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Can Central Bank Digital Currencies Be Used to Fight Financial Crimes?

Sovereign states and central banks could digitize paper money and be the concrete alternative to Libra.

Paper money today is a marginal part of the currency in circulation and represents a direct relationship between the end user and the central bank. Its use is, however, unknown to the central bank; in a certain sense, it can therefore be said that like cryptocurrencies, cash can be used for illicit purposes. Central banks could start the process of digitizing paper money and thus create their own digital currency. Such a solution would have the great advantage of combating the shadow economy and illegal activities, and could be a viable alternative to corporate-backed digital currencies like Libra. 

Cash circulation

The amount of cash circulating in the world is around 10% of the total money supply [the author derived this calculation using information from individual central banks]. De facto, cash represents a direct and untraceable relationship between the end user and the central bank. In many ways, the cash in circulation is similar to crypto: Central banks and regulatory institutions are not aware of what you do with cash — unless you run into Anti-Money Laundering policies, exactly as it happens when you exit the banking system and move toward the cryptocurrencies markets. With crypto, the transactions are recorded on blockchains, which are encrypted accounting ledgers. However, tracking an operation in crypto assets is like searching for the contents of a safety deposit box without knowing the bank, the address and without having the key.

Comparing different assets

In the crypto world, a series of regulatory provisions have arguably failed. The United States Treasury — followed by other countries — has established a taxation of the capital gains on crypto assets held on exchanges without obtaining significant revenues, possibly because many decided not to provide information that is encrypted. Back in September 2017, Chinese monetary authorities banned operations concerning crypto assets in order to control capital flight, when the People’s Bank of China (PBoC) forbid financial transfers from the banking system to cryptocurrency exchanges. However, in this case as well — likely due to the same reason highlighted in the U.S. case — it seems as though the PBoC could not reach its goal.

Nevertheless, a trackable nonencrypted digital currency would be desirable from the perspective of regulators eager to fight the shadow economy.

Digital currency as an alternative?

A fresh approach is needed, starting from the regulatory framework, such as deciding whether a cryptocurrency is a real currency or a simple financial asset. So far, the wait-and-see approach of the authorities — who are worried about rapid changes in the financial system — has only delayed the entry of institutional investors into the field, given the difficulty of establishing a reliable accounting framework.

Banks would in fact probably be bypassed, or else be forced to change their business model.  Instead of collecting money indiscriminately through deposits, they should specialize in raising funds for selected investments based on risk and the ability to actually remunerate capital.

Thinking of prohibitions or restrictive regulations, especially on a national basis, is anachronistic. We need to take the first step on that 10% of “crypto” cash in circulation and gradually transform part of it into a transparent digital currency backed by the government or the central bank. For example, citizens in the eurozone could use a digital wallet with digital euros that can be managed via a smartphone, all without the need to open a bank account.

A central bank could also offer its digital currency to other currency areas (under a conventional agreement) through foreign reserves and/or with liquidity swaps: For example, the European Central Bank could offer digital dollars as the U.S. Federal Reserve could offer digital euros. Even a eurozone member state could intervene by digitizing the physical currency. Also in this case, the government could offer digital services to all the residents of the eurozone through specific conventions, as well as outside the borders of the eurozone. This would be a solution with positive impacts on the fight against the underground economy in addition to the benefits of discontinuing lower denominated coins both in terms of the cost of minting and of the dispersion of use.

These solutions should then be followed by greater coordination among central banks, perhaps initially by using the Special Drawing Rights (SDR) of the International Monetary Fund as a guarantee, whose development has remained limited due to some international conventions relating to air or sea transport.

Monetary aggregates in the eurozone

In short, blockchain technology and digital currencies — seen today as a risk by the establishment, the authorities and others — could be an opportunity to relaunch the migration of the SDR’s monetary architecture similar to the supranational currency “bancor,” conceptualized by the economist John Maynard Keynes. Like the bancor, a CBDC would be a global currency and therefore be able to effectively reduce the reduce the instability of payments with simple rules on the management of surpluses and deficits of the various states. However, unlike the bancor, it would be digital, transparent and traceable down to the details of each individual transaction.

After the WorldWideWeb revolution, we would have a new global monetary system, held together by the WorldWideDigitalCoin. Are we sure that Libra will be a problem at this point?

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

Marcello Minenna is the director of the quantitative analysis and financial innovation unit in Consob (Italian Companies and Exchange Commission) — an authority of the Italian government responsible for regulating the Italian securities market — as well as an adjunct professor of stochastic finance at the London Graduate School of Mathematical Finance and at Luigi Bocconi University of Milan. He is an economic and financial columnist featured in leading Italian and international publications.

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CBDCs of the World: The Benefits and Drawbacks of National Cryptos, According to Different Jurisdictions

The concept of CBDCs has been steadily drawing the attention of jurisdictions worldwide.

This month alone, at least three separate countries have reported on their prospective central bank-issued digital currencies (CBDCs): The Republic of the Marshall Islands (RMI) announced the creation of a specially dedicated nonprofit organization to support its digital currency that is already being developed. Meanwhile, the central bank of Russia said it was considering its own cryptocurrency (albeit not in the near future), while the National Bank of Ukraine released a report on the matter.

The concept of CBDCs has been steadily drawing the attention of numerous jurisdictions worldwide, but will it prove to be an efficient solution? It is time to delve deeper into the idea of state-backed cryptocurrencies and go through some major examples.

Nations With a Clear Stance on National Cryptocurrency

The state’s answer to the growing popularity of crypto

CBDCs, or national digital currencies, are digital assets that are issued and controlled by a federal regulator.

By design, CBDCs are fully regulated by the state. They don’t aim to become decentralized like most cryptocurrencies — instead, they simply represent fiat money, only in a digital form. Each CBDC unit acts as a secure digital equivalent of a paper bill and is normally powered by blockchain or some other form of distributed ledger technology (DLT).

Consequently, if a central bank issues a CBDC, it becomes not only its regulator but its clients’ account holder as well, therefore taking on the role of conventional, brick-and-mortar banks. Alternatively, a central bank can issue a digital currency in a decentralized manner, similar to how physical cash is distributed.

