Simon Potter and Julia Coronado have proposed the creation of recession insurance bonds (RIBs). RIBs would be zero-coupon bonds authorized by Congress and calibrated as a percentage of GDP sufficient to provide meaningful support in a downturn (e.g., $10,000). They would be distributed to households with payouts that are recession contingent – eg if policy rates reach the zero lower bound or there is a 0.5% increase in the unemployment rate. They propose operationalizing it as effectively a synthetic central bank digital currency (CBDC) – they would be issued by a regulated system of digital currency accounts for consumers managed by digital payment providers (DPPs) and fully backed by reserves at the Fed. Basically it’s narrow bank-type model that’s small and fit for purpose. Here are the two background papers:

• Part 1: Securing macroeconomic and monetary stability with a Federal Reserve–backed digital currency
• Part 2: Reviving the potency of monetary policy with recession insurance bonds

The goal of the newly-formed Swiss-based World Stablecoin Association (WSA) is to create a united front for the sector to tackle regulatory concerns and drive collaboration. A number of projects have already reportedly become members of the WSA, such as the Canadian dollar-pegged QCAD as well as decentralized finance protocol Ren, which is backed by Polychain Capital. Additionally, the Brazillian Digital Token (BRZ), Crypto BRL (CBRL), Peg Network, QCash (QC), Stably, USDK and Digitalbits (XDB) are also believed to have joined the initiative. https://www.worldstablecoin.org/ 

Singapore-based fintech firm Grab launched a micro-investment platform (Auto Invest) and a buy-now-pay-later payment plan for select e-commerce sites, and extended its consumer loan platform to third party providers. AutoInvest funds, which are invested in fixed-income funds, can be withdrawn any time with no penalties and can also be used to spend on Grab services or at any merchant accepting the GrabPay Card. The third party loan platform will start in Singapore before expanding to other Southeast Asia countries. 

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China’s State Council Information Office, prompted by the Peoples’s Bank of China (PBOC), is reportedly looking at whether to launch an anti-trust probe into Alipay and WeChat Pay, The State Council’s antitrust committee has been gathering information on them for more than a month. But authorities have been keen to whittle back their dominance. Also, in an effort to encourage smaller players to enter the market, the PBOC said last year that it planned to standardize the interoperability of QR code payments. The United States is also planning to take action “with respect to a broad array of national security risks” posed by other Chinese instant messaging platforms like WeChat.  

The BIS Innovation Hub (BISIH) and the Hong Kong Monetary Authority (HKMA) have launched a TechChallenge designed to showcase the potential for new innovative technologies to resolve problems in trade finance (TradeTech). It is supported by the Asian Development Bank, the International Chamber of Commerce, the International Institute of Finance, the People’s Bank of China and the Wolfsberg Group.The BISIH has published three problem statements and invites private firms to develop technology solutions: (i) connecting digital islands and increasing network size and effects, (ii) trade finance inclusion for SMEs, and (iii) TradeTech for emerging markets. 

While quantum machines are still a long way from being able to break modern encryption, US National Institute of Standards and Technology (NIST) launched a competition in 2016 to develop new standards for cryptography that will be more quantum-proof. The winners are set to be announced in 2022, but last week the organization announced that it had narrowed the initial field of 69 contenders down to just 15. And so far a single approach to “post-quantum cryptography” accounts for the majority of the finalists: lattice-based cryptography. Lattice-based cryptography instead uses enormous grids with billions of individual points across thousands of dimensions. Breaking the code means getting from one specific point to another—which is essentially impossible unless you know the route. NIST thinks is that lattice problems are really hard, but they seem quite efficient in terms of time to generate keys, time to construct signatures, and also efficient in terms of memory. 

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The price of Bitcoin (BTC) and Ethereum’s Ether (ETH) plunged by 13% and 21%, respectively, within minutes on August 2, 2010. The move liquidated more than $1 billion worth of futures contracts as BTC/USD dropped from around $12,000 to as low as $10,550, before bouncing back to trade around $11,300. More than $1 billion of crypto positions were liquidated across various exchanges during the spike down.  

