Kiffmeister’s #Fintech Daily Digest (20260305)

March 5, 2026March 5, 2026 ~ kiffmeister

Call for Payment Service Providers to Participate in Digital Euro Pilot (ECB)

The European Central Bank (ECB) has opened applications for euro area licensed payment service providers (PSPs) to join a twelve‑month digital euro pilot in the second half of 2027. It will use a non‑legal‑tender “beta” digital euro in a controlled environment to test technical, operational and user experience (UX) aspects of P2P (online/offline) and P2B payments at physical and online points of sale. PSPs will onboard users and merchants without remuneration, be selected based on eligibility plus weighted criteria (compliance status, technical capacity, market presence, geographic/segment coverage, delivery track record), and then work directly with national central banks and Eurosystem teams. The ECB has published technical and procedural documentation and PSPs must apply by May 14, 2026, with the whole exercise framed as preparatory and conditional on future EU legislation and a separate decision to issue a digital euro. [ECB]

Towards a Consistent Regulatory Approach to Illicit Payments (BIS)

The Bank for International Settlements (BIS) published a paper that develops a framework for how illicit payment rules, centered on whether payment instruments rely on intermediaries, shape both illicit and legitimate users’ choice among payment instruments. Because detection probabilities differ by design and by whether instruments fall inside or outside anti-money laundering (AML) scope, actors shift activity toward instruments with the lowest expected detection and sanctioning, undermining overall effectiveness and prompting iterative regulatory expansion. Illicit payment measures also constrain informational privacy and freedom of choice for legitimate users, creating a privacy–integrity trade off moderated by data protection regimes and trust in public authorities. The paper argues for a forward looking architecture that applies uniform, risk based lex generalis AML/CFT and data protection requirements across all intermediated instruments, while using lex specialis tools such as transaction/holding limits, reliance on touch points, and additional duties on issuers or platforms for instruments without intermediaries, to reduce regulatory driven substitution across payment instruments while preserving both integrity and user privacy. [BIS]

Targeted Report on Stablecoin and Unhosted Wallet P2P Transactions (FATF)

The Financial Action Task Force (FATF) published a report that concludes that stablecoins, now a major share of on‑chain and illicit virtual‑asset activity, create elevated money laundering/ terrorist financing/ proliferation financing (ML/TF/PF) risks, especially via P2P transfers through unhosted wallets outside direct anti-money laundering/ countering the financing of terrorism/ counter proliferation financing (AML/CFT) controls. FATF affirms that stablecoins are virtual assets and that issuers, intermediaries and relevant DeFi actors must be regulated as virtual asset service providers (VASPs) or financial institutions under Recommendation 15, with licensing, supervision, Travel Rule compliance and sanctions screening. Jurisdictions are encouraged to build stablecoin‑specific regimes, require issuers to embed technical controls (freeze, burn, allow/deny‑lists) and strengthen cross‑border supervisory cooperation and data collection on P2P use. The report stresses expanded use of blockchain analytics, targeted controls on transfers to unhosted wallets, structured public‑private partnerships, and detailed red‑flag indicators to guide monitoring and investigations. [FATF]

New Recommendations for Public Payment Preparedness (Riksbank)

Sveriges Riksbank issued new recommendations on “public payment preparedness,” urging households to see themselves as part of Sweden’s total defence and to maintain multiple means of payment so essential purchases can continue during disruptions, crises or war in an increasingly digitalized environment. It advises adults to hold at least SEK 1,000 in cash at home (in mixed denominations) for roughly a week’s essential spending and to use cash periodically so cash infrastructure remains robust, to have at least two payment cards linked to different card networks (e.g. Visa and Mastercard), to ensure access to a mobile payment service such as Swish that relies on different infrastructure than cards, and to keep physical payment cards and PINs accessible even if mobile wallets are normally used. The recommendations feed into the Riksbank’s broader work on national payment contingency and will also feature in the Payments Report 2026, due on March 12, 2026. [Riksbank]

Upcoming Speaking Engagements:

The Digital Euro Conference 2026 (Frankfurt, March 26) will explore the future of money with a focus on CBDCs, stablecoins, and commercial bank tokens. This hybrid event offers the perfect platform to understand the future of digital money! [Register here and get 20% off the regular ticket price by using the Kiffmeister20 code!]

