🟩 The world's largest market goes atomic
the Lightning Network's sneaky gift to FX | the SEC comes for crypto
The New Money Brief covers the revolution underway in financial settlement. Delivered several times a week. Created and edited by Marc Andrew.
The foreign exchange market is colossal, with a daily turnover of $7.5 trillion. That dwarfs other markets — 40 times the daily activity of the New York Stock Exchange.
Now an emerging technology promises to accelerate the speed of money throughout foreign exchange. That tech is not bitcoin, but it uses an important idea borrowed from it.
That’s the verdict from Project Cedar - a collaborative effort of the New York Fed and the Monetary Authority of Singapore - to reinvent how money crosses borders. Their latest report is here.
The FX market is functional, but flawed. It's sluggish, expensive, low tech, inaccessible and it lacks transparency:
image from the NYFed and the Monetary Authority of Singapore
The main problem, and the main risk, in any FX trade lies in the settlement. Most simply: each party in the runs a risk they might sell their currency but not receive the one they bought.
The long-standing solution to that risk is called Payment versus Payment or 'PvP.' In the constant shuffle of global money, PvP ensures a fair exchange. The transaction is only considered final when both parties receive their money.
But PvP has limitations. It can be frustratingly slow. That’s because money’s path through the world economy is not direct. It flows through networks of correspondent banks, each taking on the liability and risk and due diligence of every transaction.
This can be quick, or it can take many days. You can never be totally sure, and you can’t watch the process of your transaction in real time.
And PvP only applies to 18 major currencies. Transactions involving other currencies need a 'carrier currency,' usually the USD.
To summarise: even where PvP does apply, things are inefficient. And there's a vast market where it doesn't apply. Over $2.2 trillion of the daily FX turnover isn't covered by PvP safety rules. Those trades face risks and extra costs. And given these non-PvP payments all stem from emerging markets, some of which are the world’s fastest growing economies, that number will increase.
Bitcoin isn’t a solution - yet. Right now, bitcoin isn't a fit for institutions who face regulations and need thorough vetting. And every transaction on bitcoin is final, in a world where firms need recourse if things go wrong.
But it’s early days. And important innovations from bitcoin are finding their way into the financial mainstream. Central banks are keenly studying crypto, looking to harness its innovations. The proof is their recent interest in deploying a concept called 'atomic settlement.'
Atomic settlement is being tested by the New York Fed and Singapore's central bank, among many other monetary authorities around the world. It promises to settle FX transactions in seconds instead of days. And it's made possible by technology first introduced on bitcoin’s Lightning Network: called Hash-Time Locked Contracts (HTLCs).
Sounds technical, but it's quite simple. The PvP's we discussed earlier use a legal contract to safeguard both parties' funds until a transaction settles. HTLCs tie up funds in a smart contract - to be released only if and when the transaction settles. If everyone involved doesn't receive the transaction's funds, that transaction fails.
It's the exact same idea as PvP, but built on technology, instead of the law.
Many central banks are exploring HTLCs. It's an innovation that could boost security and reduce settlement risk in the FX market. And the latest Project Cedar report explores the potential for atomic settlement to even apply to FX trades among two emerging market currencies without the use of a neutral currency to facilitate the trade.
It all demonstrates the power of new money’s ideas as the world undertakes a revolution in financial settlement. A smoother, faster, and more risk-free way to exchange value across borders would be a boon for global trade.
On to the clips
The SEC is suing Coinbase a day after it went after Binance.
In the lawsuit, filed on Jun. 6, the SEC alleges that Coinbase has been operating as an unregistered exchange.
The SEC names Coinbase and CGI — Coinbase’s holding company — as defendants in the suit. The lawsuit alleges:
“Since at least 2019, through the Coinbase Platform, Coinbase has operated as: an unregistered broker, including by soliciting potential investors, handling customer funds and assets, and charging transaction-based fees; an unregistered exchange, including by providing a market place that, among other things, brings together orders of multiple buyers and sellers of crypto assets and matches and executes those orders; and an unregistered clearing agency, including by holding its customers’ assets in Coinbase-controlled wallets and settling its customers’ transactions by debiting and crediting the relevant accounts.”
The commission also claims that staking-as-a-service products offered by Coinbase are in violation of the Securities Act of 1933 because “The Staking Program includes five stakeable crypto assets, and the Staking Program as it applies to each of these five assets is an investment contract, and therefore a security.”
Similar to the Binance suit filed on Jun. 5, the SEC is alleging that Coinbase did not ensure that the crypto assets being sold were not securities as defined by the Howey test.
Source: Blockworks
In its lawsuit filed against crypto exchange Binance on Monday, the Securities and Exchange Commission alleged that several prominent cryptocurrencies—including Solana, BNB, and the native tokens for Polygon and Cardano—are securities.
This is a significant development for the crypto industry as the SEC’s decision to name a specific token as a security can make brokers reluctant to offer it, which in turn can depress its liquidity and price.
The SEC’s latest allegations, however, come at a time when the legal status of many cryptocurrencies remains unclear. Currently, the SEC is jousting with a sister agency, the Commodity Futures Trading Commission, over whether the assets are securities—as the SEC alleges—or commodities, which comes with fewer regulatory obligations. This uncertainty has been a persistent concern for the crypto industry.
Source: Fortune
As Japanese banks get set to issue stablecoins under new legislation, the US’ lack of regulatory clarity in the segment is one hurdle blocking institutions in the country from doing the same.
Japan in June 2022 passed a legal framework for stablecoins, which took effect Thursday.