The story of stablecoins is the story of Ethereum. Driven by a global flight to safety amidst the coronavirus pandemic, stablecoin issuance ballooned over $8 billion in the first quarter of 2020. While inter-exchange settlement remains the most dominant use case for stablecoins by far, more generally, stablecoins are simply a better means of storing and moving dollars around the world. 24/7 uptime and relatively quick settlement allows users to react to market conditions much faster than when dealing with traditional payment rails.

If the Financial Action Task Force (FATF) has its way, stablecoin payments networks will no longer be able to take a hands-off approach to knowing who their users are. In a July report to the G20, FATF suggested that “central developers and governance bodies of so-called stablecoins” should be treated either as financial institutions or as virtual asset service providers (VASPs). Hence, stablecoin platforms would probably have to abide by the FATF’s Recommendation 10, which prohibits financial institutions from “keeping anonymous accounts or accounts in obviously fictitious names.” Stablecoin platforms only currently apply customer due diligence to the small minority of users who purchase, sell and redeem stablecoins for fiat currency. 

BiLira will launch TRYB, a stablecoin backed by the Turkish Lira on Avalanche during the mainnet release. Previously, TRYB was limited to the Ethereum blockchain as an ERC-20 token.  

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The CEOs of Apple, Amazon, Facebook and Google were grilled in front of a U.S. House of Representatives Judiciary Committee antitrust subcommittee. Meanwhile, all four reported stronger than expected first quarter financial results demonstrating the resilience of their business models to the impact of the COVID-19 crisis. And PayPal topped earnings and revenue expectations amid booming growth in online transactions. The firm’s CEO said that the COVID-19 crisis has meant a “tipping point” for digital payments that, over the past three to five months, drove an acceleration in e-commerce penetration that could have otherwise taken three to five years to accomplish.  

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The Group of Thirty (G30) published a report on digital currency. The report highlight the key issues that policymakers have to consider in responding to these developments. Among its recommendations are that national authorities must play an active leadership role in setting standards and providing public infrastructure for payments, which cannot be left to market forces alone. Also, because new technologies may require a sufficiently long phase-in period in order to be tested fully, multiple payment alternatives should be introduced so that the payments system gains a measure of resilience and includes adequate competition. Also, existing technologies that allow faster retail payments, which drastically increase competition and lower costs to businesses and consumers, should be implemented more widely. 

More than anything else, the debate over whether to issue a so-called central bank digital currency, or CBDC, is driving the debate on payments and privacy. A privacy-friendly CBDC is a complex and ambitious project. But designing something from scratch is forcing central banks to ask themselves whether they have an obligation to provide the public with digital privacy and, if so, how private dare they make the stuff. It’s difficult to know for sure whether a central banker’s “balanced” approach to privacy will meet the bar that is being set by an emerging group of privacy consumers. 

Fidelity Calls Bitcoin an ‘Aspirational’ Store of Value and an ‘Insurance Policy’

Fidelity Digital Assets published a paper explaining why Bitcoin has all the makings to become a store of value, its scarcity being one of the key factors. It claims that Bitcoin is capable of becoming an “insurance policy” that may provide protection against various consequences of contemporary monetary practices. They also argued that Bitcoin’s volatility actually has a positive impact on its adoption as it helps bring it attention, development and innovation—at least in its early years. It also claimed that a longer-term driver was the great wealth transfer to a millennial demographic that has a favorable opinion on digital assets.  

Real time gross settlement (RTGS) is a critical piece of national infrastructure and the backbone of UK payments. It settles an average of £685billlion each working day.  Following extensive industry engagement, the vision for the renewed RTGS service is to increase resilience and access, offer wider interoperability, improve user functionality and strengthen the end-to-end risk management of the UK high value payment system.  The renewed system will start to be delivered in 2022. The Bank of England will work with Accenture to develop and build this new world class payments service. 

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When looking at potential technologies to support this central bank digital currency (CBDC) model, the Bank of Canada is considering a universal access device. It is a device which would store and transfer CBDC without consumers having to have a smartphone, so it could look very much like a prepaid card. But the key feature is that it would have to be available to everyone and be low cost. It would also have to be designed to satisfy the needs of people with motor, sensory and cognitive impairments, which is another reason why people use cash. The universal access is kind of a core desirable feature of CBDC but having some kind of device that would deliver that is something we’ve been exploring pretty aggressively. 

