This Week in Policy (10/3)
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Last week was very eventful for those closely following central bank digital currencies (CBDCs). The week also saw some important developments related to crypto regulation, applications of blockchain technology, and the involvement of decentralized autonomous organizations (DAOs) in legal proceedings.
Last Monday, the Reserve Bank of Australia, in collaboration with the Digital Finance Cooperative Research Centre, published a white paper that showed a timeline for Australia’s new CBDC pilot project. The project is expected to conclude and publish its findings by mid-2023. In Africa, the head of fintech and innovation at the Bank of Ghana shared updates about the offline pilots of the E-Cedi, Ghana’s CBDC. During the pilot, participants successfully purchased goods and services from merchants using the CBDC with no internet connectivity. The Ghanaian official also stressed the importance of the E-Cedi for financial inclusion in his country. In Europe, the European Central Bank expressed its preference for a digital euro that would be intermediated by traditional intermediaries, such as banks, rather than through a peer-to-peer validation model.
Meanwhile, the Bank For International Settlements (BIS) Innovation Hub announced last Tuesday the successful completion of the mBridge pilot, a project that brought together the central banks of Hong Kong, China, Thailand, and the United Arab Emirates, along with 20 commercial banks, to test out a multi-jurisdiction CBDC platform for international payments. During the project’s short life (a little over a month), 164 transactions worth nearly $22 million were made. One day after the BIS’s announcement, Sweden’s central bank, Sveriges Riksbank, announced that it would team up with the central banks of Norway and Israel as well as the BIS to launch Project Icebreaker. The goal of the project is to explore how CBDCs can be used for international retail and remittance payments.
What about the U.S.? Jerome Powell, chair of the Federal Reserve (the Fed), said on Tuesday that the Fed has “not decided to proceed” with a U.S. CBDC yet. "We do not see ourselves making that decision for some time," Powel added, noting that the Fed would continue to work with Congress and the executive to evaluate design and policy issues. Powel also emphasized that, if adopted, a future U.S. CBDC would be intermediated, privacy-protected, identity-verified, and interoperable. So far, launching a U.S. CBDC has been vehemently opposed by the vast majority of the crypto industry as well as Republican lawmakers. On Thursday, Sen. James Lankford (R-OK) announced that he introduced a bill titled No Digital Dollar Act whose goal is “to prohibit the US Treasury and the Federal Reserve from interfering with Americans using paper currency if a digital currency is adopted and [make] certain individuals … maintain privacy over their transactions using cash and coins.”
2. Crypto Regulation
Last Thursday, Sen. Bill Hagerty (R-TN) introduced a bill titled Clarity for Digital Tokens Act of 2021. The bill offers a creative solution to the industry’s constant complaint about “regulation by enforcement,” the approach the Securities and Exchange Commission (SEC) has arguably adopted with respect to crypto regulation. The bill grants exchanges a two-year grace period from enforcement actions whenever the SEC reaches a conclusion that they listed tokens that it considers unregistered securities. The bill also seeks to limit the SEC’s powers by empowering the Commodity Futures Trading Commission (CFTC) to object to the SEC’s characterization of tokens. Exchanges would also be able to challenge the SEC’s findings, in which case a court would decide on whether the token is a security. Like all crypto bills introduced this year, the new bill has almost no chance of passing any time soon, at least until after the midterm elections.
3. Blockchain Technology Applications
The European Securities and Markets Agency (ESMA) published a report on Tuesday on a pilot project which explores the use of blockchain or distributed ledger technology (DLT) in the trading of securities (stocks, bonds, and derivatives). The most notable takeaway is ESMA’s conclusion that the pilot requires no adjustment of currently applicable regulatory standards, which opens the door for the next phase of experimentation. The report also underscored that “[a] significant number of market participants expressed interest in operating a DLT [market infrastructure] under the DLT Pilot.”
The CFTC is suing a DAO known as OoKi for arguably offering illegal off-exchange digital assets and lending services. What is remarkable about the lawsuit is not the accusation but the way the CFTC, acting through one of its paralegals, served legal process (i.e., documents) to the DAO. The service was done through a post on an online forum the holders of Ooki Tokens use to discuss governance issues and via the “Ooki Help Chat function.” Through a motion for alternative service, the CFTC asked the District Court of the Northern District of California to declare the service of process sufficient. The court’s decision would be a small building block in the governance system of DAOs that is currently taking shape.
See you next week!