Interim report on the design outline of a Japanese CBDC

The English version of the Interim Report on Japan’s “Design Outline of central bank digital currency (CBDC)”, initially published in Japanese only in April 2024, has been published. The joint work by the Bank of Japan (BoJ), Ministry of Finance (MoF) and other relevant ministries identifies the basic considerations on main design issues and possible options for CBDC introduction. The report does not prejudge whether or not to introduce CBDC in Japan, but this preparation will help Japan introduce CBDC in the future without delay if the decision were made after discussions with the Japanese public. [Read more at the MoF]

Bank of Ghana completes cross-border trade using eCedi CBDC

The Bank of Ghana (BOG) confirmed the completion of the Project Digital Economy Semi-Fungible Token (DESFT), a joint project with the Monetary Authority of Singapore (MAS) and the United Nations Development Programme (UNDP). The first phase saw the development of the blockchain-based Universal Trusted Credentials (UTC) system that enables micro, small and medium enterprises (MSMEs) to efficiently verify authenticity of key information, such as basic credentials, licenses, certificates, and trade records across borders. In the second phase, a cross-border payment was made using UTCs, the eCedi CBDC and a Singapore dollar stablecoin, using the purpose-bound money (PBM) protocol. [Read more at the BoG]

European Blockchain Sandbox reveals second set of participants

The European Blockchain Services Infrastructure (EBSI) European Blockchain Sandbox announced the 20 participants in its second cohort. (See here for the first cohort’s 20 participants.) [Read more at EBSI]

Demystifying tokenization: Embracing the future

The World Federation of Exchanges (WFE) published a paper on tokenization that concedes that that it has many benefits that may make it the natural next step for financial markets, but that it requires substantial upfront investment without clear gains in markets that are already highly efficient. It found that the primary benefit of tokenization is fractionalization. And by making fractional assets available to a larger pool of investors, there’s potential to enhance liquidity. However, as highlighted by Ledger Insights, the paper seems to mix up the separate concepts of atomic settlement, one of tokenization’s key benefits, with instant delivery versus payment (DVP) “atomic” settlement, ignoring the fact that batching and netting can still be achieved when settlement is atomic. [Read more at the WFE]

Digital euro safeguards – protecting banking sector liquidity

In April 2024 the European Central Bank (ECB) published a paper that shows the usefulness of digital euro safeguards, such as holding limits, that would limit the impact of the introduction of a digital euro on banks’ liquidity and on their reliance on central bank funding. To this end, it assesses how banks might respond to the introduction of a digital euro while seeking to maximize profitability and manage their risks for a range of holding limit scenarios. The results of the simulated impact on key liquidity metrics show that, with safeguards in place and on aggregate, the liquidity metrics of euro area banks would decline but remain well above regulatory minimums. In addition, the central bank funding ratios of euro area banks would not increase materially on aggregate and would remain contained overall. [Read more at the ECB]

The external financial spillovers of CBDCs

Banca d’Italia published a paper in July 2023 that uses a theoretical model to study how the introduction of a CBDC by a systemic economy can affect the choices of residents in a small open economy. It finds that an increase in the preference for the foreign CBDC induces a banking crisis and has a negative impact on GDP, the greater the more the foreign CBDC is perceived as deposit-like. Public authorities can mitigate these effects with multiple tools: by taxing the CBDC, by easing macroprudential requirements, or through FX interventions. A higher stock of foreign CBDC held by households can shield the small economy from an increase in the interest rate on external debt, if the remuneration of the CBDC remains constant. [Read more at Banca d’Italia]

Upcoming Speaking Engagements:

• CBDC Conference, Istanbul, September 10-12. The conference will offer representatives of central banks, commercial banks, technology providers, policy makers and academics the perfect platform to learn about the latest CBDC developments, exchange ideas with experts and peers. [Find out more and register here][Central bank delegates may be eligible for free registration (email registration@cbdc-conference.com to find out more)]

• Digital Currency Conference, London, September 23-24. The conference will bring together policymakers, regulators, and technology and innovation experts to network and discuss all aspects of digital currencies. And enter the KiffmeisterDCC code at registration to get a 20% discount! [Find out more and register here]

And just a reminder that I produce a monthly digest of central bank digital currency (CBDC) developments exclusively for the official sector. So (only) if you work at a central bank, ministry of finance or international financial institution (e.g., the BIS, IMF, OECD, World Bank) and who would like to receive it by email on the first business day of every month, please DM me on LinkedIn or email me at john@kiffmeister.com.