CBDCs could be seen as central banks’ response to the growing popularity of cryptocurrencies, some of which, however, deliberately attempt to bypass regulators’ purview. CBDCs, in turn, aim to take the best from cryptocurrencies, namely the convenience and security, and combine those features with the time-tested characteristics of the conventional banking system, in which money circulation is regulated and reserve-backed.

Indeed, according to a 2019 report issued by the Bank for International Settlements (BIS) — an organization based in Switzerland and comprises 60 of the world’s central banks — as much as 70% of financial authorities worldwide are conducting research into CBDC-issuance. However, concrete plans for implementation and motivations vary significantly depending on the country.

The BIS survey studied 63 central banks worldwide, 41 of which are based in emerging market economies, and 22 of which are in advanced economies — together representing almost 80% of the world’s population and more than 90% of its economic output. Of these, 70% were found to be already — or soon to be — engaged in theoretical CBDC research.

Notably, the general perception of a CBDC has been shifting toward positive. For instance, the head of the International Monetary Fund (IMF), an entity which once denounced the Republic of the Marshall Islands for its plan to issue a state-backed cryptocurrency, has recently declared that the international community should “consider” endorsing the idea.

“I believe we should consider the possibility to issue digital currency. There may be a role for the state to supply money to the digital economy,” IMF Managing Director Christine Lagarde declared, noting, however, that she is “not entirely convinced” on the concept, yet.

Adopters

Tunisia

Status: Adopted

Release date: 2015

In 2015, Tunisia became the first country in the world to issue a blockchain-based national currency called eDinar, also known as Digicash or BitDinar.

The asset was created with the participation of Monetas, a Switzerland-based software company (its CEO has gained notoriety due to the Tezos scandal), which has put the digital version of Tunisia’s dinar on blockchain rails.

Similarly to cash money, eDinar’s distribution and issuance is under the purview of a governmental body: La Poste, or La Poste Tunisian (LPT). Monetas CEO Johann Gevers commented on the launch:

“The Monetas deployment in Tunisia is the first application for a full ecosystem of digital payments. With the La Poste Tunisienne Android application powered by Monetas, Tunisians can use their smartphones to make instant mobile money transfers, pay for goods and services online and in person, send remittance, pay salaries and bills, and manage official government identification documents.”

There are transaction fees featured in the eDinar system — albeit they are insignificant, as the maximum amount is capped at just 1 dinar ($0.34), which is typical for conventional cryptocurrencies.

Now, the North African country seems to be contemplating the next step: In April, El Abassi, the governor at Banque Centrale de Tunisie — the local central bank — announced that it had created a working group that was studying the issuance of a sovereign bitcoin (BTC) bond.

Abassi added that bitcoin and blockchain technology offers central banks an efficient tool to combat money laundering, manage remittances, fight cross-border terrorism and limit informal economies.

Senegal

Status: Adopted

Release date: 2016

Senegal is also one of the earliest adopters of a national digital currency, having issued its blockchain-based eCFA — named after the CFA franc, the Senegalese paper-based fiat currency — in December 2016.

Like a regular CBDC, eCFA is fully dependent on the central banking system and can only be issued by an authorized financial institution. The currency was created jointly by local bank Banque Régionale de Marchés (BRM) and eCurrency Mint Limited, an Ireland-based startup that assists central banks in creating their own digital fiat currencies.

The eCFA has been designed to be distributed alongside paper money as legal tender. In a shared statement, BRM and eCurrency Mint declared:

“The eCFA is a high-security digital instrument that can be held in all mobile money and e-money wallets. It will secure universal liquidity, enable interoperability and provide transparency to the entire digital ecosystem in WAEMU.”

Indeed, if proven efficient, the eCFA could be extended to other West African Economic and Monetary Union (WAEMU) member states, including Côte d’Ivoire, Burkina Faso, Benin, Togo, Mali, Niger and Guinea-Bissau.

The Marshall Islands

Status: Adopted

Release date: 2019 (expected)

The Republic of the Marshall Islands (RMI) — a small island country in the Pacific Ocean with a population of roughly 53,000 people — is a presidential republic in free association with the United States, which is why it has historically used the U.S. dollar as its official currency.

However, in March 2018, it introduced another legal tender: its own cryptocurrency succinctly dubbed Sovereign (SOV). The digital asset was first introduced in late February the same year, when the government — the country has no central bank — passed the Declaration and Issuance of the Sovereign Currency Act. David Paul, minister-in-assistance to the president of the Marshall Islands, told Reuters at the time:

“As a country, we reserve the right to issue a currency in whatever form it is, whether in digital or fiat form.”

Further, Paul added that SOV is made collaboratively with Israeli fintech startup Neema and will be publicly released through an initial coin offering (ICO), with a seperate presale. Neema CEO Barak Ben-Ezer told the press that SOV “is completely decentralized and the government cannot control the money supply” after the ICO.

As Peter Dittus, chief economist for SOV, told Cointelegraph, the decision to develop a national digital currency is backed by several reasons.

First, Dittus says, developing countries such as RMI struggle with the high costs of remittances, and having a crypto legal tender creates a situation in which the solution to costly payments is integrated into the monetary system itself. Additionally, a central bank-managed fiat currency is costly to implement and to run, wherein “for a small country the costs clearly outweigh the benefits.”

In September 2018, however, the SOV project was criticized by major financial organizations, including the IMF and the U.S. Treasury Department. Specifically, the IMF warned about the potential risks of using a cryptocurrency as legal tender, stating that:

“The potential benefits from revenue gains appear considerably smaller than the potential costs arising from economic, reputational, AML/CFT, and governance risks.”

Further, in November, the RMI President Hilda Heine narrowly survived a no confidence vote that was prompted by her plans to introduce the national digital currency, among other things.

Nevertheless, in January 2019, the team behind SOV announced that a national cryptocurrency for the Marshall Islands was still being actively developed and that it intends to launch SOV sometime this year.

In early June, the RMI established the SOV Development Fund, a nonprofit organization to support the government in the implementation of a national cryptocurrency.

