National Banks & FSAs Can Hold Reserves for Stablecoin Issuers: US Federal Banking Regulator & SEC

The Office of the Comptroller of the Currency (OCC) issued new guidance regarding stablecoins on Monday.

“National banks and federal savings associations currently engage in stablecoin-related activities involving billions of dollars each day,” said Acting Comptroller of the Currency Brian P. Brooks.

“This opinion provides greater regulatory certainty for banks within the federal banking system to provide those client services in a safe and sound manner.”

As per the letter from the US federal banking regulator, national banks and federal savings associations (FSA) are allowed to hold “reserves” on behalf of their customers who issue stablecoins, and those coins are held in hosted wallets, those controlled by a trusted third party.

This means unhosted wallets, which are controlled by the individual user who owns the cryptos being stored, are not part of this announcement.

The SEC also issued a response to OCC’s guidance, in which it says whether a stablecoin is security will depend on “facts and circumstances determination,” which will require the analysis of the instrument.

The regulator asked the market participants to structure and sell a digital asset in such a way that “it does not constitute a security and implicate the registration, reporting, and other requirements of the federal securities laws.”

Bullish!

Jeremy Allaire, the co-founder and CEO of Circle, which along with Coinbase, has launched its own stablecoins called USD Coin (USDC), called this a “significant progress for the advancement of digital dollar stablecoins in the US financial system.”

This will “help the United States and the US dollar to continue its leadership role in the world economic system,” he said.

According to him, national banks allowing to hold reserves for fiat-backed stablecoins will provide businesses, fintech firms, and banks have “more confidence in building on this innovation.”

In 2020, stablecoins have exploded, currently around $20 billion, with Tether (USDT) accounting for more than $15.5 billion of it and USDC with 500% growth YTD $2.3 billion.

Market participants see it as bullish news, with one trader commenting, “Basically enables a LOT more money to funnel into crypto, if stablecoin providers don’t have to scramble for banks to hold the reserves.”

Related: European Countries Support EU Stablecoin Regulation

Also Read: BoE Gov. Calls for Global Standards for Stablecoins, Instead of Playing Catch Up

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Author: AnTy

French Multinational Bank to Launch a Digital Euro Pilot Using Tezos Blockchain

Blockchain firm Tezos has been selected to spearhead the French central bank’s digital currency pilot program, one of a kind in Europe.

Societe Generale – Forge, a tech startup founded by French investment bank giant Societe Generale, has opted for Tezos to spearhead the central bank digital currency (CBDC) pilot program.

The French central bank Banque de France selected Societe Generale – Forge in July after a successful review of applicants in development of a CBDC to ease interbank settlements. France is carrying out an experiment to become the first European country to launch a digital Euro.

Tezos is a peer-to-peer public blockchain that has features such as on-chain governance, capacity to verify smart contracts as well as consensus algorithm that is primed on proof of stake. The blockchain platform comes with a vibrant ecosystem inclusive of research and development offshoot dubbed Nomadic Labs that is located in Paris and will play a vital role for the CBDC piloting. Nomadic Labs President, Michel Mauny explained about the deal:

“The Tezos project, strengthened by its technical capabilities, its adaptability, and its strong community, is already present in various projects, both in France and abroad. We are especially pleased to see this technology selected by Societe Generale – Forge, and to reaffirm, once again, that the quality and expertise of our engineering is rewarded.”

Francois Villeroy de Galhau, Banque de France’s governor, in December last year said that he was optimistic that France will be the inaugural European country to offer digital currency. The governor explained that the central bank is exploring how technology can be leveraged in enhancement of the financial markets more so when it comes to interbank regulations.

Although France seems to be on the forefront in development of a CBDC, other European countries such as Italy, Netherlands and Lithuania are also exploring the idea of CBDC. Additionally, the European Central Bank is also working on trials although details remain scanty.

Currently, Tezos is only one of the handful public blockchain platforms participating in development of a CBDC that could culminate to a digital euro.

