BIS, Bank of England conclude DLT settlements pilot

April 19, 2023 Coin Telegraph

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.

Magazine: Are CBDCs kryptonite for crypto?

US wholesale CBDC has ‘promise,’ Fed governor says, but retail ‘difficult to imagine’

April 18, 2023 Coin Telegraph

CBDC

Federal Reserve Board governor Michelle Bowman discussed a potential U.S. CBDC in a speech at Georgetown University.

United States Federal Reserve Board governor Michelle Bowman spoke at Georgetown University on April 18 to “offer a perspective” on central bank digital currency (CBDC). The Fed plays an important role in the conversation about CBDC, Bowman said. Her examination of the problems a CBDC might solve and the design and policy issues it entails showed little enthusiasm.

Bowman expressed doubt about the need for a CBDC to improve the payment system or its ability to enhance financial inclusion in the United States. A CBDC would have to beat the performance of the new FedNow system to earn a place on the market, and the 4.5% of Americans who do not have bank accounts are unlikely to want to use a CBDC. Bowman added:

“Unbanked households are also less likely to own mobile phones or have access to the internet, which would present barriers to CBDC adoption."

Bowman also took a dim view of CBDC as an implement of policy. She saw the programmability of a CBDC as a “stark contrast to the flexibility and freedom embedded in physical currency or bank deposits” that could be misused. Furthermore:

“There is also a risk that this type of control could lead to the politicization of the payments system and at its heart, how money is used. A CBDC that permitted this type of control […] Could also threaten the Federal Reserve's independence.”

Speech by Governor Bowman on the considerations for a central bank digital currency: https://t.co/WLK1vp7hlb

Watch live: https://t.co/nurl0Ods5G
— Federal Reserve (@federalreserve) April 18, 2023

Fear of the unknown colored several of Bowman’s conclusions. Cross-border payments would require a regulatory framework to be created, stablecoin may provide an alternative, depending on future legislation, and user privacy could be at risk from CBDCs, she said, without much further consideration. Newly announced U.S. stablecoin legislation would give the Fed control over non-bank stablecoin issuers.

Repeating an argument made by her colleague Christopher Waller, Bowman dismissed claims that a CBDC would reinforce the U.S. dollar’s place in the international economy with the argument that the dollar’s role internationally is due to factors like the size of the U.S. economy, the strength of its institutions and other things a CBDC would not affect.

“We should ask ‘what current frictions exist or may emerge in the payment system that only a CBDC can solve, or that a CBDC can solve most efficiently?’" Bowman said. She concluded that there was little to recommend a retail CBDC:

“It is difficult to imagine a world where the tradeoffs between benefits and unintended consequences could justify a direct access CBDC for uses beyond interbank and wholesale transactions.”

She acknowledged some promise for wholesale CBDC, however, for some large transactions and international payments processing.

Magazine: China’s Digital Yuan Is an Economic Cyberweapon, and the US Is Disarming

Israel’s central bank says CBDC could be issued if stablecoin use increases

April 18, 2023 Coin Telegraph

bank of israel

The Bank of Israel does not want private companies taking over the digital payments system in the country.

The Bank of Israel says it's preparing an action plan for the potential issuance of a central bank digital currency (CBDC),though a formal decision has yet to be made.

On April 17, the Bank of Israel Steering Committee on the Potential Issuance of a Digital Shekel outlined possible scenarios for the development and deployment of a CBDC, a digital shekel called “SHAKED.”

It provided several scenarios that could lead to the issuance of a digital shekel, among them was increased stablecoin activity.

Increased adoption of stablecoins may “impair the payment system” it noted,before adding that stablecoins not pegged to the shekel “might also harm the monetary transmission.”

“At this point, there are no signs of substantial adoption of stablecoins as means of payment in Israel. However, paying habits of the public might change rapidly, for instance in a scenario of issuance by a major private sector entity.”

Another potential driver of CBDC development is a decline in the use of cash in Israel the Committee noted. It said cash is still used in a significant portion of consumer transactions in the country but a change in the public’s payment habits may result in a shift away from using central bank fiat.