According to its press release, the fund will be fully independent, with a board of seven directors, of whom two will be appointed by the government and two nominated by SFB Technologies — the firm that is developing SOV’s blockchain infrastructure.

The remaining directors will be selected unanimously by the aforementioned four from among international experts in blockchain, banking and monetary policy.

In a video presentation to the Blockchain for Impact Summit at the United Nations Headquarters in New York, the minister in assistance to the president, David Paul, said, “We are designing SOV in a way that will not place any burden on the government’s finances. The currency funds itself.”

Venezuela

Status: Adopted

Release date: 2018

In February 2018, the government of Venezuela launched a national cryptocurrency called Petro (PTR), or sometimes Petromoneda.

Petro was first announced in December 2017 via national television, when President Nicolas Maduro declared that his government was planning to issue a cryptocurrency backed by the country’s oil, gold and mineral reserves. In January, he elaborated, stating that 100 million petros backed by an equivalent number of barrels of oil was going to be issued in the near future. According to Maduro, a number of fiat currencies — including the Russian ruble, the Chinese yuan, Turkish lira and the euro — are freely convertible with Petro.

Notably, the currency was designed to dodge the U.S. sanctions that hinder the local economy — or, as Maduro put it: to fight the financial “blockade” erected by the U.S. President Donald Trump’s administration. In response, the U.S. has issued an order to effectively restrict American investors from participating in the ICO for Petro, which started on Feb. 20, 2018.

In March, Nicolas Maduro claimed that a total of $5 billion was raised during the presale period — which would make it one of the largest ICOs to date, putting the $2 billion Telegram ICO and $4.2 billion token sale of EOS behind it. However, as Steve Hanke, an applied economist at Johns Hopkins University, has pointed out, those claims “aren’t believable” because no independent audits have verified them.

Further, Petro allegedly has ties with Russia, as, according to anonymous sources cited in a Time article, the cryptocurrency has been receiving Russian support since 2017, particularly due to the appeal of bypassing Western sanctions also imposed on the country. As the Russian state bank allegedly told the publication, “People close to Putin, they told him this is how to avoid the sanctions.” However, in March, those claims were denied by Konstantin Vyshkovsky, the head of the Russian Finance Ministry’s State Debt Department.

Meanwhile, Maduro continues to integrate Petro into the troubled, hyperinflated economy. For instance, he has announced the launch of a Petro-funded crypto bank to support initiatives from the youth and students, while Venezuelan Minister of Habitat and Housing Ildemaro Villarroel declared that Petro will be used to fund the construction of houses for the homeless.

Moreover, even the pension bonuses have been converted into Petro, which triggered a protest led by seniors who did not believe in the oil-backed coin. According to a local labor organizer, paying pensions in Petros violates Venezuelan law.

In November 2018, after a series of delays, Petro was finally launched. Soon, crypto enthusiasts pointed out that its white paper seems to be a blatant copy of Dash’s documentation available on GitHub.

As of press time, Petro is still not listed on any major cryptocurrency exchange. According to local and South American experts cited by tech media publication Wired, Petro is a “stunt” and a “smoke curtain” to cover up hyperinflation.

Despite the questionable progress with a national cryptocurrency and, more importantly, a larger economic crisis in his country, in January 2019, Maduro was sworn in for a second term.

He has previously declared that the country was preparing to launch yet another, “even more powerful” cryptocurrency called Petro Gold, this time backed by the country’s reserve of precious metals, meaning that Venezuela might have to witness more cryptocurrency-related experiments from the Maduro government.

Iran

Status: Adopted

Release date: 2019

In April 2018, the Iranian government performed a major crackdown on cryptocurrencies, with local banks being banned from all crypto dealings. Days after, an official declared that an experimental model of a domestic digital currency had been prepared.

Indeed, similarly to Venezuela, Iran might be hoping to use its cryptocurrency to bypass Western sanctions: In May 2018, Mohammad Reza Pourebrahimi, the head of the Iranian Parliamentary Commission for Economic Affairs, referred to cryptocurrencies as a promising way for Iran and Russia to avoid U.S. dollar transactions, as well as a possible replacement of SWIFT (since all Iranian banks have been delisted from the global interbank payment system).

Additionally, Iran has reportedly been negotiating with Switzerland, South Africa, France, the United Kingdom, Russia, Austria, Germany and Bosnia to conduct financial transactions using cryptocurrency.

In January 2019, four local banks developed a gold-pegged cryptocurrency called PayMon amid rumors that Iran was going to issue its state-backed cryptocurrency.

According to reports from local media, the crypto asset has been developed in conjunction with three private banks — Parsian Bank, the Bank Pasargad and Bank Mellat — and one state-owned financial institution, Bank Melli Iran. Iran Fara Bourse, a Teheran-based over-the-counter (OTC) exchange for securities and other financial instruments, will reportedly list the new cryptocurrency.

The director of Kuknos, a blockchain company responsible for the technical side of the project, said that the new crypto asset is the way to tokenize assets and excess properties of the banks. One billion PayMon tokens will be released initially, as per the plan.

Interestingly, the launch of PayMon came less than a week after Iran’s central bank published a draft on future cryptocurrency regulations. According to Aljazeera, the authorities plan to partly reverse the ban on digital currencies but will introduce limits on the amount of cryptocurrencies that an individual can hold.

UAE and Saudi Arabia

Status: Pilot

Release date: 2019-2020 (expected)

In January 2019, the United Arab Emirates and Saudi Arabia announced an agreement to collaborate on the creation of a cryptocurrency for cross-border trading, confirming previous reports.

The project is part of the Strategy of Resolve, a larger agreement between the two countries comprised of seven joint initiatives. According to the UAE official news agency Emirate News Agency, the cryptocurrency “will be strictly targeted for banks at an experimental phase with the aim of better understanding the implications of blockchain technology and facilitating cross-border payments.”

The initiative reportedly seeks to protect customer interests, create standards for technology and consider the cybersecurity risks, while also determining the impact of centralized currencies on monetary policies, the agency reported.