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Author: Joseph Kibe

Mastercard Launches a Virtual Testing Platform for CBDCs

  • Global payments company Mastercard launched a virtual testing platform for central banks to test out their CBDCs.
  • The technology company invited central banks, commercial banks, techs, and advisory firms to evaluate the suitability of CDBDs through its custom testing platform.

As the Bank for International Settlements survey revealed, a whopping 80% of central banks are engaged in some form of Central Bank Digital Currencies (CBDCs). In the race to embrace digital payments, central banks clearly don’t want to lose its control of the monetary policy in issuing and distributing currency while supporting innovation.

Supporting central banks modernizing payments, Mastercard announced this “proprietary virtual testing environment” today where the use cases for the digital fiat currencies could be evaluated.

“Central banks have accelerated their exploration of digital currencies with a variety of objectives, from fostering financial inclusion to modernizing the payments ecosystem,” said Raj Dhamodharan, Executive Vice President, Digital Asset, and Blockchain Products and Partnerships at Mastercard. And with this new platform, the company wants to support that decision.

On this virtual platform, the interested parties can simulate the issuance and distribution of the CBDC along with the exchange ecosystem with banks and customers.

It can be used to demonstrate how CBDC can be used to pay for goods and services anywhere Mastercard is accepted.

The development efforts of the CBDC that includes the technical, design, and security aspect, can also be evaluated while to determine its value and feasibility in the market, use cases and tech designs can be examined as well.

“Mastercard wants to harness its expertise to enable the practical, safe and secure development of digital currencies.”

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Author: AnTy

China Construction Bank Disables Chinese DCEP Wallet After Users Notice Feature in Bank App

China Construction Bank, one of the central state-owned banks in China, recently realized that the official wallet for the national CBDC is open for public use within its official banking app. The users could navigate to the wallet by merely entering the national digital currency, which would take the users to the wallet feature where they can register and activate the wallet by subscribing with the mobile number associated with their bank accounts.

Soon, the bank came to discover about the activation of the official wallet from the amount of community’s buzz that the activation caused among the crypto community in the country. Many customers went on to make small transactions in the yet to be released CBDC.

As soon as the news was brought to the attention of the state-owned bank, they swiftly disabled the feature. After disabling the official wallet feature, people searching for the CBDC wallet were shown a message which roughly translated to, “This feature is currently unavailable for the public, kindly wait patiently.”

How Does the Official Wallet Look and Function

The official wallet app was online for a brief period, but in today’s day and time, anything which makes it to the internet ones hardly disappear, and that has been the case with the ongoing official digital Yuan wallet launch by mistake. People were quick to post the layout of the wallet app on the internet, which showed that the users who managed to register with the new wallet app were given an official wallet ID, which could be used for the transfer of funds between the official wallet app and the user’s account.

The wallet would not just allow transactions between the bank and the app a user can send their digital yuan to another wallet by adding the unique wallet ID.

China is going to become the first country to launch its official digital currency issued by the People’s Bank of China. The big-four state-owned banks have been tasked to develop their respective wallet app to facilitate transactions using the CBDC.

China started its research on Central Bank Issued Digital Currency almost five years ago, and rumor mills were rife that the launch of the digital yuan would take place by the end of last year. However, the Chinese government mostly discarded these rumors without offering any official stance on the date of the launch. However, by the first quarter of 2020, the PBOC launched the testnet, and last week the mainnet for the digital yuan was established as well.

During the trial run, the government used digital yuan as a form of a travel subsidy for government employees in selected areas. The testing phase was later expanded to more cities and even included restaurants and fast-food chains.

With the official launch of the digital yuan just round the corner, many countries are actively observing China’s progress in the digital currency domain.

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Author: Hank Klinger

Over 20% Of Central Banks Are Looking to Launch A CBDC In The Next 1-6 Years: BIS Report

  • There’s a growing interest in central banks looking at the possible implementation of digital currency in 2020 than the hype on Bitcoin (BTC), the Bank of International Settlement (BIS) reports.

