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2023: The Year Institutions Embraced Crypto

Regulatory clarity implemented this year for bitcoin and the crypto world ‘opened the doors’ for a new business profile, also involving monetary authorities and their digital currencies.

From the shock caused by the Silicon Valley bank crisis in March to the countdown for the approval of the first Bitcoin Spot ETF in the US, bitcoin’s price more than doubled in 2023. However, this surge doesn’t come from the volatile “old days” of crypto. But rather from a new context of institutional adoption of the digital asset and technology, by both investors and governments.

Greater regulatory clarity in major jurisdictions like the EU and Brazil, along with the tokenization of real assets, took the crypto ecosystem to a new level this year. And Brazil stands out as one of the leaders in this evolution.

“2023 was a year of maturation for the crypto market in Brazil and globally,” says crypto lawyer Nicole Dyskant. “We had some mishaps, but scandals were necessary to shed light where it was needed, keep bad actors away, and boost regulations around the world.”

Nicole also highlights the $4 billion settlement between Binance and the US Department of Justice, after the exchange admitted to wilfully failing to maintain anti-money laundering policies and implement preventive controls.

Heavyweights Entry

According to a Coinbase report, the number of global crypto users increased to 420 million in 2023, with significant growth in the US.

A Binance report notes that while the potential for a Bitcoin Spot ETF in the US has existed for a long time, “notable positive developments towards it becoming a reality happened this year”. There are currently 13 Bitcoin Spot ETF applications under review by the SEC.

Brazil’s Starring Role

Regulatory developments in Brazil and the adoption of crypto by local traditional financial institutions also leapt forward. The publication of the Legal Framework for Crypto Assets and Itaú offering Bitcoin on its Íon platform happened in the same context.

“Itaú’s move is a very positive one for Brazil’s digital asset market,” says BitGo’s Juliana Walenkamp. “It brings more visibility to the sector, leading to greater liquidity and capital inflow,” she adds.

According to Dynasty Global’s Eduardo Carvalho, Itaú’s market entry “represents a turning point for the crypto ecosystem”. He notes that the 2024 Bitcoin halving will likely boost assets’ value further. “Strategically, Itaú is positioning itself before this boom,” says Carvalho.

On the regulatory side, Brazil has been developing AML rules for Virtual Asset Service Providers (VASPs) since before 2023. Moreover, its central bank’s DREX CBDC project advanced brilliantly.

“Brazil became a ‘proof of concept’ of crypto regulation,” says Walenkamp. “It was one of the first countries to approve a crypto ETF and a few to greenlight multi-crypto ETFs.”

CBDCs’ Global Rise

Many central banks now have projects related to DLT, CBDCs and DeFi integrations, notes Hashdex’s Pedro Lapenta. CBDCs are also opening the door for innovative applications, says Javier Andrés from VAAS.

In 2024, this trend will gain a lot of traction. We can expect to see more countries testing or even launching CBDCs, says Andrés. The integration of CBDCs into traditional financial systems is a game changer, as they take on roles from cross-border transactions to everyday retail payments.

The Digital Dollar is Rising: What Does this Mean for Banks?

Digital currencies are on the rise, with major world economies developing central bank digital currencies (CBDCs) pegged to their national currencies. China has already rolled out the digital yuan, while the US, EU, Brazil and others are piloting CBDCs.

What does this acceleration into digital money mean for traditional banks though? CBDCs may allow central banks and governments to have more control and oversight over money flows. However, they could profoundly impact and even fundamentally threaten the traditional banking model.

Commercial banks have historically had a profitable business – they take in deposits and lend out that money to generate interest income. But what if people no longer need a bank account? CBDCs would allow individuals and businesses to hold government-backed digital money directly with the central bank.

Without deposits, banks have less money to lend out and generate revenue. The availability of digital cash could also trigger instant bank runs in times of crisis. If depositors can instantly switch to guaranteed official e-money with the click of a button, banks may struggle to survive sudden withdrawals.

In essence, CBDCs could slowly chip away at the foundation underpinning the banking system – commercial banks’ custody of citizen deposits and their ability to profit from issuing loans with those funds. Banks may need to offer more competitive deposit rates or value-added services on top of basic CBDCs to entice customer funds.