In February, Saudi Arabian financial news portal Argaam reported that six unnamed commercial banks from Saudi Arabia and the UAE had joined the digital currency project dubbed Aber, with a scheduled implementation during the next 12 months. The article also noted:

“The currency’s official issuance is conditional on the outcomes of the ‘proof-of-concept’ stage. The Saudi Arabian Monetary Authority (SAMA) and the UAECB will decide on the feasibility of the currency’s practical applications.”

Uruguay

Status: Pilot

Release date: Unknown

In November 2017, the Central Bank of Uruguay (BCU) presented a six-month pilot plan for the issuance and use of the digital version of the Uruguayan peso. The institution stressed that it “is not a new currency, it is the same Uruguayan peso that, instead of having a physical support, has a technological support.”

According to the scheme — the starting date of which has not been specified — a total of 10,000 mobile phone users of Antel, the state-owned telecommunications company, would be able to download an app with an integrated digital wallet. The first issue of digital tokens will consist of 20 million Uruguayan pesos, the press release notes.

Other players participating in the pilot scheme, apart from the BCU and Antel, are RGC, the system provider; IBM, for storage support, circulation and control; IN Switch, for user management and transfers; and RedPagos, for ticketing.

The head of the BCU elaborated on the plan, adding that Uruguay “is very much in the vanguard” of digital currency development:

“It will be a process of trial and error, success and failures. […] This must have the same soundness as normal currency, but sooner or later it will be implemented in Uruguay.”

However, there has not been any major update to the pilot scheme for more than 12 months.

Singapore

Status: Pilot

Release date: Unknown

Singapore shares a similar experience with Uruguay in terms of issuing a CBDC, as its project has also been stuck in the experimentation phase.  

In June 2017, the Monetary Authority of Singapore (MAS) released a report regarding the so-called Project Ubin, a blockchain-powered plan to put a “tokenized form of the Singapore Dollar (SGD) on a DLT.” The project is a collaboration between the central bank and blockchain consortium R3, which is focused on the development of a blockchain pilot to facilitate cross-border payments.

However, in January 2018, Ravi Menon, the managing director of the MAS, suddenly criticized the idea of CBDCs, specifically in the public context. In an interview with the Financial Times, he questioned the reasoning behind central banks issuing digital currencies to the nonbank public.

“If there’s any sense of nervousness about the banks, you will have a bank run; everybody is going to go into the central bank [with their deposits]. […] And, if people placed their deposits with central banks, who’s going to extend credit?”

As with Uruguay, there have not been any updates on the Ubin project since.

Thailand

Status: Pilot

Release date: Unknown

The Bank of Thailand (BOT) has been notably bullish on the concept of CBDCs. In November last year, the central bank’s governor, Veerathai Santiprabhob, argued that it will take three to five years for countries to switch from using cash to using digital currencies. However, the official noted that digital currency would not replace fiat money right away “because of complication, a readiness of people and an efficiency of technology.”

Meanwhile, the BOT has been studying the prospect of releasing its own CBDC. The project details first surfaced in June 2018, when Santiprabhob revealed details that the central bank had teamed up with a number of local banks to develop a “new way of conducting interbank settlement” using a CBDC.

According to the BOT, releasing its own cryptocurrency would reduce the transaction costs and validation time “due to less intermediation process needed compared to the current systems.”

In May 2019, more details were published. Thus, the CBDC project, dubbed Inthanon, has been developed by blockchain consortium R3 and global IT company Wipro Limited to be used for interbank settlements in Thailand, according to the latest press release. Specifically, the solution will reportedly be used by the BOT and eight local commercial banks.

Researchers

Russia

Status: Research

Release date: Unknown

According to the latest reports, the head of Russia’s central bank, Elvira Nabiullina, has said that, while the launch of a CBDC is being explored, it won’t be released in the near future.

Specifically, Nabiullina suggested that the robustness of blockchain technology should be ensured before any prospective CBDC issuance:

“If we are talking about a national currency that works as a whole in the country —  that is, not about private assets — of course, this requires the technology to provide reliability and continuity. Technologies must be mature, including distributed ledger technologies.”

Further, Nabiullina discussed CBDCs in the context of cash-free societies, arguing that, while some countries have made significant progress and become almost cashless at this point, in other jurisdictions, cash remains in high demand:

“It’s not so much because people want to perform some dubious operations. People often value their privacy, anonymity. Of course, the spread of non-anonymous digital currencies indicate in some sense society’s readiness.”

In April, the country’s central bank released a policy brief on CBDCs, in which it argued that they could represent a less risky and more liquid type of asset that could potentially reduce transaction costs in the economy. However, the paper stressed CBDCs’ lack of anonymity as a potential disadvantage in comparison to cash.

Russia’s authorities have also been working on the so-called CryptoRuble, a national stablecoin. However, the project has been accompanied by contradicting statements from various officials, and, as Cointelegraph previously reported, there are reasons to believe that a ruble-pegged stablecoin might not turn out to be very stable in the end.

Sweden

Status: Research

Release date: Unknown

Sweden’s central bank, Riksbank, has been conducting research since 2017 into a project called e-Krona, a potential DLT-based currency that could be used as a “complement to cash.” In September that year, Riksbank published the first report on e-Krona, followed by an action plan.

The papers note that Riksbank “has not yet taken a decision on whether to issue an e-Krona and the aim is not for an e-Krona to replace cash.”

However, Riksbank’s reports on e-Krona mention the dropping popularity of cash in the country as one of the main reasons for studying the CBDC concept. For instance, the latest survey conducted by the central bank in 2018 found that only 13% of Swedish residents paid for their most recent purchase in cash, while the corresponding figure for 2010 was 39%.

Essentially, Riksbank believes that e-Krona could operate under two systems: a value-based one and a registered-based one. The latter version would have digital currency balances stored in accounts on a central database — potentially underscored by blockchain — while a value-based e-Krona would be stored separately on “deposited currency accounts.”

China

Status: Research

Release date: Unknown

The People’s Bank of China (PBoC) has been researching the concept of CBDC for quite some time, with a specific institute named Digital Currency Research Lab established for this very purpose. However, it seems that the country is in no hurry to issue a national digital currency. In March 2018, governor of the PBoC, Zhou Xiaochuan, expressed the bank’s cautious position regarding the matter of blockchain technology:

“If it spread too rapidly, it may have a big negative impact on consumers. It could also have some unpredictable effects on financial stability and monetary policy transmission.”