The law requires that stablecoins — typically backed by one or more reserve assets — must be pegged to the yen or another legal tender and guarantee redemption to the holder at face value. It also confines the issuance of stablecoins to licensed financial institutions, such as registered banks, money transfer agents and trust companies.
The country’s step to bridge the gap between TradFi and DeFi with this initiative will benefit everyone in the long run, said David Tawil, co-founder of crypto fund ProChain Capital.
Source: Blockworks
From the U.S. Congress, the summary of a new draft bill on digital assets:
The current regulatory framework for digital assets hinders innovation and fails to provide adequate consumer protection. The House Committee on Financial Services and the House Committee on Agriculture are addressing these shortcomings by establishing a functional framework that works for both market participants and consumers. This functional framework would provide digital asset firms with regulatory certainty and fill the gap that exists between the authorities of the Commodity Futures Trading Commission (CFTC) and the Securities and Exchange Commission (SEC).
The Digital Asset Market Structure Discussion Draft (Discussion Draft) provides the CFTC with jurisdiction over digital commodities and clarifies the SEC’s jurisdiction over digital assets offered as part of an investment contract. Additionally, the Act establishes a process to permit the secondary market trading of digital commodities, if they were initially offered as part of an investment contract. Finally, the Act imposes robust customer protections on all entities required to be registered with the SEC and CFTC.
Source: U.S. House of Representatives Document Repository
Today Japan’s largest bank MUFG announced that its Progmat Coin solution would be used to issue native bank-backed stablecoins on multiple public blockchains, including Ethereum, Avalanche, Cosmos and Polygon. The work is at an early stage, so the timeframe for the launch was not confirmed.
Progmat Coin is designed to support stablecoin issuance from various trust banks, not just MUFG. Yesterday new enabling legislation came into force, allowing Japanese trust banks to issue stablecoins.
We previously reported that MUFG was working with blockchain interoperability startup DataChain. It is also collaborating with TOKI, a cross chain bridge solution for public blockchains based on DataChain’s technology. The aim is to support public blockchain cross chain swaps, cross chain payments and cross chain lending. For example, the purchase of an NFT could be settled with a Progmat Coin on a different blockchain.
TOKI will enable this by running liquidity pools with Progmat Coins on multiple blockchains. TOKI was established in March this year in Dubai by a DataChain executive and plans to launch its bridge later this year and issue its own crypto token.
Source: Ledger Insights
Megabank Mitsubishi UFJ Financial Group (MUFG) has announced its stablecoin issuance platform “Progmat Coin” will soon be used by banks in Japan to launch Japanese yen-pegged stablecoins on several public blockchains.
Japanese banks have recently outlined intentions to either look into or launch stablecoins following new regulations that came into effect this month.
In mid-2022, the Japanese government passed a bill prohibiting the issuance of stablecoins by non-banking institutions. The bill officially came into effect on June 1, 2023.
In a June 2 announcement, MUFG outlined the Progmat Coin will be used to facilitate the issuance of bank-backed stablecoins on Ethereum, Polygon, Avalanche and Cosmos, with more networks to be added in the future.
MUFG also revealed that its blockchain tech and security partners Toki and Datachain are building a bridge to enable cross-chain transactions, lending and swaps between the supported blockchains.
The bank expects the cross-chain infrastructure to be launched in the second quarter of 202.
Source: Cointelegraph
Russia's oil trade with India is booming — but Moscow doesn't know how to fully reap the benefits of that trade.
Even since Russia was cut off from the US dollar-dominated global payments systems following sweeping sanctions off the Ukraine war, the two countries have used the Indian rupee for trade.
However, Russia's now having issues with trading in the rupee because there's more Indian demand for Russian goods than the other way around — meaning Russia has been saddled up to $1 billion worth of rupees each month that's stuck in Indian banks, according to Bloomberg calculations on Thursday.
Source: yahoo!news
Prominent critics of AI development are calling for government intervention to stave off the threat of human extinction. But we need more than centralized regulation of this industry, argues Michael Casey.
The titans of U.S. tech have rapidly gone from being labeled by their critics as self-serving techno-utopianists to being the most vocal propagators of a techno-dystopian narrative.
This week, a letter signed by the more than 350 people, including Microsoft founder Bill Gates, OpenAI CEO Sam Altman and former Google scientist Geoffrey Hinton (sometimes called the “Godfather of AI”) delivered a single, declarative sentence: “Mitigating the risk of extinction from AI should be a global priority alongside other societal-scale risks such as pandemics and nuclear war.”
Just two months ago, an earlier open letter signed by Tesla and Twitter CEO Elon Musk along with 31,800 others, called for a six-month pause in AI development to allow society to determine its risks to humanity. In an op-ed for TIME that same week, Eliezer Yudkowsky, considered the founder of the field artificial general intelligence (AGI), said he refused to sign that letter because it didn’t go far enough. Instead, he called for a militarily-enforced shutdown of AI development labs lest a sentient digital being arises that kills everyone of us.
Source: CoinDesk
China has released standardized guidelines for the blockchain industry to boost its rapid growth and adoption in the country.
China’s Ministry of Industry and Information Technology (MIIT) has published a national standard for blockchain technology to guide the development of the industry in the country, a state-run news channel CGTN reported on June 2.
The guideline reportedly standardizes the blockchain system’s functional architecture and core elements, serving as a reference to better understand and utilize the emerging technology.
MIIT reportedly stated that the standard aims to accelerate the standardization of China’s blockchain industry and drive its further development. Global Times reported that over a hundred blockchain companies in the country have been applying the standard to their operations.