The Bank of Israel does not want this scenario or private entities controlling payments so a CBDC could be the solution.

The Bank of Israel have released a document that outlines the conditions that would enable or support a decision to issue a digital Shekel https://t.co/ALU4FEYUTh
...#Israel #Shekel #CBDC #DigitalCurrency #DigitalMoney #DigitalPayments #CBDCs #DigitalCurrencies #DigitalShekel pic.twitter.com/Jbe49i1VnR
— Digital Pound Foundation (@digitalpoundfdn) April 17, 2023

It also said that consideration for the issuance of a CBDC would be made to “support competition in the payments system and in the financial system in the digital era.”

If the United States or the European Union issues a CBDC, then this would also influence Israel’s decision to deploy one, it stated.

The Bank of Israel Steering Committee concluded that it was monitoring the situation in preparation for advancing the digital shekel.

Israel appears to be shadowing the U.S. in terms of crypto regulation. Earlier this year the country’s securities regulator, the Israel Securities Authority (ISA), proposed legislation that would classify crypto assets as securities in the country.

Industry executives have expressed concern claiming it could “kill the industry.”

Feature: Unstablecoins: Depegging, bank runs and other risks loom

Bank of England preparing for greater role of tokenization in finance, official says

April 17, 2023 Coin Telegraph

Bank of England

BoE deputy governor Sir Jon Cunliffe looked at stablecoin, CBDC and other forms of tokenization taking hold in the modern economy in a speech on financial innovation.

Bank of England deputy governor Sir Jon Cunliffe spoke at the Innovative Finance Global Summit in London on April 17 about the development of tokenization. The UK’s central bank is currently exploring tokenization in bank money, non-bank money and central bank money and the ways tokenized assets will interact.

Stablecoins, Cunliffe said, “offer the possibility of greater efficiency and functionality in payments,” but “it is extremely unlikely that any of the current offerings would meet the standards for robustness and uniformity we currently apply both to commercial bank money and to the existing payment systems.” The central bank is planning to collaborate with the Financial Conduct Authority on regulation after the passage of the Financial Services and Markets Bill.

Tokenized bank deposits are “a much simpler proposition than non-bank stablecoins,” and may allow banks deposits “to compete better with non-bank payment coins.” Regulatory issues, such as deposit insurance and Anti-Money Laundering measures remain, however, as deposit tokens would settle without the involvement of central bank money, unlike current commercial bank settlements.

The @bankofengland's Jon Cunliffe outlines 4 areas where tokenisation of money is being explored: #stablecoins for payments, tokenisation of commercial bank deposits, issuance of a digital pound, and ensuring these new forms of money are robust & uniformhttps://t.co/DthyJrtVZ1
— Central Bank Payments News (@cbpaymentsnews) April 17, 2023

A UK central bank digital currency “is likely to be needed if current trends in payments and money […] continue.” A digital pound would play an anchoring role in the economy the way cash does now and would provide a wide range of innovators access to a platform. Machinery could be created to ensure that wholesale tokenized transactions could settle in central bank money thanks to a digital pound, again adding to financial stability, Cunliffe said.

Synchronizing tokenized transactions with the British central bank’s real time payment system will also be potentially possible with upgrades that are now underway, Cunliffe said. The United States Federal Reserve has recently announced the creation of FedNow, a new instant payment system.

Magazine: Starbucks joins NFT party, UK government seeks stablecoin regulations and Crypto Twitter rallies behind cancer fighter, Hodler’s Digest: Apr. 3-9

Economist Paul Krugman Criticizes Florida Gov. Ron DeSantis’ Opposition to Central Bank Digital Currency

April 15, 2023 Bitcoin.com

IMF to publish CBDC handbook in response to increasing demand for guidance

April 13, 2023 Coin Telegraph

CBDC

The handbook will be descriptive and informational, while the IMF offers advice tailored to specific, prioritized countries.

With interest in central bank digital currencies (CBDCs) at an “unprecedented” level, the International Monetary Fund (IMF) is experiencing heavy demand for guidance in regard to them. In response, the IMF planned to release a CBDC handbook, deputy managing director Bo Li said in a recent speech.