Zhou also declared that digital currency will ultimately diminish cash circulation, while stressing that the PBoC “must prevent substantial and irreparable damages” to the domestic economy. Nevertheless, according to China Daily, he also claimed that the development of digital currency is “technologically inevitable.”

In June 2018, the Digital Currency Research Lab at the PBoC filed a new patent for a digital wallet that would allow users to track their transaction histories.

Three months later, it opened a new fintech research center in Nanjing, the capital of China’s eastern Jiangsu province. The establishment will focus on the PBoC’s testing of its developed digital currency prototype, according to reports.

South Africa

Status: Research

Release date: Unknown

Although there are few details on a South African CBDC at this point, the local central bank published a tender last month that mentions the issuance of “electronic legal tender — a central bank digital currency issued and backed by the South African Reserve Bank (SARB).”

The tender — which has been closed at this point — was reportedly created to assist the SARB in studying CBDCs.

The CBDC would be issued at one-to-one parity with the South African rand and accepted by businesses and the government, the paper mentioned. It also should be able to facilitate person-to-person transfers of value without clearing and settlement, the tender said, while consumers must be able to use the CBDC without using a bank account.

European Union

Status: Research

Release date: Unknown

While it is too early to say if EU countries could be joining the ranks of jurisdictions that have adopted the concept of CBDCs, in May 2019, a European Central Bank (ECB) official highlighted the benefits of state-backed digital currencies.

More specifically, Vitas Vasiliauskas — chairman of the board of the Bank of Lithuania and a member of the governing council of the ECB — discussed whether CBDCs should be wholesale, retail or both.

He stressed that CBDCs should serve as a medium of exchange, a means of payment and a store of value, reflecting qualities of the current forms of central bank money, but not a conventional reserve account or a private crypto asset. In the event of a release of a retail CBDC, it would be available to the general public, while access to the wholesale one would be open to financial institutions only.

Among the potential benefits of the CBDC, Vasiliauskas named increased efficiency of payments and securities settlements, as well as the reduction of counterparty credit and liquidity risks. The interest-bearing retail CBDC could purportedly improve the transmission of monetary policy and strengthen the pass-through of the policy to deposit and lending rates. However, Vasiliauskas further warned:

“The amount of cash in circulation is declining in some countries. This could mean that one day, even if it seems like a distant prospect — every single person will have to have an account with a private entity just to make payments. Unfortunately, this may lead to increased levels of financial exclusion.”

A retail CBDC would thus ensure that people continue to have access to the central bank’s money, Vasiliauskas said, and could eventually have positive effects on financial stability. In the meantime, he believes that one of the key issues the EBC should consider is the CBDC’s adherence to Anti-Money Laundering (AML) requirements and the way it can apply these standards to anonymous forms of CBDCs.

Unclear future: Some countries denounce the idea, and a well-executed CBDC is not yet here

It is worth noting that despite the potential benefits of having a CBDC, some jurisdictions have ultimately decided against the idea.

The reasons vary: For instance, Japanese officials explained that their society wasn’t ready to give up cash, as it forms a substantial part of the local economy. The U.K. had to halt its CBDC-related research due to the country’s looming withdrawal from the EU, while South Korean officials even argued that a CBDC is an expensive concept that might destabilize the market and “cause a moral hazard.”

Overall, the actual economic implications of issuing a state-backed cryptocurrency remain largely unknown, as even the jurisdictions that have adopted CBDCs have yet to launch them in a fully fledged form. However, given the steadily increasing amount of countries that have been studying the concept, a CBDC might soon arrive, prompting others to follow suit or give up the idea altogether.

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Hodl, IMF Now Declaring War on Cash After Negative Interest Rate Proposals

IMF Bitcoin

Cryptocurrency enthusiasts should hodl their coin reserves as the IMF declares war on cash following negative interest rate proposals. If anything, this is the best time for people to turn to cryptocurrencies to help preserve their wealth.

Time To Hodl Your Cryptocurrencies

For people who are already in cryptocurrencies, this is the best time to preserve wealth in digital currencies, not fiat if reports from Weiss Ratings is anything to go by. Meanwhile, no-coiners should be urged to ramp up, even if it means owning a percentage of a coin simply because saving is no longer a safe, more so if we draw events from devastated Venezuela.

According Weiss, the International Monetary Fund did declare war on cash following proposals to implement negative interest rates. In their tweet, Weiss Ratings says:

“The #IMF is the latest financial institution to declare war on cash. If they succeed, your fiat savings will go up in a puff of zero interest rate policies. This is why #crypto. #thisIsWhyWeHODL”

Negative interest functions in such a way central banks reduce interest rates with the aim of boosting economic growth. This move could see central banks reduce interest rates to negative figures. Undoubtedly, it implies that people would lose money through inflation as the government resort to stimulus in order to spur consumption and investment in an otherwise frail economy. By printing more to increase lending, boost demand, and stimulate the economy, the idea is to get people to spend instead of saving as this would help boost economies by decreasing interest rates but at the expense of high inflation.

Read: Ripple Co-Founder joining IMF Panel to Discuss Latest Financial Tech Innovations

The IMF, in a blog post earlier this year, suggests that one way to make negative interest rate work is to phase out cash. However, this effort could be arduous as paper money continues to be an integral part of payment processes in most countries.

Cash And Digital Currencies Could Work Together

The proposal by the IMF is for central banks to split their monetary base into two local currencies, cash and digital currencies (e-money). The digital currencies would be issued electronically and would have the policy rate of interest. Meanwhile, the paper cash would have an exchange rate against the digital currency.

There have been interest from some central banks across the world in developing digital currencies known as CBDC. The Central Bank Issued Digital Currencies (CBDC) would not work like cryptocurrencies. Instead, they would work like regular fiat currencies since they would be in the control of the central banks.

Reports over the past few months suggest that Sweden’s central bank is currently working on developing e-krona, the digital version of its local currency, the Krona. There are other countries that are exploiting similar moves, but no one has put together one yet.

