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Basel Committee suggests introducing maturity limits for stablecoin reserve assets

Should longer-term assets be allowed as reserve assets, the committee believes these must overcollateralize the claims of stablecoin holders.

The Basel Committee on Banking Supervision of the Bank for International Settlements (BIS) proposed several measures on targeted adjustment to its standard on banks’ exposure to cryptoassets. A consultative document was published on the BIS website on Dec. 14. 

The document is the result of the review work conducted during 2023, which helped the committee formulate amendments to its original prudential standards for banks’ exposure to stablecoins, published in December 2022.

Proposed changes relate primarily to the composition of the reserve assets of stablecoins, specifically for crypto assets, classified under Group 1b in the prudential standards, “subject to capital requirements based on the risk weights of underlying exposures.”

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SWIFT Plans to Launch CBDC Interconnection System in Next Two Years

BIS advises central banks to plan in advance for CBDC security

From legal issues to hackers, launching a CBDC is fraught with risks, and BIS has a big list of them to consider.

Issuance of a central bank digital currency (CBDC) requires adequate attention to security, the Bank for International Settlements (BIS) reminded central bankers in a report on Nov. 29. An integrated risk-management framework should be in place starting at the research stage, and security should be designed into a CBDC, the report said.

Risks associated with CBDCs will vary across countries, as conditions and goals vary, and they will change across time, requiring continual management. These risks can be broken down into categories and a wide array of individual factors, the study demonstrated. The risks grow with the scale and complexity of the CBDC. In addition:

“A key risk are [sic] the potential gaps in central banks' internal capabilities and skills. While many of the CBDC-related activities could in principle be outsourced, doing so requires adequate capacity to select and supervise vendors. […] A number of operating risks for CBDC stem from human error, inadequate definitions or incomplete planning.”

Cybersecurity may be challenged by other countries, hackers, users, vendors or insiders. The study identified 37 potential “cyber security threat events” from eight specific risks. Distributed ledger technology may be unfamiliar to a central bank and so not undergo full vetting or cause overdependence on third parties.

Related: Security audits ‘not enough’ as losses reach $1.5B in 2023, security professional says

The study suggests an integrated risk management framework to mitigate CBDC risks.

Proposed CBDC resilience framework. Source: BIS

Despite the limited use of CBDCs in real life so far, several examples of risk management failure can be found. China found it was unprepared for the data storage requirements after it launched its digital yuan pilot. The Eastern Caribbean Central Bank’s DCash, a live CBDC, suffered a two-month outage in early 2022 due to an expired certificate in the software.

On the other hand, the DCash pilot project had been considerably expanded the previous year to provide support in Saint Vincent and the Grenadines after a volcanic eruption there, improving the currency’s resilience, the study reminded.

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SWIFT Plans to Launch CBDC Interconnection System in Next Two Years

BIS Innovation Hub presents its ‘private CBDC’ project

The Bank for International Settlement’s Project Tourbillon features two eCash prototypes, the first providing “unconditional payer anonymity” and the second being “more resilient” in security terms.

The Bank for International Settlements (BIS) Innovation Hub has presented the final report on its private central bank digital currency (CBDC) initiative, Project Tourbillon. The prototypes built in the project’s framework could allow payment anonymity for CBDC transactions.

The 46-page report, published on Nov. 29, explores the concepts of privacy, security and scalability on the material of two prototypes based on the designs of one of the pioneers of cryptography, David Chaum. The prototypes were called eCash 1.0 and eCash 2.0. While the former provides “unconditional payer anonymity,” the latter has “more resilient” security features.

According to the report authors, “it is feasible to implement a CBDC that provides payer anonymity while combating illicit transactions.” Project Tourbillon achieves that with the complete anonymity of the consumer during the transaction with the merchant, the report says:

“A consumer paying a merchant with CBDCs is anonymous to all parties, including the merchant, banks and the central bank.”

The merchant’s identity in this scheme is known to the payer and is only disclosed to the merchant’s bank as part of the payment. The central bank doesn’t see any personal payment data but can monitor CBDC circulation at an aggregate level.

Related: The ‘godfather of crypto’ wants to create a privacy-focused CBDC. Here’s how

However, in the first stage, all users must undergo a Know Your Customer procedure at a commercial bank to use the CBDC. As in the current financial system, the merchant’s bank remains responsible for ensuring that transactions comply with regulatory requirements such as Anti-Money Laundering, Countering the Financing of Terrorism and tax evasion laws.

