2020 left an iconic impression in the global business and personal lives of all individuals. The slow pace of digital transformation in work environment and adaptation of the technology in our daily lifestyle accelerated ten-folds due to the critical limitations of the pandemic.
Even as the COVID pandemic is rescinding in stages and the world moves on along adapting to changed work environment and adopting new ways of business operations, there is a there exists a great deal of trepidation regarding the lingering aftereffects.
Technologies such as contactless, blockchain, artificial intelligence, and other digital solutions offer what businesses may require balancing the health mandates as well as consumer access. As the advances in AI and Deep Learning grow, the technology is vastly improving to become user friendly and less prone to error to become as a viable solution and thereby ensuring the world economy and livelihoods of the populace is stable and secure.
In recent months bitcoin has had a phenomenal rally and for good reason. Big payment giants and listed companies are adopting it and not just in the US. One month after Elon Musk announced that Tesla purchased $1.5 billion worth of bitcoin, the Chinese tech company Meitu announced that it made its entry to crypto, buying $40 million worth for bitcoin and Ethereum. On the other hand, the US government is printing money like it’s going out of style. A few days ago, the Senate voted for the new $1.9 trillion stimulus package. With the last one in April, lots of people used their check to buy bitcoin. Most likely, this will be the case when they get this new check too. So you can understand why big tech and Wall Street players are looking at bitcoin. As we all focus on bitcoin, its price and market cap, JPMorgan is looking a little to the left and to the right. They think bitcoin is a parenthesis and the true value lies in innovative products that will come out of tech companies. Analysts at the bank feel that cryptocurrencies are still plagued by a number of inherent problems that may prevent them from going mainstream. Now if you consider the power struggle we will see between the old and the new, central banks and open source crypto, we may see a slowdown. But crypto is not a parenthesis and anything moving fast at some point will have to catch its breadth. That’s only normal and expected. Bitcoin has ceased to be the play thing for a small group of early adopters, miners and believers in crypto and has become a legitimate alternative to inflationary measures. In the end bitcoin, defi and other cryptos will prevail and fiat will go go the way of the dinosaurs.
Do you believe we’ve “crossed the Rubicon” where that means policymakers are increasingly inclined to view the world through the lens of Modern Monetary Theory even if they insist they’re doing no such thing? If the answer is “yes,” you’ll be forgiven. The superfluous middleman notwithstanding, central banks are engaged in debt monetization. That’s been true for a long time, of course. What’s new is that the “match” between government borrowing and central bank bond-buying became so glaring following the pandemic that the charade was difficult to obscure, even in countries where the public isn’t exactly famous for its capacity to grasp nuance (e.g., the US). The figure (below) is about as straightforward as it can be.
Defining Crypto Money as a M=M1+…..Mx factor is not only difficult but its question on regulation and inclusiveness in the money circulation format and USD paired value definition with frequent serge and bearish volatility in trade are equally naïve though exponentially large to perform any regulatory experiment at the moment. More elusively when no multiplier effect on circulation and more futile liquid asset trade options and easy value to any goods and services or stable stored value deposits with annuity value or fixed income parallels of monetized definitions.
Today, authorities around the world are grappling with the rise of digital currencies and decentralized finance based on both emerging technologies – particularly various combinations of distributed ledger technology (DLT) and blockchain.the announcement of Facebook’s Libra project in 2019, the technological challenges to existing monetary frameworks have put a broader set of regulatory issues on the agenda. An overarching consideration is that, when faced with innovations, authorities must consider how best to apply regulation so that similar economic and financial risks emerging from varying technologies and participants are treated similarly, avoiding regulatory arbitrage. Still, the “regulatory dialectic” of regulation, regulatory avoidance and re-regulation may be unavoidable.
While Bitcoin and other cryptocurrencies have not evolved into major alternatives to sovereign monetary arrangements, stable coins have raised new challenges. They also offer opportunities for specific use cases, with private stable coins aiming to be adopted as a means of payment for online purchases (“ecommerce”), peer-to-peer and micro-payments and a range of potential future applications.
IMF’s tree logic for defining type of money and payments is grouped into five different types of money, including (1) b-money, which banks issue currently, (2) e-money, (3) investment money (i-money), (4) central bank money, and (5) cryptocurrency, which is presented in the flow chart on the left. On the surface this taxonomy feels adequate, but closer inspection of new payment innovations and proposals of Central Bank Digital Currencies (CBDCs) pose thorny questions.