In research published over the weekend, the Swiss-based BIS reports the growing attention by global central banks on research and development of central bank digital currencies (CBDCs) in 2020. The paper states the motivations, technical developments and policy approaches towards the launch of CBDCs vary across the central banks with the more innovative countries taking a step ahead.

According to the report, there is an increasing consideration of retail CBDCs across the central banks to provide a publicly usable currency while some consider a wholesale CBDC which “could become a new instrument for settlement between financial institutions.”

The comprehensive 39-page research focuses on over 175 central banks and over 16,000 speeches from recent years. The findings of the report state that central banks controlling a fifth of the world’s population are considering to launch a digital currency. Additionally, over 20% of the banks are fast-tracking their CBDC to launch in the next 1-6 years.

The report further reads,

“A full 80% of surveyed central banks are engaging in research, experimentation or development of CBDCs.”

The tipping point

Per the report, the number of speeches positively talking about digital currencies has surged since the end of 2018. As of July 2020, there were more central bank governors speaking positively about retail and wholesale CBDCs than having negative stances.

The tide seems to have switched with the launch of Facebook-led digital currency, Libra, and the global COVID 19 pandemic, the report states.

“A tipping point was the announcement of Facebook’s Libra and the ensuing public sector response.”

As for COVID 19 pandemic role in implementing CBDCs, several governments are accelerating their research and developments on CBDCs to ease payment systems and curb the spread of the virus through cash payments. The U.S. recently enhanced its efforts to offer a digital dollar “as a means of quickly executing government-to-person payments (CARE package), as an alternative to credit transfers and slow and costly cheques.”

These efforts by central banks have seen the public become more attentive to CBDCs over time. In 2020, BIS reports that internet searches across the world for CBDCs are massively overshadowing searches of Facebook’s Libra and Bitcoin (BTC) – which crossed the $12,000 mark earlier this month.

Central banks entering the digital era

As mentioned above, the technical decisions, method of implementation, and reasons for the launch of a CBDC vary across states and countries. According to the BIS report, countries with higher mobile phone usage and higher innovation capacity are associated with a higher likelihood of developing a digital currency.

So far, three countries, China, Sweden, and Canada, have completed tests on a retail CBDC and 13 countries are actively researching on the launch of a wholesale CBDC. Another 18 countries have published reports on the impact and effects of digital currencies on their economies.

BEG reported this July, the Bank of Japan (BoJ) is extending its efforts to launch a CBDC division that will work in cooperation with the U.S. and European governments. The project aims to compete with China’s launch of its digital renminbi (RMB). Other states actively focusing on CBDC include Lithuania, Canada, Cambodia, Thailand, among others.

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Author: Lujan Odera

Banking Sector Bleeds in 2020 While DeFi Records 900% Growth

In 2020, we saw the Oracle of Omaha, Warren Buffett selling all his positions in banks that included; Goldman Sachs, JPMorgan Chase, Wells Fargo, and others.

Given that the banking sector of Dow Jones, Nasdaq, and S&P 500, all three remain under losses, negative 35% returns YTD, it makes sense that even Buffett has jumped the ship.

In the current environment of ultra-low interest rates, banks are struggling to remain profitable.

But while centralized financing is suffering, Decentralized Finance (DeFi) has emerged in the crypto market as the latest craze which is seeing explosive growth.

The DeFi Boom

On January 1st, 2020, the total value locked in the DeFi sector was $680.9 million, which has now grown to $6.67 billion in just eight months.

The total market capitalization of the top 100 DeFi coins is close to touching $14 billion, as per CoinGecko. The biggest gainers of this sector this year include LEND (6,280%), REN (1,300%), KNC (835%), YFI (789%), LINK (650%), and SNX (480%).

The blockchain underpinning majority of the DeFi development, Ethereum is also up 209% YTD. Also, a record 4.6 million Ether are locked in these DeFi protocols along with 47.8k BTC.