I produce a monthly digest of digital fiat currency (DFC) developments exclusively for the official sector (e.g., central banks, ministries of finance and international financial institution (e.g., the BIS, IMF, OECD, World Bank)) plus academics and firms that are active in the DFC space (commercial banks, technology providers, consultants, etc.). (DFCs include central bank digital currency (CBDC), stablecoins and tokenized deposits.) It goes out via email on the first business day of every month, and if you’re interested in being on the mailing list, please email me at john@kiffmeister.com.

Kiffmeister’s #Fintech Daily Digest (20251124)

November 24, 2025November 24, 2025 ~ kiffmeister

Financial Integrity Implications of Retail Central Bank Digital Currencies (IMF)

The IMF published a paper that examines how retail central bank digital currencies (rCBDCs) can affect financial integrity, particularly in the context of anti-money-laundering/combating the financing of terrorism (AML/CFT) frameworks. The paper identifies offline-capable rrCBDCs as a distinct departure from standard online payment systems because transactions may be executed without real-time connectivity to a central ledger, which raises unique financial-integrity risks. The authors argue that jurisdictions must explicitly calibrate design choices around offline limits (transaction size, frequency), device and software safeguards, audit trails (including reconnection protocols) and risk-based customer due-diligence regimes for offline use. While offline capability can support resilience, merchant reach and financial-inclusion (especially in connectivity-poor settings), the more flexible the offline mode (in terms of transfer autonomy, reversibility or anonymity), the larger the integrity trade-off becomes. [Source: IMF]

Central Bank Digital Currency: Further Navigating Challenges and Risks (IMF)

The IMF published a paper that informs its Executive Board on the current state of central bank digital currency (CBDC) development, noting that while wholesale projects are gaining prominence, several retail efforts have stalled or been paused due to a lack of clear domestic necessity. The paper also summarizes the key messages and findings from the third wave (of six) CBDC Virtual Handbook chapters published in November 2025, that cover the macro-financial implications for stability and competition; the legal intricacies regarding frameworks and financial integrity; and specific challenges related to tokenized reserves and payment resilience in fragile, conflict-affected states. In total 23 chapters are planned, with the remaining six to be published in 2026. [Source: IMF]

Settlement Speed and Financial Stability (FRB)

The U.S. Federal Reserve Board (FRB) published a paper that examines how the speed of settlement in payment networks influences systemic risk and financial stability. It develops a network model that incorporates netting benefits, liquidity costs, and counterparty risks. It finds the effect of faster settlement is ambiguous: while it can reduce the probability of crisis events by lowering the chance of defaults, it can also amplify the severity of crises when they occur by increasing liquidity needs and reducing netting efficiency. The optimal settlement speed for a payment system depends on the network’s structure, the balance between efficiency and risk, and prevailing liquidity conditions. The paper identifies “default threshold points” at which small reductions in settlement time lead to discrete jumps in the number of defaults across the network. The paper concludes against uniform settlement speed policies, arguing that optimal design requires attention to network topology and liquidity conditions, and that targeted liquidity support be provided during times of stress. [Source: FRB]

Upcoming Speaking Engagements:

Kiffmeister’s #Fintech Daily Digest (20250813)

August 13, 2025August 13, 2025 ~ kiffmeister

Closing the Payment of Interest Loophole for Stablecoins (BPI)

The U.S. Bank Policy Institute (BPI), backed by several U.S. banking groups, implored Congress to close a loophole that could allow stablecoin holders to receive interest indirectly through affiliated exchanges, thereby evading the GENIUS Act’s ban on interest and yield. Because payment stablecoins neither fund loans like bank deposits nor operate as securities like money market funds, the BPI says they should not pay interest. They cite a Treasury estimate that up to $6.6 trillion of deposits could flow out of banks if stablecoins can offer yield, warning that such shifts would raise borrowing costs and reduce credit availability, especially during stress, unless the prohibition is extended to affiliates and distribution channels. [Read more at the BPI]

An Approach to Anti-Money Laundering (AML) Compliance for Crypto-Assets (BIS)

The Bank for International Settlements (BIS) published a Bulletin that proposes a practical AML/CFT framework for public blockchains that leverages transparent on-chain histories to compute “AML compliance scores” for crypto units and wallets, ranging from clean to tainted based on provenance, links to allow/deny lists, and risky patterns (e.g., mixers). Instead of relying on intermediaries as in traditional finance, authorities and off-ramps (fiat conversion points) would apply threshold-based acceptance rules to block or permit redemptions, with options spanning strict (only allow-listed/KYC’d flows) to lighter (exclude only deny-listed exposure), plus intermediate, tiered criteria like clean holding periods or limits by score. This approach aims to realign incentives—encouraging users, intermediaries, and stablecoin operators to avoid tainted flows—while enabling third-party compliance services, accommodating both UTXO- and account-based designs, and anticipating evasive tactics. It argues “same risk, same regulation” is insufficient for crypto’s unique structure, and that provenance-aware rules, coordinated internationally, can strengthen financial integrity and monetary sovereignty as crypto integrates with mainstream finance. [Read more at the BIS]

