Month: March 2022

What Is and Isn’t a *Wholesale* Central Bank Digital Currency? (as of March 30)

~ kiffmeister

To see the most up to date version of this tabulation, please go to: https://kiffmeister.com/jurisdictions-where-wholesale-cbdc-is-being-explored/

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According to the Bank for International Settlements (BIS) central bank digital currency (CBDC) is a digital payment instrument, denominated in the jurisdiction’s unit of account, that is a direct liability of the jurisdiction’s monetary authority. If it’s a broadly available general purpose payment instrument, we call it “retail” CBDC and “wholesale” CBDC usage is restricted, typically to financial institutions.

Note that I never mentioned the technology platform – whether it runs on a centralized or distributed ledger, or whether there is even a ledger at all (i.e., “token” based). And that’s because discussions around retail CBDC are generally agnostic about the platform type. However, it’s my sense that that is not the case for wholesale CBDC.

And that may be because wholesale CBDC is not really anything new. For example, a 2018 IMF staff discussion note characterized central bank reserves as a “wholesale form of CBDC used exclusively for interbank payments” which has been around for ages. And in 2020, ECB legal staff noted that “the issuance by central banks of digital liabilities and the corresponding holding, by third parties, of intangible money claims against the balance sheet of the digital liability-issuing central bank would not represent a genuine novelty.”

And a 2020 paper that surveyed wCBDC research found that “the overarching motivation for CBDC research by central banks is to assess the impact of distributed ledger technology (DLT) on financial market infrastructures (FMIs). Which all implies to me that when people say “wholesale CBDC” they really mean to say is DLT- based wholesale CBDC. This may be a trivial discussion but when we say “retail CBDC” we encompass all platforms and as everyone knows I’m a stickler on definitions!

I’ve tabulated below the experiments that have popped up in my Daily Digest. I’ve categorized them according to use cases (domestic payments, cross-border payments, and securities settlement). Two projects are cross-throughed (Project Stella and Project Nexus) because I’m not certain that there is actually a wholesale CBDC component. Anyone who can throw light on those two projects, or think I’ve missed any, please let me know in the comments!

Domestic Payments System Focused Wholesale CBDC Experiments

Central Bank

Project

Platform/Vendor Partner(s)

Reserve Bank of Australia (RBA)

Interbank payments

Ethereum

Bank of Canada

Project Jasper Phase 1

Ethereum

Project Jasper Phase 2

R3 Corda

Monetary Authority of Singapore (MAS)

Project Ubin Phase 1

R3 Corda

Project Ubin Phase 2

Hyperledger Fabric & Quorum

South Africa Reserve Bank (SARB)

Project Khokha

Quorum

Bank of Thailand (BOT)

Project Inthanon Phase 1

R3 Corda

Project Inthanon Phase 2

R3 Corda

 

Cross-Border Payments Focused Wholesale CBDC Experiments

Central Bank

Project

Platform/Vendor Partner(s)

Bank of Canada & Monetary Authority of Singapore

Project Jasper-Ubin

R3 Corda & Quorum

Banque de France (BdF)

Cross-Border Payments

Multiple Platforms

European Central Bank (ECB) & Bank of Japan (BoJ)

Project Stella Phase 1

Hyperledger Fabric

Project Stella Phase 2

R3 Corda, Elements, Hyperledger Fabric

Project Stella Phase 3

Hyperledger Fabric

Hong Kong Monetary Authority (HKMA) & Bank of Thailand (BOT)

Project Inthanon-LionRock 1

R3 Corda

Project Inthanon LionRock 2

Consensys

Saudi Arabian Monetary Authority (SAMA) and the CBUAE

Project Aber

Hyperledger Fabric

Bank for International Settlements Innovation Hub (BISIH) and:

 

 

Swiss National Bank and Banque de France

Project Jura

R3 Corda

MAS, CBs of Italy and Malaysia

Project Nexus

?

RBA, Bank Negara Malaysia (BNM), MAS, and SARB

Project Dunbar

R3 Corda and Quorum

HKMA, BOT; the People’s Bank of China (PBOC), and CBUAE

Multiple CBDC (mCBDC) Bridge

ConsenSys

 

Securities Settlement System Focused Wholesale CBDC Experiments

Central Bank

Project

Platform/Vendor Partner(s)

Reserve Bank of Australia (RBA)

Syndicated loan settlement

Ethereum

Bank of Canada

Project Jasper Phase 3

R3 Corda

Banque de France (BdF)

Securities settlement

Multiple platforms

South Africa Reserve Bank (SARB)