“From a portfolio standpoint I want to be long the asset that is driving the market with real demand. ETH is a newer trade than the traditional trade of BTC vs central banks printing money,” said trader CryptoISO.

“Rocket Fuel” for DeFi Growth

The DeFi sector is seeing a new wave of financial experiments which is tokenizing everything from money, debt, mortgages, to insurance.

As Asheesh Birla, SVP of Product at Ripple notes, “We’re seeing a melding of the old world and new. It’s only a matter of time before banks offer custody services, acquire companies with those capabilities, and potentially even offer crypto lending as they see consumer interest in DeFi.”

Decentralized exchanges, with no central operator, in the crypto world, are already giving centralized exchanges a run for their money. Fiat-backed stablecoins have been providing the fiat on and off-ramps while enabling global consumers to access the USD without a bank account through the likes of Tether (USDT).

But within this sector, a new wave of Yield Farming is what is taking DeFi world by storm. It is basically serving as “rocket fuel” for the current growth cycle in DeFi, states Delphi Digital in its latest report.

Yield farming is generating the most returns on your crypto assets, and since people started chasing high yields, many ‘experiment” projects have cropped up in this really short period. It started with Compound and only grew from there to the likes of Yearn.Finance (YFI), Balancer, YAM.Finance, the Curve-Ren-Synthetix mix, and so much more.

But Not Without the Risks

As we reported, the skyrocketing Ethereum transaction fees are pricing out smaller layers and making DeFi increasingly a game of whales.

Another big question is: Are these governance DeFi tokens, that are at the heart of DeFi’s explosive growth, really that decentralized? According to the Token Daily report, the distribution of these tokens might not be that different from the ownership structure of JP Morgan or Bank of America.

For starters, the investors of these DeFi projects control a “disproportionately large amount of votes,” such as more than 13% of the voting power for Compound is controlled by the top 10 addresses.

Also, “In yield farming, funds and wealthy investors, aka whales, are maximizing their benefit/share of governance tokens using recursive provisioning of liquidity. This ultimately leads to a concentration of these tokens into the hands of a few players/farmers.”

Although with liquidity mining as with Yearn.Finance, a new dynamic of money distribution is being added; large gatekeepers still have a big influence on the protocol, which could be even more concentrated than the centralized options.

Moreover, all this craziness will inevitably invite “difficult legal questions and regulatory scrutiny,” said Jason Somensatto, senior counsel at 0x Labs. But in the end, he hopes, it will leave a “healthier ecosystem.”

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Author: AnTy

Four Top Chinese State-Owned Banks Are Testing The Chinese Digital Yuan Project (DCEP)

In an unconfirmed report, four Chinese state-owned banks are gradually testing the ‘digital renminbi’ wallet app and Digital Currency/Electronic Payment (DCEP) system in different provinces across the country.

The reports, though unconfirmed, follow the recent comments by the People’s Bank of China (PBoC) confirming the “closed pilot of the digital RMB was completed” with plans to launch research on the legal digital currency underway in this second half of the year.

It was first revealed by a local newspaper, 21st Century Business Herald, who spoke with some of the employees working on the app. As reported, the app is in extensive scale testing in Shenzen and other parts of the country with four major banks – China Construction Bank, Bank of China, Industrial and Commercial Bank of China and Agricultural Bank of China – participating.

According to the report, users will need to have to open a digital account with either of the four banks to register the app. The digital wallets are then linked to various banks allowing the users to recharge their accounts and also spend on different utilities directly – similar to Alipay and WeChat payment services.

However, the app is still not publicly available for downloads as one respondent confirmed:

“Our bank is testing the ‘digital renminbi’ app on a large scale. The app cannot be downloaded publicly for the time being, and it has an identity code after opening it.”

The app allows users to transfer amounts to others by using their phone number or a QR code, pay, save, and spend RMB digitally across several merchants across China.

