Russia to begin work on CBDC settlement system in Q1 as sanctions endure: Report

January 10, 2023 Coin Telegraph

The country's central bank will begin studying two possible cross-border CBDC settlement models this quarter.

Russia’s central bank is reportedly set to begin developing a cross-border settlement system using its Central Bank Digital Currency (CBDC) amid ongoing sanctions in response to its invasion of Ukraine.

The plans to move forward with Russia’s digital ruble are expected to come in the first quarter of 2023 and will see Russia's central bank study two possible cross-border settlement models, according to a Jan. 9 report from local media outlet Kommersant.

The first proposed model sees various countries entering into separate bilateral agreements with Russia to integrate their CBDC systems.

Each agreement would be made to ensure the conversion and transfer of assets between the countries are in accordance with the rules of the agreements.

The second, more complicated model proposes a single hub-like platform for Russia to interact with other countries, sharing common protocols and standards to facilitate payments between the connected countries.

Roman Prokhorov, the head of the board of the Financial Innovations Association (AFI) opined that the first model was more simple to implement but less promising for bilateral interactions between countries.

The other option was more “advanced” and he considered an initial two-way system may be implemented with China as the most likely partner for its “technological and political readiness.”

Earlier reports in Sep. 2022 claimed Russia was planning to use its digital ruble for settlements with China by sometime in 2023.

Still, others believe Russia’s CBDC play won't be hamstrung by technology, but rather by politics.

Vice President of the Association of Banks of Russia, Alexey Voylukov, said introducing a digital ruble won’t change or improve Russia’s global political situation and trials for the CBDC platform can only be undertaken with Russian government-friendly countries who are technologically ready.

Previously, the Bank of Russia said it was looking to roll out its digital ruble by 2024, with all banks and credit institutions connected to the CBDC’s platform.

Russia has faced mounting financial and trade sanctions since its escalation of the Russo-Ukrainian war when it launched a full-scale invasion of Ukraine in late-February 2022.

It’s since tried to enact policies, or pondered ways to skirt the sanctions such as the central bank considering the use of cryptocurrencies in the country “only to support foreign trade.”

The Bank of Russia and the Ministry of Finance came to an agreement in Sep. 2022 on a rule allowing Russians to send cross-border payments using crypto.

Uncertainty Surrounds Federal Reserve’s Future Plans for Rate Hikes

January 9, 2023 Bitcoin.com

Mexico’s digital peso delayed, unclear launch date

January 8, 2023 Coin Telegraph

CBDC

Mexico's central bank is currently working on legal, administrative, and technological requirements for the peso's digital version.

Mexico's central bank digital currency (CBDC) development is still in an initial phase, and it is unlikely to be ready for launch by 2024.

According to local media reports, Mexico's central bank, known as Banxico, is currently working on legal, administrative, and technological requirements for the peso's digital version. The first of three stages for the proposed launch timeline.

In December 2021, the local government announced its plan to introduce a national digital currency, noting on a Twitter post that the "new technologies and next-generation payment infrastructure" would improve Mexico's financial inclusion and project the launch for 2024. A year later, authorities are reportedly avoiding predicting a launch date.

"The result of this initial phase entails the preparation of a budget that is currently being determined, and will in turn allow establishing a probable date on which the MDBC [CDBC] will be available," stated the central bank of Mexico.

The original plan included in the first stage the creation of the PagoCel platform, allowing users to make bank transfers using their mobile numbers or personal information. A second phase will involve the country's financial institutions, who will issue a security code for digital currencies to be transferred through the Interbank Electronic Payment System (SPEI), a transfer system owned and operated by the central bank.

A final stage of the project will allow participants without bank accounts to use the digital currency, thereby helping the country's financial inclusion.

Mexico's interest in cryptocurrency picked up momentum in 2021, when 40% of the firms in the country were interested in adopting blockchain and cryptocurrency, according to Triple A's crypto ownership data.

Increasing interest in Bitcoin in Mexico has led to the installation of a Bitcoin ATM in its Senate building, with the support of several legislators and crypto enthusiasts, Cointelegraph reported. Mexico is the second-largest recipient of remittances in the world, with transfers reaching a record $5.3 billion between July 2021 and July 2022, according to statistics from the World Bank.

Macroeconomic data points toward intensifying pain for crypto investors in 2023

January 6, 2023 Coin Telegraph

Bitcoin Price

Chances of a crypto bull market in 2023 decrease as the Fed maintains a hawkish stance and threats of a recession in the U.S. economy continue to appear.

Undoubtedly, 2022 was one of the worst years for Bitcoin (BTC) buyers, primarily because the asset’s price dropped by 65%. While there were some explicit reasons for the drop, such as the LUNA-UST crash in May and the FTX implosion in November, the most important reason was the U.S. Federal Reserve policy of tapering and raising interest rates.