The latest IMF paper compares cash to CBDC to broader e-money/business money as well as cryptocurrencies on 6 different dimensions:
1) central bank-issued
3) legal tender
4) backed by deposits at the central bank
5) can be used to transact peer-to-peer via electronic forms of payment
6) can also be programmable with smart contract functionality
From this perspective, the only core difference between cash and a true retail-focused CBDC is the ability to transact with central-bank issued cash, that is fiat-pegged legal tender, in an electronic and programmable form of payment.
“In terms of the conventional account versus token basis paradigm, account-based payments, they’re basically transfers of claims recorded on an account and there’s a centralized ledger. But it could also be decentralized. Then the token basis is where the payments involve a transfer, an object like a dollar bill or a coin or something like that, or a digital version of that. But there’s a lot of gray zones in there. The reason why IMF don’t like account- based versus token-based is that some economists will put the distributed ledger technology type of system into the token-based category. And yet that’s probably a flawed paradigm because even something like Bitcoin which is distributed ledger technology, involving a ledger, it’s also an account. It’s just the account is managed in a different way. It’s managed on a decentralized basis.”
The market value of existing stable coins (Tether, USD Coin, Dai, etc.) reached USD14 bn in August 2020, yet authorities are braced for a world in which these volumes are orders of magnitude higher. If this comes to pass, regulation and supervision will need to adapt quickly, both to monitor and assess risks from stable coins, and toaddress risks to the economy, consumers and the financial system. Facebook’s announcement of its Libra project has taken the private stable coin onto an entirely different plane than any previous cryptocurrency or stable coin: it is the first proposal backed by a group of corporations for a “global stable coin” aimed at retail payments. Also, with the changes introduced in Libra 2.0 (see Libra Association (2020)), this project involves the creation of both a new stable coin with both existing and new payment systems. The Libra stable coin in particular could be used across Facebook’s rapidly growing payments offerings in multiple markets including Facebook Pay, WhatsApp Pay and Instagram Pay, with potentially rapid access to hundreds of millions of retail customers in a very short period. If successful, Libra could easily attain mass adoption across multiple jurisdictions given the established networks of Facebook and other Libra Association members, with the potential to achieve substantial volumes relative to the existing payments providers. This could bring a range of benefits, particularly in the context of cross-border transfers, but it also raises substantial questions for monetary and financial authorities.
The fact that regulation should treat similar risks arising from differing technologies similarly does not preclude public authorities themselves from embracing innovation. Authorities are applying technology in their own functions, whether in the context of regulation and supervision or in the provision of public goods. These public goods include appropriate monetary instruments (constantly evolving with technology) and supporting payment and liquidity infrastructures. Whereas “financial regulation” is the process of setting the rules that apply to the
regulated entities, “financial supervision” is the compliance monitoring and enforcement of these rules, which has to be dynamic and adaptable. In particular, technology opens up new possibilities to develop better forms of financial technology opens up new possibilities to develop better forms of financial infrastructure, enhance supervisory processes and regulatory outcomes, and even for embedded supervision. At the same time, there are open questions as to whether central bank digital currencies (CBDCs) and other initiatives could fulfil these functions even more effectively than privately developed stable coins. CBDCs would enjoy the backing of
the central bank and would not be subject to the same conflicts of interest around the asset backing and stabilization mechanism. Their value could be fixed by design to the currency they reference (in particular in systems where the CBDC was actually the digital representation of the currency), thus eliminating fluctuations in value. The question is how a CBDC could be designed to offer robust interoperability with novel decentralized financial solutions (for a taxonomy of technological designs).
It is also unclear how the single-currency stable coins differ from other forms of financial intermediary-created money such as fractional reserve banking and money market funds. The white paper states that “because of the 1:1 backing of each coin, this approach would not result in new net money creation”. However, if banks engaged in the equivalent activity of the single-currency stable coins, that would be seen as money creation: the Libra Association will have government bonds as assets and sight-deposit like liabilities or functionally like a money market fund. The launch of the single-currency stable coins could hence have systemic implications, and lead to a substantial part of the money supply being taken out of the control of the central bank and the banking system. It could also remove a significant stock of safe assets from the banking system.
Overall, it is not clear that stable coins are necessarily needed to provide some of the benefits that they purport to serve. While a digital representation of value could hold great potential in many applications, CBDCs may offer these benefits without the inherent fluctuation in value or conflicts of interest entailed by stable coins. Improvements to existing payment infrastructures, or new infrastructures that do not rely on DLT, may also be able to fulfil many of the use cases for stable coins.
