On February 25, 2020 executives from the Bank of Canada made public statements regarding the issuance of a centralized bank digital currency (CBDC). Specifically, the bank’s Deputy Governor, Timothy Lane spoke on the possibility and scenarios in which the bank would pursue this course of action at the CFA Montreal FinTech RDV 2020. The speech touched on the rapidly evolving technology affecting the financial sector, and, how the Bank of Canada is responding to the environment.
Bank of Canada
The Bank of Canada has been in operation since it was chartered as a Crown Corporation in 1934. Importantly, Crown corporations are state-owned and managed enterprises. As such, the bank functions as the country’s central bank. Consequently, it is the only entity with the legal ability to issue Canadian banknotes.
Since 1944, the Bank of Canada has been the sole issuer of legal tender banknotes in the country. Additionally, the organization is responsible for formulating Canada’s monetary policy. Specifically, the firm’s responsibilities include maintaining a safe and sound financial system within Canada.
The Bank of Canada’s current responsibilities focus on the goals of monitoring and managing predictable inflation. Notably, the bank must work to ensure a stable and efficient financial system within the country. The bank accomplishes this task in a number of different ways. Primarily, the firm provides effective and efficient funds-management services for the Government of Canada and other local enterprises. Lastly, the bank ‘s responsibilities include providing citizens with a safe and secure currency.
Bank of Canada on Issuing Digital Currency
The Bank of Canada continues to evaluate if, and in what scenarios, the firm would issue a CBDC. In his speech, Lane explained how the bank is preparing for a future in which it may deem it necessary to issue digital central notes. He spoke on the responsibilities of the bank to provide citizens with the ability to use their preferred method of payments in confidence.
In the speech, Lane acknowledges that digital currencies provide new opportunities to the market. He also explained that these opportunities can create a host of new risks as well. It’s these unknown threats that continue to hamper the bank’s motivation towards the issuance of a central digital currency.
Scenarios in Which the Bank of Canada Would Issue a CBDC
Lane put forth two scenarios in which the Bank of Canada would consider the issuance of a centralized digital currency. The first scenario would be the result of the mass adoption of cryptocurrencies. In this case, the bank could lose control over the monetary system as more users migrate to private currencies such as Bitcoin. As you would imagine, central banks are not keen on any situation in which they lose control over the ability to monitor payments and regulate markets.
The second scenario that would warrant the bank’s response would be the complete removal of physical cash from the market. While this second scenario seems highly unlikely for the time being, it’s still a very real concern for banking officials. Situations such as pollution or disease could make the use of paper money obsolete in the near future.
What a Canadian CBDC Would look Like?
Interestingly, Lane took a moment to acknowledge the benefits that digital currencies bring to the market. He did so by describing what a hypothetical Canadian Bank digital currency would look like. Lane explained that the new currency would be safe, easy to access, private, and a good store of value. He stated that the new digital banknote would give users the ability to buy things electronically online or in person. Lane’s overall point was that the Bank of Canada is willing to issue a CBDC, only if, or when, it’s necessary.
Will the Bank of Canada Issue a Digital Currency?
Importantly, Lane stopped short of saying the Bank of Canada planned to issue a currency anytime in the near future. Specifically, he stated that there was no real need for the bank to issue its own digital currency at this time. His reasoning for the decision is the fact that the current financial system still serves citizens well. Lane believes at this time, the bank needs to focus on modernizing the current payment system to ensure the bank retains the confidence of its users in the future.
What Would Your Perfect CDBC Include?
Even though the Bank of Canada has no immediate plans to issue a CBDC, officials are still keen to get market feedback on the prospect. As such, banking officials released a series of questions. These questions were geared to citizens in an attempt to get a feel for the market moving forward. The questions included:
- How would a digital currency work with other methods of payment?
- What design features might make a CBDC attractive for merchants and users?
- How would a CBDC work for cross-border transactions?
- How can we protect privacy while preventing illicit uses?
Central Banks Consider Going Digital
Lane’s statement echoes ones made by other central bank executives concerning digital currency issuances. These organizations continue to monitor the markets and explore scenarios in which they would see the need to make such a drastic change. A recent statement published by the International Monetary Fund shed some light on the current situation surrounding CBDCs. The speech revealed that only around “one-quarter of central banks around the world are now actively exploring the possibility of issuing CBDCs, and only four pilots have been reported.”