The Bangko Sentral ng Pilipinas has reportedly created a committee to look at the feasibility and policy implications of issuing its own digital currency. The initial results of study is expected next month. 

Only 13 crypto exchanges provide ‘trusted’ trading volume: report 

Analytics firm Coin Metrics has a new way to weed out fake data from crypto volume metrics. Only 13 crypto exchanges can be trusted to provide accurate volume figures, according to the firm’s new Trusted Volume Framework. The framework more accurately measures trading volumes across crypto markets. Many exchanges, particularly those which list illiquid altcoins, have a reputation of falsifying volumes in a bid to attract traders. 

This literature survey focuses on the microeconomics of cryptocurrencies; What drives their supply, demand, trading price and competition amongst them. This literature has been emerging over the past decade and the purpose of this paper is to summarize its main findings so as to establish a base upon which future research can be conducted. 

This IMF working paper finds that digital technologies have the potential to boost small and medium sized enterprise (SME) productivity and growth in the Middle East, North Africa, Afghanistan, and Pakistan (MENAP) region. Economies are rapidly digitalizing, so SMEs need to embrace digital solutions to compete and survive. Therefore, for SMEs to be effective engines of inclusive growth, a rethinking of MENAP SME development strategies is needed, including making SME digital transformation a priority. 

The International Swaps and Derivatives Association (ISDA) and the International Securities Lending Association (ISLA) have agreed to closely collaborate on two key initiatives to deliver digital solutions to their respective memberships in a consistent and cost-effective way. As part of the agreement, ISLA will also work to model and code specific securities financing transaction (SFT) components for inclusion in the common domain model (CDM), creating greater alignment between derivatives and securities lending markets. The CDM establishes a single, common digital representation of events and processes that occur during the lifecycle of a trade, and is aimed at enhancing consistency and facilitating interoperability across firms and platforms.  

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Bank of Canada Deputy Governor Tim Lane said that CBDC should have limits on how much anonymity it gives users, there would need to be a trade-off in terms of privacy were a CBDC to act as a replacement or complement to cash. A central bank should not issue CBDC that would increase the scope for illicit transactions to take place. The Bank of Canada has been exploring different CBDC infrastructure models to find an optimal balance between regulation and privacy, but CBDC would not be able to offer the same cash-like degree of anonymity on an unlimited scale. 

This paper finds that central bank digital currency (CBDC) may not be widely accepted in the presence of a sizeable informal economy. Based on a two-sector monetary model, it shows an L-shaped relationship between the informal economy and CBDC. The CBDC can formalize

the informal economy but this effect becomes marginally significant in countries with significantly large informal economies. In order to promote CBDC adoption and improve its effectiveness, tax incentives and positive CBDC interest rates can be useful tools. It further finds that adjustments to the CBDC interest rate can trigger a reallocation effect between formal and informal sectors, that improves the effectiveness of both conventional monetary policy and fiscal policy. 

The Tel Aviv Stock Exchange is launching a Central Blockchain Securities Lending Platform to provide a single national market where Israeli institutions can lend securities directly to one another. This replaces a complicated and disjointed lending system and will allow the securities lending market to reach its full potential. It has been in the testing phase since March 2020 and is set to go live in November. 

Investments into insurtech funding rounds rebounded to reach $1.56 billion in the second quarter of 2020, a more than 71% increase on the first-quarter of the year, according to Willis Re. Global investments into insurtech start-ups fell at the start of the year, as the impacts of the Covid-19 pandemics in capital markets put some investors attention elsewhere. However, the second-quarter rebound was driven in part by later-stage investments, including four large investment rounds of US $100 million or greater.  