Read More: Will China’s CBDC See Strong Adoption Or Will Dollar Pegged Stablecoins Cause Resistance?

China has, in the past, hastened its efforts in launching a legal digital currency since the announcement of the Libra project, championed by Facebook. The leading committee on the digital currency, Central Bank’s Digital Currency Research Institute, launched closed pilot tests in Shenzhen, Suzhou, Xiong’an, and Chengdu in preparation for a Winter Olympics 2022 date release.

Moreover, the CBDC is in testing on Tencent Holding’s food delivery app, Meituan Dianping, as well as the Chinese Uber, Didi Chuxing, which are processing billions of dollars annually. China’s hastened launch of its DCEP project aims to reduce the dollar-influence across the country and East Asia.

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Author: Lujan Odera

Corda’s Blockchain Is Helping 85% of Italian Banks Cut Interbank Reconciliation to 24 Hours

Banks in Italy are fast moving to integrate R3 Corda blockchain for standard reconciliation processes amongst themselves. Currently, close to 85% of Italian banks have integrated with Corda’s underlying infrastructure as part of the initiative to improve interbank reconciliation in the country. This move has seen the average double-checking time reduce from 30-50 days to just 24 hours, quite a milestone in time efficiency, not to mention other fundamentals such as trusted sharing and verification of the same on a blockchain.

Notably, Italy’s interbank reconciliation agreement came into effect back in 1978 to provide guidelines for transfers amongst local banks. It has been pretty much the same for around four decades until in 2019, when a data standardization clause was added with an integration window set between March and October this year.

Following this change, the Italian Banking Association Head of Innovation, Silvia Attanasio, noted that an improvement in the underlying infrastructure was inevitable, hence the shift to decentralized tech.

“The benefit is related to the new standardization more than the technology itself, It’s like the rhythm you set on your metronome that sets a [faster] timeline.”

It is quite noteworthy that the Corda based network has been designed by NTT Data and is run by SIA, a bank tech company. With 55 members so far, this project’s stakeholders are optimistic that the number will grow to above 80 as it prepares for a final phase in October.

The Value Proposition in Decentralization

Bitcoin’s inception brought forth the concept of decentralization, an idea that has proven to be even more valuable in other ecosystems compared to payment networks. That said, experts in various industries, especially financial services, have taken the forefront in experimenting with the value proposition of blockchain tech. In Italy, for example, the banks had initially considered a centralized database, but it didn’t sail through since stakeholders wanted to ledgers at the very core.

Other than a fast and trustworthy clearance avenue, blockchain tech reduces risk exposure according to Silvia’s sentiments. This is because only banks are integrated into the Corda blockchain hence shielding clients from shortcomings that might have otherwise affected them directly,

“If we failed in this process, the worst thing that could happen was to have a problem in the information exchange between banks …. Clients are not affected, the companies are not affected. It was a natural sandbox.”

While the Corda project is still in its early stages, some Italian banks have already begun experimenting with KYC data integration such that they can seamlessly share information. Italy has also signaled an interest in participating in the pilot phase of the digital Euro.

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Author: Edwin Munyui

US Regulator Authorizes National Banks and Federal Saving Institutions as Crypto Custodians

U.S. regulator, the Office of the Comptroller of Currency (OCC), allows federal banks and national savings institutions to officially custody cryptocurrencies for their customers. The statement released on July 22, confirms that any national bank or savings facility can now hold on to unique cryptographic keys of cryptocurrencies in their vaults pertaining to custody services.

According to the statement, the decision to allow banks to offer crypto custodial services follows a growing demand by investors to safely store their cryptographic keys, which, if lost, capitulates the value of the assets. This news opens up the field to large banks to provide these services, relieving current state-chartered crypto custodians such as Coinbase and Gemini.

Nonetheless, crypto custodial services differ from the traditional custody services banks offer, the statement explained. Given that the digital assets are not physical, digital wallets will be required to safely store the cryptographic keys.