The Bank of Canada is Ready to Make Alterations to Remain Relevant
The overall tone of Lane’s speech pushed to the fact that Canadian Banking officials understand the need to be flexible in these times. Banking officials appear to be keenly aware that cryptocurrencies could have a huge impact on their ability to control markets. As such, banking officials are ready to make whatever changes deemed necessary to remain in control. For now, the Bank of Canada continues to research the adjustments that are required to remain relevant in a fully-digitized economy.
RBI Clarifies Crypto Banking Regulations in India
This month, the Reserve Bank of India (RBI) clarified its stance on banks seeking to provide services to crypto customers. The clarification comes nearly a month after the supreme court ruled that cryptocurrencies trading is not illegal in the country. The news demonstrates a growing demand for decentralized currencies in India, as well as, a desire by regulators to remain relevant in the digital economy.
No Laws Prohibiting Banks
According to a statement by RBI executives, there are no laws prohibiting banks from offering banking services to crypto-related business clients. The statement comes after a public outcry from the cryptocommunity. Many voiced concerns over banks denying them service on the grounds of RBI’s previous statement. Now, the market has clarification. As such, crypto service providers and traders can now rest easy knowing that they have the same rights as other businesses in the country.
Further research reveals that statement was a direct response to a query filed by the co-founder of the cryptocurrency exchange Unocoin, BV Harish. BV Harish utilized the country’s Right to Information (RTI) Act to force the bank’s statement. Importantly, the official filing took place back on April 25. However, SBI took nearly a month to make the news public.
Clarify RBI Stance
Importantly, the statement follows a supreme court ruling last month on the use of cryptocurrencies in the country. The ruling made it clear that crypto exchanges and traders have a place in India. Discussing the ruling, Nischal Shetty, founder, and CEO of Mumbai-based cryptocurrency exchange WazirX explained why the market needed some clarification on RBI’s stance. He welcomed the decision. He also pointed out that RBI had been silent on the matter until forced to comment via the filing.
Despite the positive response from investors, central bankers were quick to chastise the decision. Not surprisingly, RBI Bank executives even planned to file a review petition against the decision. Like most central banking authorities, they believe that cryptocurrencies pose a direct threat to the stability of the market. Notably, the group hasn’t filed any reviews as of yet.
India Continues on its Decentralization – RBI
India continues to embrace blockchain technology on all levels. This vibrant nation has an active crypto community. They have fought long and hard for their right to a free crypto market. Over the last few years, the country has been embroiled in internal debates regarding the legality of these unique financial instruments.
Importantly, since the supreme court’s ruling, crypto activity in the country has seen a gradual uptick. Specifically, local exchanges across the nation reported major upticks in trading activity. Even with all the positive growth, it could be months before India regains its spot as the crypto epicenter in the region. Hopefully, the new ruling provides investors with the transparency needed to push expansion in the Indian crypto markets further than ever before. For now, many in the country can breathe a sigh of relief knowing that their decentralized investment strategies are still safe.
Security Token Group Study Reveals Investors Hedging US Markets with Security Tokens
This month, a research team from the Security Token Group delved into how security token holders faired against US equity investors. Interestingly, the report revealed a decoupling of the STO market from the US equities markets. As such, researchers demonstrated how investors can use security tokens to hedge against US equity markets during the Coronavirus pandemic.
Uncorrelated Assets – Security Token Group
The report begins with a eureka statement from researchers. Nicely, the Security Token Group takes a moment to let you know there’s some light at the end of the Covid-19 tunnel. Here, they explain the fruits of their research. Also, the main researcher, Jonah Schulman shares a heartfelt message when he states “have faith and remain positive during these hard times.”
The study includes a comparison of two hypothetical investors from the start of 2020. Importantly, the first investor has $1 million in US equities in their portfolio. The second investor holds only $750,000 in US equities and the remaining $250,000 is held in a diversified security token. The Security Token Group chose to distribute the funds evenly over the top 14 security tokens in the market.
Top Security Tokens
- Mt Pelerin
- Lesure St, Detroit, MI
- Audubon Rd, Detroit, MI
- Fullerton Ave, Detroit, MI
- Marlowe St, Detroit, MI
- Appoline St, Detroit, MI
- Patton St, Detroit, MI
- SPiCE VC
- Blockchain Capital
The results from the report were an eye-opener. Researchers showed that the second investor outperformed the first by over 3%. Specifically, both investors took losses, but investor 2 was able to weather the storm better. The data showed investor one lost -9.50%, while investor 2 showed a return of -6.54%. In total, investor 2 held on to an additional $31,625 thanks to their security token investments.