Upcoming Speaking Engagements:

The CB+DC Conference (Nassau, Bahamas, September 9-11) is a premier gathering centered on CBDCs, tokenized assets, and stablecoins. It provides a forum for central bankers, commercial bankers, technology innovators, policymakers, and academics to explore the latest advancements in digital currency, engage with experts and peers, and discuss the future of digital currency. [Register here but before you do, email me at john@kiffmeister.com for a 15% discount]

Kiffmeister’s #Fintech Daily Digest (20240823)

August 23, 2024 ~ kiffmeister

FinCEN unhosted wallet proposal officially dead (Coin Desk)

The U.S. Treasury Department Financial Crimes Enforcement Network (FINCEN) officially withdrew its proposed rule, introduced in 2020, that would have imposed know-your-customer (KYC) requirements on unhosted wallets. Basically, it became clear that it would be practically impossible for virtual asset service providers (VASPs) to implement the proposed rules. [Read more at FederalRegister.gov]

Upcoming Speaking Engagements:

Intertribal Foreign Affairs Council Forum 2024, Yidindji, August 30-31. The conference will bring together indigenous nations to showcase the excellence of their governance practices and generate new ideas for the future. I’ll be on a panel focused on the future of money and indigenous financial inclusion. [Find out more and register here]
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.

Kiffmeister’s #Fintech Daily Digest (20240322)*

March 22, 2024March 22, 2024 ~ kiffmeister

EU Parliament outlaws anonymous crypto payments

The majority of the European Union (EU) Parliament’s lead committees have approved new legislative to ban anonymous crypto payments. This comprehensive package of anti-money laundering measures also includes significant restrictions on cash transactions. Anonymous cash payments in commercial transactions are limited to amounts under €3,000, with a complete prohibition on cash transactions exceeding €10,000 in business contexts. Also any crypto transaction via “hosted wallets” (i.e., managed by service providers) must be fully traceable, eliminating anonymity for even the smallest transactions. [Read more at Bitcoinist]

ECB Governing Council floats securities tokenization and unified ledger

The European Central Bank (ECB) Governing Council has called for the exploration, together with financial market stakeholders, the potential use of new technologies for issuance, trading and settlement, fostering tokenization and possibly a “European unified ledger”. “This will help to promote a digital capital markets union and thereby strengthen the efficiency of European financial markets while avoiding a re-fragmentation of elements that have been harmonized and integrated.” [Read more at the ECB]

*For those interested in intra-day updates, check out my searchable Diigo Fintech developments database, which is also a good place to go to query for past developments: https://www.diigo.com/user/kiffmeister/ART.

Kiffmeister’s central bank digital currency monthly monitor

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 chronicles@kiffmeister.com

The Sovereign Official Digital Association (SODA) is a technology-agnostic firm offering advisory services at the intersection of central banking, digital finance and the web3 industry, aiming to make public digital money a reality. SODA believes institutions in the existing financial ecosystem should have access to the tools and resources they need to move from discussion to action. SODA offers ‘real life’ use cases to help test digital money and drive adoption as central banks and other public institutions explore the future of a more financially inclusive world powered by interoperable blockchain-based networks. SODA would love you to join us on this journey – please get in touch (chris@sodapublicmoney.org).

Satoshi Capital Advisors is a New York-based, global advisory firm that works with central banks, governments, and the private sector to architect, implement, and operate varying initiatives. Satoshi Capital Advisors’ central bank work revolves around CBDC architecture and implementation, providing advisory services from research phase through to growth phase. Utilizing a product-market fit and technology agnostic approach to CBDC architecture and implementation enables Satoshi Capital Advisors to build tailored solutions, bespoke to local financial system nuances. Satoshi Capital Advisors welcomes requests from central bank officials for virtual and in-person CBDC workshops. [Click here for more information]

WhisperCash offers the first fully offline digital currency platform that has the same properties as physical cash. It can perform secure consecutive offline payments without compromising on security, privacy or accessibility. WhisperCash allows direct person to person offline payments without any server infrastructure or internet connectivity. It comes in various form factors including the self-contained credit card-sized “Pro” that sports an eInk screen and capacitive keyboard, and lasts for two weeks between recharges assuming a few transactions per day. [Click here for more information]

