal Reserve in addition to its existing regulator, the Wyoming Division of Banking. 

Banco de Reserva del Perú on Central Bank Digital Currency

Banco de Reserva del Perú has apparently been studying CBDC since at least 2019. “Central banks must continue with the analysis, both conceptual and technological, in order to be prepared for eventual changes in the conditions they face regarding the conduct of monetary policy in the future. It is essential to continue with the study and analysis of the potential effects of the issuance of a digital currency, as well as learning from the experiences of other countries on the subject.” I’ve added Peru to my tabulation of retail CBDC explorers.

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