The impacts could be profound – curtailing the growth ambitions of global banking giants, Triggering consolidation across banking sectors, and providing an opening for non-bank financing alternatives. Entire national banking systems built for the 20th century may need to transform to continue thriving in the 21st.

What role will traditional banks play as central banks and governments increasingly compete with and subordinate them through the digitization of money? Can the rising tide of CBDCs peacefully coexist with private commercial banks? Or will the foundational model of banking face decline?

You can share your perspectives in the comments below. Do you believe the age of CBDCs spells the end for traditional banks over the long run? Or will the banking system adapt to digitization as it has other technological shifts? Participate in the discussion!

As central banks pilot and prepare for mainstream CBDC rollouts, Now is the time for banking institutions and policymakers to seriously contemplate these existential questions. Proactively addressing risks early could make the difference between a smooth transition into a hybrid CBDC-banking system, and a disruptive overhaul of finance.

Santander’s Landmark Private DREX Transaction Paves Way for Brazil’s CBDC

In a history-making move, Spanish banking multinational Santander recently completed it’s first ever confidential transaction on Brazil’s central bank digital currency (CBDC) test network, Project DREX.

On November 28th, Santander successfully transferred digital reals from one account to a central bank test account using privacy-centric technology called Zether. The transaction details were completely concealed from the other 15 consortium members involved in piloting DREX.

Jayme Chataque, Santander’s Head of Digital Assets and Blockchain, confirmed the central bank received the funds while other participants could not view the transaction. However, Chataque noted work remains to reliably conduct private transfers at scale across DREX.

Nonetheless, this initial success proves the possibility of guaranteeing privacy within a CBDC. Resolving confidentiality concerns could pave the way for full-blown CBDC deployment in Brazil.

Critics argue CBDCs must balance transparency through an immutable ledger with user privacy protections inherent to cash. Santander’s historic DREX transaction demonstrates this balance is achievable via privacy-enhancing cryptography like Zether.

While questions around efficiently scaling privacy features remain, overcoming initial hurdles bodes well for Brazil’s CBDC. Few countries have advanced as far in exploring how to make CBDCs a palatable replacement for notes and coins.

Santander unlocking user privacy on DREX underscores Brazil’s progress to date. The ability to replicate bank-level confidentiality safeguards could tip the scales for a Brazilian CBDC in the not-too-distant future. Santander’s success proves CBDCs can potentially deliver the best of both worlds – transparency and privacy

How AI Could Revolutionize Cross-Border Payments and CBDCs

Artificial intelligence (AI) is poised to make huge waves in finance, especially around transforming cross-border payments and advancing central bank digital currencies (CBDCs). As global money flows continue rising, AI promises to unlock faster, cheaper, and more inclusive international payment systems.

The Challenges Plaguing Current Cross-Border Rails

Over $150 trillion moved across borders last year alone. Yet underpinning these gigantic money flows is an antiquated mess of technology systems and intermediaries. Costs remain high, settlement excruciatingly slow, and access extremely uneven.

Cross-border inefficiencies arise from difficulties tracking funds as they traverse disparate domestic payment networks using proprietary technology standards. Manual compliance hurdles like sanctions screening and KYC checks also bog transfers down.

This breeds delays ranging from days to over a week as funds sluggishly snake through various intermediaries before reaching recipients. And it leads the average transaction fee for global payments to hover around 5-10% of the total—an order of magnitude above domestic transfer costs.

Such frictions severely curb the potential of international business and remittances to combat poverty. So pressure has been intensifying for a financial infrastructure overhaul.

AI and CBDCs – A Future of Seamless Global Money Movement

Here AI and CBDCs can tag-team a solution. CBDCs on their own promise real-time programmable money flows between central bank reserves. But coordinating dozens of new proprietary CBDC regimes could further fragment global payments.

AI provides the connective layer enabling diverse system interoperability. It can manage complexity as digital currencies communicate across standardizations and regulations. AI is also lightning-fast at processing and monitoring, automating tedious manual compliance work impeding transfers today.

Together, CBDCs and AI offer tantalizing glimpses of wholly integrated economic zones where money moves as freely between countries as it does within them today. Costs plummet towards zero as payments finalize instantly, while embedded safeguards preserve regulatory trust.

Several initiatives are already underway leveraging machine learning to bridge CBDC systems for revolutionary global money movement. As more countries warm up to digital currencies this decade, AI-powered platforms could profoundly expand access and affordability.