Kiffmeister’s #Fintech Daily Digest (20231019)*

October 19, 2023October 19, 2023 ~ kiffmeister

FinCEN proposes designating crypto mixers as money-laundering hubs

The US Treasury Department Financial Crimes Enforcement Network (FinCEN) proposed designating crypto mixing as an area of “primary money laundering concern” following Hamas’ attack on Israel. FinCEN assessed that the percentage of convertible virtual currency (CVC) transactions processed by CVC mixers that originated from likely illicit sources is increasing. FinCEN proposed requiring domestic financial institutions and agencies to implement certain recordkeeping and reporting requirements for transactions involving crypto mixers. [Read more at FinCEN]

Correcting the record: Inaccurate methodologies for estimating crypto’s role in terrorism financing

Chainalysis claims that terrorist groups’ use of crypto-assets has been overstated. Some terrorist organizations do raise, store, and transfer funds using crypto-assets, but according to Chainalysis, terrorism financing is a very small portion of the already very small portion of crypto transaction volume that is illicit. Instead, terrorist organizations will likely continue to use traditional, fiat-based methods such as financial institutions, hawalas, and shell companies as their primary financing vehicles. Also, crypto-assets are not effective solutions to finance terrorism at scale due to blockchain technology’s inherent transparency. [Read more at Chainalysis]

Kiffmeister’s central bank digital currency monthly monitor

Kiffmeister’s #Fintech Daily Digest (20230906)*

September 6, 2023September 6, 2023 ~ kiffmeister

Blockchain privacy and regulatory compliance: towards a practical equilibrium

Ethereum’s Vitalik Buterin has co-authored a paper on a smart contract-based protocol designed to reconcile financial privacy with regulatory compliance. The core idea is to allow users to publish a zero-knowledge proof, demonstrating that their funds (do not) originate from known (un-)lawful sources, without publicly revealing their entire transaction transaction history. This is achieved by proving membership in custom association sets (“privacy pools”) that satisfy certain properties, required by regulation or social consensus. [Read more on SSRN]

Bank of Canada explores impact of quantum computing on CBDCs

The Bank of Canada has engaged evolutionQ for a research project involving quantum-safe cybersecurity technologies for greenfield digital currencies. The Bank of Canada is exploring technologies and technical ecosystems that may inform decisions relating to the development of a potential digital loonie. The evolutionQ research will explore the impact of integrating quantum-safe encryption methods and crypto-agility as design goals for central bank digital currency (CBDC). The code developed during the research will be released as open source to give developers and researchers the opportunity to explore the new cryptographic methods. [Read more at evolutionQ]

Kiffmeister’s central bank digital currency monthly monitor

Kiffmeister’s #Fintech Daily Digest (20230626)*

June 26, 2023June 27, 2023 ~ kiffmeister

MAS proposes framework for digital asset networks

The Monetary Authority of Singapore (MAS) published a report proposing a framework for designing open, interoperable networks for digital assets (i.e. tokenized real-economy and financial assets ). The report also considers how the CPMI-IOSCO principles for financial market infrastructures (PFMIs) can be applied to evolving models of digital asset networks, based on industry pilots launched under Project Guardian, MAS’s collaborative initiative with the financial industry to test the feasibility of applications in asset tokenization and decentralized finance (DeFi). The MAS also announced an expansion of Project Guardian to more asset classes. [Read more at the MAS]

Crypto Travel Rule implementation ‘remains relatively poor,’ says FATF

The Financial Action Task Force (FATF) renewed its request for countries to implement the “travel rule”, explaining that “many” member states have failed to implement the rule. The rule requires virtual asset service providers (VASPs) to communicate the personally identifiable information (PII) of senders to the VASPs of recipients and vice versa whenever the amount transacted is above $1,000. FATF claims that the travel rule is a “key requirement to prevent funds being transferred to sanctioned individuals or entities”, and noncompliance “creates significant loopholes for criminals to exploit”. Closing the gaps in global regulation of virtual assets is an urgent priority. [Read more at the FATF]

Belgium regulator orders Binance to stop services in country

Belgium’s Financial Services and Markets Authority (FSMA) ordered Binance to cease all offers of virtual currency services in the country — immediately. “The FSMA has noted that Binance is offering and providing exchange services in Belgium between virtual currencies and legal currencies, as well as custody wallet services, from countries that are not members of the European Economic Area.” FSMA said Binance did not dispute that it offered those services in Belgium. [Read more at the FSMA]

Upcoming conferences, webinars and speaking engagements:

I’ll be participating in Currency Research’s in-person Central Bank Payments Conference and Global Payments Summit in Cape Town from June 26 to 30. [Register here and here respectively]
I’ll be lecturing at the Digital Euro Association (DEA) Digital Money Academy on July 27, 2023. [Register here]

Kiffmeister’s global central bank digital currency monthly monitor

Just a reminder that I produce a monthly digest of central bank digital currency (CBDC) developments exclusively for the official sector. So for any of you out there who work for a central bank, ministry of finance or international financial institution 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 chronicles@kiffmeister.com.

