How should Central Bank launch their digital currencies?

ECB Research paper, Deribit Insights, Binance launching 180+ fiat pairs,

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🕵️ How should Central Bank launch their digital currencies?

The European Central Bank (ECB) recently published a working paper called (Tiered Central Bank Digital Currencies) CBDC and the financial system [Link]. Below a short summary

  • CBDC could be considered a third form of base money next to (i) overnight deposits with the central bank (available only to banks, specific non FIs) and (ii) banknotes, universally accessible.

  • The paper assume that the CBDC is for general purpose and offered in the form of deposit accounts with the central bank to all household and corporates

  • Central bankers have warned against the structural (ie disintermediation of the banking system) or cyclical disintermediation of deposit collecting institution. In other words,

  • The goal of the CBDC is to be served as means of retail payment, without putting into question the monetary order by making CBDC a major form of store of value

  • The answer to such paradigm lies into the well-tested tool of tiered remuneration seems to be an effective and simple to control the volume of CBDC.

“any nascent increase in the demand for CBDC can be eliminated by a drop in the interest rate on CBDC. But there are potential limits if this requires a highly negative interest rate, and if further reductions of the interest rate below this level become politically difficult... Assume therefore a CBDC price rule where the central bank fixes the interest rate on CBDC at the lowest politically acceptable level, and assume that even at this penalty rate group A wants to convert deposits to CBDC at (almost) any price, perhaps because it is concerned about the solvency of banks…”

  • It is proposed to solve the problem of political acceptance of (temporarily) very low interest rates on CBDC by differentiating remuneration according to the amount of deposits

“in bad times, depositors could switch rapidly and at no cost from their bank account to the CBDC. The central bank could limit such risks – for example by setting a ceiling on the amount of CBDC that each individual investor can hold, or by bringing the remuneration to zero for holdings of CBDCs above a certain threshold

  • This would allow controlling the quantity of CBDC at a level such that the central bank balance sheet size could be kept broadly stable and significantly reduce the political constraints on controlling the quantity of CBDC through low or negative interest rate

  • The paper proposes a system of financial accounts calibrated towards the euro area illustrates the mechanics and implications of CBDC and allows presenting flow of funds implications

  • It is important to note that beyond the interest rate of the CBDC, account services of CBDC must include the same level of services that deposit accounts with commercial banks typically offer ie internet access, mobile app, etc… In short Central Banks will need to launch or use their own neo-banks

  • The CBDC would eat the market share of banknote circulation rather than financial accounts of banks

Carstens (2019, 10), central banks are not there to “put a brake on innovations just for the sake of it”, but to ensure that implications of major changes are well understood so “that innovations set the right course for the economy, for businesses, for citizens, for society as a whole”.

🐦 Tweets of the week

Data is a big challenge for anyone in crypto. It’s great to see CryptoCompare, a London based company being recognised as the leader!

Meanwhile the awesome Deribit Insights team published a new article on crypto exchanges

🤹 Startups News

  • Bitcoin miner Argo installs 3,600 new Bitmain machines, increasing its capacity by 75% The firm recently said that it aims to become “the world's largest publicly-listed crypto miner by 2020.” To that end, it also increased its electricity from 14 megawatts to 64 megawatts. [Link]

  • Telegram Refusing to Tell SEC How It Spent $1.7 Billion of ICO Cash [Link]

“The requested bank records are highly relevant to the issues in dispute in this case, including how much money Telegram has spent, and in what manner, in developing the TON Blockchain, the Telegram Messenger application to be integrated with the TON Blockchain, and related applications.”

  • Team Gnosis based in Berlin are working hard on their next chapter!

🎁 Startups Product & Partnership

  • Former head of Barclays Technology launching crypto/fiat banking w/mastercard, for UK only called Ziglu. [Link]

  • Cryptocurrency exchange Binance has confirmed it will offer euro (EUR) trading against six cryptocurrencies in the platform’s latest fiat expansion. Binance is leading the spot market and is looking to have 180+ fiat currencies supported by the end of the year. This is huge

Supported fiat currency pairs on Binance as of Jan. 2, 2020

🏭Corporates

  • Turkish Takasbank launched BiGA Digital Gold to provide banks with a blockchain-based system for the issuance, repayment and transfer of digitized gold. Each asset represents a gram of gold that is physically stored in vaults of the Borsa Istanbul (BIST) Turkish stock exchange. [Link]

Takasbank launched the BiGA Digital Gold platform with the participation of several Turkish financial institutions, including state lenders Ziraat and Vakif, private lender Garanti BBVA, and private and state participation banks Albaraka Turk, Kuveyt Turk, and Ziraat Participation.

🏦Regulations / Universities

  • UK Regulator Exposes Crypto and Binary Options HYIP Scheme - a company called Pro-Options is an unlicensed trading provider, cautioning all retail investors about the risks of dealing with it. The company claims to offer Bitcoin and binaries investment plans, with returns ranging from 50 percent to 100 percent after 24 to 48 hours. Obviously, such type of returns sound very dodgy. Stay safe! [Link]


About the author: Etienne used to head principal strategic investment (Companies, Funds and token investment) at Elwood, One of the largest European digital assets investment firm spun off of Brevan Howard, billion-dollar Macro Hedge fund. Previously, he was part of the founding team at the largest Capital Markets Venture Fund in London, Illuminate Financial.