Project Khokha 2

Accenture

Bank of Thailand (BOT)

Project Inthanon Phase 2

R3 Corda

Bank for International Settlements Innovation Hub (BISIH) and:

 

 

Swiss National Bank (SNB)

Project Helvetia

R3 Corda

SNB and BdF

Project Jura

R3 Corda

 

 

 

Kiffmeister’s #Fintech Daily Digest (20220307)

~ kiffmeister

Towards a common understanding of digital currency

A working group formed through the Digital Currency Global Initiative has set out to establish a common classification framework for all kinds of digital currency. Members of the architecture-focused working group introduced a new tool designed to overcome terminology problems during January 2022’s DC3 conference hosted by the International Telecommunication Union (ITU). The working group is building an ontology – an explanatory framework of terms and characteristics – that can describe exactly what constitutes different kinds of digital currency. The goal is to marry basic taxonomy concepts with deeper ontology concepts, or so-called “notions.” [Read more]

PBOC branch chief seeks clarity on digital yuan as legal tender

“People’s Bank of China (PBOC) Nanjing branch president Guo Xinming proposed amendments to the administrative law to clarify the digital yuan’s status as legal tender at China’s annual plenary session on March 5, 2022. Meanwhile, He Hengyang, a deputy to the NPC and chief procurator of the Chongqing Municipal Procuratorate, also proposed amendments to the criminal law for guidelines on charges and sentencing of digital yuan-related crimes. He said digital yuan-related crimes could violate existing law and citizens’ information protection, data security, and economic and national security.” [Read more]

Kiffmeister’s #Fintech Daily Digest (20220306)

~ kiffmeister

I’ve updated various links in my tabulation of retail central bank digital currency (CBDC) explorers: https://kiffmeister.com/jurisdictions-where-retail-cbdc-is-being-explored-as-of-march-6-2022.

Philippines central bank to launch CBDC research effort

The Bangko Sentral ng Pilipinas (BSP) is moving ahead with a CBDC research project. The BSP’s  exploratory work started in 2021, focusing on implications of CBDC for the financial system. A national payment system assessment was later conducted which resulted in the identification of relevant use cases of wholesale CBDC aimed at enhancing the payment system’s safety, resiliency, and efficiency. As a next step (Project CBDCPh) the BSP targets to roll-out Project CBDCPh aimed at building organizational capacity and hands-on knowledge of key aspects of CBDC that are relevant for a use case around addressing frictions in the national payment system. [Read more]

Kiffmeister’s #Fintech Daily Digest (20220305)

~ kiffmeister

Bank of Uganda Exploring a Central Bank Digital Currency (CBDC)

The Bank of Uganda is exploring issuing central bank digital currency (CBDC) with key questions revolving around the rationale, for example “what issues it is going to help resolve.” [Watch here]

Central Bank of the Bahamas completes Sand Dollar’s link to automated clearing house

The Central Bank of The Bahamas has now completed its integration of the Sand Dollar with the Bahamas Automated Clearing House (BACH) system, opening the door for Sand Dollar to now be transferred from a digital wallet to any deposit account at a local commercial bank. Sand Dollar users simply pair their mobile wallets to a deposit account and carry out transfers. [Read more]

The Central Bank of Uruguay Publishes Two CBDC-Related Papers

The Central Bank of Uruguay (BCU) published two new CBDC research papers by Adolfo Sarmiento.  The first paper shares seven key lessons from the BCU’s 2017/18 e-Peso pilot, highlighting that CBDC design choices are not only based on technical considerations, but also on cultural implications of the use of money. [Download here] The second paper uses an ecological approach, finding that spatial and temporal scales of disturbance best describe the financial stability effects. [Download here]

Kiffmeister’s #Fintech Daily Digest (20220304)

~ kiffmeister

ECCB DCash Service to Resume Next Week

The Eastern Caribbean Central Bank (ECCB) is completing the final testing and assurance exercises following several system upgrades and will make the DCash platform available for public use during the week of March 7. The DCash system has been down since January 14. The interruption was due to an expiring certificate on the version of the Hyperledger Fabric that hosts the DCash ledger, and not to any external intervention. It has taken longer than expected to fix the problem because the ECCB took the opportunity to undertake several upgrades platform including enhancing the system’s certificate management processes, and updating the version of Hyperledger Fabric. Other upgrades will allow the platform to process government disbursements to individuals and permit commercial websites to accept DCash. The ECCB says that the security and integrity of all DCash data, applications and architecture, including all central bank, financial institutions, merchant and wallet apps remain secure and intact. [Read more]

