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The Front Page of Global Fintech

The the largest fintech community in the world. Subscribe to our newsletter to stay up to date on the latest in news opinions, and all things financial technology.

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This Week in Policy (8/24)

This Week in Policy (8/24)

γεια σας λάτρεις του φιντεκ. Think the language the word “crypto” came from. Not sure? Here’s a noncryptic hint.

This week’s post will be the last one that comes on Wednesday. Moving forward, the Policy Edition of This Week in Fintech will be published on Mondays. Subscribe to the Policy Edition if you want it delivered to your inbox every week. You can also manage which editions of This Week in Fintech you are subscribed to!

At first blush, this week was uneventful. I mean, there are no sweeping crypto regulations à la MiCA or surprising stablecoin regulations à la the Waters-McHenry bill to report. But, nonetheless, if you have been closely following what is happening, you would soon realize that the seemingly quiet week gave a cryptic yet very comprehensive story about the future of cryptocurrency. Let’s decrypt it together.

Last week, Federal Reserve Governor Michelle Bowman shared with the audience at the VenCent Fintech Conference the latest efforts of the Federal Reserve to update the U.S. payment system. Bowman’s speech did not bring anything we do not already know about a future U.S. CBDC. Earlier this year, we learned from the Federal Reserve Vice Chair Lael Brainard that such CBDC may take up to five years to come online. The real news in the speech, however, was that completing FedNow is currently “a high priority” of the Federal Reserve and that we should expect it to be available by mid-2023.

FedNow is “a new instant payment service that the Federal Reserve Banks are developing to enable financial institutions of every size, and in every community across the U.S., to provide safe and efficient instant payment services in real time, around the clock, every day of the year.” The new service is centralized, does not use blockchain technology, only open to “depository institutions (i.e., banks) and their service providers,” and, according to Bowman, “addresses the issues that some have raised about the need for a CBDC.”

Apart from membership, how could FedNow make it harder for crypto companies, primarily stablecoin issuers, to become part of the payment system?

The inclination to stymie a future role of crypto companies in the payment system reverberated across the Atlantic, although in a different fashion. The European Central Bank (ECB) released a discussion paper this week about the economics of CBDCs. The paper studies the relationship between the use of a medium of exchange; access to data on large trading platforms; and network externalities (i.e., the larger the number of users of a medium of exchange, the more usage it sees). According to the paper, “network externalities could lead to a dominance of BigTech companies in the payments market, providing a motivation for central banks to introduce CBDC.”

Such motivation can explain why the introduction of a CBDC seems to be the favored European approach to updating the payment system, which is reinforced by the forthcoming restrictions MiCA imposes on the use of stablecoins as a means of payment. Other countries prefer the same solution, i.e., updating the payment system by introducing a CBDC, for different reasons. In Nigeria, the most populous country in Africa, the Nigerian Central Bank announced this week that it aims for a tenfold increase in the users of its CBDC, the e-naira, which, believe it or not, will be available to the unbanked! Rather than staving off BigTech, the Nigerian Central Bank cited the pending dissipation of the use of cash.

Do you think that CBDCs are more capable of updating payment systems than private solutions such as stablecoins?

Meanwhile, countries are trying to limit the role cryptoassets play in the banking system. Last week, we saw that the Federal Reserve Board now requires regulated banks to notify the Board before they engage in “crypto-asset-related activities.” The Superintendent of Financial Institutions, Canada’s main bank regulator, followed suit by directing regulated banks to limit their exposure to unbacked cryptoassets, known as Group 2, to 1% of their tier 1 capital, which is the core component of a bank’s reserves. The said restrictions do not apply to fully backed cryptoassets such as USDT or USDC. The same restrictions are expected to be implemented soon in the EU. The new requirements put into effect new standards suggested but not yet formally approved by the Basel Committee on Banking Supervision.

Why do you think traditional banks are interested in adding cryptoassets to their portfolios? What would the new restrictions mean for banks?

Beyond the banking system, we are starting to see restrictions on individuals’ exposure to cryptoassets. Last week, nine provinces in Canada, including Ontario, imposed a new limit of CAD 30,000 on the cryptoassets an individual investor can purchase yearly, unless an exception applies. The new limit, however, does not include four major cryptoassets: Bitcoin, Ethereum, Litecoin, and Bitcoin Cash. Soon after, new measures were implemented by Canadian crypto exchanges to execute the new restrictions. But why the restrictions in the first place? The answer in one word: volatility.

How convinced are you of the rationales for the new Canadian limits on the purchase of cryptoassets?

So, what is this week’s cryptic story? Most central banks seem reluctant to welcome crypto firms, primarily stablecoin issuers, to the payment system; international standard-setters, such as the Basel Committee, and central banks are starting to differentiate between different classes of cryptoassets; and new restrictions are being imposed on the most volatile ones. Which cryptoassets will survive this process, and which will not make it? That is yet to be revealed.

Join me in conversation on Twitter or LinkedIn or leave a comment below.

See you next week!