The New Money Brief covers the global rise of digital currencies and how they are disrupting the world of payments, and much else.
Delivered several times a week. Created and edited by Marc Andrew.
1. The world's financial system needs a “massive adjustment” to cope with higher interest rates, and key rules will have to be revisited, according to a top global regulator.
Klaas Knot, chair of the Financial Stability Board, an international standard-setting body, told POLITICO that rising interest rates fueled problems at several regional U.S. banks and similar losses may show up elsewhere.
“The speed with which interest rates have changed, that, of course, implies a massive adjustment in the financial system,” the Dutchman said in an interview from his office in Amsterdam. He added it was unclear exactly where those losses would be.
Knot said he was more worried about risks stashed at “nonbanks” — a term that encompasses investment funds, insurers, private equity, pension funds and hedge funds — where authorities have less visibility on hidden losses.
“If they are hidden for a very long period of time, sometimes the problem then grows so big, that it only becomes unhidden or visible when it's too big to deal with," he said.
Source: POLITICO
2. Mohamed El Erian, on First Republic:
The solution that emerged early Monday morning deals with the immediate threat of a disorderly failure of First Republic and, therefore, does not fuel the already uncomfortable risk of possible additional disruptions to other regional and community banks. Yet the potential collateral damage and the unintended consequences are far from immaterial. Four stand out in particular.
First, the US now has a more concentrated banking system, with what was once viewed not so long ago as “too big to fail”/”too big to manage” banks becoming larger.
Second, there is even greater doubt about the nature of the de facto deposit insurance system in place.
Third, the compositional risk within the banking system of less credit extending into the economy will continue, potentially aggravating the headwinds to high and inclusive growth.
Finally, the total cost of First Republic’s resolution remains to be assessed, including how the burden be shared among the public and private sectors and, with that, the extent of the “bailout” for the 11 banks that had large deposits with First Republic.
Source: Bloomberg
3. New paper: stablecoin regulation could pull 20% of deposits from banks
A newly-published paper from a prominent financial regulation scholar predicts a significant flight of bank deposits from traditional banks should lawmakers and regulators require that the tokens are backed by special reserves that can satisfy withdrawal requests.
House Republicans, who earlier this week introduced a discussion draft of a bill that would create a federal framework for stablecoin regulation, are continuing to move forward on negotiations with White House and House Democrats to pass some kind of legislation this Congress.
One of the least controversial provisions in that bill — one that was present in the original draft House Financial Services Committee Chairman Patrick McHenry, R-N.C., and ranking member Rep. Maxine Waters, D-Calif., negotiated last Congress — is that stablecoins should be backed one-to-one by reserves of highly liquid assets.
Source: American Banker
4. Visa, the global financial services giant, has revealed plans to develop an innovative stablecoin payments project. Cuy Sheffield, the company’s Head of Crypto, made the announcement in a recent press release. While specific details about the project remain scant, Visa has already started recruiting top talent, emphasizing candidates with expertise in layer-1 and layer-2 blockchain solutions and Solidity programming.
This ambitious project aims to revolutionize the way we conduct commerce in our increasingly digital and mobile lives. Visa envisions a world where everyone, regardless of location or financial status, can access and utilize digital payment solutions seamlessly. By harnessing the power of stablecoins – cryptocurrencies pegged to a stable asset like a fiat currency – Visa seeks to provide a reliable, secure, and efficient payment method that will enhance and streamline the digital and mobile commerce experience for millions of users worldwide.
Source: The Currency Analytics
5. Crypto is gaining currency regardless of legal status
KARACHI: If you’re a bank customer, chances are that it has formally warned you against using your debit or credit card for crypto trading.
But regardless of the sternly worded SMS that every bank sends out en masse every few weeks, cryptocurrencies are getting increasingly popular in Pakistan.
“My understanding is that the annual trading volume of cryptocurrencies for Pakistan-based wallets has gone up to $25 billion, up from $18-20bn a year ago,” said Zeeshan Ahmed, country general manager at Rain Financial, a Gulf-based trading platform for cryptocurrencies.
The State Bank of Pakistan (SBP) doesn’t recognise crypto assets, which are digital currencies in which transactions are verified and recorded by a decentralised system. The SBP issued a formal notice last year advising the general public to be cautious of, and refrain from, trading cryptocurrencies.