The release, which comes a month after the OCC asked for public input on Crypto and DLT, further states that the increasing technological innovations in the financial world call for “banks and other service providers to leverage new technology and innovative ways to provide traditional services on behalf of customers.”

A modern form of traditional banking activities

Discussing the new regulation, the author of the statement, Jonathan V. Gould, the Senior Deputy Comptroller & Chief Counsel, claimed that cryptocurrency custodial services Is a new form of already existing asset custodian businesses of national banks.

The OCC permits national banks and savings to hold their customers’ cryptocurrencies in both a fiduciary and non-fiduciary role. Banks holding crypto in a fiduciary capacity will need to manage them in the same way as they manage other assets while non-fiduciary capacity targets holding cryptographic keys that control the actual transfer of the cryptocurrency.

Manage your cryptocurrency risk

Brian Brooks, the current head of OCC and a former executive at Coinbase, however, warns on the risk management of custody services across national banks. Focusing on customer assets protection, Brooks said,

“This opinion clarifies that banks can continue satisfying their customers’ needs for safeguarding their most valuable assets, which today for tens of millions of Americans includes cryptocurrency.”

The statement concludes by warning custodians to focus on risk management techniques, due diligence, and KYC/AML compliance as they begin the operations on holding crypto assets. No specific recommendation of customers was provided in the statement with banks open to deal with crypto institutions, as recently seen with JPMorgan onboarding Coinbase and Gemini.

This, however, should be done with the thought that cryptocurrencies do hold their risks and challenges. It states,

“A national bank or FSA engaging in new activities should develop and implement those activities consistent with sound risk management practices and align them with the bank’s overall business plans and strategies as set forth in OCC guidance.”

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Author: Lujan Odera

International Banks Reportedly Enhance Due Diligence in Hong Kong Following New Security Law

Global banks have begun scrutinizing their Hong Kong clients to filter out pro-democracy individuals following the new national security law backed by mainland China.

A recent report by Reuters has revealed that the likes of HSBC, Credit Suisse, and Julius Baer are among the international banking giants that have since increased their diligence process, screening for government and political ties.

With the new security law in place, such a move was anticipated, given more exposure to regulatory risks. Citing anonymous sources, the report notes that banks have, in turn, introduced a new ‘sub-class’ of threat dubbed ‘politically exposed persons.’

“The designation, called politically exposed persons, can make it more difficult or altogether prevent people from accessing banking services, depending on what the bank finds about the person’s source of wealth or financial transactions.”

It goes on to detail that wealth managers are relying on social media posts by the individuals and their affiliates in the recent past. A key stakeholder in this industry revealed that his clients’ AUM, which currently totals $200 billion, could be audited as far as 2014 to determine a person’s stand in the Hong Kong pro-democracy ‘umbrella’ movement, which kicked off in the same year. Should a party be found to be a pro-democrat, they may end up being excluded from Hong Kong’s entire financial ecosystem.

Though none of the global banks has yet to comment on the matter, they appear to be towing the line as they look to maintain and probably scale business in Hong Kong.

Surprisingly, this is not the same reaction from parent governments that have since called out China for the new security law. The U.S senate, for instance, has already passed some sanctions under the ‘Hong Kong Autonomy Act,’ which could eventually affect financial service providers that link Hong Kong’s liquidity with the dominant dollar-system.

China CBDC Implementation takes on Crypto Decentralization

At the same time, China is fast-moving to play an ace card on the emerging decentralized economy whose fundamentals are pegged on crypto assets. The country banned cryptocurrencies earlier but has aggressively developed its own PBoC backed digital currency, an initiative that is now a reality in the pilot phase.

Also dubbed ‘DC/EP,’ the Chinese digital yuan will be an integral part of its financial network, given most of its population already transacts via Alipay or WeChat. Notably, the CCP will be able to exercise further its authoritarian approach in this new central bank digital currency.

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Author: Edwin Munyui