All the latest from the world of CBDCs
Digital Euro progress report
The ECB has released a white paper on the development of the digital euro. The paper notes the need for full compatibility with other CBDCs in order to facilitate cross-border payments among other things. Additionally, the bank says that it is no longer aiming for full European inclusiveness, but useful applications for the digital euro must be developed by the market. Logging into the system will be carried out similarly to the existing procedures for registering accounts with payment services.
Interestingly, the ECB has also released an article that models the properties of interest-bearing deposit CBDCs. This reflects a changing problem area: in Europe, rates will rise in the near future or are highly likely to remain at the same level, above zero. When the key rate was negative, the main problem of the ECB in the context of the CBDC was working around the negative rate in the context of withdrawing the currency. Now, however, inflation will take care of the issue.
In April, a press release was also published on the work being done to integrate a wholesale DLT solution within the TARGET mutual settlement system. The digital euro will apparently not be a retail CBDC solution.
Argotoken in Brazil
Visa has developed a programmable finance platform that allows Brazilian soybean farmers to securely finance and sell crops on a private version of the Ethereum blockchain. In conjunction with Agrotoken, Microsoft and Sinqia, Visa was one of nine finalists tasked with exploring innovative use cases based on the central bank-issued digital rial (CBDC) blockchain in the latest LIFT Challenge hosted by Banco Central do Brasil. Brazil has been testing the CBDC solution since March.
Digital Canadian dollar
The Central Bank of Canada announced it would be carrying out public consultations to ascertain the public’s attitude towards the digital dollar. The bank wants to find out how people are likely to use a CBDC, what security features are important, and what concerns there are about the availability and privacy of the digital currency.
Zimbabwe gold tokens
The Reserve Bank of Zimbabwe will begin selling its gold-backed digital currency on May 8, 2023. Applications must be submitted for at least $10 for individuals and $5,000 for corporations and other organizations, respectively, in US dollars and local currency. The USD price will be “informed or oriented” to the international gold price determined by the London Bullion Market Association. Payment in the local currency will be made at a 20% margin over the average interbank rate set for willing buyers and sellers. Borrowed funds cannot be used for the purchases. It is assumed that the token will be used as a means of accumulation and carrying out payments. Zimbabwe is a canonical example of hyperinflation, where banknotes have become collectible for cryptocurrency enthusiasts. Below is a 2008 Zimbabwe hyperinflation graph from the Weimar Artifacts project.
Japan: test results in
The Bank of Japan (BoJ) has published the results of the second round of its central bank digital currency (CBDC) concept trials, which were conducted from April 2022 to March 2023. Although the report is only available in Japanese, Norbert Gercke wrote a summary of it in English. The goal of Phase 2 was to identify potential technical issues at an early stage as they relate to the core features covered in Phase 1. Some desirable peripheral features not covered in Phase 1 were also added. The technical implementation and performance of the platform were then tested.
The trials confirmed that there were no performance bottlenecks. Latency (processing time for a single transaction) has slightly increased compared to Phase 1 due to an increase in the volume of transactions and the number of systems through which it passed, and system distribution has also increased. Despite this, processing times were typically less than 200 milliseconds, indicating no significant performance hit.
Bahamian Sand Dollar
The Central Bank of the Bahamas has released an update on the Sand Dollar CBDC. Approximately 100,000 wallets have been created, but usage remains low compared to the overall size of the national payment system. In addition, only a small fraction of businesses have downloaded wallets (1,512 vs. approximately 22,000 potential downloads). The bank intends to release a new version of the wallet to increase the usage rate. Financial institutions will be able to customize the application’s appearance in order to display their individual brandings, including logos and color preferences. In addition, the CBOB is ramping up promotional activities at civic and cultural events and has committed to giving away $1 million in sand dollars to early adopters through 2024.
Stablecoins
Price stability and arbitrage opportunities
A team of authors from Columbia University, the University of Pennsylvania and the University of Chicago investigated the run risk facing US dollar-backed stablecoins and uncovered a dilemma centered around stablecoin price stability and financial stability. They show that bank runs exist even if ordinary investors only trade stablecoins in secondary markets with flexible prices. Incentives are being restored thanks to stablecoin issuer liquidity transformation and the $1 fixed price at which arbitrageurs redeem stablecoins for cash in the primary market.
EUR CoinVertible
A subsidiary of Societe Generale Forge will issue its own stablecoin. However, already issued Euro-based stablecoins currently account for less than 1% of the market in relation to dollar tokens.
Tether dominates
A sharp decline in confidence in USDC, the emerging large-scale banking crisis in the US, and Circle’s alleged problems in obtaining an account in the Fed system have led to a reduction in its market share, which was taken by Tether. Despite this, USDC has continued ahead, recently launching a bridge between Ethereum and Avalanche.
Regulations
MiCA approved
The European Union Legislative Framework for Crypto Asset Markets (MiCA) received unanimous approval from the European Council (consisting of the finance ministers of all 27 EU member states) on May 16, 2023. In accordance with the decision, crypto firms will have to obtain a license to conduct activities on the territory of the European block, and issuers of stablecoins will have to have the appropriate reserves. While it does not cover all aspects of digital assets, leaving out areas such as NFTs and decentralized finance (DeFi), these are expected to be included in subsequent versions of the law.
Abu Dhabi Proposes Laws for Decentralized Economy
The Abu Dhabi Regulator (ADGM) has released a consultation paper to clarify the proposed 2023 Blockchain Fund Regulation and seek public feedback on the proposed new legal framework for funds that promote distributed ledger technology (DLT) and token issuance. The ADGM is an international financial center based in the United Arab Emirates (UAE) and has a special licensing regime for virtual asset service providers under the supervision of its financial regulator. This body is not the financial controller of the ADGM, so the proposal is limited to resolving type of service and management issues. The Venom smart contract platform is an ADGM license recipient.