Source: DAWN Pakistan
6. The introduction of a regulatory framework for stablecoins in the U.S. could set the stage for long-promised financial innovation, but bipartisan support for the initiative may prove elusive, says Moody’s Investors Service in a new report.
The rating agency reported that draft U.S. legislation, which seeks to create a much-needed regulatory framework for stablecoins, has been tabled.
Among other things, it would require that cash-like digital assets be issued either by a bank or a registered non-bank. It would also impose strict reserve requirements, and a series of standards for disclosure, asset segregation, insurance, and redemption mechanics.
Additionally, the bill would impose a two-year ban on the issuance of new uncollateralized algorithmic stabloecoins, it noted.
Source: IE| Investment Executive
7. The U.S. Should Lead the Digital Future of Money
the writer is Christopher Giancarlo, a former head of the U.S. CFTC
“What is clear is that both sovereign and non-sovereign digital currencies are coming, and coming quickly. Thus, the fashionable debate between CBDCs and stablecoins is already passé. It was always a false choice and now it is moot. The future will contain both sovereign and non-sovereign digital currency. Americans – even Floridians – will not be able to shield themselves from it.
The possible benefits of digital currency are many. They include programmable, instantaneous round-the-clock payments at much lower cost, and greater access to financial services for both retail and wholesale participants. Digital currency may strengthen the ability of governments to implement benefits policy, allowing direct infusions of money across economies and vastly improving the administration of payments compared to inadequate U.S. efforts during the COVID-19 pandemic to issue paper checks to people locked up at home without access to bank accounts.
Our vision for digital currency is nothing less than the prospect of fully networked and integrated economies with digital currencies as operating systems and digital tokens as their value components. In the same way that 19th century railroad and telegraph technology weaved together North America’s disconnected regional economies into a continental economy (the power and influence of which had never been felt before), digital currency holds the promise of directly linking the world’s many disparate, self-contained silos of financial activity into one or more global, digital currency-based, financial system networks..”
Source: Nasdaq
In January, the IMF hosted an excellent debate between Mr. Stanton and Natalie Smolenski of the Bitcoin Policy Institute on the merits and value of CBDCs.
You should watch - it provides the contours of a debate that will only grow in importance. It is here.
8. Stablecoin Reserves Need to Be Diverse, EU Bank Agency Chief Says
The European Banking Authority's José Manuel Campa urged crypto players to start managing risks immediately as new rules take effect.
Forthcoming European Union rules to govern stablecoins will focus on ensuring issuers have diverse reserves, manage conflicts of interest and don’t transmit risks to other players, José Manuel Campa, chairman of the European Banking Authority, wrote in article for think tank Eurofi.
The bloc’s Markets in Crypto Assets rules, known as MiCA, are set to take effect next year, but crypto market players should start adjusting their operations now, said Campa, whose agency will play a key role in implementing MiCA by drafting more details of the laws. MiCA was passed by the European Union last week.
MiCA requires issuers of stablecoins to have enough reserves to manage turbulence – and “the EBA will be paying special attention to diversification of the deposit component of the reserve,” Campa wrote.
Source: CoinDesk
9. Walmart and Kroger, both giant retailers, eagerly await instant payment system possibilities, according to industry professionals who heard their representatives speak recently.
Mega retailers Kroger and Walmart are interested in harnessing the coming power of the FedNow instant payments system to provide their customers with alternatives to the traditional card rails.
That’s according to industry professionals who heard representatives of the two giant store chains speak on a panel at the Faster Payments Council spring meeting in March in Kansas City. Speaking during that “Business End-Users Mega Use Cases” discussion were Walmart’s Matt Howarter and Kroger’s Kathy Hanna.
Source: Payments Dive
10. Swift works to bridge 'digital islands' of CBDCs
While Swift isn't directly creating a central bank digital currency, it is providing space for others to build support for cross-border payments involving different CBDCs as well as transactions that bridge CBDCs and traditional currency.
CBDC projects or experiments are underway in nearly 100 countries. But almost all of the work is focused on domestic payments.
Swift, which provides messaging standards for international payments, plans to launch a product in its sandbox for CBDC developers that will enable central banks, commercial banks or a mix of organizations to develop use cases for CBDCs to work across borders. Swift's initiative comes as CBDC proponents try to develop international networks to boost efficiency for cross-border payments while allowing digital currencies to reach more markets.