Bitcoin’s price had dropped 50% from its peak to lows of $33,100 before the LUNA-UST crash, thanks to the Fed rate hikes. The first significant drop in Bitcoin’s price was due to growing market uncertainty around potential rate hike rumors in November 2021. By January 2022, the stock market had already started showing cracks due to the increasing pressure of imminent tapering, which also negatively impacted crypto prices.

*BTC/USD daily price chart. Source: TradingView*

Fast forward year, and the crypto market continues to face the same problem, where the headwinds from the Fed rate hikes have restricted substantial bullish moves. The worst part is that this regime may last much longer than the marketparticipants expect.

Clues emerge from the 1990s dot-com bubble

The dot-com bubble of 1999-2000 could teach investors a lot about the current crypto winter, and it continues to paint a grim picture for2023.

The tech-heavy Nasdaq Composite inflated to enormous levels by the early 2000s and this bubble burst when the Fed began raising interest rates in 1999 and 2000. As credit became more expensive, the amount of easy money shrank in the market, causing the Nasdaq to drop from its peak by 77%.

*Nasdaq composite index chart. Source:* *Macrotrends*

The crypto market is currently facing the same scenario.

Fed chairman Jerome Powell is hell-bent on curbing inflation and this means there will behigher rates for some time ahead. Minneapolis Federal Reserve President Neel Kashkari wrote in a blog post recently that he expects the terminal rates to go up to 5.4% by June 2023 —currently, the rates are in the 4.25% to 4.50% range.

Notably, at the time of the dot-com bubble, the Fed stopped increasing rates in May 2000, but the downturn in Nasdaq continued for the next two years. Thus, we can expect the crypto market to drop further at least until the Fed pivots. There is a risk of the current bear market stretching even longer if the U.S. economy experiences a recession similar to 2001.

Increasing signs of recession

According to a report by Mises Institute analyst Ryan McMaken, the M2 money supply of the U.S. dollar turned negative in November 2022 for the first time in 28 years. It is an indicator of potential recession, which is usually “preceded by slowing rates of money supply growth.”

While McMaken acknowledged the possibility of the negative money supply growth indicator turning into a false signal, he added that it “is generally a red flag for economic growth and employment. It also serves as just one more indicator that the so-called soft landing promised by the Federal Reserve is unlikely to ever be a reality.”

*Potential recession indicator using M2 money supply of USD. Source: Mises Institute*

The latest report from the Institute of Supply Management also shows that U.S. economic activity contracted for the second consecutive month in December. The purchasing manager’s index (PMI) came out at 48.3% for December and values below 50% signify contraction. It suggests that the demand for manufactured goods is declining, probably an impact of higher interest rates.

The average U.S. recession since 1857 lasted 17 months, with the six recessions since 1980 lasting less than ten months. This recession technically began in August 2022 with two-quarters of negative GDP growth. Historical averages show that the current recession may last until June 2023 to January 2024.

Can favorable conditions form sooner than 2024?

The crypto market needs the realm of easy money to return to build a sustainable bull run. However, based on the Fed's current plan, those conditions look far away into the future.

Only a black swan event that forces the U.S. government to resort to quantitative easing with low-interest rates and economic stimulus like it did during the COVID-19 pandemic can ignite another bull run.

According to independent market analyst Ben Lilly, a bubble might be forming in the consumer loan sector, which has grown exponentially in the last decade to nearly $1 trillion.

The rise was particularly steep in the last two years since the U.S. government stopped writing stimulus cheques. Lilly infers that the sector could collapse if many borrowers default on their loans due to growing economic strain. He also noted that "it'll take government stimulus to solve."

The timeline for a bubble burst is one of the most challenging things to predict. It could possibly coincide with the recession's end sometime in late 2023 or 2024. Still, until the confirmation of a Fed pivot or quantitative easing comes along, most investors expect the crypto markets to remain in a downtrend.

To date, the total crypto market capitalization has declined by 75% from its peak of $3 trillion. The 2017 peak of around $750 billion is a crucial support and resistance level for the market. If this level breaks, the industry's total market capitalization could slip below $500 billion.

*Total crypto market capitalization chart. Source: TradingView*

While there could be temporary bear market rallies, the macroeconomic pressures are likely to undermine all positive moves.

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

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.

French central bank governor pushes for crypto licensing ahead of EU laws

January 6, 2023 Coin Telegraph

Bank of France

The Bank of France’s head said turmoil in the crypto markets proves the need to move to a mandatory licensing scheme for crypto firms “as soon as possible.”

The Bank of France’s governor has called for more stringent licensing requirements for crypto companies in France, citing the current turmoil in the crypto markets.

