Bank for International Settlements Unveils ‘Game-Changing’ CBDC Blueprint Using Privatized and Controlled Crypto Technology

June 26, 2023 The Daily Hodl

BIS releases unified-ledger proposal for cross-border, tokenized asset transactions

June 20, 2023 Coin Telegraph

BIS

Like the IMF’s single-ledger proposal released a day earlier, BIS’ unified ledger uses familiar concepts, such as tokenization, without the blockchain.

The Bank for International Settlements (BIS) has released a chapter of its annual report early. That chapter, on the future of the monetary system, discusses “a new type of financial market infrastructure — a unified ledger.” The chapter was published June 20, one day after the International Monetary Fund (IMF) released a paper describing its “single ledger” cross-border payments concept.

The BIS proposal harnesses central bank digital currency and tokenized assets into “a new type of financial market infrastructure” — that is, the unified ledger, which would be powered by application programming interfaces (APIs). The authors of the proposal critiqued existing financial technology. They said:

“The collapse of crypto and the faltering progress of other tokenisation projects underline a key lesson. The success of tokenisation rests on the foundation of trust provided by central bank money and its capacity to knit together key elements of the financial system.”

One drawback of current tokenization schemes is that they exist in silos, the proposal claimed. A unified ledger would incorporate the ledgers of the counterparties, programmed reconciliation and messaging, enabling faster transactions and atomic (simultaneous) settlement in a “partitioned data environment” where privacy and transparency are controlled.

A unified-ledger system would allow for considerable disintermediation in transactions with securities. Cross-border transactions would require more coordination, assuming an intermediated system with the presence of both central banks and private payment service providers.

BIS general manager Agustín Carstens first mentioned unified-ledger technology at the Singapore FinTech Festival in February. Like the IMF “single ledger” introduced a day earlier, the unified ledger uses concepts and technology familiar to the cryptocurrency community. The IMF proposal was met with immediate pushback from the crypto community.

Neither the single ledger nor the BIS unified ledger crucially relies on blockchain technology. Project Rosalind, undertaken by the BIS and the Bank of England, also depended on API technology. The full BIS annual report is due out on June 25.

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BIS issues comprehensive paper on offline CBDC payments

May 11, 2023 Coin Telegraph

BIS

According to the Bank for International Settlements, offline payments with CBDC raise new risks related to counterfeiting, fraud and privacy concerns.

The Bank for International Settlements (BIS) is actively exploring opportunities for offline payments involving a central bank digital currency, or CBDC.

On May 11, the BIS Innovation Hub Nordic Centre published a comprehensive handbook exploring how CBDCs could work for offline payments.

The guide is written in collaboration with technical consultancy Consult Hyperion, addressing objectives for resilience, cash resemblance, accessibility and other offline CBDC features.

*Offline payments and ledger systems. Source: BIS*

Titled “Project Polaris,” the paper highlights new potential risks stemming from offline payments with CBDCs, including counterfeit or privacy concerns.

According to BIS and Hyperion, offline CBDC payments pose privacy threats as they can “both support anonymous transactions and be privacy-revealing depending on design.”

Some of the listed privacy concerns include the level of privacy protection offered by the value transfer protocol. “If the offline value transfer protocol does not support privacy by design, then offline payments can never be anonymous,” the handbook reads.

Offline CBDC payment transactions also raise privacy or even fraud issues when it comes to identification and verification of counterparty users.

In some cases, it may be crucial for offline CBDC payees or payers to identify the counterparty, and such transactions may not always involve face-to-face contact. Central banks would have to take into account such situations when designing offline CBDCs, BIS wrote, adding:

“The payer may want to be assured of the identity of the payee, the details given to them are valid and their payment goes to the right place. [...] Impersonation fraud is a potential area of risk that central banks need to consider with regard to privacy.”

The paper also mentioned the importance of interoperability and risk management systems for offline payments, stressing the need for the ability to detect potential breaches of offline purses.

“The roles and responsibilities of the ecosystem in supporting offline payments need to be better defined, and collaboration between public and private sectors will be required,” the handbook notes.

Offline functionality is a major feature of multiple CBDC projects currently being developed by global central banks. As previously reported, countries like Australia, India and Russia have been working on offline CBDC payment technology.

Australia’s central bank plans to launch a “live pilot” of a CBDC that features offline payments “in the coming months.” The Reserve Bank of India has been testing CBDC offline functionality since March 2023. The central bank of Russia expects to introduce the offline mode for the digital ruble by 2025.