Central Bank of Brazil Lift Challenge Real Digital selects nine vendors

The Banco Central do Brasil’s Lift Challenge Real Digital has chosen nine partners to help develop a digital real, Brazil’s central bank digital currency (CBDC). They received 47 project proposals from Brazil, Germany, the U.S., Israel, Mexico, Portugal, the U.K. and Sweden. An implementation phase for the selected projects will begin on March 28 and last until July 27, with an eye towards launching a pilot in 2022 and introducing a final version in 2024. [Read more]

  • Aave – gathers resources from several savers (forming a liquidity pool) with a focus on offering loans and ensuring compliance of these operations with the rules of the financial system, using DeFi tools;
  • Banco Santander Brasil – deals with DvP and the conversion to digital format (tokenization) of the right to own vehicles and properties;
  • Febraban – deals with DvP of financial assets;
  • Giesecke + Devrient – ​​handles offline payments;
  • Itaú Unibanco, B3 and R3 – handles international payments, using the PvP method in an application with Colombia;
  • Mercado Bitcoin, Bitrust and CPqD – deals with digital asset DvP, with a focus on crypto assets;
  • Tecban and Capitual – presents a logistics solution for e-commerce based on IoT techniques;
  • VERT, Digital Assets and Oliver Wyman – deals with rural financing based on a programmable tokenized asset with a value linked to the Real (Real stablecoin);
  • Visa do Brasil, ConsenSys and Microsoft – deals with financing small and medium-sized companies based on a DeFi solution.

Swiss DLT trading facilities can have central bank accounts, use SIC for payments

The Swiss National Bank clarified the criteria for allowing distributed ledger technology (DLT) trading facilities to access to the Swiss Interbank Clearing (SIC) payment system, to enable atomic securities settlement. This simultaneous exchange of a tokenized asset for cash ideally requires access to the payment system and an account at the central bank. Last year new legislation came into force that created a “DLT trading facility”  license in the Financial Market Infrastructure Act (FinMIA), without which separate licenses would be needed for trading versus custody and settlement. DLT trading facilities that use SIC are expected to have a central bank account or “sight deposit”.  [Read more]

DvP using CBDC: a “settlement choice model” for securities settlement

This paper from R3 proposes a new “best of both worlds” delivery versus payment (DvP) model that allows for a choice of settlement type at the time of trading and offers the ability to settle both gross and netted trades instantly using CBDC and digital assets on a blockchain infrastructure. DvP is central to the world’s securities settlement systems, but is implemented in multiple forms that differ by jurisdiction. All of these different models exist on a continuum from intraday gross settlement–which minimizes settlement risk while requiring a great deal of liquidity–to delayed batch settlement–which offers netting efficiencies but delays final settlement. Market participants acknowledge the benefits of real time gross settlement but continue to rely on the operational and liquidity advantages of delayed batch settlement. [Read more]

Kiffmeister’s #Fintech Daily Digest (20220303)

~ kiffmeister

Monetary Authority of Singapore Sees No Need for a Retail Digital Sing Dollar

The Monetary Authority of Singapore (MAS) has assessed that the case for a retail CBDC in Singapore is not compelling. It has found that reasons typically offered for issuing retail CBDCs are not very relevant to MAS and Singapore at this juncture. “Some of the reasons usually offered are that CBDCs can ensure financial inclusion or enable cheaper and faster payments. Financial inclusion is not a significant problem in Singapore. Electronic payments in Singapore have also become pervasive, seamless, and efficient…  In short, [the MAS is] using improvements in payment technology and competition to achieve [its] objectives of cheap and fast payments for all, using existing forms of central bank-backed money… [However] the case for a CBDC could strengthen if foreign digital currencies become more widely used locally… [so the MAS] continues to build up its technological and institutional capabilities in the CBDC space…” [Read more]

Taiwan to Debut Central Bank Digital Currency by September

Taiwan is reportedly looking to complete trials of its prototype central bank digital currency (CBDC) by the third quarter of 2022. Its most recent design is a two-tier system that allows consumers to exchange bank deposits with digital currency. In addition, the CBDC can also be linked to credit and debit cards and will be legal tender. [Read more]

Is the Bank of Mexico Ready to Launch its CBDC?