Notably, Protos showed the most gains over 2020. The token is up 27% to date. Reversely, the worst performer in the portfolio was Blockchain Capital. This token showed a -10.03% loss over 2020. The report then breaks down the aggregate return for the total portfolio since the start of the year.
The data showed a +2.35 return. Importantly, researchers pointed out that an investor that followed this strategy would be up 12% versus investors that only held equities. Crucially, the data signals that if you were invested in the Dow Jones, S&P 500, and the NASDAQ exclusively for 2020, you may want to expand your horizons.
Security Token Group – Delving Deep
As part of this strategy, the group decided to calculate the correlation coefficient for all of the security tokens in the study. When you calculate a correlation number you examine varying factors and market movements to notice patterns. The higher the score, the more correlation you have between two financial instruments.
Amazingly, the security tokens correlation coefficient score was only -.19. To put this score in perspective, the report lists Apple stock as .88. Interestingly, researchers then show the data for each token independently. This data helps to indicate what security tokens unhinged from the US markets during the epidemic specifically.
The next step was to examine each tokens correlation to each of the major US markets independently. Interestingly, the largest security token in terms of market capital, tZERO showed the highest correlation among the tokens. SPecifically, tZERO ranked .74. The other tokens in the study scored much lower. For example, all of RealT’s tokenized properties scored just .21.
An Escape Pod
The Security Token Group’s research proves what blockchain-based financial instruments continue to make headway in the market. Notably, STG researchers plan to conduct further studies in the coming weeks to better understand the effect of these tokens in the sector. For now, savvy investors continue on their hunt for uncorrelated assets during the quarantine.
DTCC Unveils Two Security Token Research Platforms
This week, the security token sector got a jolt of energy after the Depository Trust & Clearing Corporation (DTCC) unveiled two new blockchain programs. The programs are meant to study distributed ledger technology (DLT) and how it can improve the current settlement processes. The news marks a turning point in blockchain integration as the DTCC processes quadrillions worth of securities transactions yearly.
DTCC Projects Underway
According to reports, DTCC has two DLT initiatives already in the works. The two projects, Ion and Whitney, leverage blockchain technology to improve upon the current business models. For example, Ion is a proof-of-concept alternative settlement service. The platform will work as a stress test indicator to verify the scalability of blockchain settlement systems under heavy traffic. The protocol is the result of years of research. In 2018, the public got a glimpse into the project as DTCC announced the results of a benchmark study. The report demonstrated for the first time that DLT is capable of supporting average daily trading volumes in the US equity market.
Ion is the DTCC’s new blockchain settlement protocol. Impressively, the platform is said to be able to handle quadrillions of transactions. Interestingly, Ion developers ran this concept for 12 weeks with mixed reviews. For example, in their report developers acknowledged scaling issues that emerge during development. Despite some bugs, the proof-of-concept served its purpose as a benchmark tester for DLT tech. Importantly, the platform utilized the Ethereum network. This decision makes sense as Ethereum is known for its developer-friendly ecosystem.
Ion is now moving on to the next stage in its development. DTCC executives are now on the lookout for a “technical stack” to bring the platform to life. Additionally, the DTCC already offered to start testing APIs of other firms within the ecosystem. This decision is sure to help bolster the security token sector as more developers make the leap into distributed applications (Dapps).
The second platform the DTCC plans to examine is Whitney. This private securities market’s design is a combination of features from the private and public securities markets. Developers hope to bring more traditional investment firms to the STO sector with this maneuver.
Importantly, Whitney is a full security token ecosystem. The platform supports the issuance, distribution, and exchange of securities on the blockchain. Consequently, smart contracts integrated with compliance mechanisms are built throughout the protocol. Notably, the DTCC stated it will also keep records of every transaction stored off the blockchain as a security measure. While this decision seems redundant, it does reveal the level of caution the firm plans to exercise.
In a public interview, the managing director of business Innovation at DTCC, Jennifer Peve discussed the main goals of the projects. She started with an explanation of how the private securities markets lack transparency. Importantly, Reg D securities have far fewer regulations than publicly traded securities. She explained the DTCC plans to use the data gained from the platforms to build a next-generation securities clearing system.
The Time is Now
Peve, like many in the market, believes the time is ideal to leverage emerging technologies. Its true, blockchain provides intuitive minds a gateway to develop completely new solutions to many of the inefficiencies plaguing the market. For now, it’s exciting to hear a securities powerhouse such as the Depository Trust & Clearing Corporation (DTCC) already has plans to upgrade their systems in the near future.
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