The Future of International Payments is AI-Enabled

From detecting fraud to enabling compliance and interlinking currencies, AI will be the engine driving the real-time CBDC-powered global payments future. And given the quadrillions sloshing around the world annually, even fractional efficiency gains unlock tremendous economic potential.

AI is the missing puzzle piece that makes CBDCs work for international transfers. So as finance continues rapidly digitizing, policymakers must recognize AI’s indispensability in building the next generation of payment infrastructure for the globalized digital economy.

IMF Proposes “Trust Ledger” Concept to Improve Cross-Border Payments

The International Monetary Fund (IMF) is proposing a unified “trust ledger” system called XC to enhance safety, speed, and access in global cross-border payments. This centralized ledger would enable seamless interoperability between CBDCs, national currencies, and legacy financial rails.

According to IMF monetary chief Tobias Adrian, XC offers four key advantages:

  • Settlement in central bank reserves for security
  • Interoperability with domestic currencies and old systems
  • Managing information flows to ease economic friction
  • Reliance on transparency and rules of global finance

By streamlining compliance and monitoring, XC aims to ensure payments reliably reach recipients while preventing money laundering, terrorist financing, and other criminal exploits.

XC: Addressing the Shortcomings of Cross-Border Transactions

The IMF is exploring XC as a solution to the lingering inefficiencies in current cross-border payment channels. Existing infrastructure continues to suffer from:

  • Slow settlement times
  • High costs
  • Error rates
  • Limited access

These pain points persist due to fragmentation across payment systems globally. Domestic networks remain siloed, using proprietary message standards and settlement rails not interoperable with other countries.

There is also inadequate coordination around compliance, security protocols, and data sharing. This complicates transfers as money moves across multiple intermediaries before reaching its final destination. It also introduces vulnerabilities at hand-off points between systems.

As Adrian noted, perhaps the biggest cross-border payments challenge is establishing trust and transparency between disparate regulatory and technology regimes globally. Hence where the promise of XC lies.

XC: Unlocking the Potential of CBDCs for Cross-Border Flows

XC would not only connect legacy payment systems but also clear the path for central bank digital currencies (CBDCs) to transform cross-border transactions.

CBDCs offer a chance to build modernized payment infrastructure from the ground up. Digital currencies could enable real-time settlement and hyper-efficient compliance via integrated ledgers between central banks.

But the global rollout of dozens of proprietary CBDCs could also further fragment the payments landscape. This underscores the need for unifying platforms like XC that allow CBDCs to seamlessly interoperate domestically and internationally.

The IMF expects that growing adoption of CBDCs will put pressure on existing systems and expose more of their limitations over this decade. Hence why the urgency now to establish interlinking mechanisms like XC.

Ongoing Efforts to Unlock Faster, More Affordable Cross-Border Payments

The IMF’s proposal comes as the Bank for International Settlements (BIS) has launched similar cross-border payment projects. Initiatives like Project Mandala and Project mBridge also introduce centralized systems to smooth transactions between CBDCs and automated compliance processes.

However, Adrian admitted the world still lacks adequate infrastructure for affordable, efficient cross-border payments and messaging. Building out technology like XC across the IMF’s 190 member countries will require substantial coordinated effort.

As CBDCs gain global traction, central banks are racing to modernize complex existing payment channels. Unified trust ledgers could be the key to unlocking faster, more inclusive international transactions. But realizing that vision depends on countries embracing collaborative systems like the IMF’s XC.

Ripple and XRP Catch Attention in Federal Reserve’s CBDC Research

The U.S. Federal Reserve’s new public questionnaire on central bank digital currencies (CBDCs) brought up Ripple and its XRP cryptocurrency numerous times. Of the 584 pages of responses, XRP was mentioned over 100 times – signaling its potential relevance to the Fed’s eventual CBDC decisions.

Opinions widely varied on risks and benefits of digital assets like XRP. Some respondents urged caution in collaborating with “illegal” cryptos, while others highlighted unique capabilities like offline transactions that Ripple and the XRP Ledger provide.

Several submissions proposed the XRP Ledger could enable CBDC sidechains or cross-border bridges, minimizing the need for a direct Fed-issued digital currency. Crypto advocates even suggested the Fed utilize Ripple’s technology as a foundation for CBDCs.