The report concludes that Tourbillon’s payment process is easy to integrate into today’s payment landscape as it uses existing technologies such as QR codes, proof-of-stake protocols and account relationships between customers, merchants, banks and central banks.

The BIS spearheads global CBDC adoption, assisting the Swiss National Bank in wholesale CBDC development and collaborating on joint platforms with central banks in China, Hong Kong, Thailand and the United Arab Emirates, among others. It is also working on a transaction tracker proof-of-concept with the European Central Bank.

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SWIFT Plans to Launch CBDC Interconnection System in Next Two Years

South Korea to invite 100K citizens to test CBDC in 2024

Participants will be restricted to using the CBDC only for payment, without an option to store, exchange or send it to other users.

The Bank of Korea (BOK) — South Korea’s central bank — has said it will invite 100,000 Korean citizens to purchase goods with deposit tokens as part of its central bank digital currency (CBDC) pilot. The testing will start “around September to October” of 2024 and last for three months. 

According to a Korea Times report from Nov. 23, participants will be restricted to using the CBDC only for payment, without an option to store, exchange or send it to other users. The goal of the pilot stage is to evaluate the feasibility and effectiveness of issuing and distributing the currency.

The BOK will also collaborate with the Korea Exchange to integrate its new digital currency into a simulation system for carbon emissions trading to test the feasibility of delivery versus payment transactions. The BOK statement cited by the newspaper said:

“[...] The pilot project will be conducted first in the fourth quarter of 2024. The possibility of conducting separate pilots will be considered as well if banks propose new individual projects.”

The statements from the BOK coincided with a visit to the country’s capital, Seoul, by Agustin Carstens, general manager of the Bank for International Settlements (BIS). Carstens has publicly referred to the Korean CBDC project as the digital won.

Related: IMF head: CBDCs can replace cash, help financial inclusion

The Bank of Korea announced the launch of the CBDC pilot in October. The pilot, testing retail and wholesale CBDCs, will include private banks and public institutions, while the BIS will provide expert technical support.

The BIS is at the forefront of global CBDC adoption. It is helping the Swiss National Bank to develop a wholesale CBDC, as well as assisting in building a joint platform with the central monetary authorities of China, Hong Kong, Thailand and the United Arab Emirates. It’s also developing a proof-of-concept for a transactions tracker with the European Central Bank, among numerous other projects.

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SWIFT Plans to Launch CBDC Interconnection System in Next Two Years

‘Primitive’ stablecoin lacks mechanisms that maintain fiat stability: BIS

The answer again is regulation, although this time the suggested regulation looks a lot like central bank co-option.

Stablecoins lack crucial mechanisms that guarantee money market stability in fiat, and an operational model that gave regulatory control to a central bank would be superior to private stablecoin, a study released by the Bank for International Settlements (BIS) found.

The authors used a “money view” of stablecoin and an analogy with onshore and offshore USD settlement to probe the weaknesses of stablecoin settlement mechanisms. 

Per the study:

“In both Eurodollar and FX markets, when private bank credit reaches the limits of its elasticity [that is, loses the ability to maintain par], central bank credit steps in, with the ultimate goal of protecting par in global dollar settlement.”

When eurodollar holders sought to bring their funds onshore during the financial crisis of the late 2000s, the Federal Reserve provided a $600 billion liquidity swap to other central banks to shore up par using what the authors described as “non-trivial institutional apparatus.”

Related: BOE governor trashes crypto, stablecoins in favor of ‘enhanced digital money’

Stablecoins bridge on-chain and off-chain funds and maintain par with the fiat USD with up to three “superficial” mechanisms: through reserves, overcollateralization and/or an algorithmic trading protocol.

Reserves, crucially, are “an equivalent value of short-term safe dollar assets.” Stablecoins mistakenly assume their solvency — the ability to meet long-term demand — based on their liquidity — the ability to meet short-term demand, whether they depend on reserves or an algorithm, according to the authors.

In addition, reserves are unavoidably tied to the fiat money market. This ties stablecoin stability to fiat money market conditions, but during economic stress, there are mechanisms in place to attempt to maintain bank liquidity both onshore and offshore. Stablecoin lacks such mechanisms. One example the authors gave was the banking crisis of this year:

“Central banks were probably surprised to find that lender of last resort support for Silicon Valley Bank in March 2023 was also in effect lender of last resort for USDC, a stablecoin that held substantial deposits at SVB as its purportedly liquid reserve.”