Also Read: Why Ripple (XRP) Fits The Bill Of What The IMF Would Recommend To Global Central Banks

Regardless, saving your funds in cryptocurrencies seems like the best move at the moment. After all, the primary goal of Bitcoin was to take away financial control from the government and hand it over to the people. Specifically, Satoshi wants to avoid the calamities that took place following the 2008 global financial crisis.

If the negative interest rate gets a nod and countries follow the IMF lead, then it would significantly affect a large swathe of world’s population already struggling with hyperinflation or deflation. Therefore, to protect your funds from bank negative rate charges, resorting to cryptocurrencies is no brainer. Encouragingly, indicators show that Bitcoin and other cryptos are gradually gaining traction, becoming an excellent store of value as data from Venezuela and Iran shows.

The post Hodl, IMF Now Declaring War on Cash After Negative Interest Rate Proposals appeared first on Ethereum World News.

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IMF Spring Meetings: Digital Money Is Imminent, But No Decentralization in Sight

As the IMF and the bosses of central banks gather to talk digital money, concerns of stability and institutional trust dominate the discussion.

The custodians of global financial order have been prominent in crypto news recently. The weekend kicked off with the announcement of the International Monetary Fund (IMF) joining forces with the World Bank to launch a private blockchain coupled with a “quasi-cryptocurrency” for training purposes, then continued with the Spring Meetings of the two organizations’ Boards of Governors in Washington, D.C., which ran throughout the whole week.

Although it would be an overstatement to claim that distributed ledgers were particularly conspicuous on the forum’s overall agenda, the program included a series of fintech workshops, as well as at least a couple of major talks relevant to grasping where global regulators stand on some issues pertinent to crypto and blockchain applications. Situated in the context of the IMF’s previous statements and actions, the ideas expressed at the meetings can update our understanding of the intellectual currents that shape how international financial institutions envision the future of blockchain technology.

Spring Meetings

Christine Lagarde, the IMF’s managing director, moderated the seminar entitled “Money and Payments in the Digital Age” that featured Benoît Cœuré, a board member of the European Central Bank (ECB); Central Bank of Kenya Governor Patrick Njoroge; JPMorgan Chase Chief Financial Officer Sarah Youngwood; and Jeremy Allaire, co-founder and CEO of crypto finance firm Circle. Predictably, speakers who represented established financial institutions and the fintech entrepreneur offered vastly different opinions on whether the digital payments model is superior.

While JPMorgan Chase’s Youngwood touted the bank’s new digital coin that is used for instantaneous settlement of wholesale payments, the Central Bank of Kenya’s chief talked about mobile-based payment service M-Pesa and ECB’s Cœuré introduced TIPS — a cost-efficient European service for the settlement of instant payments. Allaire, on his part, painted a future marked by a “fundamental redesign of how civic societies work,” in which economic activity is fully automated, effectively eliminating the notion of payments as we now think of them. Notably, he argued that not only the decentralized forms of money underlain by permissionless public ledgers would benefit from the internet-like open design, but sovereign digital money would as well.

Cœuré — the same ECB official who once had reportedly called bitcoin “the evil spawn of the financial crisis” — expressed confidence that central bank-issued digital money would be prominent in the financial system of the future, but warned that “decentralization, if not properly managed, can introduce fragility” to the system.

International Monetary Fund Managing Director Christine Lagarde along with Jeremy Allaire, Benoit Coeure, Patrick Njoroge and Sarah Youngwood talk about Money and Payments in the Digital Age at the IMF Headquarters during the 2019 IMF/World Bank Spring Meetings on April 10, 2019 in Washington, D.C. IMF Staff Photograph/Stephen Jaffe

International Monetary Fund Managing Director Christine Lagarde along with Jeremy Allaire, Benoit Coeure, Patrick Njoroge and Sarah Youngwood talk about Money and Payments in the Digital Age at the IMF Headquarters during the 2019 IMF/World Bank Spring Meetings on April 10, 2019 in Washington, D.C. IMF Staff Photograph/Stephen Jaffe

An overarching motif that loomed large in almost every speaker’s account was trust. However, if Circle’s Allaire was talking about trust in open networks based on public infrastructure for money, in which clearance and settlement are decentralized, other panelists obviously meant a different kind of trust — i.e., trust in the incumbent financial institutions that has to be maintained and preserved.

In an interview after the panel, Madame Lagarde made a nod to blockchain “disruptors,” who are “clearly shaking the system” and “changing business models of commercial banks.” Yet, she sounded much more in line with Cœuré than with Allaire when she remarked that she remains concerned about the trust and stability of the system, and that the IMF doesn’t want “innovation that would threaten stability.”

Interestingly, the IMF head noted, apparently in response to Allaire’s mention that Facebook was expected to roll out its own coin soon, that the organization is watching “data collectors” entering the financial space and is ready to regulate. The remark could be relevant to social services with payment ambitions beyond just Facebook, particularly the Telegram Open Network.

“New Economy Talk: CBDC: Should Central Banks Issue Digital Currencies?” was another event among the Spring Meetings germane to the domain of crypto. Moderated by Tommaso Mancini-Griffoli — the deputy division chief in the IMF’s Money and Capital Markets Department — the event had Deputy Governor Cecilia Skingsley of the Swedish Riksbank and Bank of Canada’s Deputy Governor Timothy Lane pondering the prospects of digitizing sovereign money.

In this discussion, the word “cryptocurrency” was mentioned just once, yet in a rather revealing context. When talking about the possible design and functionality of central bank digital currencies (CBDCs), Riksbank’s Skingsley contended that such an instrument will have to be highly functional and the best at fulfilling citizens’ needs — otherwise, “other versions of money could come in, perhaps cryptocurrency,” implying that government-issued digital money would stand in direct competition with its decentralized counterpart.

Lane expressed a number of concerns over the potential tokenization of central banks’ liabilities, including systemic risks like facilitating bank runs and displacing financial intermediation. He also pointed out that, with the existing cryptocurrencies, “anonymity is a big issue” and any digital instrument that Canada would develop will ensure that law enforcement has access to transacting parties’ data, if needed. By and large, the discussion proceeded along the lines of designing a convenient digital reincarnation of fiat money rather than envisioning paradigmatic changes in the nature of state-issued money that a crypto-libertarian would welcome.