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Private Sector Could Bring Value to Future CBDC Launches, Says IMF Official
The IMF’s Tobias Adrian gave a keynote address at the “Building CBDC: A Race To Reality” conference. Adrian offered two models for the provision of a CBDC, varying in how they would pair the private sector with central banks. The first model looked at synthetic CBDCs (sCBDC), which are backed by the liabilities of a central bank but issued with the aid of a private entity, such as a commercial bank. The second, “two-tiered,” model puts central banks in charge of CBDC issuance and transaction settlement, which would spur private sector-led innovation at a more fundamental level.

Taiwan’s stimulus voucher scheme kicked in July
Stimulus vouchers aimed to boost Taiwan’s economy amid fallout from COVID-19 became available in July. Residents were able to select from four types of vouchers — hard copies, credit card payments, contactless smartcards, or mobile payments. The vouchers must be spent by December 31, 2020. Those favoring hard copies can “purchase” vouchers with a total value of NT$3,000 for NT$1,000. Individuals who prefer one of the three digital forms of vouchers will earn NT$2,000 back by spending NT$3,000.

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Design choices for central bank digital currency: Policy and technical considerations
This Brookings paper enumerates the fundamental technical design challenges facing CBDC designers, with a particular focus on performance, privacy, and security. Through a survey of relevant academic and industry research and deployed systems, it discusses the state of the art in technologies that can address the challenges involved in successful CBDC deployment. It also presents a vision of the range of functionalities and use cases that a well-designed CBDC platform could ultimately offer users.

Digital Dollar Project In Light Of Recent Congressional Hearings
Recent U.S. House Finance Committee hearings expose the views of some of the principal players on retail central bank digital currency (CBDC) in the United States. In particular, it was evident from Fed Chair Jay Powell’s remarks that the Fed would not be open to private operators creating the digital dollar infrastructure. He said he believed private entities should not have a role in designing a digital dollar: “The private sector is not involved in creating the money supply, that’s something the central bank does.”

It is notable that the Digital Dollar Project (DDP) whitepaper doesn’t touch on digital identity. Without a firm notion of digital identity and its anonymous expression, a digital wallet functioning in multiple capacities is impossible to construct. However, in the United States, there is a perception that a national identity scheme would be antithetical to privacy and anonymity. This has led to the creation of an ad-hoc system of digital identity patched together from social security numbers, tax id numbers, biometrics, drivers licenses, utility bills, passports, and birth certificates. There is a lack of a national privacy law with teeth. This will present a major challenge for retail CBDC and secure digital wallets.

Prime Brokerage Enters Crypto Market, Sort Of
Ultimately, for all of the crypto prime brokers’ valiant efforts, the Tower of Babel of state regulations and the lack of oversight under longstanding traditional securities laws could stymie cryptofund managers, particularly registered investment advisers from using a third-party service provider. The maze of state laws that apply to trust companies and money service companies is a major impediment to the development of a coherent model for trading and custody of digital assets. For now cryptofund managers will likely have to balance their operational and liquidity needs with asset safety and legal uncertainty.

GNU Taler — ‘Digital Cash’ that is socially responsible
GNU Taler is a privacy-preserving payment system. Customers can stay anonymous, but merchants can not hide their income through payments with GNU Taler. This helps to avoid tax evasion and money laundering. Payments are always backed by an existing currency. Payments are made after exchanging existing money into electronic money with the help of an Exchange service, that is, a payment service provider for Taler. When making a payment, customers only need a charged wallet. A merchant can accept payments without making their customers register on the merchant’s Website. Taler is based on blind signatures.

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ECB takes steps to ensure pan-European reach of instant payments
“The ECB’s Governing Council has taken significant steps to support the full deployment of instant payments across the euro area, in line with objectives shared with the European Commission. Pan-European instant payments can be ensured by the end of 2021. All Payment Service Providers (PSPs) which have adhered to the SCT Inst scheme and are reachable in TARGET2 should also become reachable in a TIPS central bank money liquidity account, either as a participant or as reachable party (i.e. through the account of another PSP which is a participant). At the same time, all Automated Clearing Houses (ACHs) offering instant payment services should migrate their technical accounts from TARGET2 to TIPS. The Eurosystem will discuss with ACHs and PSPs whether a migration window is needed for this purpose. The ultimate goal is to enable European citizens to make electronic payments in euro from and to any country in real time, both in physical shops and online.”

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