Furthermore, stablecoins have to maintain par among themselves. Bridges are another sore point. The authors compare blockchain bridges to foreign exchange dealers, which are highly dependent on credit to absorb imbalances in order flow. Stablecoins are unable to do that. The higher interest rates common on-chain only make their task more difficult.

The study suggested that the Regulated Liability Network provides a model solution to the difficulties faced by stablecoin. In that model, all claims are settled on a single ledger and are inside a regulatory perimeter. “The commitment of a fully-fledged banking system that would include the central bank and thus have a credibility that today’s private crypto stablecoins lack,” the authors said.

The BIS has been paying increased attention to stablecoins. It released a study earlier in November that examined examples of stablecoins failing to maintain their pegged value. That, as well as the legislative attention stablecoin has been receiving in the European Union, United Kingdom and United States, is testimony to its increasing role in finance.

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SWIFT Plans to Launch CBDC Interconnection System in Next Two Years

IMF head: CBDCs can replace cash, help financial inclusion

International Monetary Fund managing director Kristalina Georgieva urged the public sector to “keep preparing to deploy” central bank digital currencies.

During her opening speech at the Singapore FinTech Festival, International Monetary Fund (IMF) managing director Kristalina Georgieva urged the public sector to “keep preparing to deploy” central bank digital currencies (CBDCs) and related payment platforms in the future.

Georgieva expressed her optimism about the implementation of CBDCs worldwide but said, “We have not yet reached the land,” and there is still much uncertainty:

“Adoption of CBDCs is nowhere close. But about 60 percent of countries are exploring them in some form today.”

Georgieva believes CBDCs can replace cash, offer resilience in advanced economies and improve financial inclusion in underbanked communities. According to Georgieva, CBDCs can co-exist with “private money,” being its “safe and low-cost alternative.” 

Related: IMF director urges ‘financial inclusion’ via digitalization

Georgieva also highlighted the importance of technological infrastructure in CBDC projects, personal data protection and even the possible role of artificial intelligence (AI) in enhancing the national digital currencies. She put a particular emphasis on cross-border payment support:

“To the extent CBDCs are deployed, they must be built to facilitate cross-border payments, which are at present expensive, slow, and available to few. Again, we must start this work today so we don’t have to backpedal tomorrow.”

The IMF head presented its CBDC virtual handbook and marked the Bank for International Settlements (BIS) role in the public sector’s digital money experiments. 

The IMF has recently been active in its analysis of necessary crypto regulations. On Sept. 29, it proposed a crypto-risk assessment matrix (C-RAM) for countries to spot indicators and triggers of potential risks in the sector.

The IMF’s Synthesis paper — jointly prepared with the Bank for International Settlements (BIS) — was unanimously adopted by the “G20 Finance Ministers and Central Bank Governors Communique” in October.

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SWIFT Plans to Launch CBDC Interconnection System in Next Two Years

BIS general manager urges central banks to “lead innovation” for CBDCs

Agustín Carstens called CBDCs the “central element” of central bank leadership in innovation.

Central banks have a responsibility to keep pace with the digital age and lead innovation, Agustín Carstens, general manager of the Bank for International Settlements (BIS), believes.

In his opening remarks at a conference in Basel, Switzerland, on Nov. 8, Carstens called central bank digital currencies (CBDCs) the “central element” of this leadership, elaborating on the potential threats and challenges to implementing them.

One particular challenge is the variety of technological infrastructures different countries intend to develop for their CBDC projects. Carstens also mentioned cyber risks and new possibilities for “criminal activities by unscrupulous actors.”

Related: Central banks want to look under crypto’s hood — Is this a positive sign?

Speaking of the priorities in adapting the CBDCs to potential threats, the official named the flexibility of its design as the number one issue, but he also mentioned privacy problems:

“Maintaining an appropriate level of privacy, for example, will be crucial to ensuring public acceptance of retail CBDCs.”

Carstens pledged BIS support for central banks in their efforts to go digital. This support comes primarily from the BIS Innovation Hub and Cyber Resilience Coordination Centre.

The former has been active recently, participating in numerous digital currency projects. It is helping the Swiss National Bank to develop a wholesale CBDC, as well as helping to build a joint platform with the central monetary authorities of China, Hong Kong, Thailand and the United Arab Emirates and developing a proof-of-concept for a transactions tracker with the European Central Bank, among numerous other projects.

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SWIFT Plans to Launch CBDC Interconnection System in Next Two Years

Project mBridge reveals details of its workings ahead of MVP, commercial debut

Project mBridge has put together a slick publication with lots of new information to let the world know what the hottest project in CBDC is.

