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CBDC, a potential financial stabilizer: US Federal research

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According to U.S. federal academics who published a report on Tuesday, the Central Bank Digital Currency (CBDC) may play a significant role in stabilizing an unstable financial system. The results might undermine the efforts of financial lobbyists to convince the government not to adopt such a currency.

In examining how a central bank digital currency (CBDC) would impact the workings of U.S. finance, the Office of Financial Research (OFR), a division of the U.S. Treasury Department that studies risks to the financial system, came to the conclusion that concerns about a future panic driving people to quickly move assets into digital dollars may be exaggerated.

The Central Bank Digital Currency, according to the paper’s authors, would provide the government with an early-warning system, operating as a canary in a mine that it can monitor for warning indications of trouble. More inflows into digital currency would alert regulators to potential problems.

The paper written by Todd Keister, Rutgers University, and Cyril Monnet, University of Bern, stated,

“Observing the flow of funds into a CBDC can allow policymakers to infer when a run by a bank’s depositors is underway more quickly and to place troubled banks into resolution sooner.”

It also emphasizes how substantial depositors might be deterred from withdrawing money and starting that procedure if they know that doing so will raise concerns with watchdog authorities.

Perks of a CBDC

Since a CBDC would have eliminated some of the advantages of “maturity transformation,” in which banks profit from borrowing money at shorter periods than they give it out at, depositors would have less motivation to flee a weak bank when a crisis arises, they claimed. According to the OFR research, banks would thus be a little bit more stable before the crisis occurs.

According to Cowen Group analyst Jaret Seiberg, the OFR research appears to be countering Wall Street bankers’ criticisms of the digital currency.

In a research note to clients, Seiberg wrote,

“We see [the report] as a tool that digital dollar advocates can use to justify proceeding with plans to prepare a central bank cryptocurrency for launch.”

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Lael Brainard, vice chair of the Federal Reserve

Lael Brainard, vice chair of the Federal Reserve, who would ultimately be in charge of creating a digital dollar, also expressed support for a prospective CBDC last week.

However, Brainard seems very optimistic about the whole approach, in spite of being aware that the effort to launch a CBDC in the US could take the Fed as long as five years.

Ripple Announces CBDC Hackathon With $197K Prize Pool; Details

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Ripple has launched the CBDC Innovate challenge, which comes with a total prize pool of $197,000. According to the post, the hackathon is aimed at providing a platform for programmers to build or update a fintech or payments solution that utilizes CBDC and is capable of running on the XRP Ledger. 

“Participants will use our XRPL, CBDC sandbox to drive financial inclusion, interoperability, and retail payments solutions,” the tweet read.

The deadline for the initial round of submissions is August 25.

The tech firm also published a blog outlining the requirements and revealed that winners from this challenge would be invited to a Winners Only Event with a $150K prize pool.

Recently the blockchain firm has announced its official headquarters in Toronto with plans to onboard 100 new employees. 

With regards to Ripple and its interest in helping global banks with their CBDC projects, it is worth noting that on February 11, the Digital Euro Association [DEA] announced that it was “delighted” about a new partnership with Fintech firm.

Ripple Promotes XRP As “Designed For Issuing Currencies”

In a blog post published on 3 March 2021, Ripple said that over 80% of the world’s central banks were “actively exploring some form of sovereign-backed cryptocurrency”, and that eventually there would be a wide range of central bank digital currencies [CBDCs].

Arguing that existing public blockchains cannot fulfill the needs of CBDCs, the fintech firm said that the proposed solution would be to use a Private Ledger.

And according to the firm, XRP uses the same distributed ledger technology necessary for payments and is “designed for issuing currencies”

“XRP could then serve as a neutral bridge asset for frictionless value movement between CBDCs and other currencies,” it argued.

Roughly six months ago, Ripple had signed a deal with the Kingdom of Bhutan, a landlocked nation in the Eastern Himalayas.

According to its blog post, the partnership was intended to onboard Bhutan’s central bank [aka “Royal Monetary Authority”] in using Ripple’s CBDC solution to pilot digital currency in phases.