Ripple’s blockchain, XRP, stands out for its potential engagement with a US CBDC.

The attention on XRP comes despite Ripple’s ongoing legal battle with the SEC. The company continues expanding its financial infrastructure, recently acquiring a major crypto firm in Switzerland. Ripple also partners with HSBC and Mastercard, gaining traction in banking and payments – two critical areas for CBDCs.

As the Federal Reserve weighs options for a possible US CBDC, it will be hard to ignore the clear interest from some citizens in empowering projects like Ripple. And Ripple is certainly poised to play a role, as its history of partnerships hints at the company becoming an important bridge between governments, CBDCs, and the world of private crypto innovation.

Swiss National Bank, BIS Successfully Exploring Privacy for Retail CBDCs

A new trial called Project Tourbillon, led by the Swiss National Bank (SNB) and the BIS Innovation Hub, is testing privacy techniques for retail central bank digital currencies (CBDCs). The goal is to enable anonymous payments while still being compliant with anti-money laundering regulations.

Privacy is a major concern with retail CBDCs. People worry that governments could see exactly how they spend money or even prevent access to digital cash altogether. Solutions like Tourbillon aim to protect transaction details much like physical cash does. However, all digital money relies on central bank systems, so access could theoretically be limited no matter the privacy tech.

Tourbillon utilizes “eCash” protocols invented in the 1990s by cryptography pioneer David Chaum. His company DigiCash introduced early digital currency concepts but went bankrupt in the dot-com crash. Now there is renewed interest in Chaum’s privacy techniques for modern CBDCs projects.

The trial implemented two versions of eCash. eCash 1 checks each payment against a registry of spent coins to prevent double spending. But this can have security and performance issues as the registry grows huge. eCash 2 instead tracks unspent coins, solving those problems but reducing anonymity since the central bank now knows users’ coin serial numbers. An additional “mix network” shuffle of serials is required to restore anonymity.

Quantum computing was also tested but found to significantly slow performance, needing more research. And alternative anonymity methods like zero-knowledge proofs are being explored by groups like the Bank of Israel.

For my blog’s readers, the SNB is focused on wholesale CBDCs for now, with the SIX Digital Exchange using one for settlements. But the innovation around retail CBDC privacy showcases the currency technology still being researched by leading central banks. Experiments like Project Tourbillon will inform any future retail CBDCs while advancing the field as a whole.

Standard Chartered Becomes First Foreign Bank to Join China’s CBDC Pilot

On November 27th, British multinational bank Standard Chartered announced it would be joining China’s central bank digital currency (CBDC) pilot testing program for the digital yuan (e-CNY). This makes Standard Chartered the first foreign bank to engage with the country’s CBDC initiatives.

South Korea to Initiate CBDC Pilot with Participation of 100,000 Citizens in 2024

Through its local partner City Bank Clearing Services Co, Standard Chartered will provide e-CNY services to its clients in China. This includes allowing clients to purchase, exchange and redeem e-CNY within their bank accounts. The bank will explore potential use cases such as cross-border merchant payments, trade financing and supply chain financing.

As per the announcement, Standard Chartered is optimistic about the prospects for digital renminbi. Xiaolei Zhang, President of Standard Chartered China, expressed the bank’s long-standing roots in the Chinese market.

The CBDC pilot is currently undergoing testing across 26 cities and provinces in China. Since its launch in 2020, e-CNY transactions have exceeded 1.8 trillion yuan ($253.6 billion), while 120 million e-wallets have been activated.

Standard Chartered has been actively engaged with digital currencies. Last year, it participated in a cross-border payment settlement test project for CBDCs in Hong Kong. Earlier in 2023, the bank published a report with PwC China discussing CBDC applications in banking.

The move highlights growing interest in China’s CBDC initiative, which has seen increasing adoption. Standard Chartered’s participation is a step towards broader adoption of CBDCs by financial institutions globally.

CBDCs: a solução para quedas e indisponibilidades dos sistemas bancários?