Kiffmeister’s #Fintech Daily Digest (20230531)*

May 31, 2023May 31, 2023 ~ kiffmeister ~ 1 Comment

RBI CBDC pilot to be expanded to include more locations and banks

The Reserve Bank of India (RBI) is gradually expanding the scope of its retail central bank digital currency (CBDC) pilot to include more locations and banks. The pilot launched on December 1, 2022 in four cities with four banks. Four more banks were subsequently added, and now four more will be added, along with ten more cities. [Read more at the RBI]

Mooney unveils bill to block US CBDC pilot program

Alex Mooney of West Virginia introduced in the US House of Representatives the Digital Dollar Pilot Prevention Act, to prevent the Federal Reserve from launching a pilot program that would test the operability of a CBDC in the U.S. financial system. According too Mooney, “CBDCs would threaten the liberties of law-abiding Americans and are being used by authoritarian countries right now to crack down on dissent.” [Read more from Alex Mooney]

UAE central bank issues AML/CFT guidance for crypto

The Central Bank of the United Arab Emirates (CBUAE) issued new guidance concerning anti-money laundering (AML) and countering financing of terrorism (CFT) measures for crypto businesses on May 31, 2023. It outlines the risks arising from dealing with virtual asset and virtual asset service providers (VASPs), taking into account the recommendations of the Financial Action Task Force (FATF). The new rules will come into effect in one month. [Read more at the CBUAE]

CFTC warns on expansion of clearing digital assets

The Commodity Futures Trading Commission (CFTC) issued a staff advisory on the risks associated with the expansion of Derivatives Clearing Organization (DCO) clearing of digital assets. Noting the increased cyber and other risks that may be associated with digital assets, the CFTC expects DCOs and applicants to actively identify new, evolving, or unique risks and implement risk mitigation measures tailored to the risks that these products or clearing-structure changes may present. [Read more at the CFTC]

Prudential treatment of crypto-asset exposures

The Bank for International Settlements (BIS) published an executive summary of the Basel Committee on Banking Supervision (BCBS) standard on the prudential treatment of crypto-asset exposures published in December 2022. The standard outlines minimum regulatory, supervisory review and disclosure requirements of banks’ crypto-asset exposures under Pillars 1, 2 and 3 of the Basel Framework. Internationally active banks in BCBS member jurisdictions are expected to adopt the standard by 1 January 2025. [Read more at the BIS]

Upcoming conferences, webinars and speaking engagements:

I’ll be participating in Currency Research’s in-person Central Bank Payments Conference and Global Payments Summit in Cape Town from June 26 to 30. [Register here and here respectively]
I’ll be lecturing at the Digital Euro Association (DEA) Digital Money Academy on July 27, 2023. [Register here]

Kiffmeister’s global central bank digital currency monthly monitor

Kiffmeister’s #Fintech Daily Digest (20230506)

May 6, 2023May 6, 2023 ~ kiffmeister

On Tuesday (May 9, 2023) at 10am EST (3 pm UK time) I’ll be chatting (virtually) with author and commentator David Birch (15Mb Ltd) about what to expect from the introduction of new forms of money, such as central bank digital currency (CBDC) and stablecoins. Are the use cases strong enough to expect their adoption? Are we ready and eager to use and receive payments in these new forms of money? [Sign up at FNA]

Binance faces US probe of possible Russian sanctions violations

The US Department of Justice (DOJ) is reportedly investigating whether Binance was used illegally to let Russians skirt US sanctions and move money through the cryptocurrency exchange. Binance is also already being examined by the Internal Revenue Service (IRS) and federal prosecutors, regarding anti-money laundering obligations compliance, and the Securities and Exchange Commission (SEC) has been scrutinizing whether the exchange has supported the trading of unregistered securities. [Read more at Bloomberg]