A month later, the payments firm had joined hands with the island country Republic of Palau to develop strategies for a digital currency.

RBI Says That India’s CBDC Will Go Hand in Hand With the Monetary Policies

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The debut of India’s Digital Rupee CBDC, which is slated to take place in the current fiscal year 2022-23, is highly anticipated by the investors of the country.

According to a report produced by the Reserve Bank of India (RBI), the CBDC will be in line with the country’s current monetary policies and payment systems.

The Reserve Bank of India (RBI), which will have responsibility for the Digital Rupee, intends to use a graded approach in line with the country’s financial system.

A Central Bank Digital Currency (CBDC) is a central bank-regulated blockchain-based payment mechanism. While it functions similarly to a traditional cryptocurrency in that it allows for quick, high-value digital payments, CBDC transactions are traceable and overseen by the government.

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RBI Says That India’s CBDC Will Go Hand in Hand With the Monetary Policies 3

Will India’s CBDC improve the government’s stance on crypto?

“The Reserve Bank proposes to adopt a graded approach to introduction of CBDC, going step by step through stages of Proof of Concept, pilots and the launch. The design of CBDC needs to be in conformity with the stated objectives of monetary policy, financial stability and efficient operations of currency and payment systems.”

RBI highlighted in the report

The news comes after a top RBI official was quoted as saying that the CBDC would be implemented separately for the wholesale and retail sectors.

The country’s finance minister, Nirmala Sitharaman, has stated on multiple occasions that the Digital Rupee will expand payment choices for Indians.

The Indian government is also counting on the CBDC to expand its efforts to bring financial inclusion to people who have yet to access the country’s banking networks. The creation and roll-out of the Digital Rupee are underway, and the Indian government does not want to expedite the process.

RBI Governor T Rabi Sankar remarked in April that the launch of India’s first digital currency would require a sophisticated and calibrated approach because it would have multiple consequences for the economy and monetary policy.

Several other countries, including the United States, Russia, China, Jamaica, Nigeria, and Mexico, are working on their own CBDCs.

Chile Halts CBDC Plans Till End of 2022 for More Analysis

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The Central Bank of Chile has postponed plans for a central bank digital currency (CBDC), claiming that the issuing of a digital Chilean peso necessitates a more thorough examination of the advantages and hazards, promising a fresh report by the end of the year.

The bank released a report on May 11 that contained a preliminary assessment of a Chilean CBDC. It looked at the country’s present payment system, as well as the advantages, disadvantages, and principles of establishing a digital peso.

While the present payment system “functions effectively” and has been able to “adapt well to recent obstacles,” the bank claims that a CBDC will enhance and alleviate any risks associated with digital transformation.

Chile halts CBDC for further analysis

“A CBDC would contribute to achieving a competitive, innovative and integrated payment system that is inclusive, resilient and protects people’s information.”

The bank believes there is insufficient information to make a definitive judgment on releasing a digital peso and will “carry out a series of seminars, presentations, and discussions with various counterparts” to inform the upcoming report.

Chile’s central bank said in September 2021 that it would develop a plan including suggestions and possibilities for a CBDC deployment in early 2022, as well as organize a working group to explore the possible digital peso.

The bank expressed its reservations about crypto adoption in the nation, noting the possibility of money laundering, criminal activities, and the capacity to disrupt banks’ access to funds if used as a substitute for bank deposits.

According to Statista, Chile was ranked 18th globally for bitcoin usage in 2021. Furthermore, 14% of Chilean respondents stated they owned or used cryptocurrency that year, making Chile the fourth-highest cryptocurrency user in South America.

Although Chile does not restrict the usage and trading of cryptocurrencies, it shares the concerns of other South American governments. Early in May, Argentina’s central bank intervened to prevent two banks from selling cryptocurrency services, citing the need to “mitigate the dangers crypto brings.”