During a speech in Paris on Jan. 5, Francois Villeroy de Galhau said France shouldn’t wait for upcoming EU crypto laws to enact obligatory licensing for local digital asset service providers (DASPs).

The European Parliament’s Markets in Crypto Assets bill (MiCA) that provides a crypto-licensing regime isn’t expected to come into force until potentially sometime in 2024.

According to a Jan. 5 Bloomberg report, Villeroy addressed the country’s financial industry in his speech, stating:

“All the disorder in 2022 feeds a simple belief: it is desirable for France to move to an obligatory licensing of DASP as soon as possible, rather than just registration.”

Currently, crypto businesses providing crypto trading and custody are required to be “registered” with the Financial Markets Authority (AMF), the country’s market regulator.

A DASP license is optional, with those licensed forced to comply with a slew of requirements related to business organization, conduct and financing.

However, out of the 60 AMF-registered crypto firms, none are currently licensed as a DASP.

*Villeroy speaking in December 2017 at a panel in Paris. Source: The Jacques Delors Institute*

The call from Villeroy comes after an amendment was proposed in December by Senate finance commission member Hervé Maurey to eliminate a clause allowing companies to operate without a license.

Current laws in France allow firms to operate unlicensed until 2026 even if, or when, MiCA passes into law and establishes a licensing regime.

Deliberations in Parliament regarding the amendment will begin in January.

MiCA has been grinding its way through the EU Parliament since September 2020.

On Oct. 10, the crypto framework was passed by the European Parliament Committee on Economic and Monetary Affairs, the result of negotiations between the EU Council, the European Commission and the European Parliament.

The final plenary vote for MiCA was rescheduled from the end of 2022 to February. European Parliament member Stefan Berger explained to Cointelegraph in November the reason for the delay was “the enormous amount of work for the lawyer linguists, given the length of the legal text.”

US federal agencies release joint statement on crypto asset risks and safe practices

January 3, 2023 Coin Telegraph

Banking

The Fed, FDIC and OCC teamed up to wish the banks they regulate a FUD-filled new year with a warning about the risks associated with crypto assets and their efforts to contain those risks.

United States federal bank regulatory agencies started off the new year with a statement on crypto assets looking back at the troubles of the crypto sector in 2022. The Federal Reserve, Federal Deposit Insurance Corporation (FDIC) and the Office of the Comptroller of the Currency (OCC) released a joint statement on Jan. 3 on past problems and their efforts to maintain sound banking practices in spite of those challenges.

“It is important that risks related to the crypto-asset sector that cannot be mitigated or controlled do not migrate to the banking system,” the agencies stated. They identified eight specific risks, including fraud, volatility, contagion and similar familiar issues.

The agencies also noted that, “Banking organizations are neither prohibited nor discouraged from providing banking services to customers of any specific class or type, as permitted by law or regulation,” but took aim squarely at the sector with a stark warning:

“Based on the agencies’ current understanding and experience to date, the agencies believe that issuing or holding as principal crypto-assets that are issued, stored, or transferred on an open, public, and/or decentralized network, or similar system is highly likely to be inconsistent with safe and sound banking practices.”

The statement hinted at the state of crypto regulation in the United States and the possibility of it changing with references to agencies’ “case-by-case approaches to date”:

“Through the agencies’ case-by-case approaches to date, the agencies continue to build knowledge, expertise, and understanding of the risks crypto-assets may pose to banking organizations, their customers, and the broader U.S. financial system.”

All of the banking regulatory agencies have expressed misgivings about crypto before. Their attitudes are not monolithic, however. A representative of the FDIC has spoken positively of stablecoins, for example. The OCC has taken steps recently to engage more actively with fintech, and the Fed has taken an active, if noncommittal, interest in central bank digital currency.

1/ The Federal Reserve, the FDIC and the OCC just released this devastating Joint Statement on Crypto-Asset Risks to Banking Organizations. https://t.co/nvmpg0Qpf4
— Margaret Rosenfeld (@RosenfeldM) January 3, 2023

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

January 3, 2023 Coin Telegraph

CBDC

David Chaum explained his game plan to create a CBDC that would also be appreciated by the crypto ecosystem in an exclusive interview.

When it comes to the “crypto” part of cryptocurrencies, David Chaum’s work predates the crypto ecosystem. His efforts as a renowned cryptographer date back to 1989, long before Bitcoin (BTC) was a thing.

Chaum developed the protocols that act as the basis of DigiCash — the world’s first digital currency secured by cryptography. As the CEO of privacy-focused network developer Elixxir, David Chaum is working with the Swiss central bank to develop a central bank digital currency (CBDC) that could also attract the crypto ecosystem due to its privacy features.

Named eCash 2.0, the new project aims to develop digital cash that would be “inalienably private” and quantum-resistant to counterfeiting. Since the technical details require a deep understanding of cryptography, Cointelegraph sat down with Chaum at Istanbul Blockchain Week to get a better understanding of the mechanics behind this crypto-friendly CBDC project.