Insights from Finance and Development

The ideas on digital money that most of the financial world’s notables expressed on the floor of the IMF-hosted forum largely resonate with those articulated in the June 2018 issue of the organization’s quarterly magazine, “Finance and Development,” dedicated almost entirely to the future of currency, and heavily focused on the threats and promises of blockchain. This issue — which, at the time of publication, did not make too much of a splash in the crypto community — is nevertheless a remarkable document that captures some themes that seem to remain influential with many financial bosses up to this day.

Title page of the June 2018 issue of Finance and Development, a magazine released and published by the International Monetary Fund

Title page of the June 2018 issue of Finance and Development, a magazine released and published by the International Monetary Fund

Some of the points that the authors raise are hardly shocking. Martin Mühleisen, director of the IMF’s Strategy, Policy and Review Departmentacknowledges blockchain’s capacity to revolutionize the world of finance, but reiterates common concerns over its potential to facilitate illicit activities. Andreas Adriano, a senior communications officer in the IMF’s Communications Departmentapplies Ken Galbraith’s taxonomy of financial bubbles to what he calls “crypto euphoria,” observing that most of the common features of historic financial euphorias are also visible in the irrational exuberance surrounding crypto assets.

In their primer on cryptocurrencies, economist Antoine Bouveret and the assistant director of the IMF’s Strategy, Policy and Review Department, Vikram Haksarpoint out that such assets are often costly to produce and that “decentralized issuance implies that there is no entity backing the asset.” They also mention that crypto assets might pose a threat to central banks’ ability to conduct monetary policy by weakening their centralized control over the money supply.

Perhaps the most forceful, in-depth and also the most unsettling analysis presented in the issue is the one penned by Dong He, deputy director of the IMF’s Monetary and Capital Markets Department. He affirms that crypto assets challenge the model of state-issued money and the dominant role of central banks, thus presenting direct competition to fiat money — a point that Riksbank’s Skingsley shared the other day. Further, he admits that the rise of cryptocurrencies might foreshadow a paradigmatic shift from account-based to token-based payment systems. He also contends that a situation in which crypto assets come to define the unit of account would mean irrelevance of central bank’s monetary policy.

His solution? Make fiat money — digital or not — a more attractive unit of account and settlement tool, naturally. That is also something we’ve heard a lot throughout the Spring Meetings sessions. But he also adds this to his recipe:

“Government authorities should regulate the use of crypto assets to prevent regulatory arbitrage and any unfair competitive advantage crypto assets may derive from lighter regulation.”

In other words, the analyst suggests that regulation should be there not to protect consumers from fraud — or to stifle the financing of terrorism — but rather, it is needed to protect the dominance of the incumbent financial instruments and institutions. That is a step further from the usual way of rationalizing regulatory pressure on crypto, if at lease a more honest one.

Arguably the most refreshing article of the June issue of “Finance and Development” was written by a historian. Princeton professor Harold James reminds us that “money was almost always an expression of sovereignty,” which is a concise explanation of why crypto enthusiasts shouldn’t expect central banks to cede any of their power to open, decentralized financial systems. James also offers an elegant take on what he calls a “transformational shift in the perception of fundamental value.” He puts it that, in the past, value was created when humans applied labor to nature. In the near future — and bitcoin appears to be a harbinger of this change — value may arise from the application of nonhuman intelligence to stored energy.

Words and deeds

Whenever she talks about blockchain, Lagarde almost invariably brings up this ever-recurring maxim: Financial authorities should go about distributed ledger technology with caution, yet make sure that regulation does not stifle innovation. But what does this mean in practice? It seems that, feeling the weight of the responsibility for global financial stability on its shoulders, the IMF is not eager to rush the advent of a decentralized monetary system. Experiments will be tightly controlled, in a sandbox style; jurisdictions that try to shoot ahead too enthusiastically, like the Marshall Islands and Malta, will be reminded that they better simmer down. Stability and trust should remain paramount — and that means stability and trust in the incumbent institutions.

As is visible in the recent discussions and the analysts’ prior work, central bankers globally are well aware of the threat that open blockchains could pose in the near future to the monetary system that they are in charge of. The next decade will almost definitely see the emergence of CBDCs in many jurisdictions, but it is unlikely that these financial vehicles will be fundamentally different from a digitized version of the existing, centrally issued and controlled fiat money. The incumbents have resources to make digital fiat appealing to consumers and the regulatory power to limit competition from potential decentralized alternatives, so it may take a while before blockchain-powered, peer-to-peer financial networks have a chance to give central banks a run for their money.

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Bank of Thailand Develops Cryptocurrency Pilot Based on R3 Technology

The Bank of Thailand (BoT) – the country’s central bank has announced that it has made significant progress on its cryptocurrency pilot program. The country’s apex bank’s planned completion date for phase one of the project is Q1 2019.

Project Inthanon

In a press release published on Tuesday (August 21, 2018), the BoT said that it had secured partnerships with eight Thai-based financial institutions. The purpose of these collaborative efforts, according to the bank is to facilitate the creation of Project Inthanon – a central bank digital currency (CBDC). The plan is to have the CBDC run on R3’s proprietary distributed ledger technology (DLT) platform – Corda.

According to the press release:

The outcome and insights from Project Inthanon will contribute to the design of Thailand’s future financial market infrastructure. This is in line with similar projects embarked upon by other central banks such as the Bank of Canada, the Hong Kong Monetary Authority and the Monetary Authority of Singapore. In addition to Project Inthanon, the BOT is conducting a DLT proof of concept for scripless government savings bond sale to improve operational efficiency.

The BoT plans to conclude, in tandem with its partners, the design, development, and testing of a proof-of-concept prototype for Project Inthanon. This prototype will facilitate domestic wholesale fund transfer via the CBDC. Most of the preliminary testing activities will focus on liquidity saving mechanisms, as well as risk management strategies. Phase one should be completed before the end of March 2019. Upon completion, the BoT plans to publish a detailed summary of the project.

