Brazil’s central bank to integrate AI-based apps into its CBDC (Exame)

Banco Central do Brasil (BCB) is looking to integrate artificial intelligence (AI) based apps into its Drex central bank digital currency (CBDC). Specifically, it plans to incorporate instant payment methods like Pix and leverage AI technologies similar to OpenAI’s ChatGPT. Central bank President Roberto Campos Neto envisions a future where multiple banking apps are replaced by a single, comprehensive super app that aggregates financial data and uses AI to offer personalized financial services. [Read more at the BCB]

Stablecoins’ impact on banks’ balance sheets and prudential ratios (ECB)

The European Central Bank (ECB) published a paper that explores the relationship between banks, and stablecoins and their issuers, focusing on the mechanical effects on banks’ capital and liquidity ratios when issuing stablecoins or collecting deposits from stablecoin issuers. The analysis reveals that converting retail deposits into stablecoin issuers’ deposits weakens a bank’s liquidity coverage ratio (LCR), turning a retail deposit into a wholesale deposit, even when these funds are reinvested in high-quality liquid assets (HQLA). If a credit institution issues its own stablecoins, the impact on its LCR depends on whether it can identify the stablecoin holders; unknown holders weaken the LCR which could incentivize banks to issue stablecoins where they can continually identify the holders to benefit from more favorable liquidity treatment. The study also finds that when retail customers of bank A buy a stablecoin issued by a non-bank that keeps reserves at bank B, both banks could see an unexpected decline in their liquidity ratios, as bank A loses stable retail deposits and bank B gains volatile wholesale deposits. [Read more at the ECB]

The economics of crypto exchange tokens (BIS)

The Bank for International Settlements (BIS) published a paper on the economics of crypto exchange tokens, which are blockchain-based assets issued by crypto exchanges that may promise holders discounts on transaction fees and access to certain platform services. They are an important funding source for centralized crypto exchanges, and they have been at the core of some of the biggest disruptions in the crypto industry. The paper develops a tractable model for the exchange rates of crypto exchange tokens that incorporates user demand, investment demand, and commonly observed pledges by exchanges to buy back tokens. It derives closed-formed solutions for the valuation of exchange tokens and the time required to fulfill the pledge. Buyback pledges increase the amount of funding raised by selling tokens. However, the additional amount raised is always less than the discounted cost of the buyback pledge. Future price manipulation by investors can further increase the cost of the buyback pledge. [Read more at the BIS]

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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.