Kiffmeister’s #Fintech Daily Digest (02/16/2022)*

Digital ruble starts pilot testing

The creation of a prototype digital ruble platform was finished in December 2021, and twelve banks are now ready to pilot test the platform. Three of them have already connected to the platform, and two have successfully completed a full cycle of digital ruble transfers between clients using banking mobile applications. In addition to opening digital wallets on the digital ruble platform, clients were also able to exchange non-cash rubles in their accounts for digital ones, and then they transferred digital rubles between themselves.

The first stage of the pilot includes issuing digital rubles, opening of digital wallets by banks and households, and transfers between individuals. At the second stage, it is planned to test payments for goods and services at retail and service companies, payments for public services, sales of smart contracts, as well as interaction with the Federal Treasury. Further on, it is suggested to introduce the possibility of making offline payments, set up interaction with financial intermediaries and digital platforms, and also conducting digital ruble transactions with non-residents. [Read more]

FSB Assessment of Risks to Financial Stability from Crypto-Assets

The Financial Stability Board (FSB) published an examination of developments and associated vulnerabilities relating to unbacked crypto-assets, stablecoins; and decentralised finance (DeFi) and other platforms on which crypto-assets trade. The report notes that although the extent and nature of use of crypto-assets varies across jurisdictions, financial stability risks could rapidly escalate, underscoring the need for timely and pre-emptive evaluation of possible policy responses.

Crypto-assets remain a small portion of overall global financial system assets, and direct connections between crypto-assets and systemically important financial institutions and core financial markets, while growing rapidly, are limited at the present time. Nevertheless, institutional involvement in crypto-asset markets, both as investors and service providers, has grown over the last year, albeit from a low base. If the current trajectory of growth in scale and interconnectedness of crypto-assets to these institutions were to continue, this could have implications for global financial stability.

DeFi has recently become a fast-emerging sector, providing financial services using both unbacked crypto-assets and stablecoins. Moreover, a relatively small number of crypto-asset trading platforms aggregate multiple types of services and activities, including lending and custody. Some of these platforms operate outside of a jurisdiction’s regulatory perimeter or are not in compliance with applicable laws and regulations. This presents the potential for concentration of risks, and underscores the lack of transparency on their activities.

Stablecoin growth has continued, despite concerns about regulatory compliance, quality and sufficiency of reserve assets, and standards of risk management and governance. At present, stablecoins are used mainly as a bridge between traditional fiat currencies and crypto-assets, which has implications for the stability and functioning of crypto-asset markets. Were a major stablecoin to fail, it is possible that liquidity within the broader crypto-asset ecosystem (including in DeFi) could become constrained, disrupting trading and potentially causing stress in those markets. This could also spill over to short-term funding markets if stablecoin reserve holdings were liquidated in a disorderly fashion.

The report highlights a number of vulnerabilities associated with crypto-asset markets. These include increasing linkages between crypto-asset markets and the regulated financial system; liquidity mismatch, credit and operational risks that make stablecoins susceptible to sudden and disruptive runs on their reserves, with the potential to spill over to short term funding markets; the increased use of leverage in investment strategies; concentration risk of trading platforms; and the opacity and lack of regulatory oversight of the sector. [Read more]

The Chainalysis 2022 Crypto Crime Report

According to Chainalysis, crypto-based crime hit a new all-time high in 2021, with illicit addresses receiving $14 billion over the course of the year, up from $7.8 billion in 2020. However, this represented just 0.15% of total crypto-asset transaction volume, which grew to $15.8 trillion in 2021, up 567% from 2020’s totals. Hence, illicit activity’s share of cryptocurrency transaction volume is actually declining. [Read more]

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Central Bank Digital Currency Workshop, Hosted by the CBDC Think Tank

The CBDC Think Tank (CBDCTT)  is hosting an in-person CBDC Workshop in Washington DC on February 24 exclusively for central bank and finance ministry staff looking to understand and position for CBDC issuance.  [Register here]

Also, in Q2 2022, the CBDCTT will launch the OpenCBDC Sandbox for evaluating, studying and learning from the OpenCBDC Boston Fed and the MIT Digital Currency Institute open source CBDC platform. It will provide easy to use access, with the CBDCTT providing training and all updates. It’s available exclusively to central banks and official institutions. [Read more]