BIS, Bank of England conclude DLT settlements pilot

April 19, 2023 Coin Telegraph

Bank of England

The insights of Project Meridian would be used by the Bank of England in its real-time gross settlement system.

The Bank of England and the Bank for International Settlements (BIS) Innovation Hub London Center have tested a distributed ledger technology-powered settlements system between the institutions. The insights of the project will be used by the Bank of England in its real-time gross settlement (RTGS) system.

On April 19, BIS published a report about the joint pilot project with the Bank of England called Project Meridian. According to the 44-page document, the banks have successfully purchased houses in Wales and England through the synchronization network using distributed ledger technology (DLT).

As the report states, the messages sent between the synchronization network and RTGS system using APIs provide a generic interface that could be “relatively easily” extended to other asset classes, such as foreign exchange. This could reduce the time, costs and risks of transactions.

*The Synchronization system of Project Meridian. Source: BIS*

Project Meridian clearly aims to provide a settlement system for central bank digital currencies (CBDC). The report is unequivocal in citing the possible benefits for central banks:

“Synchronization can provide a catalyst for innovation in wholesale payments and support the emergence of new payments infrastructures that settle using central bank money.”

However, there are several reservations about the possible use of the system, concluded in the “Political and operational considerations” part of the report. For example, future network operators will have to think about the mechanics of identity verification. Also, the synchronization services would be restricted by existing RTGS operating hours at a time when many jurisdictions are considering extensions to the operating hours of their national payment infrastructures.

Implementing the system would raise several legal questions, such as the final point of irrevocability of the settlement, digital representation of asset ownership and the prevention of the arbitrary use of the clients’ funds by commercial banks before a transaction date.

In March, the BIS reported about the completion of Project Icebreaker, exploring international retail and remittance payments use cases for CBDCs with the central banks of Israel, Norway and Sweden. In October 2022, the bank reported that a CBDC pilot involving the central banks of Hong Kong, Thailand, China and the United Arab Emirates was “successful” after a month-long test facilitating $22 million in cross-border transactions.

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April 16, 2023 Bitcoin.com

BIS Releases Report On ‘Project Icebreaker’ — Develops Cross-Border Retail CBDC Payment Model

March 8, 2023 Bitcoin.com

BIS wraps exploration project on retail CBDC payment system

March 6, 2023 Coin Telegraph

BIS

The bank concluded that a ‘hub-and-spoke’ model between CBDC domestic systems could “reduce settlement and counterparty risk" and complete cross-border transactions in seconds.

The Bank for International Settlements, or BIS, has reported it has concluded a project exploring international retail and remittance payments use cases for central bank digital currencies, or CBDCs, with the central banks of Israel, Norway and Sweden.

In a March 6 report, the BIS said it had finished Project Icebreaker, an initiative involving the bank’s Innovation Hub Nordic Centre testing key functions and the technological feasibility of interlinking domestic CBDC systems through the Central Bank of Norway, the Bank of Israel, and Sveriges Riksbank. According to the report, the BIS concluded that a ‘hub-and-spoke’ model between domestic systems could “reduce settlement and counterparty risk by using coordinated payments in central bank money and complete cross-border transactions within seconds”.

“Without a hub-and-spoke approach, each [retail CBDC, or rCBDC] system would need to make individual specific network and infrastructure configurations to communicate with other rCBDC systems,” said the report. “Communication between these rCBDC systems may not be standardised via a common interface and would instead be a bespoke integration between each pair of rCBDC systems. This would be not only complex to support and maintain but could also introduce cyber security risks.”

The #BISInnovationHub Nordic Centre and the central banks of Israel, Norway and Sweden have concluded Project Icebreaker, which studied the potential benefits and challenges of using retail #CBDC in international payments @riksbanken @NorgesBank https://t.co/2OfFYaPbr6 pic.twitter.com/jPFjrCXDlT
— Bank for International Settlements (@BIS_org) March 6, 2023

The report could provide the groundwork for a cross-border payment system should the central banks of Israel, Norway and Sweden move forward with issuing a digital shekel, digital krone, and digital krona, respectively. In October 2022, the bank reported that a CBDC pilot involving the central banks of Hong Kong, Thailand, China and the United Arab Emirates was “successful” after a month-long test facilitating $22 million worth of cross-border transactions.