The Bank for International Settlements (BIS) released a colorful and fact-filled Project mBridge update on Oct. 31. The publication combines technical and promotional discussions in a shift of tone as the project prepares to become a minimum viable project for commercial launch next year.

The update gathers a significant amount of information about the central bank digital currency (CBDC) bridge that had been scattered or completely unavailable until now. The governance structure is explained in general terms, and technical details are slipped into the text at a level of readability that makes it accessible to non-specialists.

The update explains the project’s use of the Dashing consensus algorithm, which was introduced earlier this month and had previously only been announced in Chinese-language media. It describes it as:

“A Byzantine Fault Tolerance (BFT) consensus protocol that uses proofs of partial confirmation of a block validation to reduce the time needed to achieve consensus and to improve the overall protocol performance.”

The use of legal entity identifiers for Anti-Money Laundering and Countering the Financing of Terrorism is also new information.

Related: BIS, EU central banks building data platform to track crypto, DeFi flows

The technical information is sandwiched in text that is, at least by the standards of central banking, blatantly promotional:

“With Project mBridge, the number of steps [in cross-border payments] can be significantly reduced by allowing direct, bilateral connectivity between the payee’s and payer’s local banks supported by interoperability with participants’ domestic payment systems.”

One of the bigger revelations in the update is a list of observer organizations in the project. Their presence was known before but never specified. There are 25 observers, which include central banks and organizations such as the International Monetary Fund and Federal Reserve Bank of New York. Eleven of them are active in the project’s sandbox. Their identities were not revealed.

Observing members of Project mBridge. Source: BIS

Project mBridge was initiated in 2021 by the central monetary authorities of China, Hong Kong, Thailand and the United Arab Emirates in partnership with BIS. It announced plans for its commercial launch in September. This publication calls "see[ing] if the platform tested can evolve to become a Minimum Viable Product" the project's next step. 

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SWIFT Plans to Launch CBDC Interconnection System in Next Two Years

BIS Says ‘Strongly Coordinated’ International Efforts’ Needed To Prevent Stablecoin Regulatory Arbitrage

BIS Says ‘Strongly Coordinated’ International Efforts’ Needed To Prevent Stablecoin Regulatory Arbitrage

The Bank for International Settlements says coordinated international efforts are necessary for stablecoin regulation. According to a new BIS release from the organization’s Committee on Payments and Market Infrastructures (CPMI), stablecoin technology offers both new financial opportunities and challenges, but its drawbacks may outweigh the benefits. Says the report, “The use of stablecoins in cross-border payments […]

The post BIS Says ‘Strongly Coordinated’ International Efforts’ Needed To Prevent Stablecoin Regulatory Arbitrage appeared first on The Daily Hodl.

SWIFT Plans to Launch CBDC Interconnection System in Next Two Years

US OCC to host discussion on tokenization of real-world assets

The Office of the Comptroller of the Currency highlighted the “emerging divide” between crypto and tokenization and strongly criticized crypto for being “marked by rampant scams.“

The United States Office of the Comptroller of the Currency (OCC), an independent bureau of the U.S. Treasury Department that supervises national commercial banks in the country, will host a symposium on tokenization in February 2024. 

The upcoming symposium is set to ignite a public dialogue on the transformative potential of tokenizing real-world financial assets and liabilities. The event will particularly focus on establishing the groundwork for “responsible innovation.” In a press release, Acting Comptroller Michael Hsu highlights the emerging divide between crypto and the tokenization of real-world assets and liabilities:

“Crypto remains driven by the promise of speculative gains, continues to be marked by rampant scams, fraud, and hacks, and struggles to comply with anti-money laundering rules. By contrast, tokenization is driven by solving real-world settlement problems and can easily be developed in a safe and sound manner and fully compliant with anti-money laundering rules.”

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The symposium is set to include keynote remarks from Hyun Song Shin, economic adviser and head of research at the Bank for International Settlements. Panel discussions will explore the legal foundations for tokens, tokenization use cases, risk management considerations and economic research on tokenization.

The OCC says it will livestream the event and post the registration forms later in 2023 on its website.

The OCC has consistently discouraged banks from engaging with cryptocurrencies through its interpretive letters. At the start of 2023, it joined two other bank regulatory agencies in issuing a collective statement cautioning banks about the potential risks associated with crypto.

In March 2023, the agency announced the establishment of its Office of Financial Technology, which it said will broaden the OCC’s technology focus and help it stay abreast of the rapid developments in the banking industry.

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SWIFT Plans to Launch CBDC Interconnection System in Next Two Years