CBDC Weekly: NY Fed Warns About Bank Risks; India Lauds Crypto ‘Killer’; Thai Central Banker Says CBDC Will Replace Cash; Brazil Wants ‘Innovation’

Fed Exec Sees Payments ‘Revolution’

While the Federal Reserve and Treasury Department have been trying to reassure banks that a digital dollar would not disintermediate them, an executive of the New York Federal Reserve warned that central bank digital currencies (CBDCs) could do just that.

See also: Heyday or Doomsday? Regulators, Banks at Odds Over CBDCs

Speaking generically of CBDCs, Lorie Logan said they have “the potential to alter the existing … monetary system upon which current monetary policy,” is designed, according to Reuters. “The impact of these innovations could be revolutionary, or more evolutionary.”

Either way, she added, central banks’ use of CBDCs using the blockchain or digital ledger technology used by cryptocurrencies and stablecoins could potentially cannibalize private banks’ deposits the way the industry fears they will — forcing central banks to hold larger balance sheets. They could also make it difficult for central bankers to control interest rates, she said.

“In an environment with new public and private digital currencies, liquidity backstops for traditional banks may become even more important,” Logan said.

Speaking at a Columbia University symposium on June 2, Logan, who is set to become president of the Dallas Federal Reserve Bank later this summer, added that the actual impact would depend on whether it is offered through private banks, corporations or directly to the public.

RBI Seeks Crypto Killer

India’s central bank is looking for a crypto “killer” and sees a CBDC as the weapon of choice.

A phased introduction of the digital rupee CBDC will begin this year with a goal of going live in March 2023, assuming know your customer (KYC) and ani-money laundering (AML) requirements can be met, the Reserve Bank of India said in its 2021-2022 annual report last week.

“The design of CBDC needs to be in conformity with the stated objectives of monetary policy, financial stability and efficient operations of currency and payment systems,” the annual report noted. “The Reserve Bank proposes to adopt a graded approach to introduction of CBDC, going step by step through stages of Proof of Concept, pilots and the launch.”

Meanwhile, RBI Deputy Governor T Rabi Sankar said the digital rupee will be able to “kill whatever little case that could be” for private cryptocurrencies like bitcoin and stablecoins, India’s Business Standard reported on June 3.

In a June 3 webinar, Sankar noted that the number of transactions handled by India’s highly successful Unified Payment Interface (UPI) had grown 160% in the past five years — more than triple the growth of digital payments as a whole, CNBC TV18 reported.

The RBI, which was forced to end what amounted to a de facto ban on cryptocurrencies by the Supreme Court in March 2020, has remained vehemently opposed to the government’s plan to legalize — and heavily tax — investment cryptocurrencies rather than the outright ban them.

Prime Minister Narendra Modi has said emphatically that the use of cryptocurrencies of any kind for payments will not be permitted. The Business standard report noted that the RBI sees digital rupee advantages like better currency management and reducing settlement risk in the system as the best cross-border payments solution.

Calling the acceptance of stablecoins, particularly by central bankers, “puzzling,” Sankar said, “I’ve heard repeated central bankers trying to justify private currencies by arguing that we have changed, we actually have private money largely in the system. Now I’m sure they understand the difference between money and currency.”

He argued that the International Monetary Fund (IMF) should lead work on an international legal framework for both cryptocurrencies and CBDCs, the Business Standard report noted. The latter should include interactivity, Sankar added.

Meanwhile, Gita Gopinath, first deputy managing director of the International Monetary Fund (IMF), warned that the international lender feared that CBDCs could lead to the “fragmentation of the international payment system, which would be broken down into smaller blocs based on geopolitical situations,” CNBC said.

Digital Baht Will Replace Cash

Bank of Thailand Governor Sethaput Suthiwartnarueput said he believes a digital baht will eventually replace cash.

Speaking to CoinDesk at the World Economic Forum in Davos on June 1, Suthiwartnarueput said he believes that “ultimately, a retail CBDC will coexist with other stuff. Yes, it will probably replace cash. But not the other stuff that’s still out there, including private stuff.”

A pilot scheduled for the second quarter of 2022 has been pushed back, hopefully to the end of the year, he added, saying it was the “usual” delay in a complex project with many partners.

“But it’s a limited scale pilot. We just want to make sure that we do it end to end, get the types of players that we want involved, both banks and nonbanks,” Suthiwartnarueput said. “We see question marks on how soon a retail CBDC might go production scale. But when that happens, it will warrant … putting in place the infrastructure that the private sector can innovate on, making sure that whatever platform they innovate on is controllable.”

That innovation is really the key reason the Bank of Thailand is exploring a CBDC, he added.

“The existing system works pretty well on payments, if we have a fast payment system [that] works very well,” Suthiwartnarueput said. “So the additional incremental benefits you would get from using a retail CBDC for payments are not immediately known.