In 2020, the Central Bank of the Bahamas became the first in the world to make a central bank-issued CBDC called the Sand Dollar available to all residents of the island nation. Other countries have been moving forward on large-scale trials of digital currencies, including China — the nation’s central bank reportedly distributed millions of digital yuan over the Lunar New Year holidays.

Crypto distribution is uneven among banks as prudential exposure rises: BIS report

March 1, 2023 Coin Telegraph

Banking

One bank accounts for almost 62% of all crypto asset prudential exposure; almost two-thirds of banks holding crypto are in the Americas.

Around 20% of banks have exposure to crypto assets, a Bank for International Settlements (BIS) report released Feb. 28 found. The majority of those banks are in the Western Hemisphere.

According to the report, which is based on data from the first half of 2022, 17 Group 1 banks reported approximately 2.9 billion euros in crypto asset prudential exposure and 1 billion euros in crypto assets under custody. A Group 1 bank is one that has Tier 1 capital of more than 3 billion euros and is internationally active. Tier 1 capital is a bank's equity capital and disclosed reserves.

The 17 banks make up slightly less than 20% of the total monitored. Eleven of them are in the Americas, with four in Europe and two in other parts of the world. Thus, crypto asset holdings represented a tiny fraction of the banks’ holdings:

“In relative terms, prudential exposures make up only 0.013% of total exposures on a weighted average basis across the sample of banks reporting cryptoasset exposures, while cryptoassets under custody make up only 0.005% of total exposures.”

The BIS has instituted standards limiting banks to 2% crypto reserves by the beginning of 2025.

The #Basel_III monitoring report in full is herehttps://t.co/NjKcPTKOxr
— Hyun Song Shin (@HyunSongShin) March 1, 2023

Among the entire set of banks monitored, crypto asset exposure represents 0.003% of total exposures and crypto assets under custody represent 0.001% of the total. Prudential exposure rose 30% over the first half of the year, and custody decreased by 66%. The latter figure was particularly impacted by banks dropping out of the study, the report noted, while the rest of the decrease was down to falling crypto asset market values.

A single, unidentified bank accounted for 61.7% of all crypto asset prudential exposure, and four other banks make up 35% of exposure. Clearing and trading created almost three-quarters of all prudential exposure. Bitcoin was the largest underlying exposure, at over 40%, with Coinbase coming in second slightly with under 30%. Ether was a distant third with less than 5%.

Bitcoin price continues to fall, but derivatives data hints at a short-term rally to $25K

February 24, 2023 Coin Telegraph

Bitcoin price continues to fall, but derivatives data hints at a short-term rally to K

BIS

This week regulators joined hands to highlight the crypto sector’s inherent risk, but pro traders fought back by adding leverage to their long positions.

It’s possible that many people have already forgotten that Bitcoin’s (BTC) price closed 2022 at $16,529 and the recent rebound and rejection at the $25,000 level could raise concern among certain investors. Bears are pushing back at the $25,000 level and there has been multiple failed attempts at the level between Feb. 16 and Feb. 21. Currently, it looks like the $23,500 resistance is continuing to gain strength with every retest.

Pinpointing the rationale behind Bitcoin’s 45.5% year-to-date gain is not apparent, but part of it comes from the United States Federal Reserve’s inability to curb inflation while raising interest rates to its highest level in 15 years. The unintended consequence is higher government debt repayments and this adds further pressure to the budget deficit.

It’s virtually impossible to predict when the Fed will change its stance, but as the debt to gross domestic product ratio surpasses 128, it should not take longer than 18 months. At some point, the value of the U.S. dollar itself could become endangered due to extreme debt leverage.

On Feb. 23, the Fed, the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency issued a joint statement encouraging U.S. banks that rely on funding from the crypto sector to prevent liquidity runs by maintaining strong risk management practices. Regulators said the report was spurred by “recent events” in the industry due to increased volatility risks.

Let's look at derivatives metrics to better understand how professional traders are positioned in the current market conditions.

Bitcoin margined longs were used to defend the $24,000 level

Margin markets provide insight into how professional traders are positioned because it allows investors to borrow cryptocurrency to leverage their positions.

For example, one can increase exposure by borrowing stablecoins to buy (long) Bitcoin. On the other hand, Bitcoin borrowers can only bet against (short) the cryptocurrency. Unlike futures contracts, the balance between margin longs and shorts isn’t always matched.