A censorship-resistant CBDC

It all started when Thomas Moser, a board member at Swiss National Bank, invited David Chaum to Zurich for a conference and told him “he wanted to make eCash great again,” asking for his help in a new project.

“[Moser] couldn’t understand why people weren’t using eCash for CBDC,” Chaum started explaining. Big banks have too much to consider in terms of reliability and future readiness. So, they are not eager to invest in something that isn’t quantum-resistant.

As part of the project, which is internally called “Project Tourbillon,” Chaum developed a cryptographic protocol that proves a CBDC can protect privacy, be censorship- and quantum-resistant, scalable and even compatible with decentralized finance (DeFi) blockchains. One of his goals was to make the total supply number of coins transparent.

At first, the project team tried to use the legacy eCash but quickly realized it wasn’t a good fit for what they had in their mind. That’s why the BIS Innovation Hub, Swiss National Bank and xx Network based the joint project on eCash 2.0. Chaum noted that user-controlled privacy, “the best feature of the original eCash,” carried over to this new project.

According to the official announcement, Project Tourbillon aims to reconcile trade-offs between cyber resiliency, scalability and privacy by combining technologies like blind signatures and mix networks with the groundwork prepared by David Chaum and Thomas Moser.

Chaum pointed out that privacy is pivotal for banks, along with scalability and blockchain compatibility, as the public is very concerned about it. He noted the European central bank’s public call for comments about CBDC, highlighting that 40% of the comments were about privacy.

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“You can withdraw $500 every day with your ATM card, but you can’t walk into a bank and withdraw $1,000,000 in cash — that’s privacy for the people,” Chaum explained. It should be similar in electronic payment systems, he noted. “Those systems should make it very difficult for someone to gather enough and use it for bad purposes, like hiring a hitman without being noticed.”

Inalienable keys: A new approach to privacy

To meet the privacy requirements of a digital currency, Chaum envisioned a privacy system in which it’s possible to prove a user knows their secret phrase without revealing it. It’s a relatively new approach that Chaum called “inalienable.”

The name, inalienable key, is derived from its key ability: This new private key type cannot be given or taken away by nature. The key itself is a phrase or a sentence that can be easily memorized by the owner but is impossible to guess by third parties.

Within the context of central bank digital currencies, when a user wants to join the CBDC system as a user, they can go to a bank office to prove that they know their inalienable key by confirming specific placements of random letters in the phrase.

When it’s done in a privacy-focused physical setting, as exemplified by Chaum in the image below, it helps users to prove that they know the key without actually revealing the private key.

Once users confirm their identity, they can establish a whole family of related pseudonyms that can’t be seen together, although they are all linked to the user’s passphrase.

In the inalienable system, the user doesn’t have to go through the physical confirmation step after the first time. They can send their confirmation electronically and also create pseudonyms for every other specific situation, Chaum explains. He likened the pseudonyms to notebooks with specific signatures or “credentials.” He believes that the usability of inalienable keys extends beyond finance.

“They can represent that a user paid their taxes this year. Or they have graduated with high honors,” Chaum said, adding: “If they are asked for proof about any of those, they can use one of these pseudonyms and confirm it in a zero-knowledge way.”

Quantum resistance can’t wait for quantum computers

Any conversation with the “godfather of crypto,” a moniker given to David Chaum for his decades-long contributions to cryptography, would not be complete without discussing quantum resistance. While it’s not a direct threat to crypto — yet — quantum computers that can easily break Bitcoin’s SHA-256 cryptographic protocol are expected to arrive within the next decade. Therefore, being ready against attacks from such devices is a must for any future-proof systems and services.

Chaum advised that quantum resistance should be on everyone’s agenda. “Because the data, even though it can’t be read now, is easily saved.” Once quantum computers arrive on the scene without any warning, today’s encrypted data will be much easier to crack.

His company, Elixxir, is focusing on the quantum-resistance aspect of cryptocurrencies with xx Network, which uses quantum-resistant backup keys to support its xx coins. Chaum claimed that xx Network was able to do 3,500 quantum-resistant transactions per second during the xx coin public test.

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But, money is not everything; communication also matters. Chaum stressed that most of today’s chat services use end-to-end encryption as a promotional label. He added that most modern messengers are misdirecting people to prevent them from noticing that there’s no metadata shredding, adding that anyone who taps one of these messengers can see all of “who talks to who” globally:

“We thought, we'll put quantum-resistant encryption to protect the message content, then announce it and see what happens. And we did, and we have it, and none of the other messengers followed.”

Instant messaging services don't care about their so-called strong end-to-end encryption, Chaum claimed, “because they don't have it.”

Central Bank