Mapping the privacy landscape for central bank digital currencies

An article by Raphael Auer, Rainer Böhme, Jeremy Clark and Didem Demirag explores the multiple dimensions of retail CBDC privacy considerations. They point to the number of distinct stakeholders, combined with the technical challenges, as possibly responsible for stalling progress toward deploying retail CBDC. One step forward is understanding who the key stakeholders are and what their interests are in payment records. Knowledge of conflicting interests is helpful for developing requirements and narrowing the range of technical solutions. This article contributes to the literature by identifying three stakeholder groups – privacy enthusiasts, law enforcement, and data holders – and exploring their conflicts. A main insight is that nuanced data-access policies are best to resolve the conflicts, which in turn rule out many technical solutions that promise “hard privacy,” meaning solutions relying on cryptography and user-guarded secrets without room for human discretion. This observation shifts attention to a softer form of privacy-enhancing technologies, which gives authorized stakeholders the capability to access certain payment records in plaintext under defined circumstances. Such a system depends on compliance and accountability, supported with technically enforced access control, limited retention periods, and audits. This is referred to as “soft privacy”. [Read more at Pulpsy.com]

Crypto-assets and CBDC – Potential implications for developing countries

The United Nations Conference on Trade and Development (UNCTAD) published a paper aimed at supporting developing country policymakers in their thinking about crypto-assets. Crypto adoption has been strong in developing countries, based on its purported capacity to increase financial inclusion, reduce costs of remittances, and ease access to investment finance and export credit. However, any substitution of national sovereign currencies by crypto-assets can jeopardize financial stability and the effectiveness of monetary policy, reduce the effectiveness of capital controls, pose risks to countries’ monetary sovereignty and, through the pseudonymous character of crypto assets, facilitate illicit financial flows. Some of these challenges can be addressed by regulation, improving financial inclusion and monetary stability, CBDC, fast retail payment systems and improved auxiliary digital infrastructure. [Read more at the UNCTAD]

A simple model of a central bank digital currency

The National Bureau of Economic Research (NBER) published a paper that highlights the trade-offs between physical and digital forms of retail central bank money based on a general equilibrium model. It finds that the key differences between cash and CBDC include transaction efficiency, possibilities for tax evasion, and, potentially, nominal rates of return. It establishes conditions under which cash and CBDC can co-exist and shows how government policies can influence relative holdings of cash, CBDC, and other assets. The paper illustrates how a CBDC can facilitate negative nominal interest rates and helicopter drops, and also how a CBDC can be structured to prevent capital flight from other assets. [Read more at the NBER]

Wholesale CBDC – the safe way to debt capital market efficiency

The European Stability Mechanism (ESM) published a paper that analyzes the usefulness of digital currencies for wholesale financial transactions in Europe. It identifies the risks impede broad adoption of distributed ledger technology (DLT), despite potential widespread debt capital market efficiency gains from DLT-based smart contracts. A wholesale CBDC on a private permissioned blockchain could overcome these risks and impediments and lead to significant efficiency gains in the financial system. [Read more at the ESM]

Stablecoin runs and the centralization of arbitrage

A paper by Yiming Ma, Yao Zeng, and Anthony Lee Zhang analyzes the run risk of USD-backed stablecoins and uncover a dilemma between stablecoins’ price stability and financial stability. They show that panic runs exist even though general investors only trade stablecoins in secondary markets with flexible prices. Run incentives are reinstated by stablecoin issuers’ liquidity transformation and the fixed $1 at which arbitrageurs redeem stablecoins for cash in the primary market. The authors discover that more efficient arbitrage amplifies run risk. This explains why stablecoin issuers only authorize a small set of arbitragers even though it comes at the expense of maintaining a stable secondary price. In other words, the centralization of arbitrage embeds an inherent tradeoff between run risk and price stability. The paper’s findings are based on a model and a novel dataset on stablecoin redemptions, trading, and reserve assets. Calibrating the model, the authors find a higher run risk for USDT, the largest stablecoin, compared to USDC, the second-largest stablecoin. However, even USDC bears significant run risk due to its less concentrated arbitrage and more concentrated deposit holdings. [Read more here]

Upcoming conferences, webinars and speaking engagements:

I’ll be moderating a panel on “what happens when the lights go out…different schemes for offline functionality” at the in-person Digital Currency Conference (DCC) in Mexico City on May 18. [Register here]
I’ll be participating in Currency Research’s in-person Central Bank Payments Conference and Global Payments Summit in Cape Town from June 26 to 30. [Register here and here respectively]

Kiffmeister’s global central bank digital currency monthly monitor