Cryptocurrency in Thailand

While the BoT continues in its push to develop robust blockchain-based financial solutions, the cryptocurrency industry in the country continues to feel the impact of a few sweeping developments in the past few months. Beginning in June, the government released a detailed framework for cryptocurrency operations in the country covering both trading and initial coin offerings (ICOs).

The Thailand Securities and Exchange Commission (SEC) also approved seven cryptocurrencies while setting financial benchmarks for crypto exchanges and brokers as well as projects looking to carry out ICOs in the country. Earlier in August, the Commission also approved seven cryptocurrency exchanges.

What do you think about project Inthanon? Will the Thai Central Bank launch a state-issued digital currency? Keep the conversation going in the comment section below.

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Central Bank Crypto Could Bring Economic Gains: Bank of Canada Paper

Central bank-issued cryptocurrency can potentially bring economic welfare gains for Canada and the U.S., according to a central bank researcher.

In a working paper published Thursday, the Bank of Canada’s S. Mohammad R. Davoodalhosseini states that introducing a central bank digital currency (CBDC) “can lead to an increase of up to 0.64 percent in consumption for Canada and up to 1.6 percent for the US, compared with their respective economies if only cash is used.”

At the moment, Davoodalhosseini says, a key question to the “many” central banks currently mulling the option of issuing a CBDC is whether cash and a digital form of fiat currency should co-exist, and if so, how to maintain an “optimal” monetary policy.

Based on detailed modeling and mathematical calculations, the researcher argues in the paper that a country’s economic welfare – at least for Canada and the U.S. – might be better off by substituting cash with a CBDC, provided implementation is not extremely costly.

He wrote:

“Having both cash and CBDC available to agents (consumers) sometimes results in lower welfare than in cases where only cash or only CBDC is available. This fact suggests that removing cash from circulation may be a welfare-enhancing policy if the motivation to introduce CBDC is to improve monetary policy effectiveness.”

The paper further states that, by introducing a CBDC, central banks could have a higher level of flexibility in adjusting current monetary policy.

“This is because the central bank can monitor agents’ portfolios of CBDC and can cross-subsidize between different types of agents, but these actions are not possible if agents use cash,” it says.

The paper’s quantitative approach follows a previous December 2017 effort by other researchers from Canada’s central bank to gauge the value of offering a CBDC over cash – work that took a more qualitative look at the pros and cons.

CoinDesk reported at the time that the researchers argued that the potential benefits of a CBDC may vary between developed and developing economies.

Bank of Canada image via Shutterstock

The leader in blockchain news, CoinDesk is a media outlet that strives for the highest journalistic standards and abides by a strict set of editorial policies. CoinDesk is an independent operating subsidiary of Digital Currency Group, which invests in cryptocurrencies and blockchain startups.

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US Congressman Calls for Ban on Crypto Buying and Mining

A U.S. lawmaker has called for a blanket ban on cryptocurrency buying.

Congressman Brad Sherman is no stranger to controversial statements on the subject – back in March he called cryptocurrencies “a crock” – and during the Wednesday hearing of a subcommittee for the House of Representatives Financial Services Committee, he went so far as to advocate keeping Americans out of the market entirely.

“We should prohibit U.S. persons from buying or mining cryptocurrencies,” the California Democrat declared. He added that, beyond cryptocurrencies being potentially used as a form of money in the future, it can currently be used by tax evaders and rogue states seeking to bypass U.S. sanctions.

One of the panelists, Norbert Michel, director for the Center for Data Analysis at the Heritage Foundation, pushed back against the idea that criminal use should define cryptocurrencies as a whole.

Michel told the subcommittee:

“Yes it is true that criminals have used bitcoin, but it’s also true that criminals have used airplanes, computers and automobiles. We shouldn’t criminalize any of those instruments simply because criminals used them.”

“Those components I believe are the main barriers to widespread adoption in the U.S,” he added.

No love for CBDCs

Though much of the hearing revolved around general monetary policy and history, the crypto-specific portions revealed a general opposition to the idea of a central bank digital currency (CBDC).

To quickly recap: a number of central banks around the world have been investigating the idea of using some of the technology concepts behind bitcoin and other cryptocurrencies as part of new, wholly digital money systems. The idea is that the tech can boost transparency and efficiency.

But some of those looking into the subject have warned that it could amplify the risk of bank runs, and several institutions have sworn off the idea entirely following their research.

Alex Pollock, a senior fellow at the R Street Institute, blasted the concept during Wednesday’s hearing, declaring it “a terrible idea – one of the worst financial ideas of recent times.”

Other committee members couldn’t help but agree that the idea, at the very least, raised more fundamental questions about how blockchain and cryptocurrencies actually work.

Congressman Bill Foster asked about blockchain immutability, saying “the promise of blockchain is a non-falsifiable ledger … [what] remains an unsolved problem in the digital world is how do you authenticate yourself?”

Payments boon

On a more positive note, Dr. Eswar Prasad, senior professor of Trade Policy at Cornell University, argued that the existence of cryptocurrencies had the potential to impact the financial services system, particularly the payments system, in positive ways.

According to Prasad, cryptocurrencies could “make transactions much easier … and bring down the cost,” but the benefits are limited at the moment.

Michel himself noted:

“It is certainly difficult to imagine a cryptocurrency replacing the U.S. dollar as long as the Federal Reserve acts as a moderately good steward of the national currency, but it is for this very reason that Congress should eliminate barriers that impede people from using their preferred medium of exchange.”

Ultimately, the hearing was cut short in order to make way for a House vote.

However, just prior to dispersing the attendees, chairman Andy Barr noted that cryptocurrencies will “continue to have a greater and greater impact on our financial system,” making it a topic the committee would likely have to “revisit” once again.

You can follow CoinDesk’s live coverage of the hearing on Twitter.

Image via House Financial Services Committee 

The leader in blockchain news, CoinDesk is a media outlet that strives for the highest journalistic standards and abides by a strict set of editorial policies. CoinDesk is an independent operating subsidiary of Digital Currency Group, which invests in cryptocurrencies and blockchain startups.