90% Of the Central Banks Are Eyeing CBDCs as per Reports

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The Bank for International Settlements (BIS) assessed 81 central banks to reveal their interest in CBDCs, finding that 60% of them are working on proofs-of-concept and 26% are undertaking pilots. In 2022 alone, the number of institutions announcing a CBDC review nearly doubled.

The majority of banks seek to collaborate with the private sector, and these CBDCs are focused on both wholesale and retail. This two-tiered design is becoming increasingly popular among central banks.

More than half of the banks think there is a significant probability they will issue CBDCs when it comes to a more detailed projection on how they would turn out.

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Source: BIS

The survey includes stablecoins, with over 70% of institutions reporting to be investigating the potential impact of stablecoins on financial stability. Over time, this percentage has actually declined.

CBDCs have gotten a lot of attention and have grown quickly in the last 18 months, owing to the rise of stablecoins and DeFi.

The latter two have caught the attention of regulators, who are concerned that they may erode the dominance of national currencies and existing financial institutions.

Governments and central banks are beginning to see the advantages of blockchain-based currencies, including faster transaction times, cheaper transaction costs, and more security.

Nigeria updates its CBDC

Even after a UN study said that limitations on digital currencies are suffocating the country’s fintech sector, Nigeria’s central bank has improved its eNaira to steer the country away from crypto.

The Central Bank of Nigeria (CBN) is moving on with plans to expand the usage of the country’s central bank digital currency (CBDC) to a wider variety of products and services. It also maintains severe crypto regulations that have hampered the country’s fintech industry.

According to a report from Vanguard, CBN branch controller Bariboloka Koyor spoke at a market in the country’s most populated metropolis of Lagos on Monday as part of a push to “sensitize” companies to the eNaira.

The naira has lost almost 209% of its value in the last six years, prompting Nigerians to flock to cryptocurrency. According to a survey released in April by the KuCoin crypto exchange, around 33.4 million Nigerians owned or exchanged cryptocurrencies in the previous six months.

Following the introduction of the eNaira in October 2021, the country’s crypto trading restrictions were strengthened.

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90% Of the Central Banks Are Eyeing CBDCs as per Reports 6

In February of that year, the CBN barred banks from providing crypto exchanges. Still, serious enforcement came in November 2021, when the CBN ordered the accounts of two crypto dealers to be frozen.

CBDC of Bahamas must increase its cybersecurity: IMF

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The International Monetary Fund (IMF) warned in a review published Monday that the Bahamas’ central bank digital currency (CBDC), known as the sand dollar, requires broader reach and security to meet its goals. The IMF stated in an assessment of the Caribbean nation’s economic and financial policy that the sand dollar accounts for only 0.1 percent of the total money in circulation.

The IMF advised the country’s central bank to maintain building internal capacity – including on cybersecurity and the reliability of systems related to the sand dollar, noting that the sand dollar has limited avenues to usage.

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In reaction to the findings, Bahamas authorities aim to enhance public awareness campaigns about the CBDC, according to Philip Jennings, the IMF executive director responsible for that country.

The Bahamas, along with Nigeria and China, has been a leader in lobbying for a CBDC, seeing it as a viable means of reaching people on the archipelago’s hundreds of remote islands. Citizens can now use it to pay their taxes, according to the country.

The IMF has been cautious of the use of private crypto in countries like El Salvador and Argentina, maybe because it sees bitcoin (BTC) as a danger to its own power. It’s warming up to government-controlled cryptocurrencies like CBDCs.

9 out of 10 banks to establish their own CBDCs

According to a recent poll conducted by the Bank for International Settlements, nine out of ten central banks are considering establishing their own CBDCs.

The results of a survey of 81 central banks performed in autumn 2021 were presented in a report issued on Friday by BIS, an umbrella body for central banks. The poll looked into banks’ involvement in their digital currency activities, as well as their motivations and goals for CBDC issuance. BIS is owned by 63 central banks representing approximately 95% of global GDP.

Furthermore, around 70% of central banks are exploring the effects of stablecoins on monetary and financial stability, while a quarter are investigating the use of cryptocurrencies.