Vamos falar sobre como as CBDCs podem revolucionar o sistema financeiro e superar os desafios do arcaico sistema bancário tradicional. As Moedas Digitais dos Bancos Centrais são projetadas para rodar em blockchains, garantindo segurança, transparência e eficiência, e podem fazer transações offline, ampliando o acesso e a inclusão financeira. Além disso, o dinheiro não dependeria de uma instituição, mas sim de validadores autorizados pelo Banco Central, eliminando intermediários e custos desnecessários. Isso significa que as CBDCs podem resolver o problema da indisponibilidade temporária de sistemas e dinheiro nas contas, pois as transações podem ser realizadas a qualquer momento e em qualquer lugar, sem a necessidade de uma instituição financeira intermediária.

CBDCs: Por que especialistas acreditam que o Real Digital vai revolucionar os investimentos

Por exemplo, se o dinheiro estivesse em uma CBDC, ele não seria afetado por problemas de processamento noturno, como o que ocorreu recentemente no Bradesco. Os correntistas do Bradesco enfrentaram problemas nas contas vinculadas à instituição financeira, com relatos de descontos feitos sem permissão, conta negativada e saldo zero. As queixas não pararam de crescer, com 91% das reclamações relacionadas a problemas no saldo das contas.

Com as CBDCs, os usuários teriam mais controle sobre seu dinheiro e não dependeriam de uma instituição financeira intermediária para gerenciar suas finanças. Além disso, as transações poderiam ser realizadas sem a necessidade de uma conexão com a internet, o que ajudaria a prevenir a indisponibilidade temporária de sistemas.

Mais de 100 países, incluindo Brasil, já testam CBDCs, revelam dados

Mais de 117 países embarcaram na jornada de concepção de suas próprias Moedas Digitais de Bancos Centrais (CBDCs). Esta tendência ganha destaque como uma resposta direta ao crescimento do Bitcoin (BTC) e das criptomoedas.
Conforme relatórios do cbdctracker.hrf.org, divulgados recentemente pela equipe da Human Rights Foundation (HRF), os avanços são notáveis: nove países, juntamente com as oito ilhas da União Monetária do Caribe Oriental, já lançaram suas próprias moedas digitais.

As CBDCs são, portanto, uma alternativa moderna e inovadora para o sistema financeiro, que pode trazer benefícios tanto para os indivíduos quanto para as instituições.

FMI diz que moedas digitais do banco central podem substituir o dinheiro

Na perspetiva do FMI – Fundo Monetário Internacional (em inglês, International Monetary Fund), as moedas digitais do banco central têm potencial para substituir o dinheiro. No entanto, a adoção em massa pode levar tempo.

As CBDCs (Central Bank Digital Currency), em português, moedas digitais do banco central, são a forma digital da moeda fiduciária de um país, regulada pelo banco central desse país e sustentada pela tecnologia blockchain.

Na opinião de Kristalina Georgieva, managing director do FMI, as moedas digitais do banco central “podem oferecer resiliência em economias mais avançadas” e podem melhorar “a inclusão financeira onde poucos possuem contas bancárias”.

As CBDCs podem substituir o dinheiro, cuja distribuição é cara nas economias insulares.
Ofereceriam uma alternativa segura e de baixo custo [ao dinheiro]. Elas também ofereceriam uma ponte entre o dinheiro privado e um parâmetro para medir o seu valor, tal como o dinheiro hoje, que podemos retirar dos nossos bancos.

De acordo com a organização internacional, mais de 100 países estão, atualmente, a explorar esta forma de transação digital.

Num relatório publicado em setembro, o FMI partilhou que “o nível de interesse global nas CBDCs não tem precedentes”. Afinal, conforme temos acompanhado, um largo leque de bancos centrais lançou projetos-piloto e alguns até já emitiram a sua moeda digital.

Mais, numa pesquisa de 2022 conduzida pelo Bank for International Settlements, dos 86 bancos centrais inquiridos, 93% disseram estar a explorar CBDCs. Por sua vez, 58% disseram que, provavelmente, emitiriam ou poderiam possivelmente emitir uma CBDC a curto ou médio prazo.

Segundo a CNBC, o FMI lançou, agora, um guia dedicado às CBDCs, com o intuito de servir como referência para decisores em todo o mundo. Afinal, há muitos países a investigá-las e a desenvolver regulamentações para orientar o dinheiro digital.

O setor público deve continuar a preparar-se para implantar CBDCs e plataformas de pagamento relacionadas no futuro […] estas plataformas devem ser concebidas desde o início para facilitar os pagamentos transfronteiriços, incluindo com CBDCs.

Disse a managing director do FMI.

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