“Even though fast payment systems can offer us a lot of low-hanging fruit that we can take advantage of, we recognize that there are limitations from an innovation standpoint. CBDCs and retail CBDCs offer more potential for the private sector to get involved, innovate.”

Pointing to the self-executing smart contracts built into most post-bitcoin, blockchain-based digital currencies, he said, “You can’t put programmability on a fast payment system.”

Read more: DeFi Series: What Is a Smart Contract?

That doesn’t mean stablecoins or other privately-issued cryptocurrencies will be invited to the party. Thailand said earlier this year that it will ban the use of cryptocurrencies for payments, joining Indonesia, India and China in limiting private digital assets to investments. China, or course, has banned them outright.

Brazilian CBDC Aimed at Innovation

The Central Bank of Brazil pushed plans to begin testing a digital real from later this year to 2023, potentially launching a live CBDC as early as the second half of 2024, according to The Brazilian Report.

The digital real project is aimed primarily at financial innovation rather than real-time payments, Fabio Araujo, an economist at the central bank, said in a May 31 paper for the Bank for International Settlements (BIS).

Noting that the country has had a “solution for real-time gross settlement (RTGS) has already been available for 20 years … [and] an instant payment system — Pix — went live in November 2020 and has been very well received by the public,” Araujo added that an e-money system operated by “a diverse ecosystem of payment service providers” has been in place for a decade.

“In Brazil the main objective of the introduction of a CBDC is to provide entrepreneurs with a safe and reliable environment to innovate through the use of programmability technologies, such as programable money and smart contracts,” he said. “Technologies available for smart payments, as seen in the cryptoassets ecosystem, open up space for new business models and are better suited to meeting the population’s demand for natively digital means of settlement.”

Related: Mercado Bitcoin, Stellar Team on CBDC Project

Saying that cryptocurrencies and tokenized assets are already a reality, Araujo wrote that “it is up to regulators to provide a safe environment so that entrepreneurs can propose innovations and a larger base of citizens can benefit from these technologies, without exposure to the uncertainties of an unregulated financial environment.”

If a CBDC is going to be “an infrastructure for smart payments,” interoperability with other payments system is vital, he said. It is also a way to “curb threats of currency substitution” by dollar-denominated stablecoins which “would remain used at the margin of society,” he added.

That said, Araujo does foresee regulated stablecoins issued by payments service providers (PSPs) and banks, redeemable for the CBDC on demand. These would, unlike a digital real, potentially offer interest.

The high-speed stablecoin runs central bankers have warned of — and saw in the collapse last month of the TerraUSD stablecoin that wiped out $45 billion in less than a week — “could be averted by backstops and constraints on conversion flow from and to CBDC.”

See also: TerraUSD’s Price Collapse Shows Vulnerability of Dollar-Pegged Cryptos

These include automatic circuit breakers to halt runs on a bank- or PSP-issued token, as well as daily transaction limits and requiring large conversions to be scheduled in advance.

Here and There

While denying that bitcoin will become a legal tender as it has in El Salvador, Malaysia’s Deputy Finance Minister, I Mohd Shahar Abdullah, made comments late last month suggesting a wider crypto payments ban could be under consideration.

Without specifically suggesting Malaysia will join the growing list of giant Asian countries banning crypto payments — most recently Thailand but also Indonesia, India and China — Abdullah said “cryptocurrences like bitcoin are not suitable for use as a payment instrument due to various imitations” like price swings and cyber threats, Bloomberg reported.

Read more: Malaysian Finance Minister: Crypto Will Not Become Legal Tender

Meanwhile, China has been airdropping tens of millions of dollars in its still-in-pilot-phase digital yuan in lotteries to encourage citizen to create digital wallets and merchants to accept it for several years now. The city of Shenzen announced last week that it would give away $4.5 million to users of the Meituan Dianping food delivery app, according to a Cointelegraph report.

Users would have to log into the app — potentially downloading it first — and sign up for the lottery. Winners would receive the CBDC, formally called e-CNY, in their accounts. Some 15,000 local merchants in Meituan’s network accept it, and like most lotteries, this is aimed at stimulating local spending, as well as China’s top food delivery app.

In other news, U.S. Senator Tom Cotton, R-Ark., introduced the subtly-named “Defending Americans from Authoritarian Digital Currencies Act” last week. The goal of Cotton’s bill is to “prohibit app platforms in the United States from hosting apps that enable transactions using the Chinese Communist Party’s Digital Yuan (e-CNY),” said a May 26 release.

“The Chinese Communist Party will use its digital currency to control and spy on anyone who uses it,” Cotton said in the release. “We can’t give China that chance — the United States should reject China’s attempt to undermine our economy at its most basic level.”

Related: GOP Bill Would Ban App Stores From Supporting Apps That Accept Digital Yuan