The IMF official saw some urgency in meeting the needs of central banks planning CBDCs. Therefore, the organization has engaged with almost 30 countries that requested assistance in the past two years. Over 40 countries had contacted it so far, Li said. He said:

“We believe CBDC capacity development is essential to avoid a digital divide.”

In addition, poor design of a CBDC could to a variety of risks. To address the informational need, the IMF will produce a CBDC handbook that will be “the basis for capacity development,” Li said.

The future handbook was discussed in greater detail in an IMF staff report. The handbook will “mostly be descriptive rather than prescriptive, offering information, experience, empirical findings, and frameworks to evaluate CBDC.”

Deputy Managing Director Bo Li: #CBDC has profound implications for monetary policy & fin stability. If properly designed and implemented, it could strengthen the usability, resilience & efficiency of payment systems & increase fin inclusion: https://t.co/a1GQRhsDLO pic.twitter.com/GuKgaWcxpv
— IMF (@IMFNews) April 12, 2023

It will be completed over the course of four to five years, with major funding for it coming from Japan, the report said. It presented a tentative table of contents for the handbook, with 19 chapters divided into broad sections. It touches on both policy and technical issues.

Meanwhile, as policymakers consider more concrete questions relating to CBDC, the IMF advice has had to become “more tailored to country circumstances and […] more normative and anchored in policy experience and frameworks,” according to the report. The IMF will prioritize assistance for “countries that are systemically important and to countries that are fast-tracking CBDC developments but have relatively high-capacity constraints or weak regulatory standards.”

Magazine: Are CBDCs kryptonite for crypto?

Despite Using Euro, Montenegro to Develop Own Digital Currency With Ripple

April 13, 2023 Bitcoin.com

Swedish Riksbank report looks at collaboration with potential e-krona in retail payments

April 12, 2023 Coin Telegraph

CBDC

The Swedish central bank’s third report on a potential CBDC raised several issues while focusing on a rather narrow question.

Sweden's central bank Riksbank has released a report detailing the third phase of its central bank digital currency (CBDC) research. A collaborative model for retail payments and conditional payments is the focus this time.

The Riksbank started its CBDC research in 2020 with collaboration with existing private payment services as an initial priority. It discussed governance as a key question for collaboration and divided options into three levels. The lowest level was a set of guidelines that risked giving participants so much freedom that “it may be difficult for the public to form a common understanding of what an e-krona is.” In addition, it may not develop to serve the entire population.

The other end of the spectrum would be a Riksbank-operated app where “the interface and range of services for the e-krona would […] be standardised and common for all participants.” It noted that setting of those parameters could have a high impact on innovation.

The Swedish Central Bank, Riksbank, is creating the E-krona #CBDC and is already in pilot phase 3.https://t.co/k9GOBxA6uE
— Avem (@avemfinance) April 12, 2023

The Riksbank reported on a successful trial conditional payment involving the purchase of a car. While this was a positive sign for the potential e-currency’s programmability, it raised privacy questions due to the extra information that was necessary to complete the complicated transaction. Furthermore:

“If conditions are placed on money, for example that it can only be used for certain purchases or on certain occasions, it risks becoming something more like a gift card and thus no longer money.”

The Riksbank pointed out that the transparency inherent in the system could have implications for bank secrecy and could be useful for uncovering bad behavior on the part of service providers.

While the Riksbank, similarly to the United States Federal Reserve and European Central Bank, emphasizes that no decision on the issuance of a CBDC has been made, its discussion had a certain sense of urgency. It wrote:

“When cash takes a back seat in favour of digital services from private actors, the Riksbank’s direct role on the payment market is reduced. The Riksbank may thus find it more difficult to fulfil its task of promoting a safe and efficient payment system accessible to all groups in society.”

The e-krona, it suggested, is a potential solution to this problem. The report also touched on the Riksbank’s participation in Project Icebreaker involving cross-border retail payments and remittances.

Magazine: Sweden: The Death of Money?