*OKX stablecoin/BTC margin lending ratio. Source: OKX*

The above chart shows that OKX traders' margin lending ratio increased between Feb. 21 and Feb. 23, signaling that professional traders added leverage long positions as Bitcoin price broke below $24,000.

One might argue that the excessive demand for bullish margin positioning seems a desperate move after the failed attempt to break the $25,000 resistance on Feb. 21. However, the unusually high stablecoin/BTC margin lending ratio tends to normalize after traders deposit additional collateral after a few days.

Options traders are more confident with downside risks

Traders should also analyze options markets to understand whether the recent rally has caused investors to become more risk-averse. The 25% delta skew is a telling sign whenever arbitrage desks and market makers overcharge for upside or downside protection.

The indicator compares similar call (buy) and put (sell) options and will turn positive when fear is prevalent because the protective put options premium is higher than risk call options.

In short, the skew metric will move above 10% if traders fear a Bitcoin price crash. On the other hand, generalized excitement reflects a negative 10% skew.

*Bitcoin 30-day options 25% delta skew: Source: Laevitas*

Notice that the 25% delta skew shifted slightly negative since Feb. 18 after option traders became more confident and the $23,500 support strengthened. A skew reading at -5% denotes a balanced demand between bullish and bearish option instruments.

Derivatives data paints an unusual combination of excessive margin demand for longs and a neutral risk assessment from options traders. Yet, there is nothing concerning about it as long as the stablecoin/BTC ratio returns to levels below 30 in the coming days.

Considering regulators have been applying enormous pressure on the crypto sector, Bitcoin derivatives are holding up nicely. For example, on Feb. 22, the Bank for International Settlements general manager Agustín Carstens emphasized the need for regulation and risk management in the crypto space. The limited impact of the BIS statement on the price is a bullish sign and it possibly increases the odds of Bitcoin price breaking above $25,000 in the short-term.

This article does not contain investment advice or recommendations. Every investment and trading move involves risk, and readers should conduct their own research when making a decision.

The views, thoughts and opinions expressed here are the authors’ alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.

BIS head describes ideal ‘unified ledger’ for central banks and other financial users

February 22, 2023 Coin Telegraph

BIS

peaking in Singapore, Agustín Carstens described a ledger that would accommodate a variety of public and private projects in discrete but connectable parts.

General manager of the Bank for International Settlements Agustín Carstens spoke at the Singapore FinTech Festival on Feb. 22 and described the digital financial infrastructure he believes would best suit central bankers’ needs. He called that infrastructure a “unified ledger.”

Carstens compared the theoretical unified ledger with a smartphone, saying they both work seamlessly with a variety of components. Unlike a smartphone, a unified ledger would have open architecture, however, and would show programmability and composability, that it, it would run and bundle smart contracts. There are over 2 million apps available to smartphone users, Carstens noted. He said:

“A unified ledger is a digital infrastructure with the potential to combine the monetary system with other registries of real and financial claims.”

A unified ledger would not have to be decentralized or permissionless, Carstens said, but could accommodate a variety of projects that “use of money as a means of payment and settlement” where the central bank plays a large role in the governance of the ledger and the consumer-facing sector is in private hands.

What a major validation of our #CBDC design! Checkout the BIS paper making the case for a #DLT based CBDC where Central Bank Money, #Tokenized Deposits and Other #stablecoins coexist on common ledger with #ecosystem and #regulatory frameworks #whysandbox https://t.co/yR1WCzzYU7
— EMTECH (@emtech_inc) February 22, 2023

Central bank digital currency and tokenized deposits could exist in “partitioned” sections of the ledger, with smart contracts to facilitate their interaction, Carstens said. The ledger could be used for everything from micropayments on the Internet of Things to escrow in real estate transactions.

Carstens took the opportunity to express his current thinking on stablecoin. He said of stablecoin proponents:

“But what this view forgets is that what sustains fiat money is not the application of novel technologies but all the institutional arrangements and social conventions behind it.”

They also run the risk of depegging, he added. Stablecoins were developed because they were technically able to do things other forms of money could not. Central banks should take those roles over from them.

Carstens also raised the hackles of the crypto community Feb. 22 with a blunt assessment of the success of cryptocurrency.

BIS

Bitcoin margined longs were used to defend the $24,000 level

Options traders are more confident with downside risks

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