Finance and technology continue to evolve together. Today, technology is not only transforming finance, but money as well, with the advent of a range of challengers to traditional sovereign currencies, from Bitcoin to Libra. Of these, the evolution of new technology-based “stable coins” offers important potential to embed a digital monetary instrument in distributed systems and transaction frameworks. Yet as with all technologies for payments and all structures involving asset backing, there is a need for adequate regulation. Moreover, while most stable coins offer limited financial and monetary stability risk, the advent of global stable coins raises much larger issues and concerns. Going forward, it is essential for authorities have the tools, skills and technology to identify the evolution or creation of stable coins, in particular global stable coins, and to build appropriate regulatory and supervisory frameworks.
NEW SVF (STORED VALUE FACILITIES) REGULATION BY UAE CENTRAL BANK
The apex bank said is currently working on a new Retail Payment Services Regulation that introduces the concept of payment tokens, which are defined as crypto-assets that are backed by a fiat currency and used for payment purposes.
By issuing the new SVF regulation, the CBUAE aims to facilitate FinTech firms and other non-bank payment service providers’ easier access to the UAE market while continuing to safeguard the customers’ funds, ensure proper business conduct and support the development of payment products and services.
Three major enhancements have been included in the new SVF Regulation compared to the old version such as:
• Allowing non-bank payment service providers to obtain a license without the need to incorporate a company jointly with a licensed bank and where the licensed bank is the major shareholder;
• Lowering the capital requirement from Dh50 million to Dh15 million; and
• Allowing non-face-to-face digital customer on-boarding process instead of physical verification
The new SVF Regulation provides a level playing field to the market participants and fosters competition and innovation in stored value and retail payment products and services by removing certain restrictions on licensing, to encourage market entry by FinTech and other non-bank payment service providers.
The central banks of Saudi Arabia and the United Arab Emirates (UAE) have concluded a digital currency (CBDC) pilot, finding that distributed ledger technology can improve cross-border transactions and meet the demands of financial privacy in a purely digital context.
In a 93-page overview of the “Aber” project, the two central banks outlined the lessons learned from a yearlong proof-of-concept meant to test the viability of a shared digital currency between the nations. They found that a distributed payment system offers “significant improvement over centralized payment systems” for domestic and cross-border commercial bank settlements.
“The name Aber was selected because, as the Arabic word, for ‘crossing boundaries,’ it both captures the cross-border nature of the project as well as our hope that it would also cross boundaries in terms of the use of the technology,” the report reads. The project was announced in 2019 as part of Saudi Arabia and the UAE’s “Azzam” strategy, an agreement to foster bilateral cooperation.
While the central banks say further research is needed, the Aber pilot contributes to the “body of knowledge in CBDC and DLT technologies.” Specifically, the report builds on earlier CBDC experimentation in Canada, Japan and Singapore, which were typically limited to single currency, rather than dual-issued CBDC.
In addition to the two central banks, six local commercial banks ran nodes and contributed “real money” from reserves deposited at the central banks. The pilot was built on Hyperledger Fabric, an open-source, permissioned distributed ledger attached to the Linux Foundation and IBM. However, JPMorgan’s Quorum, a private version of Ethereum, and R3’s Corda DTL system were also considered. Aber’s researchers note that further experimentation could see the introduction of additional fiat-backed currencies, geographical expansion and the deployment of financial instruments like bonds. Perhaps the biggest question left unanswered? How distributed systems will affect monetary policy.
Money Protects™ facilitates in accordance to new laws as an advisory and complete working model for non-bank payment services with access to UAE market while continuing to safeguard the customers’ funds, ensure proper business conduct and support the development of payment products and services as per Central Bank of UAE regulations. Also, we assist users to store these digital currencies in their own digital wallets or with custodians (assist in opening accounts). Clients with crypto or digital currencies can use them to make payments, P2P lending, remittances and other forms.
One the many marvels of 2020 was the US corporate bond market, where borrowers were able to access cheap money in record amounts despite (or because of, depending on how you want to conceptualize things) the worst economic downturn in a century.
When the lockdowns began in March, credit markets convulsed. Spreads ballooned wider, CDX exhibited multi-standard deviation moves, outflows accelerated, and popular ETFs looked to be on the brink of “breaking,” as big discounts to NAV suggested the underlying liquidity mismatch in retail credit products was finally being exposed as an untenable flaw (figure below).
Ultimately, the Fed stepped in on March 23, and then, just days later, unveiled a backstop for fallen angels and high yield ETFs.