Kiffmeister’s #Fintech Daily Digest (02/28/2022)*

I’ve updated my tabulation of retail central bank digital currency (CBDC) explorers to include Uganda and update a few links.

Cecchetti and Schoenholtz Comments on Fed CBDC Paper

Steve Cecchetti and Kermit Schoenholtz responded to the 22 questions posed in the Fed’s central bank digital currency (CBDC) discussion paper. In general, they doubt that the benefits of a U.S. CBDC will exceed the risks, and that other, less risky, means are available to achieve all the key benefits that CBDC advocates anticipate. But if the Fed were to go ahead, they suggest that there should be no cap on individual holdings, to avoid a premium on CBDC (compared to other central bank liabilities) that would just redirect runs into close substitutes (such as Treasury bills).

Also, the Fed should expect to pay interest on CBDC because it would be politically unsustainable for the Fed to pay interest on wholesale digital liabilities without paying interest on retail digital liabilities. Also, not paying interest on CBDC would diminish its attractiveness relative to other safe, liquid instruments. Plus, that interest will be in part a mechanism to compensate the private intermediaries for performing the necessary services of creating and maintaining accounts, verifying identities, tracking assets, implementing transactions, and monitoring for suspicious activity.

They acknowledge that these would increase run risk in the private financial system, but in their view all of the benefits expected from issuing CBDCs can be achieved less disruptively, and they provide alternative mechanisms for five widely claimed benefits. They see two potential developments that could make a U.S. CBDC worthwhile; (i) if regulation of stablecoins prove politically infeasible (see their earlier post), or (ii) if other highly trustworthy financial jurisdictions (with convertible currencies, credible property rights protections, and free cross-border flow of capital) offer their own CBDC.

If the Fed does go ahead an issue CBDC, offline capability would add to its attractiveness. When the internet is not available, mobile telephony could provide a backup, and to facilitate everyday payments, small transactions also should be feasible offline, via Bluetooth or NFC links. [Read more]

Central Bank of Trinidad and Tobago to make decision on CBDC pilot by mid-year

The Central Bank of Trinidad and Tobago reportedly hopes to make a decision on a possible CBDC pilot by mid-year. The central bank’s  focus is on improving the payments system by promoting more widespread, safe and efficient electronic financial transactions. It is receiving IMF technical assistance, including on technical aspects and country experiences. [Read more]

Tracing the footprint of cryptoization in emerging market economies

This Bank for International Settlements (BIS) note provides estimates of the extent of “cryptoization” in emerging market economies (EMEs). In countries with volatile and/or depreciating exchange rates, holders of domestic fiat currencies have incentives to shift into reserve currency-pegged stablecoins, which conveniently help avoid capital controls and financial integrity requirements. The BIS note found that trading of US dollar-linked stablecoins vis-à-vis some EME currencies has soared since 2020, particularly against the Turkish lira and the Brazilian real. In addition, trading of risky crypto-assets, such as Bitcoin, also spiked in some EMEs facing depreciation pressure. [Read more]

The emerging autonomy-stability choice for stablecoins

This paper by Maarten van Oordt illustrates how fiat-backed/pegged stablecoin peg deviations may occur when the issuer doesn’t have reliable access to the traditional payment system of the jurisdiction that issues the relevant fiat currency. It suggests that national authorities could make stablecoin issuer access to payment systems conditional on submitting to regulatory controls. Stablecoin users would then face a choice between regulated stablecoins with a stable value but little autonomy, and alternative stablecoin arrangements with more autonomy but a less stable value. [Read more]