Japan’s Quest For CBDC Enters Phase 2; What’s Next?

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The Bank of Japan’s initiative for a digital Yen has entered its second stage which centered around restrictions on holdings and transactions, as stated in the press release.

The first stage completed in March focused on issues related to the basic functions of a CBDC, including its issuance, withdrawal from financial institutions, and transfers between them.

April marked the onset of the second phase that revolved around implementing measures such as preventing funds from being shifted from bank deposits to a CBDC which it claims threatened financial system stability.

Specifically, the BOJ is examining restrictions on the maximum amount of a CBDC that a person can hold and that can be transferred at one time. Issues related to holders of multiple CBDC accounts at different financial institutions will also be studied.

As per the P.A, BOJ plans to complete the second stage in March next year. It also intends to conduct a pilot test involving the participation of consumers and businesses in the future.

Japan’s Central Bank takes inspiration from Swedish Model

Japan after a careful and thorough analytical approach toward the introduction of its central bank digital currency (CBDC), has decided to take a leaf out of Sweden’s detail-oriented approach to digital currencies.

This was revealed by the Head of the payments system department at the BOJ, Kazushige Kamiyama, who in a recent interview said that the Bank of Japan would follow a model similar to Sweden’s for its central bank digital currency and not China’s as previously believed.

“Japan has a strategy to launch the digital currency slowly and steadily rather than implementing large pilot programs in bulk right from the beginning”, one report said. 

Kamiyana asserted that the gradual expansion that Japan is planning to adopt was inspired by Sweden and is “suited best for the country.” He further said that the design and framework of the central bank’s digital currency need to be considered as part of a system of overall settlement for the future. 

The Bank of Japan governor, Haruhiko Kuroda, said that a decision to issue a CBDC would be made only by 2026.

EU Commission Receives Backlash for Their CBDC as the Website Gets 11,000 Public Comments

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More than 11,000 individuals and organizations have provided comments on the EU Commission’s “Digital euro for the EU” project in less than two weeks since it was opened for public consultation. The section for input will be accessible until June 14th.

In addition to the website’s open-ended comments section, there is a targeted consultation questionnaire to gather information from industry representatives, authorities, and experts.

The topics vary from privacy and data protection, anti-money laundering (AML), and counter-terrorist financing (CFT) rules, the impact on financial stability, and users’ needs and expectations.

EU Commission opened up for public comments

The consultation period runs ahead of the parliamentary debate on the digital euro, which is planned to begin in 2023.

According to crypto advocate Patrick Hansen, the majority of respondents in last year’s round of consultations on the digital euro spoke out in support of payments being a private affair. Despite this, Commissioner for Economy Paolo Gentiloni of the EU Commission remarked that “a totally anonymous digital euro is not desired.”

A study of a sample of the information in the public feedback area indicated that there was some dissatisfaction with the project as a whole as evident from the EU commission’s website feedback. As one example, an anonymous German remark reads:

“I am against a digital euro for the EU. My concern is that basic freedoms can also be endangered here and authoritarian governments would then have total control. The example of the Maastricht criteria shows that the previous governments do not follow the rules and with a digital euro the state could do what it wants with its citizens and suppress any opposition.”

German-language commentator, Michael Hagmüller

In addition, residents of smaller EU member states have expressed concern about the likelihood of increased power consolidation in the hands of the EU’s largest economies.

Others voiced displeasure with the whole process of money virtualization, which is expected to be accelerated significantly if a pan-European digital currency is formed.

However, the euphoria about the level of input should be tempered because the great majority of comments are anonymous brief remarks that are generally critical of the project. These are not necessarily representative of the views of the majority of EU citizens.

Elizabeth Warren advocates US to establish a CBDC

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Senator Elizabeth Warren (D-Massachusetts) believes it is past time for the United States to develop its own digital currency (CBDC). In an episode of NBC’s “Meet the Press Reports” with Chuck Todd, set to air on Thursday at 10:30 p.m. ET, Warren made this urge to the US government.