The Bank of Mexico reportedly plans to launch a two-tier (“intermediated”) CBDC by 2024. As part of the roll-out, commercial banks expect interoperability capacity to increase through the Interbank Electronic Payment System (SPEI), and that a CBDC should in principle seek greater inclusion and lower transaction costs. [Read more]

Rwanda’s central bank to pronounce itself on digital currency by December 2022

The National Bank of Rwanda will reportedly complete its CBDC research by the end of December 2022, according to central bank Deputy Governor, Soraya Hakuziyaremye, after which  it will have a clear policy on whether it will issue the CBDC or not. Financial inclusion will be the primary goal. [Read more]

Overhaul Needed for BNPL as Losses Mount up in APAC

Despite phenomenal growth, current buy now, pay later (BNPL) models are showing to be rather unprofitable. Quinlan and Associates estimates that in Asia-Pacific (APAC), the largest BNPL firms, including Australia’s Afterpay and Japan’s Paidy, are currently running average profit margins of -15% per annum (p.a.), while the more nascent players operating in emerging markets like the Philippines’ Cashalo and Indonesia’s Akulaku are suffering from profit margins of -100% p.a. According to the analysis, APAC BNPL providers are struggling to reach profitability as costs relating to sales, marketing, funding, staff, technology, and credit losses eat into all their profits. Losses are even more pronounced for emerging market BNPL providers because of their stronger focus on long tail, unbanked/underbanked consumers, leading to much larger credit losses and funding costs. Quinlan and Associates identified three key pathways for them to become commercially viable: optimization, vertical integration and expansion. [Read more]

Kiffmeister’s #Fintech Daily Digest (20220302)

~ kiffmeister

The potential effects on the Israeli banking system of issuing a digital shekel

The Bank of Israel published a paper on the potential impact of issuing a central bank digital currency (CBDC) on the stability of the banking system and its ability to continue fulfilling its financial intermediation function. It concludes that, under common assumptions regarding the substitution volume between the public’s deposits and the digital shekel, the negative impact to profitability is not expected to lead to a significant erosion in the banking system’s profitability, its stability, or its ability to provide credit and fulfill its classic functions in a modern economy. [Read more]

A Report Card on China’s Central Bank Digital Currency: the e-CNY

The People’s Bank of China’s Mu Changchun provided an update to the central bank’s CBDC pilot.  He reported that the e-CNY system completes transactions at higher speed than Visa, but it’s still way behind payment AliPay and TenPay. The pilot uses a centralized ledger to record retail transactions and, in parallel, implements a distributed ledger for day-end reconciliation. Wallets can be software based or hardware based, and Mr. Changcun presented a video showcasing how the hardware wallets work, including their offline functionality. [Read more]

Klarna losses swell to $748 million

Full year 2021 operating losses at Swedish “buy now, pay later” (BNPL) group Klarna soared to SKR7.1 billion (versus SKr1.4 billion reported in 2020), driven by expansion to fresh markets and the challenges of underwriting a massive inflow of new customers. Credit defaults of SKR4.6 billion (versus SKR2.5 billion in 2020) were a significant proportion of losses. On the other hand, net operating income was up 38% from 2020, with the U.S. market continuing to be Klarna’s fastest growing market (71% year-over-year growth). [Read more]

Kiffmeister’s #Fintech Daily Digest (20220301)

~ kiffmeister

Cambridge University Launches Crypto Research Project with IMF, BIS

Cambridge University’s Centre for Alternative Finance has announced a collaboration with the International Monetary Fund (IMF), the Bank for International Settlements (BIS) and others to conduct crypto research. The Cambridge Digital Assets Programme, aims to bring further insight into the growing digital asset industry by providing data-driven insights through collaborative research involving public and private sector stakeholders. [Read more]

The research agenda for the Programme will be centered around three workstreams. The first is focused on environmental implications and broader environmental, social and governance (ESG) considerations of digital assets and their associated services. The second will look at the processes and configurations of distributed financial market infrastructure (dFMI), and the third on crypto-assets, stablecoins, central bank digital currency (CBDC), as well as enterprise and consumer tokens. [Read more]

CME Group plans to launch micro-sized Bitcoin and Ether options

The Chicago Mercantile Exchange (CME) announced that it will launch, subject to regulatory review, options trading for its existing micro Bitcoin (BTC) futures and micro Ether (ETH) futures that will be 10% the size of the respective tokens. The futures options, expected to start trading on March 28, will come more than two years after the firm launched a BTC options trading product in January 2020 and more than four years since the group launched the first Bitcoin futures contract in December 2017. [Read more]

Bitcoin jumps after Treasury imposes new sanctions against Russian central bank

The crypto market rose after the Treasury Department imposed new sanctions against Russia’s central bank that will effectively prohibit Americans from doing business with the Russian central bank and freezes assets within the United States. However, the crypto market rally may also be linked to hopes that Fed will be less likely aggressively hike amid the uncertain geopolitical backdrop. [Read more]