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Senator Elizabeth Warren

A brief transcript of the conversation was provided by NBCUniversal. She said,

“So a lot that banks do wrong, if you think, ‘We could improve that in a digital world,’ the answer is, ‘Sure you could.’ But in that case, let’s do a central bank digital currency,” Warren told Todd. “Yes, I think it’s time for us to move in that direction.” 

In response to Todd’s question regarding whether Bitcoin will be regulated as a commodity, Warren responded that she believes it will, noting the subprime mortgage financial crisis that started in 2007. She made no reference to the regulations’ possible format.

Elizabeth Warren’s sanctions compliance bill for crypto companies

In March, Elizabeth Warren announced a new bill that would prevent bitcoin companies from trading with sanctioned entities. Sens. John McCain and Tim Kaine introduced the Digital Assets Sanctions Compliance Enhancement Act, which would make it easier to comply with sanctions on digital assets.

Senators Jack Reed (D-R.I.), Mark Warner (D-Va.), Jon Tester (D-Mont.) and others sponsored the Digital Assets Sanctions Compliance Enhancement Act, which would allow the US president to add non-US-based crypto firms to the sanctions list if they encourage sanctions evasion.

According to a draft of the bill, the president’s administration would be entrusted with identifying “any foreign person” who runs a crypto exchange or otherwise enables digital asset transactions and has also helped Russians on the Office of Foreign Asset Control’s sanctions list evade sanctions.

The bill appears to cover more than just Russian sanctions. Another provision would allow the Financial Crimes Enforcement Network (FinCEN) to track people who transact with cryptocurrency worth more than $10,000.

Furthermore, with respect to the CBDC, when Elizabeth Warren was asked if the senator viewed cryptocurrency as this decade’s real estate bubble, she stated that the entire digital world has operated in a bubble-like fashion. She supported her statement by further adding that it has risen due to the fact that everyone is saying how amazing it is going to be, just as it was in the real estate market.

BIS to develop multi-CBDC platform prototypes; collaborates with 4 central banks

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The Bank for International Settlements (BIS) Innovation Hub collaborated with central banks from Australia, Malaysia, Singapore, and South Africa to develop prototypes of two versions for an international settlement platform that uses different central bank digital currencies (CBDCs).

According to the executive summary of the report, the project’s first phase was successful in developing functioning prototypes and demonstrating practical solutions, meeting its goal of demonstrating that the notion of multi-CBDCs was technically realistic.

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Project Dunbar is the name of the collaboration. It focuses on how, as detailed in that paper, a shared platform including numerous CBDCs could aid enable cross-border payments “cheaper, faster, and safer.”

Project Dunbar, led by the Innovation Hub’s Singapore Centre, established that financial institutions may use CBDCs granted by participating central banks to interact directly with each other on a shared platform, according to a press release, on 22 March 2022, from the BIS. The release further articulated,

“This has the potential to reduce reliance on intermediaries and, correspondingly, the costs and time taken to process cross-border transactions.”

The project was divided into three work streams: one for high-level functional requirements and design, and two parallel technical streams for prototyping on various technological platforms (Corda and Partior).

Key challenges emphasized in the BIS report

When it comes to settling transactions using a shared platform, the BIS collaborated research identified three major problems. The first concern is regarding the issues of access to the platform’s CBDCs, like whether banks should be able to utilize CBDCs from nations where they do not have a presence. Another problem was figuring out how to make cross-border payments as simple as possible while yet adhering to each country’s standards. Finally, the third problem was devising a governance framework that would allow countries to share their payment facilities while also taking national security concerns into account.

Enabling entities to directly hold and conduct business in CBDCs from different jurisdictions, according to Michele Bullock, assistant governor at the Reserve Bank of Australia, could reduce the desire for intermediaries in cross-border payments, but it would have to be done in a way that conserves the security and resilience of these payments.

While there is still more work to be done in terms of thinking about the viability and design of multi-CBDC platforms, Bullock believes Project Dunbar’s findings give a sound foundation for future research in this area.